M.C. Muthanna vs Commissioner of Income Tax

Ratnam, J.—In these reference at the instance of the assessee u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ""the Act"")

the following common question of law has been referred to this court for its opinion.

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding notwithstanding the provisions of

section 161 of the Income Tax Act, 1961 that interest to the extent of Rs. 366 in the assessment year 1975-76 and Rs. 2,490 in the assessment

year 1976-77, which was interest received by the assessee in excess of the rate prescribed in clause (b) of rule 6 of Part A of the Fourth Schedule

to the Income Tax Act, 1961, did not qualify for deduction u/s 80L of the Income Tax Act, 1962 ?

The assessee is an individual and was employed in Bombay Burmah Trading Corporation Limited. The assessee was a member of an approved

provident fund constituted by the company for which recognition was granted u/s 58B(1) of the Indian Income Tax Act, 1922, by an order of the

Commissioner of Income Tax Bombay on February 3,1938. The fund was constituted under certain rules and was a contributory provident fund.

By virtue of the rules, the fund came into possession of certain moneys. One of the rules governing the fund came into possession of certain

moneys. One of the rules governing the fund and its administration provided for the investment of the funds received by the trustees and for the

payment of interest realised thereby to the members, the assessee received interest from the investments made out of the amounts belonging to the

provident fund and such interest, to the extent prescribed in clause (b) of rule 6 of Part A of the Fourth Schedule to the Act, was excluded from

the assessment. The excess interest was assessed under the head ""Salary"" as per section 17(1)(vi) of the Act, as could be gathered from the order

of the Appellant Assistant Commissioner, though the assessee claimed that a deduction ought to have been allowed to the extent admissible u/s

80L of the Act in respect of the said amount.

Such interest so assessed in the assessment year 1975-76 was Rs. 366 and Rs. 2,490 in the assessment year 1976-77. The order of

assessment in respect of the relevant assessment years proceeded on the footing that the aforesaid amounts had been added back, in the appeals

preferred by the assessee reiterating that the excess interest disallowed should be deducted u/s 80L of the Act, which provided for deduction of

interest from certain specified investment, the Appellate Assistant Commissioner took the view that the source for the said amounts is the

employment of the assessee and his membership in the company''s provident fund and by virtue of section 17(1)(vi) of the Act and rule 6 of Part A

of the Fourth Schedule to the Act, the amounts were rightly assessed under the head ""Salary"" as per section 17 of the Act and, therefore, there is

no question of permitting any deduction u/s 80L of the Act. Aggrieved by this, the assessee preferred appeals before the Tribunal and the Tribunal

was of the view that as the stand taken by the assessee and the Department were the same as those considered in a decision of a Special Bench of

the Tribunal in I.T.A. Nos. 1172 and 1173 (Mds) of 1977-78 dated February 25,1978, that decision would govern the appeals preferred by the

assessee and for the very same reasons set out in that decision, the assessee was not entitled to the relief u/s 80L of the Act on the aforesaid

amounts in either of the two assessment years.

Inasmuch as the Tribunal had, in disposing of the appeals preferred by the assessee, merely made a reference to the reasoning in its earlier

order, the reasons given by the Tribunal in that order, which forms part of the stated case, may also be briefly noticed. The Tribunal opined that the

interest amounts paid to the assessee would be ""salary"" only for limited purposes and would not partake of the nature of ""salary"" and that the

trustees were the owners off the fund and the investment of the funds was for the benefit of the beneficiaries and not on their behalf and that as the

interest was paid to the assessee and others only on behalf of the trustees of the fund such interest does not emanate from any of the sources

mentioned in section 80L of the Act and. Therefore, the deduction u/s 80L of the Act would not be available, the Tribunal dismissed the appeals.

Learned counsel for the assessee submitted, referring to the rules of the provided fund, that the interest realised by the trustees by the investment

of the funds of the trust would qualify for the benefit of deduction u/s 80L of the Act and that it is not necessary that the assessee himself should be

the owner of the funds so invested in order to claim the benefit of section 80L of the Act. Reliance was also placed by learned counsel in this

connection on the decision reported in Commissioner of Income Tax Vs. Smt. Shakuntala Banerjee, . On the other hand, learned counsel for the

Revenue contended that having regard to the provision contained in clause (b) of rule 6 of Part A of the Fourth Schedule read with section 15 to

