GESTETNER DUPLICATORS (PVT.) LTD. vs. COMMISSIONER OF INCOME-TAX, WEST BENGAL

CIVIL APPEAL No. 565/1978Supreme Court[1979] 2 S.C.R. 78814 December 1978Bench: 3 JudgesAuthor: P.N. BHAGWATI, V.D. TULZAPURKAR, R.S. PATHAK A GESTETNER DUPLICATORS17 pages
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What did the Supreme Court hold?

The Supreme Court allowed the assessee's appeals. On the first issue, it held that commission paid by the assessee to its salesmen clearly falls within the expression 'salary' as defined in Rule 2(h) of Part A of the Fourth Schedule. The Court reasoned that 'salary' conceptually means remuneration for work done or services rendered, and can be determined by time spent, work done, or a combination. In this case, commission based on turnover represented remuneration partly by time and partly by work done, thus partaking of the character of salary. The Court found the High Court's reliance on the 1941 circular and the distinction between fixed monthly payments and commission to be unsustainable. It clarified that the circular's intent was to exclude commissions not partaking of the character of salary. Regarding the second issue, the Court held that the Tribunal was correct in its view that the provident fund satisfied the conditions in Rule 4(c). The Court emphasized that once a provident fund is recognized, and that recognition continues, taxing authorities should proceed on the basis that it satisfies all conditions, as withdrawal of recognition is a power vested in the Commissioner under Rule 3, and until exercised, the recognition stands.

What were the facts?

The assessee, Gestetner Duplicators (Pvt.) Ltd., maintained a recognized provident fund since 1937. Under its provident fund scheme rules, 'salary' included fixed monthly salary, commission, and dearness allowance. Salesmen were paid a fixed monthly salary plus commission based on turnover. The assessee calculated its provident fund contributions on both salary and commission. For assessment years 1962-63, 1963-64, and 1964-65, the assessee claimed these contributions as deductible under Section 36(1)(iv) of the Income Tax Act, 1961. The Income-Tax Officer disallowed the portion of the contribution calculated on commission, citing Rule 2(h) of Part A of the Fourth Schedule, which he interpreted as excluding commission from 'salary'. An Appellate Assistant Commissioner rejected the assessee's appeal for 1962-63 but allowed it for the other two years. The Tribunal ruled in favor of the assessee, holding commission as part of salary and thus deductible. The High Court, however, ruled for the Revenue, relying on a 1941 Central Board of Revenue circular and the principle that commission, unlike salary, is not a fixed monthly payment.

What were the issues?

1. Whether the commission paid to salesmen, which was part of their contractual employment terms and calculated as a fixed percentage of turnover, falls within the definition of 'salary' under Rule 2(h) of Part A of the Fourth Schedule to the Income Tax Act, 1961, for the purpose of allowing employer's provident fund contributions as a deduction under Section 36(1)(iv). Assessee's Contention: The commission paid to salesmen is a part of their contractual remuneration for services rendered and thus constitutes 'salary' as defined in the assessee's provident fund scheme rules, making the contributions thereon deductible. Revenue's Contention: Commission is not a fixed monthly payment and therefore does not fall within the definition of 'salary' under Rule 2(h) of Part A of the Fourth Schedule, as clarified by a Central Board of Revenue circular dated January 16, 1941, and is not deductible under Section 36(1)(iv). 2. Whether the provident fund maintained by the assessee satisfied the conditions laid down in Rule 4(c) of Part A of the Fourth Schedule, thereby entitling the employer's contributions to be deducted. Assessee's Contention: The provident fund was recognized in 1937 and had continued to be recognized, implying it satisfied all conditions, including those in Rule 4(c). Revenue's Contention: Not explicitly recorded, but implied by the disallowance of deductions related to commission contributions, suggesting a dispute over the fund's compliance.

Which sections of the Income-tax Act were involved?

Section 17(1)(iv),Section 36(1)(iv)

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788 A GESTETNER DUPLICATORS (PVT.) LTD. v. COMMISSIONER OF INCOME-TAX, WEST BENGAL December 14, 1978 B [P. N. BIIAGWATI, V. D. 'TuLZAPURKAR AND R. S. PATHAK, JJ.] Income-tax Act, '1961-s. 17(1) (iv) and r. 2(h) of Part A of Fourth • Schedule-Sco~e of. ,,...

Salesmen entitled to t:ommission in <uldition to salary-Assessee credited into the provident fund accounts of sales1nen its share of PF contribution calculated 011 both salary and commission-Assess.ee's <:ontribution of PF on conunission, • C if could be claimed as an allowable deduction under s. 36(1) (iv). D E F G u Words and phrases: Salary-Mif!aning of--..'ialary, if includes con1mission.

The expression "salary," under s. 17(1)(iv) of the Income Tax Act, 1961, includes "any fees, comm.i.SBions, p~rquisit.es or profits in lieu of or in addition to any salary or wages"; under r. 2(h) in Part-A of the Fourth Schedule to the Act, which contains Rules relating to recognised Provident Funds, the term 'salary' includes dearness allowance, if the terms of employment so provide, but excludes ali other allowances and perquisites, where an MBCSsee, as an employer, has paid any sum by way of oontribution

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