COMMISSIONER OF INCOME-TAX VS RAAB PIPE WORKS (P.) LTD.
1999 P T D 2022
[226 I T R 710]
[Madras High Court (India)]
Before Abdul Hadi and N. V. Balasubramanian, JJ
COMMISSIONER OF INCOME-TAX
Versus
RAAB PIPE WORKS (P.) LTD.
T. No.659 of 1983, decided on 01/04/1997.
Income-tax---
----Business expenditure---Contribution to recognised provident fund-- Ceiling on contribution--Employee having substantial shareholding in company---Income-tax Rules---Section 36(1)(iv) deals with contribution of the employer and only that can be subject of allowance or disallowance-- Rule 75(1) fixing ceiling limit for joint contribution of employer and employee goes beyond the power of rule-making authority---Rule 75(1) has to be read down to limit contribution of employer only---Employer's contribution should be considered first in working out limit prescribed under R.75(1)---Indian Income Tax Act, 1961, S.36; Sched. IV, Part A, Rr. 6 & 15---Indian Income Tax Rules, 1962, R.75.
Section 36(1)(iv) of the Income Tax Act, 1961, provides that deductions provided in the said section will be subject to the limit prescribed for the purpose of recognising the provident fund. Section 36(1)(iv) of the Act deals with the contribution of the employer towards a recognized provident fund or an approved superannuation fund. Rule 75(1) of the Income-tax Rules, 1962, deals with the joint contribution, but section 36(1)(iv) of the Act and Rule 15 of Part A of Schedule IV to the Act, provide for fixing the ceiling limit for the contribution by the employer and the employee separately. Rule 75(1) of the Rules, providing for fixing the ceiling limit for the joint contribution of the employer and employee goes beyond the power of the rule-making authority. The rule has to be read down, to limit the contribution of the employer concerned. Section 36(1)(iv) deals with the contribution of the employer and it is only the employer's contribution that can be the subject-matter of allowance or disallowance under the provisions of the Act. The employee's contribution does not figure in the employer's assessment except for the limited purpose of the employee's assessment. In working out the limit prescribed under Rule 75(1) of the Rules, the employer's contribution should be considered first. When the employer's contribution exceeds the prescribed limit provided under Rule 75(1) of the Rules that can be disallowed invoking the provisions of Rule 75. This, construction does not, in any way, go against the spirit and object of Rule 75 of the Rules. If there is any excess contribution by an employer, it is taken care of under Rule 6 of Part A of Schedule IV to the Act as the amount contributed in excess of 10 per cent of the salary of the employee, is treated as salary for the purp6se of assessment in the hands of the employee. Even if there was any excess contribution from the employer to the recognised provident fund, then that amount can be subjected to disallowance under Rule 75 of the Rules read with section 36(1)(iv) of the Act. The definition of "salary" under section 17 of the Act indicates that if any contribution is made by an employer in excess of 10 per cent of the salary of the employee, that would be regarded as salary of the employee and is taxable in the hands of the employee. Therefore, if an employer contributes to the provident fund in excess of the prescribed percentage, even if such an employee owns shares exceeding 10 per cent of the voting power in the company, the e. cess amount is taxable in the hands of such employee. Secondly, if Rule 75(1) of the Rules is construed to mean that the contribution of an employer should first be taken into account, the excess contribution by an employer towards the recognised provident fund, exceeding the prescribed amount, can be disallowed in the hands of the employer Thizdly, the contribution of the employer should normally be matching the contribution made by the employee to his recognised provident fund. These inbuilt checks provided by various sections of the Income-tax Act clearly show that if there was an excess contribution by an employer to a recognised provident fund to the credit of the employee having some substantial interest in the company, the excess is taken care of, in the hands of the employee, or can be disallowed in the hands of the employer also. Therefore, the construction placed on Rule 75(l) of the Income-tax Rules does not go against the object of Rule 75(1) which obviously was introduced to curb the practice of the employer making excessive contribution to the credit of an employee, who is having a substantial interest in the shareholding of the company:
Held, affirming the decision of the Appellate Tribunal, (i) that in the instant case, there was no finding of the Appellate Tribunal on the question of the applicability of the provisions of section 37 of the Act to the contribution made by the assessee to the recognised provident fund in excess of the limit prescribed under Rule 75(1) of the Income-tax Rules. There was no finding by the Appellate Tribunal on the question whether the payment was made out of commercial consideration or the expense was incurred wholly and exclusively for the purpose of the business. Therefore, this point raised by the assessee could not be considered.
