VELJAN HYDRAIR (P) LTD. v. INCOME TAX OFFICER
[Citation -1985-LL-0430-3]

Citation 1985-LL-0430-3
Appellant Name VELJAN HYDRAIR (P) LTD.
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 30/04/1985
Assessment Year 1980-81
Judgment View Judgment
Keyword Tags approved superannuation fund • recognised provident fund • representative capacity • employee and employer • house rent allowance • individual capacity • dearness allowance • managing director • production bonus • returned income • voting power • karta
Bot Summary: The question is whether the set of rules meant to govern the 'Scheduled Provident Funds' apply to the provident funds maintained under the Employees' Provident Funds and Miscellaneous provision Act both of which come under the definition of 'Recognised Provident Fund'. On a common sense point even a layman can say that the rules meant to govern 'Schedule Provident Funds' do not govern the provident funds under the Employees' Provident Funds and Miscellaneous Provisions Act for the simple reason that if both kinds are governed by the same set of rules why the provident funds maintained under the Employees' Provident Funds and Miscellaneous Provisions Act should be made to govern by the provisions of that Act and for what earthly purpose the Employees' Provident Funds and Miscellaneous Provisions was enacted at all. Sub-section of the same section is as follows: Any amount standing to the credit of a member in the Fund or of an exempted employee in a provident fund at the time of his death and payable to his nominee under the scheme or the rules of the provident fund shall, subject to any deduction authorised by the said scheme or rule, vest in the nominee and shall be free from any debt or other liability incurred by the deceased or the nominee before the death of the member or of the exempted employee. The provident fund under Employees' Provident Funds and Miscellaneous Provisions Act shall vest in the Central Board constituted under section 5A of the Employees' Provident Funds and Miscellaneous Provisions Act and the scheme framed under the said Act should provide all or any of the matters provided in the Second Schedule to the said Act. The question of recognition does not arise as already discussed above to the provident funds maintained under the Employees' Provident Funds and Miscellaneous Provisions Act but such recognition is essential only for 'Scheduled Provident Funds'. From the above, it can be seen that their Lordships of the Supreme Court always maintained distinction between the 'Scheduled Provident Fund' on the one hand and the provident fund under the Employees' Provident Funds and Miscellaneous Provisions Act on the other. From all the above, we have to conclude that rule 15(1)(b) governing the 'Scheduled Provident Funds' does not apply to the provident fund under the Employees' Provident Funds and Miscellaneous Provisions Act.


This is assessee's appeal. point involved, though short, is interesting. assessee is Veljan Hydrair (P.) Ltd., Hyderabad. Admittedly, one Shri Janardhana Rao is managing director of said company. He had contributed Rs. 3,680 whereas his employer, assessee, contributed Rs. 3 ,6 3 2 to provident fund. Admittedly, contribution is to scheme formulated under Employees' Provident Funds and Miscellaneous Provisions Act, 1952. total of employer and employee's contributions came to Rs. 7,312. ITO held firstly, that Shri Janardhana Rao, managing director of assessee-company, owns shares in company with voting power exceeding 1 0 per cent of total shareholding. He also held that it is case where contribution should be limited to permissible sums mentioned in rule 75 of Income-tax Rules, 1962 ('the Rules'). Therefore, ITO held that permissible limit was only Rs. 3,000 and he had disallowed sum of Rs. 3,632 which is found to be in excess under rule 75. On appeal, it is contended that rule 75 does not apply to this case as contributions are made to scheme formulated under Employees' Provident Funds and Miscellaneous Provisions Act and not to any provident fund mentioned in Part of Fourth Schedule to Income-tax Act, 1961 ('the Act'). It is further contended that Shri Janardhana Rao contributed to provident fund in this individual capacity, whereas he held shares in capacity of karta of this HUF. In such circumstances, as there is difference among 'person' who contributed to provident fund and 'person' holding shares, even requirements of rule 75 are not fulfilled to justify any disallowance, out of total of contributions made by employer as well as employee to provident fund. Therefore, addition of Rs. 3,632 to returned income of assessee is unjustifiable and cannot be sustained. assessee