1. In this reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax (Central), Calcutta, Messrs. Turner Morrison & Co. Private Ltd., of 6, Lyons Range, Calcutta-1, the assessee, was assessed to income-tax for the assessment year 1962-63. The relevant previous year corresponding to the said assessment year 1962-63 is the calendar year, 1961. The Income-tax Officer in. making the assessment disallowed a sum of Rs. 1,75,000 out of the sum of Rs. 3,91,150 claimed by the assessee as having been paid as directors' remuneration. The Income-tax Officer held that such payment to the extent of the said sum of Rs. 1,75,000 was excessive and unreasonable.
2. Further, the assessee had paid a sum of Rs. 6,826 as contribution to a provident fund in East Pakistan where the assessee carried on business during the said assessment year. This provident fund was recognised by the Pakistan authorities but not by the Indian revenue authorities. The assessee claimed a deduction for the said sum of Rs. 6,826, which was disallowed by the Income-tax Officer.
3. On appeal, the Appellate Assistant Commissioner held that the Income-tax Officer was not justified in disallowing the said sum of Rs. 1,75,000 out of the directors' remuneration and deleted such disallowance. The Appellate Assistant Commissioner further directed the Income-tax Officer to allow the said sum of Rs. 6,826 contributed to the provident fund in Pakistan after satisfying himself that such fund was constituted under an irrevocable trust,
4. The revenue preferred a further appeal to the Tribunal. The Tribunal, following its earlier order made in the assessment year 1961-62 in the case of the same assessee, upheld the decision of the Appellate Assistant Commissioner observing that the remuneration paid to the directors could not be described as excessive and the full claim should be allowed. So far as the contribution to the provident fund in Pakistan was concerned it was contended by the revenue before the Tribunal that under Section 36(1)(iv) only payments to the provident fund recognised in India could be allowed and not payment to any other provident fund. The Tribunal held, inter alia, as follows :
' ......if an employee is working outside India, a fund is set up in theforeign territory concerning these foreign employees, and the question of payment in the foreign country to a provident fund recognised in India does not arise. We would be concerned with the computation of the foreign income and this is to be determined by deducting the expenditure allowable for the purpose of earning the foreign income. In this context, the question would be whether an alleged payment to a provident fund is merely an appropriation in the accounts, the assessee retaining full control over the amount, or whether the payment is to an outside body and is beyond the assessee's control. As the Appellate Assistant Commissioner has correctly observed, the payment would have to be deducted in computing the Pakistan income, if the provident fund has been set up under an irrevocable trust.'
5. From the aforesaid order of the Tribunal, the following questions have been referred :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in allowing the entire remuneration to the directors as admissible deduction for the purpose of assessment under the Income-tax Act
2. Whether, on the facts and in the circumstances of the case, the contribution made by the assessee to a provident fund recognised in Pakistan but not in India could be allowed as a deduction in computing the income earned in Pakistan under the Income-tax Act in India?'
6. In the assessment years 1952-53 and 1953-54, the same question relating to the remuneration of the directors arose in the assessment of the sameassessee. In Commissioner of Income-tax v. Turner Morrison & Co. P. Ltd. : 93ITR385(Cal) , the identical question on almost similar facts was answered by this court in favour of the assessee. Following this decision, we answer question No. 1 in the affirmative and in favour of the assessee.
7. On question No. 2, Mr. B.L. Pal, learned counsel for the revenue, has contended that where an assessee claimed a deduction in respect of the amounts paid by way of contribution to a provident fund, the provisions of Section 36(1)(iv) of the Income-tax Act, 1961, which specifically dealt with payments to provident funds and under which such deduction could be claimed, had to be satisfied and if any payment to a provident fund did not fall within the four corners of the said section, the assessee was not entitled to any deduction. He submitted further that it made no difference in the instant case whether the income arose in India or in Pakistan because the entire income would be pooled and all permissible deductions would be allowed in assessing such income. In support of his proposition he cited a decision of the Supreme Court in the case of Commissioner of Income-tax v. C. Parakh & Co. (India) Ltd. : 29ITR661(SC) . It was held by the Supreme Court in that case, that where an assessee carried on the same business at a number of places for the purpose of Section 10 of the Indian Income-tax Act, 1922, they should be deemed to be only one business and the net profits thereof had to be ascertained by pooling together the profits earned in all the branches and deducting all the expenses, and the fact that some of the branches were in foreign territory would make no difference to the position, if the assessee was resident and ordinarily resident within India. Mr. Pal also cited a decision of this court in the case of Carew & Co. Ltd. v. Commissioner of Income-tax : 104ITR471(Cal) , where the principle laid down in the case of C. Parakh & Co. (India) Ltd. : 29ITR661(SC) was applied.
