COMMISSIONER OF INCOME TAX vs ELGI EQUIPMENTS LTD.

R. JAYASU BABU, J.

As to whether the initial contribution made to superannuation fund has to be allowed in its entirety as a deduction, and as to whether the intercom,

amplifiers and air- conditioners installed in the computer room in the factory premises are eligible for investment allowance, are the questions which

have been referred to us at the instance of the Revenue. These questions arise out of the assessment for Income Tax for the asst. yrs. 1982-83 and

1983-84 of the respondent/assessee who is a manufacturer of air- compressors, car washers, hydraulic lift, air horns, power brakes, etc.

The Tribunal reversed the disallowance by the ITO of a substantial portion, namely 80 per cent of the initial contribution to the superannuation

fund claimed as a deduction. The ITO had relied on a circular of the CBDT being S.O. No. 3433 dt. 21st Oct., 1965, purported to have been

issued by the Board in exercise of powers conferred on it under s. 14 [sic-s. 36(1)(iv)]of the Act and by which notification the deduction for the

initial contribution paid to the superannuation fund by an employer was to be considered for deduction in the year of payment only to the extent of

one-fifth of 80 per cent of the amount. 20 per cent of the amount was not to be allowed. Initial contribution was not to be allowed as a deduction

in any year and the allowance of the 80 per cent was spread to be over period of five years at the rate of one-fifth of 80 per cent for five years

commencing from the year of first payment. The Board had also specified yet another condition that the amount of contribution to be taken into

account for the purposes of the notification was not to exceed 25 per cent of the employees salary for each year of his past service with the

employer as reduced by the employer''s contribution, if any to the provident fund in respect of the employees for each such year.

The Tribunal has held that the conditions specified with regard to the spread-over and the denial of any deduction in respect of 20 per cent of

the initial contribution were beyond the powers of the Board and, therefore, those conditions specified by the Board were not to be applied while

deciding the extent to which the amount paid as initial contribution would be allowed as a deduction.

Before considering the merits of the matter it is necessary to clear the ground at the outset as to the scope of the power of the Tribunal as also of

this Court in a reference in not giving effect to a subsidiary legislation or notific41ons issued by the authorities designated under the provisions of

the statute it is not normally within the power of the Tribunal or of this Court in a reference td pronounce on the *validity of legislation whether the

principal statute or the ''statutory rules made ''thereunder. The creature of the statute cannot pronounce on the validity of the statute under which it

is vested with the power and duty of deciding the matter under the statute. However, when it comes to the notice of the Tribunal or the reference

Court that an authority purporting to act in terms of the statute has acted beyond the terms of the provision by which power is conferred on the

authority. It is permissible to the adjudicatory forum to refrain from giving effect to such patently ultra 1dres act of the subordinate authority

purporting to act in terms of a statute though in fact it is inconsistent with the statute.

The Supreme Court in the case of Commissioner of Income Tax, Madras Vs. S. Chenniappa Mudaliar, , while dealing with an appeal arising

from a judgment of the High Court rendered in an Income Tax reference considered the validity of the r. 24 of the Tribunal Rules, 1946, and held it

to be ultra vires the provisions of s. 33 of the IT Act, 1922. Having regard to that pronouncement of the apex Court, we have permitted counsel to

canvass the validity or otherwise of the notification issued by the CBDT in S.O. No. 3433 dt. 21st Oct., 1965.

See. 36M0) of the Act, under which the power of the Board is purported to have been exercised while issuing the notification, reads as under:

36(1) The deductions provided in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income

referred to in s. 28 .....

(iv) 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 recognising 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 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 numbers of members of the fund ......

This provision for the deduction of sums paid by the assessee as an employer by way of contribution to a recognised provident fund or an

approved superannuation fund. The limits upto which the sums may be so paid is to be within such amount as may be prescribed for the purpose of

recognising the provident fund or approving the superannuation fund. The reference to contribution in the opening part of s. 36(1)(iv) does not

make any distinction as between annual contribution and initial contribution. The limits subject to which the contribution may be made are to be

prescribed by the Rules. Sec. 2(23) of the Act defines the word ""prescribed"" as meaning prescribed by the rules made under the Act. The power

to frame rules has been conferred on the Board by s. 295 of the Act and by r. 11 of With Schedule to the Act. More specifically r. 11C of the

Wth Schedule which empowers the Board to limit, the ordinary annual contribution and any other contributions to an approved superannuation

fund by an employer.