17 of the Act, it is clearly seen that the amounts received by the assessee would partake of the character of ""salary"" for purposes of the Act and

that, therefore there is not question of claiming the benefit of deduction u/s 80L of the Act. It was further submitted that the trustees are the owners

of the fund and the assessee, as a beneficiary has rights against the trustees and the trustees held and invested the funds for the benefit of and not

on behalf of the assessee and rule 17 of the provident fund rules providing for payment of interest to every member did not in any way negative the

relationship between the assessee, as a beneficiary, and the trustees as the owners of the fund and the trustees being the legal owners are the

persons who may claim the benefit of deduction u/s 80L of the Act and not the assessee. The decision relied on by learned counsel for the

assessee was also sought to be distinguished on the ground that it related to a private trust and not a provident fund, as in this case attracting clause

(b) of rule 6 of Part A of the Fourth Schedule and the other related provisions and, therefore, that decision would be inapplicable. In reply, learned

counsel for the assessee pointed out that the question whether the amounts received by the assessee would fall under the head ""Salary"" for

purposes of the Act has not been made the subject-matter of the reference at the instance of the Revenue and cannot be considered in this

reference before the court at the instance of the assessee and the proper course for the Revenue would have been to ask for a reference on that

question negatived by the Tribunal in the appeals before it. Reliance was placed in this connection on the dissection reported in E.I.D. Parry

Limited Vs. Commissioner of Income Tax, . However, learned counsel for the Revenue pointed out that the main question referred for the opinion

of the court related to the claim made by the assessee for deduction u/s 80L of the Act and in considering the question whether the amounts did

not qualify for deduction u/s 80L of the Act, it would be open to the court to consider all aspect which have fairly a direct bearing on the dispute

and comprised within the framework of the question already referred.

Before proceedings to consider the merits of the claim of the assessee for deduction u/s 80L of the Act. We may dispose of the ancillary

submission on behalf of the Revenue as well as the assessee whether the question that the amounts received by the assessee could be regarded as

Salary"" can be considered. These amounts were no doubt received by the assessee, but the amounts represented interest earned by the trust on

investment of the money belonging to the trust by the trustees in banks and others securities. Whether, the amounts so received by the assessee

could be regarded as income by way of interest on deposits with a banking company within the meaning of section 80L(1)(c)(vi) of the Act and

included in the gross total income of the assessee would be a relevant aspect in the consideration of the claim for deduction u/s 80L of the Act

made by the assessee. It is obvious that if the interest on the investment made by the trustees of the provident fund and distributed to the assessee

partakes of the character of ""Salary"" under the provisions of the Act, the, it would not qualify for the benefits of deduction u/s 80L of the Act.

Indeed, in the orders of the Appellate Assistant Commissioner and also the Tribunal, this aspect had been dealt with and we are of the view that

their is only a closely related aspect with reference to the question refereed. It may be useful to refer to the decision of the supreme Court in

Commissioner of Income Tax, Bombay Vs. Scindia Steam Navigation Co. Ltd., where, discussing the scope of a reference u/s 66(1),(2) and (5)

of the Indian Income Tax Act, 1922 the Supreme Court has pointed out that when a question is raised before the Tribunal and is dealt with by it, it

is clearly one arising out of its order and that where the question itself was under issue, as in this case before the Tribunal regarding the claim to the

benefit of a deduction u/s 80L of the Act, it will be an over refinement of the position to hold that each aspect of the question is itself a distinct

question for purposes of section 66(1) of the Act. We may also refer to the question framed which deals with the qualification for deduction u/s

80L of the Act of the amount of interest received by the assessee during the assessment years in question of the amount of interest received by the

assessee not qualifying for deduction u/s 80L of the Act owing to the amount not falling under the description of the categories of income

enumerated in section 80L of the Act. We may usefully refer in this connection to the decision of the Supreme Court in Bhanji Bagawandas Vs.

Commissioner of Income Tax, Madras, , where it has been pointed out that a question may be a single one having its impact on one point, or it

might be a complex one involving more that one aspect and requiring to be tackled from different standpoints and the where the question itself was

under issue, it will be an over refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of section

66(1) of the Act. In the view we have taken that the question as referred is comprehensive enough to permit consideration of the character, for

purposes of the Act, of the interest received by the assessee, it is unnecessary to refer to the decision in E.I.D. Parry Limited Vs. Commissioner of

Income Tax, as that decision may not apply having regard to the terms in which the question referred has been counched in this case.