(ii) That the contribution made by the assessee in excess of Rs.3,000 per annum could be disallowed under Rule 75(1) of the Income-tax Rules and the disallowance should be restricted only to the amount of Rs.600 out of Rs.6,600 made by the Income-tax Officer, as held by the Appellate Tribunal.
CIT v. Western India Paper and Board Mills (Pvt.) Ltd. (1991) 189 ITR 309 (Bom.) ref.
C.V. Rajan for the Commissioner.
K. Mani for the Assessee.
JUDGMENT
N. V. BALASUBRAMANIAN, J.---The assessee is a company. The question that arises is regarding the allowance of the contribution made by the assessee as an employer towards a recognised provident fund maintained by it. The assessee made a matching contribution of an equal amount that was made by two of its director-employees, viz., N.J.K. Raj and M.A, Abraham, to the provident fund recognised by the Income-tax Department. The assessee made a contribution during the previous year relevant to the assessment year 1978-79, a sum of Rs.3,600 in the case of N.J.K. Raj, and another sum of Rs.3,000 in the case of M.A. Abraham. The Income-tax officer found that the contribution made by the assessee was in excess of the limit prescribed under Rule 75(1) of the Income-tax Rules, and he, therefore, held that the entire contribution made by the assessee as an employer as well as by the employee has to be taken into account to determine the ceiling limit prescribed under Rule 75(l) of the Income-tax Rules (hereinafter referred to as "the Rules"). Applying Rule 75(1) of the Rules, he disallowed a sum of Rs.6,600 on the ground that it constituted excess contribution and completed the assessment.
The assessee preferred an appeal against the order of assessment before the Commissioner of-Income-tax (Appeals). The Commissioner of Income-tax (Appeals) held that the entire contribution made by the assessee as an employer is allowable under the provisions of the Income-tax Act. The Revenue preferred an appeal before the Income-tax Appellate Tribunal challenging the order of the Commissioner of Income-tax (Appeals). The Appellate Tribunal considered the matter from two different angles, According to the Appellate Tribunal, Rule 75 of the Income-tax Rules has to be construed in the light of Rule 15 of Part A of Schedule IV to the Income tax Act, and if so construed the provisions of Rule 75 of the Rules were in direct conflict with the power conferred on the Board under Rule 15(1)(b) of Part A of Schedule IV to the Income-tax Act. The Appellate Tribunal also held that the provisions of Rule 75 should be construed as limiting the contribution of the employer and not that of the employees. The Appellate Tribunal also held that in determining the permissible limit under Rule 75 of the Rules, the employer's contribution should be considered first, and then only the employee's contribution should-be considered. According to the Appellate Tribunal if the employer's contribution is considered initially, it will be in consonance with section 36(l)(iv) of the Act because there is no question of contribution by the employee being claimed as a deduction under section 36(l)(iv) of the Act. In this view of the matter, the Appellate Tribunal held that the disallowance made by the Income-tax Officer should be restricted to Rs.600 instead of Rs.6,600 made by the Income-tax Officer in the order of assessment. Thus, the Appellate Tribunal partly allowed the appeal preferred by the Revenue. The Revenue has sought for and obtained a statement of the case under section 256(1) of the Income Tax Act, 1961, on the following question of law for our opinion:
"Whether, on the facts and circumstances of the case and having regard to the provisions of section 36(1)(iv) of the Act, Rule 75(1) of the Income-tax Rules, Schedule IV, Part A, the Appellate Tribunal was right in deleting the disallowance made by the Income tax Officer of Rs.6,000 as excess contribution to the provident fund in the case of the two director-employees?"