In exercise of those powers the Board has framed r. 87 in Part XHI of the IT Rules, 1962 in specifying the limit for the ordinary annual

contributions and r. 88 with regard to the initial contribution. Rule 87 provides that the ordinary annual contribution by the employer is not to

exceed 25 per cent of his salary for each year reduced by the employer''s contribution, if any to any provident fund whether recognised or not in

respect of the same employee for that year.

So far as the initial contribution is concerned the amount to be allowed as deduction on account of the initial contribution which an employer may

make to the fund in respect of the past service of an employee admitted to the benefit of that part shall not exceed 25 per cent of the employee''s

salary for each year of his past service with the employer, as reduced by the employer''s contribution, if any, to the provident fund in respect of that

employee for each such year. This limit on initial contribution is made subject to any condition which the Board may think fit to specify under s.

36(1)(iv) of the Act.

In the purported exercises of the power under s. 36(1)(iv) of the Act, the Board has issued the notification dt. 21st Oct., 1965, specifying three

conditions for the deductions of the contributions not being annual contributions of fixed amounts or annual contributions fixed on some definite

basis by reference to the income chargeable under the head ""Salaries"". The three conditions prescribed by the Board under s. 36(1)(iv) are as

under . 1

The total amount of contribution that shall be taken into account for the purposes of this notification shall not exceed twenty-five per cent of the

employee''s salary for each year of his past service with the employer as reduced by the employer''s contribution, if any, to any provident fund

(whether recognised or not) in respect of the employee for each such year.

Subject to condition 1, eighty per cent of the amount actually paid by the employer by way of contribution during any previous year shall be the

deductible allowance.

One-fifth of such deductible allowance shall be allowed in the assessment year relating to the previous year in which the amount was actually

paid and the balance of the deductible allowance shall be allowed in equal instalments for each of the four immediately succeeding assessment

year.

The condition No. 1 is in conformity with r. 87, the other two conditions Nos. 2 and 3 cannot be regarded as being within the scope of the

power conferred on the Board by s. 36(1)(iv). the first part of s. 36(1)(iv) provides for a limit being placed on the amount of contribution whether

initial or annual by rules framed under the Act. The rule framed being rr. 87 and 88 have specified the limit of 25 per cent of the salary of the

employee for each year as reduced by the employer''s contribution to the fund.

It was not permissible for the Board after having framed rule specifying the limit to reduce that limit indirectly by purporting to specify conditions

subject to which the deduction could be claimed. Condition No. 2 in the notification has the effect of reducing the limit by 20 per cent even without

a rule having been made to that effect. Condition No. 3 has the effect of denial of the benefit of deduction to the extent of four-fifth of the amount

paid as initial contribution even when there is no rule limiting the deduction to that percentage of the amount actually paid as contributes 11. Sec.

36(1)(iv) has been so drafted as to require the limit of the contribution eligible for deduction to be regulated only by rules. The Board is permitted

by that provision to stipulate conditions with respect to contributions which are not in the nature of annual contributions whether of fixed amounts

or fixed on 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. The power to fix the limit having been regulated by the rule it was not permissible for the Board in the purported exercise of the power to

specify condition, whittle down the rule and alter the limits of the contributions whether annual or initial, that would qualify as a deduction under s.

36(1)(iv) of the Act the conditions 2 and 3 imposed by the Board in the notification, therefore, cannot be given effect to while determining the

extent to which the employer is eligible to claim deduction for the initial contribution paid to the approved superannuation fund or recognised

provident fund, so long as the amount of that initial contribution is within the limit specified in r. 88. The substantive power to specify condition is

conferred on the Board by s. 36(1)(iv), and that power cannot be exercised so as to alter the rules. The reference to the conditions to be specified

by the Board in r. 88 cannot have the effect of enlarging the power conferred on the Board under s. 36(Miv).

