Commissioner of Income Tax vs G. Hyatt

G. Mehrotra, C.J.—The following question of law has been referred to us for opinion u/s 256(1) of the Income tax Act, 1961.

Whether, on the facts and in the circumstances of the ease and having regard to the provisions of Section 17(3)(ii) of the Income Tax Act, 1961 the amount of Rs. 27,948/-represenling the interest on the amount of the Assessee''s own contributions to an unrecognised provident bind was assessable under the residuary Section 56 of the said Art?

The Assessee was the manager of a tea estate under the managing agency of M/s Gillanders Arbuthnot and Co., Ltd. The provident fund in respect of this tea estate was not a recognised provident fund under the Income-lax Act. The assessment year is 1962-64. The accounting year will be 1962-63. The Assessee retired during the accounting year and received out of this provident fund Rs. 27,948/- representing the interest on the amount of his own contribution to the fund. The Income Tax Officer assessed this amount as the Assessee''s income from other sources u/s 56 of the Income-lax Act, 1961, hereinafter referred to as the Act.

On appeal by the Assessee to the Appellate Assistant Commissioner, the Appellate Assistant Commissioner observed that this was an unfortunate case and the employee had to suffer this because the Company did not care get the provident fund recognised under the Income Tax Act. The Appellate Assistant Commissioner held that though the amount was not assessable as salary, it was assessable Income as any interest which became payable to any person was income within the meaning of the Income Tax Act. He also coned the decision of the Income Tax Officer, he matter then went up to the Tribunal.

The Tribunal was of opinion that the income chargeable under a particular head u/s 14 could pot be brought to tax under any other head in that section. As this amount comes under the head ''salary'' and it was exempt from tax u/s 17(3)(ii) it could not be taxed u/s 56 of the Act. An application was then made to the Appellate Tribunal for reference to this Court the question which we have already set out in the earlier part of our judgment.

2-3. The contention of the Assessee is that having regard to the scheme of the provisions of Section 17, it is clear that the contribution made by the employee and the interest thereon comes under the definition of the word ''salary'' and it is exempt from taxation in view of the fact that u/s 17(3)(ii) it has been specially exempted. That being so, it cannot be taxed under the general Section 56 of the Act. It is not necessary to cite the various authorities as this is a settled principle of law now that if the income comes under one head and could be taxed under that head, it is not open to the Income Tax authorities to tax the Assessee under a different head simply because by certain provision of the Act it is exempt from tax under a particular head. Reference in this connection may be made to Civil Appeals Nos. 731 and 732 of 1964 decided by the Supreme Court on 4-5-1966 : (reported in Nalnikant Ambalal Mody Vs. Commissioner of Income Tax, Bombay, In that case the Assessee was a practising lawyer. Before he was elevated to the Bench, during the period he was carrying on the profession of an advocate, certain fees fell due lo him. They were paid to him after he was elevated to the Bench. The argument raised in that case was that this income was an income from other sources and thus could bo taxed in the hands of the Assessee although they were in respect of the arrears of the work done by him when he was in the profession. It was held by their Lordships of the Supreme Court in that case that as the income falls under the head of vocation and profession and because such an income from vocation and profession was not taxable u/s 10, was no ground to tax it under a different head, that is, as the income from other sources.

Mr. Pathak, who appears for the Department, has therefore, contended to argue that this income does not come under the definition of the word ''salary''. His contention is that in the case cited above both the parties had admitted that the income was from vocation and profession. In the present case, it is not admitted that the income will fall under the definition of ''salary'' and thus it does not come under the taxable head u/s 15 of the Act. It will be convenient at this stage to mention the relevant provisions of the Act. Section 15 reads as follows:

The following income shall be chargeable to Income Tax under the head "Salaries"-

(a) any salary due from an employer or a former employer to an Assessee in the previous year, whether paid or not;

(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;

(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to Income Tax for any earlier previous year.

Explanation: For the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due.

Section 16 reads as follows:

The income chargeable under the head "Salaries" shall be computed after making the following deductions, namely:

(i) any amount not exceeding five hundred rupees, expended by the Assessee on the purchase of books and other publications necessary for the purpose of his duties;

(ii) in respect of any allowance in the nature or an entertainment allowance specifically granted to the Assessee by his employer-

(a) in the case of an Assessee who is in receipt of a salary from the Government, a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less; and

(b) in the case of any other Assessee who is in receipt of such entertainment allowance and has been continuously in receipt of such entertainment allowance regularly from his present employer from a date before the 1st ay of April, 1955, the amount of such entertainment allowance regularly received by the Assessee from his present employer in any previous year ending before the 1st day of April, 1955, or a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or seven thousand five hundred rupees, whichever is the least.