Mr. C.V. Rajan, learned counsel appearing for the Revenue, submitted that Rule 75 of the Income-tax Rules fixes the limit of contribution of both the employer as well as the employee to a recognised provident fund maintained by the company. Since Rule 75 of the Rules is fully applicable to the facts of the case, the amount of contribution made by both the employer as well as by the employee has to be taken into account, and if it exceeds the limit prescribed under Rule 75 of the Rules, it is not allowable under section 36(1)(iv) of the Act. According to learned counsel for the Revenue, section 36(1)(iv) of the Act clearly specifies that the deduction provided in section 36 of the Act will be subject to the limits as may be prescribed for the purpose of recognising the provident fund. He, therefore, submitted that the rule is very clear and that the Tribunal was not correct in holding that the entire amount paid would be allowable as a business expenditure. He also submitted that section 36(1)(iv) of the Act empowers the Board to fix the contribution to be made by the employer and Rule 15 of Part A of Schedule IV to the Act empowers the Board to prescribe the limit of contribution by the employees and hence the view of the Appellate Tribunal that Rule 75 is beyond the rule-making power is not correct in law. According to learned counsel for the Revenue, the total contribution of both the employer as well as the employee should be taken into account in allowing the contribution made by the employer under Rule 75 of the Rules.
Mr. K. Mani, learned counsel for the assessee, on the other hand, submitted that the view of the Appellate Tribunal is a reasonable one and even if the amount is not allowable under section 36 of the Act, the amount is allowable under section 37 of the Act.
We have carefully considered the contentions raised by learned counsel for the Revenue as well as by learned counsel for the assessee.
Section 36(1)(iv) of the Income-tax Act provides that deductions provided in the said section will be subject to the limit as may be prescribed for the purpose of recognising the provident fund. There is no doubt that section 36(1)(iv) of the Act deals with the contribution of the employer towards the recognised provident fund or an approved superannuation fund. Part A of Schedule IV to the Act deals with the provision relating to the recognised provident fund. The expression "contribution" is defined to mean any sum credited by or on behalf of the employee out of his salary or by an employer out of his own moneys, to the individual account of an employee, but does not include any sum credited as interest. Rule 4 of the said Schedule deals with the contribution of an employee and it shall be a definite proportion of the salary drawn by the employee and the contribution shall be deducted by the employer from the employee's salary in certain proportion. The contribution of an employer to the individual account of the employee shall not exceed the contribution of the employee in that year, and the employer's contribution shall also be credited to the employee's individual account. Rule 6 of the said Schedule provides that any excess contribution made by the employer in excess of 10 per cent. of the salary which is defined in Rule 2(h) of the said Schedule, shall be treated as salary of the employee. Rule 15 empowers the Board to make rules in relation to the recognised provident fund. Under Rule 15(1)(b) of Part A of Schedule IV, the Board is empowered to limit the contribution to the recognised provident fund made by the employees who are the shareholders of the company. Rule 75 deals with limits for contribution and sub-rule (1) of Rule 75 deals with the case of an employee of a company who owns shares in the company with a voting power exceeding ten per cent. of the total voting power. There is no dispute about the facts that the two employees for whom contributions have been made by the assessee fulfilled the above condition prescribed under Rule 75(1) of the Income-tax Rules. The said Rule 75(1) also fixes the ceiling limit and it provides that the total sum of the contributions made by the employee and the employer to the recognised provident fund maintained by the company shall not exceed Rs.250 in any month. We have seen that section 36(1)(iv) deals with contribution of the employer towards the recognised provident fund or approved superannuation fund. It is also seen that Rule 15 of Part A of Schedule IV deals with the power of the Board to fix the limit of contribution by the employees of the company who are shareholders of the company. Rule 75(1) deals with the total contribution of both the employer as well as the employee. There is no separate limit fixed either for the employer or for an employee which can be the subject matter of disallowance under section 36 of the Income-tax Act. In other words, Rule 75(1) of the Income-tax Rules deals with the joint contribution, but section 36(1)(iv) of the Act and Rule 15 of part A of Schedule IV provide for fixing the ceiling limit for the contribution by the employer and employee separately. In this view of the matter, the view of the Appellate Tribunal that Rule 75 providing for fixing the ceiling limit for the joint contribution of the employer and employee, goes beyond the rule-making authority appears to be justified. We also hold that the Tribunal was justified in reading down the rule to limit the contribution of the employer concerned. As already seen section 36(1)(iv) of the Act deals with the contribution of the employer and it is only the employer's contribution that can be the subject matter of allowance or disallowance under the provisions of the Act. The employee's contribution does not figure in the employer's assessment except for the limited purpose of employee's assessment. Therefore the Appellate Tribunal was quite justified in reading down Rule 75 to the contribution made by the employer. The other view of the Appellate Tribunal that in working out the limit prescribed under Rule 75(1) of the Rules, the employer's contribution should be considered first also appears to be reasonable. As already seen the subject-matter of disallowance can only be the employer's contribution and when the employer's contribution exceeds the prescribed limit provided under Rule 75(1) of the Rules, that can be disallowed invoking the provisions of Rule 75 of the Rules. The construction which we are placing on Rule 75 does not in any way go against the spirit and object of Rule 75 of the Rules. If there is any excess contribution by an employer, it is taken care of under Rule 6 of Part A of Schedule IV as the amount contributed in excess of ten per cent of the salary of the employee is treated as salary for the purpose of assessment in the hands of the employee. Even if there was any excess contribution by the employer to the recognised provident fund, then that amount can be subjected to disallowance under Rule 75 of the Rules read with section 36(1)(iv) of the Act.
