Commissioner of Income Tax vs Western India Paper and Board Mills (P.) Ltd.

Sugla, J.—The Tribunal has referred to this Court only one question as a question of law for opinion u/s 256(1) of the income tax Act, 1961 (''the Act''). The question reads thus:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee-company was entitled to the deduction of Rs. 13,755 being its contribution to the provident fund in the case of its Managing Director for the assessment year 1972-73?"

The assessee is a company. It has been deducting certain amount from the salaries paid to the Managing Directors (it is not clear from the record, whether Managing Director was one or more than one) on account of provident fund and has also been making its own contribution towards the same for quite some time. The proceedings herein pertain to the assessee''s assessment for the assessment year 1972-73. The amount of salary is Rs. 3,000 per month and the amount paid by the assessee towards the provident fund account in respect of the salaries paid to the Managing Director is Rs. 13,755. We are told that this has been so for a number of years.

The question whether the amount paid towards provident fund as the assessee''s contribution in respect of the salary paid to the managing director was or was not allowance u/s 36(1)(iv) of the Act came up for consideration before our Court in the assessee''s own case for the assessment years 1964-65to 1967-68 (both inclusive). By its judgment dated 1-2-1982, our Court held that in the absence of material on record to show that the managing directors had become members of the provident fund by making necessary applications as required by the rules, it was not possible to accept that they were or could be members of the provident fund. Accordingly, it was held that the assessee was not entitled to deduction in respect of the amount paid by it towards provident fund as its contribution. It may be pertinent to mention that while so holding, our Court kept the question of allowance of the claim u/s 37 of the Act open by observing:

"That there was no finding whatsoever by the AAC or the Tribunal that the amounts had been laid out wholly and exclusively for the purpose of the business of the company. Since the Tribunal had rejected the assessee''s miscellaneous application, and the court could not go behind the statement of the Tribunal that such a question was never argued before it, the Tribunal could not be called upon to deal with the question again for the first time as to whether the assessee was entitled to a claim u/s 37 and the assessee could not also be permitted to raise the contention that alternatively the claim for deduction was permissible u/s 37" - Western India Paper & Board Mills v. CIT [1982] 137 ITR 525, 526 (Bom.).

When this question came up for consideration before the Tribunal in the appeal for the assessment year 1969-70, the Tribunal, it appears, considered the question of the assessee''s claim for deduction not only u/s 36(1)(iv) but also u/s 37. As regards the claim u/s 37, the Tribunal observed that the amount of the assessee''s contribution could be taken as a benefit to the managing directors. This kind of benefit was a commonly known benefit conferred in terms of service conditions of private employers and even of the Government where pensionary benefits are not applied. Thus, there was nothing unreasonable about the kind of benefit that was given to the managing directors. The Tribunal stated that they were satisfied that the payment had been made out of consideration of commercial expediency and was, therefore, allowable. In the subsequent assessment years, i.e., the assessment years 1970-71 to 1972-73, the last one being the assessment year involved herein, the Tribunal has followed its earlier orders. Though the Tribunal''s order for the year under reference is brief, it has to be taken to be on the basis of the reasons given by it in the assessee''s appeal for the assessment year 1969-70. It may not be out of place to mention that the reference arising out of the Tribunal''s order for the assessment year 1970-71 had come up for consideration before our Court. Somehow, both the counsels had then agreed that the issue was covered by our Court''s decision in the assessee''s own case (supra) and the question was answered against the assessee. It has been brought to our notice that the second aspect of the question, namely, whether the assessee could be entitled to deduction u/s 37, was not brought to the notice of our Court in the reference for the assessment year 1970-71 and, therefore, the judgment for that year should not bind us to the extent of the claim u/s 37.

We are inclined to accept the assessee''s contention that the assessee''s claim u/s 37 requires to be considered in view of the fact that the question was specifically left open by our Court in Western India Paper & Board Mills'' case (supra) and in the judgment for the assessment year 1970-71 this question was not brought to the notice of the Court. We need hardly mention that so far as the question of allowance of the claim u/s 36(1)(iv) is concerned, our Court''s judgment in Western India Paper & Board''s case (supra) is binding on us, following which we hold that the assessee''s claim u/s 36(1)(iv) was rightly rejected. However, so far as the claim u/s 37 is concerned, we find ourselves in agreement with the Tribunal that if the assessee''s contribution towards provident fund in respect of salaries paid to the managing directors is not to be treated as provident fund contributions, it has to be treated as some kind of payment in addition to the salaries paid to the managing directors. The pertinent question, therefore, would be whether such a payment which will include salaries as well as the contributions towards provident fund, is a business expenditure incurred by the assessee wholly and exclusively for the purposes of his business. In view of the Tribunal''s observations broadly reproduced by us earlier, with which we are in agreement, we have no difficulty in holding that the payments made herein were exclusively for the purposes of the assessee''s business and, therefore, represented an allowable deduction.

Accordingly, we answer the question in the affirmative and in favour of the assessee. No order as to costs.