(iii) any amount paid by the Assessee in respect of taxes on professions, trades, callings or employments levied under any State or Provincial Act;

(iv) where the Assessee is not in receipt of a conveyance allowance, whether as such or as part of his salary, and owns a conveyance which is used for the purposes of his employment, such sum as the Income Tax Officer may estimate in respect of such use as representing the expenditure incurred by him in it maintenance and as representing its normal wear and tear;

(v) any amount actually expended by the Assessee, not being an amount expended on the purchase of books or other publications, or on entertainment or on the maintenance of a conveyance, which, by the conditions of his service, he is required to spend out of his remuneration wholly, necessarily and exclusively in the performance of his duties.

Section 17 reads as follows:

For the purposes of Sections 15 and 10 and of this section-

"Salary" includes-

(i) wages;

(ii) any annuity pension;

(iii) any gratuity;

(iv) any fees, commissions, perquisites of profits in lieu of or in addition to any salary or wages;

(v) any advance of salary;

(vi) the annual accretion to the balance at the credit of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under Rule 6 of Part A of the Fourth Schedule; and

(vii) the aggregate of all sums that are comprised in the transferred balance as referred to in Sub-rule (2) of Rule II of Part A of the Fourth Schedule of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under Sub-rule (4) thereof;

"Perquisite" includes-

(i) the value of rent-free accommodation provided to the Assessee by his employer;

(ii) the value of any concession in the matter of rent representing any accommodation provided to the Assessee by his employer;

(iii)the value of any benefit or amenity granted or provided free of cost or at concessional rule in any of the following cases-

(a) by a company to an employee who is a director thereof;

(b) by a company to an employee being a person who has a substantial interest in the company;

(c) by any employer (including a company to an employee to whom the provisions of paragraphs (a) and (b) of this sub-clause do not apply and whose income under the head "Salaries" exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds eighteen thousand rupees;

(iv) any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the Assessee, and

(v)any sum payable by the employee, whether directly or through a fund, other than a recognised provident fund or an approved superannuation fund, to effect an assurance on the life of the Assessee or to effect a contract for an annuity;

"Profits in lieu of salary" includes-

(i) the amount of any compensation due to or received by an Assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto;

(ii) any payment (other than any payment referred to in Clause (10), Clause (11) or Clause (12) of Section 10), due to or received by an Assessee from an employer or a former employer or from a provident fund or other fund, (not being an approved superannuation fund), to the extent to which it does not consist of, contributions by the Assessee or interest on such contributions.

If we examine the history of this legislation, it will appear that prior to 1939, it was held by their Lordships of the Privy Council that the amount of provident fund withdrawn by a person after his retirement is a capital again and is not an income and thus not liable 10 tax. By Amending Act 1939, Section 7 with certain provisions was introduced which brought in contributions made by the'' employer and the interest thereon under the definition of ''salary'' with a view to tax that part of the provident fund and to exempt from tax the employee''s contribution and interest thereon. Section 7 with certain modifications has been enacted in the present Act u/s 17, which we have already set out above. Section 17(1)(iv) provides that ''salary'' includes ''any as, commissions, perquisites or profits in lieu or in addition to any salary or wages''. In our opinion, the contribution made by the employee and the interest thereon will come under the word ''perquisites or profits in lieu of or in addition to any salary or wages''.

Mr. Pathak''s contention was that the contribution of the employee and particularly the interest thereon cannot be said to be in lieu or in addition to any salary or wages. We not think that that is a correct interpretation of these words. When a person enters a service and a part of the conditions of service is that whatever he contributes towards the provident fund will have interest to be paid by the employer, it is only in lieu of the salary as part of the conditions of his service and not as au investment that he gets the amount of interest from the employer on his contribution to file provident fund. Thus the contribution made by the employees and the interest there-: on but for Section 17(3), would have been ineluded in the words "perquisites or profits in lion of or in addition to any salary or wages".

The next question which arises for ''consideration is what is the effect of Section 17(3)(ii). In our opinion, the object of Section 17(3)(ii) is two-fold. Firstly it extends the meaning of the words "profits in lieu of or addition to any salary or wages" so as to include the contribution made by the employer id the interest thereon. The second object of is section is that it exempts the contribution made by the employee and interest thereon from being taxed. If the object of Section was only to enlarge the meaning of the words "or profits in lieu of" so as to include the contribution made by the employer and interest hereon, then the Legislature would have framed Section 17(1)(iv) as follows:

any fees, commissions, perquisites or profits in lieu of including the contribution made by the employer and interest thereon.

And it would not have first brought the contribution made by the employee as a part of the salary and then excluded it from the definition of profits in lieu of. The whole object s was to bring it under the bead salary and n exempt it from tax. The scheme of Section 17, in our opinion, clearly shows that the pie object was to bring under the head the employee''s contribution and interest hereon and then to exempt it from being (sic). It will be really curious if by one hand .would have excluded it from the definition of the word ''salary'' and then tax it again u/s 56. This could not have been tended by the Legislature.

In our opinion, therefore, the question referred to us should be answered in the negative. The Assessee is entitled to costs. The Department will pay the hearing fee which we assess at Rs. 100/-.