COMMISSIONER OF INCOME-TAX VS INDOCEAN ENGINEER (P.) LTD., 1999 PTD-ANDHRA-PRADESH-HIGH-COURT-INDIA 259 (1996)

Income-tax

----Business expenditure---Contributions to recognised provident funds-- Restriction of deduction to Rs.250---Applies to contributions to fund maintained by company---Contributions to fund under scheme formulated under Employees' Provident Funds Act, 1952---Deductible in full---Indian Income Tax Act, 1961, Ss.2(38) & 36(1)(iv)---Indian Income Tax Rules, 1962, R.75.

The expression "recognised provident fund" as defined in section 2(38) of the Income Tax Act, 1961, contemplates two categories of provident funds ---(i) a provident fund which has been recognised by the Chief Commissioner or Commissioner by applying the rules contained in Part A of the Fourth Schedule to the Act; and (ii) provident fund established under the scheme framed under the Employees' Provident Funds Act, 1952. The restriction to Rs.250 specified in rule 75(1) of the Income Tax Rules, 1962, applies to the first category and not to the second category, for the reason that the second category contributions are not in respect of -a provident fund' maintained by the company".

Held accordingly, that since the contributions made by the assessee were not in respect of any provident fund maintained by the company, but were remittances directly to the scheme under the Employees' Provident Funds Act, 1952, and maintained by the Provident Fund Commissioner, rule 75 of the Income Tax Rules was not applicable and the assessee was entitled to claim deduction of the entire remittance of Rs.12,000 under section 36(1)(iv) of the Act.

S.R. Ashok for the Commissioner.

P.R. Rao for the Assessee.

JUDGMENT

M. N. RAO, J.---In all the three referred cases, the following question was referred for the opinion of this Court under section 256(1) of the Income Tax Act, 1961, by the Income-tax Appellate Tribunal:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in holding that the entire contribution of Rs.12,000 made by the assessee-company was allowable and rule 75 of the Income Tax Rules was not applicable in the case of the assessee-company?"

R.C. No.31 of 1990 pertains to the assessment year 1982-83, R.C. No. 38 of 1988 pertains to the assessment year 1983-84 and R. C. No. 102 of 1989 relates to the assessment year 1984-85.

The assessee is a private limited company. In respect of the aforesaid three assessment years, the assessee claimed deduction of Rs.12,000 being the contribution of the company at the rate of Rs.3,000 per each of the four directors. The Income-tax Officer following rule 75 of the Income Tax Rules disallowed a sum of Rs.12,000 on the ground that the total contribution both from the employee and the employer should not exceed Rs.250 per months. On appeal, the Commissioner Income-tax (Appeals) restricted the addition to Rs.6,000 instead of Rs.12,000. The Income-tax Appellate Tribunal, in the second appeal following the view taken by it in Nath Laboratroies Ltd., Hyderabad's case (1985) 14 ITD 409 held that rule 75 of the Income Tax Rules was not attracted as the contributions were not made to the provident fund "maintained by the company", but remittances were made directly to the Provident Fund Scheme under the Employees' Provident Funds Act, 1952. At the instance of the Revenue, the above question has been referred for decision by this Court.

In the computation of "the income from business" under section 28 of the Income Tax Act certain deductions are permissible and one such deduction as contained in section 36(1)(iv) of the Income Tax Act is in the following terms:

"Any sum paid by the assessee as an employer by way of contribution towards a recognised-provident fund or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of recognizing the provident fund or approving the superannuation fund, as the case may be; and subject 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 fix 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. "

"Recognised provident fund" is defined in clause (38) of section 2 of the Income Tax Act in the following terms:

"' recognised provident fund' means a provident fund which has been and continues to be recognised by the Chief Commissioner or Commissioner in accordance with the rules contained in Part A of the Fourth Schedule, and includes a provident fund established under a scheme framed under the Employees' Provident Funds Act, 1952. "

Part A of the Fourth Schedule contains the rules for recognised provident funds. Rule 1 specifically lays down that Part A has no application "to any provident fund to which the Provident Funds Act, 1925 applies". As contemplated in section 36 (1)(iv) of the Income Tax Act concerning the limits to the contributions to provident funds deductible under that section, the Central Board of Direct Taxes has framed rule 75(1) which isfollowing terms:

Where an employee of a company owns shares in the company 7th a voting power exceeding ten per cent of the whole of such power, the sum of the contributions of the employee and employer to the recognised provident fund maintained by the company shall not exceed Rs.250 in any month."

