TMI Blog1978 (12) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to as " the Act"), in respect of three sums of Rs. 95,421, Rs. 1,00,564 and Rs. 1,17,969 out of the total contributions made by the assessee to a recognised provident fund for the assessment years 1962-63, 1963-64 and 1964-65, respectively, was disallowed and the principal question raised in these appeals is whether the expression " salary " as defined in r. 2(h) in Part A of the Fourth Schedule to the Act includes "commission" paid by the assessee to its salesmen in terms of their contracts of employment. The assessee is a private limited company and carries on the business of manufacture and sale of duplicating machines and accessories. It has in its regular employment three categories of salesmen-machine salesmen, mixed salesmen and supply salesmen. As a term of the contract of employment between the assessee and the salesmen of the aforesaid categories, the assessee, besides paying a fixed monthly salary, also paid commission to them at fixed percentage of turnover achieved by each salesman, the rate of percentage varying according to the class of article sold and the category to which the salesman belonged. The assessee maintained a regular provident fund for its emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fund recognised by the CIT which recognition was in force during the relevant years, the taxing authorities could not disallow the deduction claimed by the assessee, and the view taken by the AAC in respect of assessment years 1963-64 and 1964-65 was canvassed for acceptance. On the other hand, the revenue contended before the Tribunal that the definition of the expression "salary" as given in r. 2(h) of Part A of the Fourth Schedule to the Act, which applied to the recognised provident fund, governed the matter and since that definition excluded all other allowances and perquisites the commission paid by the assessee to its salesmen, which was nothing but some sort of allowance, could not be regarded as salary and, on that basis, the Tribunal was pressed to accept, the contrary view taken by the AAC for the assessment year 1962-63. The Tribunal on a consideration of the rival submissions held that the commission paid by the assessee to various classes of salesmen was a part of the contractual obligation and as such was part of the salary of the employees and contributions made on that basis were liable to be deducted under s. 36(1)(iv) of the Act. It also took the view that since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect that commission and other similar allowances are excluded from the definition of "basic wages" under the Employees' Provident Funds Act, 1952, because it was not a universal rule that each and every establishment must pay commission to its employees. The High Court further held that Circular No. 80, dated March 4, 1972, on which reliance was placed by the assessee and which stated that (See [1977] 110 ITR 46, 52 (Cal)), "if the terms and conditions of service are such that commission is paid not as a bounty or benefit but is paid as a part and parcel of the remuneration for services rendered by the employee, such payment may partake of the nature of salary rather than as a benefit or perquisite", could not be availed of because the same was not in existence during the relevant years and further it had been issued under s. 40(c)(iii) of the Act and would not apply to s. 36(1)(iv). The High Court also held that the ordinary meaning of "salary" was a fixed monthly payment while "commission" was not such payment and, therefore, it could not be included within the scope and ambit of the term "salary", the meaning of which could not be extended by the assessee-company by defining i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxing authorities to reach a conclusion that the provident fund of the assessee did not satisfy the condition laid down in r. 4(c) of Part A of the Fourth Schedule to the Act during the relevant years nor was it open to them to disallow the deductions claimed under s. 36(1)(iv) of the Act by interpreting the expression "salary" in r. 2(h) in Part A of the Fourth Schedule to the Act as being exclusive of the commission of the nature and kind paid by the assessee to its salesmen. Secondly, counsel contended that on a true and proper construction of the expression "salary" occurring in the said r. 2(h) the commission of the nature and type paid by the assessee to its salesmen under the terms of their contract of employment would be included or covered by that expression. According to him, commission in business practice covered various kinds of payments made under different circumstances and in the cases where a servant was employed by a businessman and as a condition of his employment it was agreed that he would be paid for his services at a fixed rate of percentage over the turnover, it was clear that such commission payable to the employee will partake of the character of "salary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to him, the definition merely included dearness allowance and excluded all other allowances and perquisites and commission payable by the assessee to its salesmen was nothing but an allowance paid without reference to any time factor which is associated with salary or wages as an important concomitant thereof. In this behalf reliance was also placed by him upon Circular No. 6 dated January 16, 1941, issued by the Central Board of Revenue under the 1922 Act and continued under s. 297(2)(k) of the 1961 Act wherein on the question whether the term "salary" as used in Chap. IX-A (of the old Act) included commissions and bonuses paid to the employees, the Board expressed its view that, "unless commissions and bonuses are fixed periodical payments not dependent on a contingency, they are not covered by the term 'salary' as used in Chap. IX-A of the Act". Counsel further contended that in the matter of deductions claimable in respect of contributions to the provident fund, the position of the employer could not be different from that of the employee and in regard to employee's contribution the condition required to be satisfied in r. 4(b) was to the effect that the contribution of an empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds a recognised provident fund or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of recognising the provident fund or approving the superannuation fund, as the case may be; ......" Rule 2(c) of Part A of the Fourth Schedule defines "contribution" as meaning: "any sum credited by or on behalf of any employee out of his salary, or by an employer out of his own monies, to the individual account of an employee, but does not include any sum credited as interest." Rule 4 of Part A of the Fourth Schedule lays down the conditions which are required to be satisfied by a provident fund in order that it may receive and retain recognition, and the conditions in cls. (b) and (c) are material and these conditions are: "4. (b) the contributions of an employee in any year shall be a definite proportion of his salary for that year, and shall be deducted by the employer from the employee's salary in that proportion, at each periodical payment of such salary in that year, and credited to the employee's individual account in the fund; (c) the contributions of an employer to the individual account of an employee in any year shall not exceed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly called a salary." (per Latham C.J., in Federal Commissioner of Taxation v. Thompson (J. Walter) (Aus.) Pty. Ltd. (69 CLR 227). It appears that conceptually "salary" and "wages" connote one and the same thing, namely, remuneration or payment for work done or services rendered but the former expression is generally used in connection with services of a higher or non-manual type while the latter is used in connection with manual services. In Gordon v. Jennings [1882] 51 LJ QB 417; 9 QBD 45 (QB), Grove J. observed as follows: "Though this word (wages) might be said to include payment for any services, yet, in general, the word 'salary' is used for payment of services of a higher class, and 'wages' is confined to the earnings of labourers and artisans." In Mohmedalli v. Union of India, AIR 1964 SC 980 ; 24 FJR 221, this court, while repelling the contention that the Employees' Provident Funds Act, 1952, was intended by Parliament to apply to employees who were mere wage earners and not salaried servants, has made observations clearly indicating that there is no difference between the two concepts of salary and wages. Chief Justice Sinha, speaking for the court, observed in pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act, in the case of salary the recompense could be determined wholly on the basis of time spent on service or wholly by the work done or partly by the time spent in service and partly by the work done. In other words, whatever be the basis on which such recompense is determined it would all be salary. Having reached the above conclusion we have to consider the nature of recompense that is being made by the assessee to its salesmen, whether the whole of it partakes of the character of salary or not ? The definition of "salary" in r. 2(h) includes dearness allowance if the terms of employment so provide and excludes all other allowances and perquisites. It does not in terms exclude "commission" as such and, in our view rightly, for, though ordinarily according to the Shorter Oxford English Dictionary "commission" means "a Pro rata remuneration for work done as agent", in business practice commission covers various kinds of payments made under different circumstances. In Raja Ram Kumar Bhargava v. CIT [1963] 47 ITR 680, the Allahabad High Court has pointed out how in certain circumstances commission payable to an employee may, in fact, represent the salary receivable by him for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 36(1)(iv) of the Act. Turning to the circular dated January 16, 1941, issued by the Central Board of Revenue on which counsel for the revenue has relied, it cannot, in our view, affect the question of deductibility, for, if the commission paid by the assessee to its salesmen is covered by the expression "salary" on its true construction, which, according to us, it does, the Board's view or instructions cannot detract from the legal position arising on such proper construction. In any case, we are of the view that by the said circular what the Board wants to keep out of the term "salary" are payments by way of commissions which do not partake of the character of salary. Similarly, the decision of this court in Bridge Roofs Co.'s case, AIR 1963 SC 1474; 23 FJR 550, on which the High Court has relied, cannot avail the revenue. In the first place, it was a case under the Employees' Provident Funds Act, 1952, where this court was required to construe the expression "basic wages" as defined in s. 2(b) of that Act and to decide whether "production bonus" was included in that expression and it was in that context that this court made observations to the effect that the said express ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had granted recognition to the provident fund maintained by the assessee under the relevant Rules under the 1922 Act, that such recognition had been granted after the true nature of the commission payable by the assessee to its salesmen under their contracts of employment had been brought to the notice of the Commissioner and that the said recognition had continued to remain in operation during the relevant assessment years in question, the last fact in particular clearly implied that the provident fund of the assessee did satisfy all the conditions laid down in r. 4 of Part A of the Fourth Schedule to the Act even during the relevant assessment years. In that situation we do not think that it was open to the taxing authorities to question the recognition in any of the relevant years on the ground that the assessee's provident fund did not satisfy any particular condition mentioned in r. 4. It would be conducive to judicial discipline and the maintaining of certainty and uniformity in administering the law that the taxing authorities should proceed on the basis that the recognition granted and available for any particular assessment year implies that the provident fund satisfies a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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