Earlier, it has been noticed how the Appellate Assistant Commissioner in the course of his order has found that the amounts received by the

assessee are assessable as part of his ""Salary"" as per section 17(1)(vi) of the Act and in the course of its order, the Tribunal has also proceeded to

consider the character of the interest received by the assessee. While doing so the Tribunal has referred to clause (b) of rule 6 of part A of the

Fourth Schedule and to sections 15 to 17 of the Act, but had concluded that the interest income received by the assessee does not partake of the

nature of ""Salary"" but retained its character as interest income. We are, however, unable to agree with the view taken by the Tribunal. Rule 2(e) of

Part A of the Fourth Schedule states that ""annual accretion"", in relation to the balance to the credit of an employees, means the increases to such

balance in any year, arising from contributions and interest. Under rule 6(b) that portion of the annual accretion in any previous year to the balancd

at the credit of an employee participating in a recognised provident fund as consists of interest credited on the balance to the credit of the employee

in so far as it exceeds one third of the salary of the employee or is allowed at a rate exceeding such rate as may be fixed by the Central

Government in this behalf by notification in the Official Gazette, shall be deemed to have been received by the employee in that previous year and

shall be included in his total income for that previous year and shall also be liable to Income Tax. Thus interest credited on the balance in excess of

one third of the salary of the employee or in excess of the rate exceeding the rate fixed by the Central Government is deemed to have been

received by the employee in the previous year and should also be included in his total income for the previous year and shall be liable to Income

Tax. There is no dispute that the amounts of Rs. 366 and Rs. 2,490 represented such excess in accordance with rule 6(b) referred to earlier. u/s

17(1)(vi) of the Act, for the purpose of sections 15, 16 and 17 ""Salary"" includes 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. Thus, by

the application of rule 6(b) and section 17(1)(vi) of the Act, it follows that the excess interest credited which is declared to be liable to tax under

rule 6 is included in the expression ""Salary"" for purposes of sections 15, 16 and 17 of the Act. Section 15 of the Act provides for certain

deductions while computing the income chargeable under the head ""Salary"". The interest income in excess of the permissible limit referred to in

clause (b) of rule 6 of Part A of the Fourth Schedule is by the combined operation of rule 6(b) and section 17(1)(vi) of the Act to be ""Salary"" for

purposes of sections 15 and 16 of the Act. Section 15 of the Act, after enumerating the categories of income falling under the head ""Salary"" also

provides for their chargeability to income tax under the head ""Salary"". It follows, therefore, that the interest amount paid in excess of the

permissible limit under rule 6(b) has to be treated as salary and also treated as such for purposes of assessment. Unfortunately, the Tribunal has

taken the view that the payment of excess interest can be considered to be salary only for certain limited purposes, viz., apportioning it to a

particular head of income for purposes of classification and no more. While so doing, the Tribunal has referred to the following observations of

Lord Asquith in East End Dwellings Co. Ltd. Finsbury Borough Council [1952] AC 109 .

If you are bidden to treat an imaginary state of affairs as real, you must surely unless prohibited from doing so, also imagine as real the

consequences and incidents which, if the putative state of affairs, had in fact existed, must inevitably have flowed from or accompained it... The

statute says that you must imagine a certain state of af fairs, it does not say that having done so, you must cause or permit your imagination to

boggle when it comes to the inevitable corollaries of that state of affairs.

Despite referring to the aforesaid passage which cautions against the boggling of the imagination when it comes to the inevitable corollaries of

treating an imaginary state of affairs as real, the Tribunal has permitted its imagination to boggle. The Tribunal would accept that the excess interest

paid to the assessee in accordance with rule 6(b) would be ""salary"" but for limited purposes. In other words, the Tribunal, while accepting that it is

bidden to treat the interest excess of the prescribed rate in clause (b) of rule 6 of Part A of the Fourth Schedule as ""salary"" for purposes of the Act,

had failed to give full effect to the inevitable corollaries of that state of affairs in that it had pigeon holed such income as one intended for arriving at

the total income, not in any manner affecting the nature of the income, we are unable to agree with this line of reasoning. When under clause (b) of

rule 6 read with section 17(1)(vi) of the Act and section 15 of the Act, the payment of excess interest is deemed to be included in the ""salary

income and also assessable as such, it cannot be said that it is only for the purpose of classification and not for other purposes, inclusive of

assessment as such. We, therefore, hold that the interest payment received by the assessee in these cases would really partake of the character of

salary"" as decided by the Appellate Assistant Commissioner and there is, therefore, no question of the assessee claiming the benefit of deduction

u/s 80L of the Act.