Mr. C.V. Rajan, learned counsel appearing for the Revenue, brought to our notice a passage from the book of Sampath Iyengar's Law of Income tax, 9th edition, page 2359, wherein the learned author states as under: "Where the employer is a company and the employee owns shares with more than ten per cent. of the voting power, the contributions of the employer and employee should not together exceed Rs.250 per month". The learned author has not examined the validity of the rule in the light of section 36(1)(iv) of the Act or Rule 15 of Part A of Schedule IV of the Act or whose contribution should be considered first in limiting the allowance.
The definition of "salary" under section 17 of the Act indicates that if any contribution is made by an employer in excess of ten per cent. of the salary of the employee, that would be regarded as salary of the employee and is taxable in the hands of the employee. Therefore, if an employer contributes to the provident fund in excess of the prescribed percentage, even if such an employee owns shares exceeding ten per cent. of the voting power in the company, the excess amount is taxable in the hands of such employee. Secondly, if Rule 75(1) is construed to mean the contribution of an employer should first be taken into account the excess contribution by an employer towards the recognised provident fund, exceeding the prescribed amount can be disallowed in the hands of the employer. Thirdly, the contribution of the employer should normally be matching contribution of the contribution' made by the employee to his recognised provident fund. These inbuilt checks provided by various sections of the Income-tax Act clearly show that if there was an excess contribution by an employer to a recognised provident fund to the credit of the employee having some substantial interest in the company, the excess is taken care of in the hands of the employee, or can be disallowed in the hands of the employer also. Therefore, the construction which we are placing on Rule 75(1) of the Income-tax Rules does not go against the object of Rule 75(1) which obviously was introduced to curb the practice of the employer making excessive contribution to the credit of an employee, who is having a substantial interest on shareholding in the company. As already seen the employee's contribution is not the subject-matter for consideration of allowance or disallowance in the hands of the assessment of the employer. Viewed from any angle, we are of the opinion that the Tribunal has come to a correct conclusion in holding that the disallowance made by the Income-tax Officer as if there was excessive contribution in the provident fund was not correct, is justified.
That apart, learned counsel for the assessee also brought to our notice a decision of the Bombay High Court in the case of CIT v. Western India Paper and Board Mills Pvt. Ltd. (1991) 189 ITR 309, wherein the Bombay High Court has held that even though the assessee may not be entitled to claim deduction of the amount contributed under section 36(1)(iv) of the Act, the contribution of the employer towards the recognised provident fund in violation of section 36(1)(iv) of the Act can be treated as some kind of payment in addition to the salary paid to the directors. The Bombay High Court held that where such payment was made to the provident fund, it can be allowed provided the amount was paid on commercial considerations and for the purpose of the business of the assessee. However, this point was not urged before the Appellate Tribunal and there was no finding of the Appellate Tribunal on the question of the applicability of the provisions of section 37 of the Act to the contribution made by the assessee to the recognised provident fund in excess of the limit prescribed under Rule 75(1) of the Income-tax rules. There is no finding by the Appellate Tribunal on the question whether the payment was made out of commercial considerations or the expenses were incurred wholly and exclusively for the purpose of the business. Therefore, we are-not inclined to go into the point raised by learned counsel for the assessee.
Hence, we are of the view that the Tribunal has come to the correct conclusion in holding that the contribution made by the assessee in excess of Rs.3,000 per annum can be disallowed under Rule 75(1) of the Income-tax Rules and the disallowance should be restricted only to the amount Rs.600 out of Rs.6,,600 made by the Income-tax Officer. Accordingly, we answer the question of law referred to us in the affirmative and against the Revenue.
M.B.A./1944/FCOrder accordingly