As can be seen from the specific language employed in rule 75(1) of the Income Tax Rules, 1962, the prescribed limit of Rs. 250 applies only to a recognised provident fund "maintained by the company" (emphasis supplied). The contributions made by the assessee are not in respect of any provident fund maintained by the company, but the remittances are directly to the scheme under the Employees' Provident Funds Act, 1952, and the Scheme is maintained by the Provident Fund Commissioner. It, therefore, follows that the Tribunal was right in not applying rule 75 of the Income Tax Rules, 1962, to the deductions claimed by the assessee. The result of the view taken by the Tribunal was that the assessee became entitled to claim deduction of the entire Rs.12,000 under section 36(1)(iv) of the Income Tax Act since the definition of "recognised provident fund" under section 2(38) of the Income Tax Act comprehends a provident fund established under a Scheme framed under the Employees'. Provident Funds Act, 1952.

We may also mention that the expression "recognised provident fund" as defined in section 2(38) of the Income Tax Act contemplates two categories of Provident funds ---(i) provident fund which has been recognised by the Chief Commissioner or Commissioner by applying the rules contained in Part A of the Fourth Schedule; and (ii) a provident fund established under the scheme framed under the Employees' Provident Funds Act, 1952. The restriction of Rs.250 specified in rule 75(1) of the Income-tax Rules applies to the first category, but not to the second category for the reason that the second category contributions are not in respect of a provident fund "maintained by the company" (emphasis supplied).

However, Sri S.R. Ashok, the learned Senior Advocate for the Revenue, has invited our attention to a decision of a Division Bench of this Court in R.C. No. 17 of 1985, dated March 10, 1988, which arose out of Nath Laboratories Ltd., Hyderabad's case (1985) 14 ITD 409, relied upon by the Tribunal for the conclusion reached in the case on hand. In the aforesaid case, the Division Bench of this Court while adverting to the application of rule 75(1) of the Income Tax Rules in respect of the contributions made by the assessee directly to a scheme framed under the Employees' Provident Funds, Act, 1952, observed:

"Part A of the Fourth Schedule of the Income Tax Act exempts from its operation any provident fund to which the Provident Funds Act, 1925 applies. The contributions of the assessee made under the Provident Funds Act, 1952, are, therefore, not exempt from the Income Tax Act, but governed by the Income Tax Act. It, therefore, follows that any contribution made by the assessee in excess of the limit specified in rule 75(I) of the Rules is liable to be disallowed in computation of the income of the assessee. The provisions of Part-A of the Fourth Schedule to the Income Tax Act are lost sight of by the Tribunal. "

There is apparent contradiction discernable in the first two sentences of the passage extracted above. If Part A of the Fourth Schedule has no application to the contributions made to the Provident Funds Act, 1925, the ceiling limit of Rs.250 envisaged in rule 75(1) of the Income Tax Rules will not apply. As already stated, rule 75(1) of the Income Tax Rules limits the ceiling deduction to Rs.250 only in respect of contributions made by an, employer "to the recognised provident funds maintained by the Company" and these crucial words were not noticed by the Division Bench in the aforesaid case. We, therefore, with great respect to the learned Judges, are inclined to hold that the view expressed by the Division Bench is per incuriam, in that, the crucial part of the rule has not been noticed. For the above reason, we are unable to accept the argument of Sri. S.R. Ashok, the learned Senior Advocate appearing for the Revenue, that the assessee is not entitled to deduction in excess of Rs.6,000.

In the result, we answer the question in the affirmative, in favour of the assessee and against the Revenue.

M.B.A./1674/FCReference answered.