8. Mr. R. N. Dutt, learned counsel for the assessee, has contended on the other hand that there was no question of the assessee claiming a deduction under Section 36(1)(iv) of the Income-tax Act, 1961, inasmuch as the said section categorically applied to provident funds recognised in India and not foreign provident funds. He submitted that the real question was whether in computing the income arising in Pakistan, money laid out by the assessee in the foreign provident fund for the purpose of carrying on the business would be allowable as a general expenditure under Section 37 of the Income-tax Act, 1961, as an expenditure not in the nature of capital expenditure or personal expenses but laid out or expended wholly and exclusively for the purpose of business or profession. He submitted further that both the Appellate Assistant Commissioner and the Tribunal had in the instant case proceeded on the basis of Section 37 and not on the basis of Section 36(1)(iv).
9. In support of this contentions Mr. Dutt cited a decision of the SupremeCourt in the case of Commissioner of Income-tax v. Mysore Spg. & Mfg. Co. Ltd. : 78ITR4(SC) , where the assessee had transferred the accumulations in two unrecognised provident funds to the employees' provident fund set up under the Employees' Provident Funds Act, 1952, and claimed deduction of the amount of the transfer in computing its profits. It was held, that the amount in question had been spent and paid out in the relevant accounting period, and was deductible as expenditure incurred exclusively for the purpose of the business of the respondent under Section 10(2)(xv) of the Indian Income-tax Act, 1922. To appreciate the controversy in this case, it is necessary to consider the relevant sections in the Act.
10. Section 2(38) of the Income-tax Act, 1961, defines a recognised provident fund, inter alia, as follows :
''Recognised provident fund' means a provident fund which has been and continues to be recognised by the Commissioner in accordance with the rules contained in Part A of the Fourth Schedule...,...'
11. Section 36(1)(iv) permits deduction of sums paid by way of contribution to a recognised provident fund and reads, inter alia, as follows :
'Any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund.........subject to such limits as may beprescribed for the purpose of recognising the provident fund.........; andsubject to such conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed amounts or annual contributions fixed on 'some definite basis by reference to the income chargeable under the head ' Salaries ' or to the contributions or to the number of members of the fund.'
12. The rules relating to a recognised provident fund as contained in Part A of the Fourth Schedule lay down conditions to be satisfied by recognised provident funds and the first condition which a recognised provident fund is to satisfy is :
'(a) All employees shall be employed in India, or shall be employed by an employer whose principal place of business is in India.'
13. Reading the statutory provisions it is amply clear that sums contributed to a provident fund in Pakistan can never be claimed by way of deduction under Section 36(1)(iv). The question which arises is whether deduction can be claimed under any other head. Section 37(1) of the Income-tax Act, 1961, which corresponds to Section 10(2)(xv) of the earlier Act of 1922 provides as follows :
' 37. General.--(1) Any expenditure (not being expenditure of thenature described in Sections 30 to 36 and not being in the nature of capitalexpenditure or personal expenses of the assessee), laid out or expended whollyand exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ' Profits and gains of business or profession '.'
14. It appears to us that the Tribunal correctly appreciated the question involved and proceeded to compute the foreign income of the assessee. In such computation, the Tribunal proceeded by deducting the contribution to the foreign provident fund as expenditure allowable for the purpose of earning the foreign income for the determination or computation of such income. We see no reason to differ from the view taken by the Tribunal and following the decision of the Supreme Court in Mysore Spg. & Mfg. Co. Ltd. : 78ITR4(SC) , we answer the question No. 2 in the affirmative and in favour of the assessee. There will be no order as to costs.
C. K. Banerji, J.
15. I agree.