In order to ascertain whether the interest received by the assessee would otherwise fall within section 80L of the Act, it has to be found out

whether such interest income can be construed as interest form securities or bank deposits, etc. The provident fund, as noticed earlier, had been

recognised u/s 58B(1) of the Income Tax Act, 1922 by the Commissioner of Income Tax Bombay. The funds invested are trust funds and they

comprised the contribution of the employees as well as the interest accrued thereon, the contribution by an employee like the assessee would be

repayable on his leaving the service. There is a specific provision under rule 13 of the rules framed in relation to the provided fund to the effect that

the crediting of the employer''s fixed and optional contributions and interest shall not confer on any member any right in respect thereof except such

as is expressly provided by these Rules, rule 22 of the Rules provides for recoupement of the employer''s contribution in specified cases and rule

23 provides for forfeiture of the employer''s contribution in certain other cases. It is thus seen that under the rules, on the employee leaving the

service the entire amount of contributions, both by assessee and also the employer, as well as interest thereon, become payable to the employee or

his heirs, subject to the provisions of recoupement of forfeiture. It is in the context of these rules governing the provident fund that the real nature of

the relationship between the assessee and the first has to be considered. No doubt, the funds of the trust are vested in the trustees. Who are also

the legal owners of the funds and the other trust properties, however, the trustees hold the property for the other trust properties. However, the

trustees hold the property for the benefit of the beneficiaries and not on their behalf. This distinction is fine but appreciable and has been clearly

brought out in the decision is fine but appreciable and has been clearly brought out in the decision of the Supreme Court in W.O. Holdsworth and

Others Vs. The State of Uttar Pradesh, . It has clearly been pointed out that the definitions of ""trustee"" ""beneficiary"", ""beneficial interest"" ""trust

property"" and ""trust money"" emphasised that the trustee is the owner of the trust property and the beneficiary has rights only against the trustee as

owner of the trust property and the trustee is the legal owner and the property vests in him as such. It has also been further laid down that the trust

property is held by the trustee for the benefit of the beneficiaries, but such property is not held on their behalf and the expressions ""for the benefit

of"" and ""on behalf of"" connote different concepts in that the former denotes a benefit enjoyed by another thus bringing in a relationship as between

a trustee and a beneficiary or cestuique trust, while the later contemplates an agency bringing about a relationship between principal and agent

between the parties, one of whom is acting on behalf of another. The principles laid down in the decision of the Supreme Court would, in our view,

govern this case also. The assessee as a members of the provideno fund had only a right against the trustees. Who are the owners of the trust funds

even in respect of the contribution of the assessee as well as the interest accruing thereon and till the assessee left the service, the amounts were not

repayable and the contribution and the interest thereon by the employer did not confer any right as such on the member contributing. The trustees

in this case were thus the owners of the trust funds and had also invested them for the benefit of the employees and not as their agents and though

under rule 17 of the Provident Fund Rules payment of interest to every subscriber on the amount standing to his credit could be made, that would

not in any manner alter the character of the funds held and invested by the trustees as one on behalf of the employees. The trustees have therefore,

to be considered as the legal owners and the interest received by them the investment of the trust funds in bank deposits might perhaps qualify for

deduction u/s 80L of the Act in their hands, if that interest could be assessed. But inasmuch as the trustees had not acted as the agents of the

employees. It follows that the assessee cannot, for purposes of section 80L of the Act, be considered to have included in the gross total income

any income by way of interest on deposits in the banking company, In other words, the excess interest paid to the assessee over the prescribed

rate cannot be income of the nature contemplated u/s 80L of the Act and, therefore, the assessee cannot claim the benefit of deduction under

section, 80L of the Act.

We may now briefly refer to the decision in Commissioner of Income Tax Vs. Smt. Shakuntala Banerjee, relied on by learned counsel for the

assessee, that related to a private trust and the distinction pointed out, viz., trustee acting ""for the benefit of"" and ""on behalf of the beneficiary"" has

not been borne in mind. We are, therefore, of the view that that decision cannot be of any assistance to the assessee, We, therefore, hold that the

Tribunal was quite right in its conclusion that the interest received by the assessee in the assessment years 1975-76 and 1976-77 in excess of the

rate prescribed in clause (b) of rule 6 of part A of the Fourth Schedule did not qualify for deduction u/s 80L of the Act. We answer this reference

accordingly against the assessee. The Revenue will be entitled to the costs of this reference. Counsel''s fee Rs. 500. One set.