The Tribunal, therefore, was right in holding that the assessee is entitled to the deduction of the entire amount paid by it as initial contribution 1

It was not the case of the Revenue before the Tribunal nor is it its case before us, that the amount paid as initial contribution is in excess of the limits

specified by r. 88.

Similar is the view taken by the Andhra Pradesh High Court in the case of Commissioner of Income Tax Vs. Hyderabad Asbestos Cement

Products Ltd., .

The first question referred to us with regard to the eligibility of the assessee to claim the deduction of the entire initial contribution made by it to

the superannuation fund is answered in favour of the assessee and against the Revenue.

The second question referred to us is with regard to the claim for investment allowance in respect of intercom, amplifiers and air-conditioners

installed in the computer room which has been regarded as part of the factory

premises of the assessee by the authorities below. The ITO has denied the benefit of the investment allowance for these items on the ground that

they are office appliances falling within s. 32A, second proviso cl. (b). That proviso reads thus:

Provided further no deduction shall be allowed under this section in respect of...

(b) any office appliance or road transport vehicles;

The expression ""office appliance"" has not been defined in this section or in the definition section of the Act. While there is no difficulty in

ascertaining the meaning of the term ""appliance"" difficulty arises in treating appliances which are capable of being used in diverse locations, as office

appliances, merely on the ground that such appliances are capable of being used in the office, even while, they are equally capable of being used

elsewhere.

The word ""appliance"" normally denotes a mechanical, electrical or electronic device which is used as an aid in performing any work. An

appliance may be used in more than one location. An appliance like air- conditioners which is meant to regulate the temperature within the

premises in which it is used, is equally capable of being used within an office, a residence, shop a factory, or buildings used for entertainment, etc.

For the purpose of determining the meaning of expression ""office appliance"" in s. 32A second proviso (b), it is also necessary to have regard to the

contents of sub-cl. (a) under the same proviso which refers to ""any machinery or plant installed in any office premises or any residential

accommodation, including any accommodation in the nature of a guest house"". Sub-cl. (a) excludes all machinery and plant installed in any office

premises. The exclusion is not confined to the office appliances, but would take, into account all machinery and plant which, had they been installed

elsewhere would have qualified for the investment allowance.

Office appliance as the term is used in cl. (b) of the second proviso must be a 66-nstrued strictly and limited to appliances which are

exclusively or primarily used in an office, and not extended to appliances which are capable of being used in an office and are equally capable of

being used in a place where the production of articles is carried on or elsewhere.

The investment allowance claimed by the assessee in this case was in respect of intercom, amplifiers and air-conditioners. All these appliances are

capable of being installed and used in any place where people work or gather, and desire to communicate. As to whether these appliances would

qualify for investment allowance would depend upon the place where and purposes for which they have been installed. In this case, all these

appliances are installed in the computer room which has been treated as part of the factory. There is also no dispute that the computers qualify for

investment allowance. It has been found by the Tribunal that for the efficient functioning of the computer, the installation of the air- conditioners in

the room in which the computers are kept, is necessary, and for effective communication by those who are required to handle the computers, the

use of intercom facilities and amplifiers are necessary. These appliances are thus being used as adjuncts to the use of the computers. Having regard

to these facts, we do not find it, possible to agreewith the learned counsel for the Revenue when he submits that these appliances are to be

regarded as office appliances, and therefore, not eligible for investment allowance.

A view similar to that taken by us with regard to these appliances, has been taken by the High Court of Himachal Pradesh, Karnataka and

Bombay in the case of Commissioner of Income Tax Vs. Mohan Meakin Breweries Ltd., in the case of Commissioner of Income Tax Vs.

Electronics Research Industries Pvt. Ltd., and in the case of CIT vs. Tata Chemicals Ltd. (1986) 52 CTR (Bom) 387 : (1987) 162 ITR 662 .

The second question referred to us with regard to the right of the assessee to claim investment allowance in respect of intercom, amplifiers and

air conditioners, is therefore, answered in favour of the assessee and against the Revenue.

The assessee shall be entitled to costs in the sum of Rs. 1000.