sought to rely upon decision of Bench of Tribunal in J. & J. De Chane Laboratories (P.) Ltd. v. ITO [IT Appeal Nos. 1466 to 1468 (Hyd.) of 1982, dated 17-8-1983]. It is contended for assessee company that rule 75 will apply only to recognise provident fund coming under Fourth Schedule and not to statutory provident fund like Employees' Provident Funds and Miscellaneous Provisions Act. learned Commissioner (Appeals) did not agree with arguments advanced on behalf of assessee. Firstly, he held that no distinction can be recognised regarding shareholding in one's individual capacity and one's holding in representative capacity on behalf of joint family. He also held that it is incorrect to hold that rule 75 will not apply to contributions made to statutory provident fund like Employees' Provident Funds and Miscellaneous Provisions Act. learned Commissioner (Appeals) concedes that no doubt as per rule 1 of Part of Fourth Schedule will not apply to provident fund governed by Provident Funds Act, 1925. As consequence rule 15(1)(b) of Part of Fourth Schedule does not govern cases coming under Provident Funds Act. He held that rule 75 was framed not only in context of rule 15(1)(b) of Part of Fourth Schedule but was framed mainly in context of section 36(1)(iv) of Act, whereby any contribution made by employer to recognised provident Fund is admissible 'subject to such limits as may be prescribed.' According to him, limits are prescribed under rules 75, 87 and 88 of Rules read with section 2(38) of Act. He further held that term 'recognised provident fund' employed in section 36(1)(iv) would include provident fund established under scheme framed under Employees' Provident Funds and Miscellaneous Provisions Act. He ultimately held that rule 75 would apply to employer's contribution in view of section 36(1)(iv), read with section 2(38). learned Commissioner (Appeals) was further of view that rule 75 puts ceiling limit of Rs. 250 per month in respect of contributions made by employer as well as employees. Therefore, it can reasonably be presumed that ceiling limit for contribution by each of employer will be Rs. 125 per month or Rs. 1,500 per annum. In fact, this was view taken by this Tribunal Bench 'A' as per its order in Indocean Engineers (P.) Ltd. [IT Appeal No. 1133 (Hyd.) of 1981-82, dated 22-12-1982.] He ultimately held that ITO erred in considering contributions made by employer as well as employee together for purpose of applying ceiling limit. Since only contribution made by employer would be relevant for purposes of application of section 36(1)(iv), only employee's contribution of Rs. 3,652 will have to be taken into account. He held that out of it only Rs. 1,500 is admissible and Rs. 2,132 is to be disallowed. disallowance was reduced from Rs. 3,632 to Rs. 2,132 by learned Commissioner (Appeals). Thus, he allowed appeal filed before him in part. 2. Further, aggrieved by order of learned Commissioner (Appeals) dated 27-4-1984, assessee came up in second appeal to this Tribunal and, thus, matter stands for our consideration. We have heard Shri G. Rajagopala Rao, learned counsel for assessee, and Shri P. Radhakrishnamurthy, learned departmental representative. Firstly, it is argued by Shri G. Rajagopala Rao that assuming without admitting rule 75 governs case. Rule 75(1) which is concerned rule for our purposes reads as follows: "(1) Where employee of company owns shares in company with voting power exceeding ten per cent of whole of such power, sum of contributions of employee and employer to recognised provident fund maintained by company shall not exceed Rs. 250 in any month." So before applying said rule, employee should have shares in employer company with voting power exceeding 10 per cent of whole of such power. fair reading of rule would disclose that ceiling under that rule would apply if only employee whose contributions to 'recognised provident fund' would be same 'person' holding shares of more than 10 per cent of total shareholdings. Now in this case, total shares are 9,100. managing director in his individual capacity held 293 shares, whereas, as karta of his HUF he held 1,052 shares. In order to buttress his contention that Shri Janardhana Rao was holding only 293 shares in his individual capacity, learned counsel for assessee filed assessment order in individual case of Shri Janardhana Rao which is dated 27-3-1982. In statement of total income accompanying his return, he had shown his dividend income derived from 293 shares at Rs. 2,917.50 which was accepted in assessment. Further, when same contention was put forward before learned Commissioner (Appeals) he did not express any doubt about truth of contention but he held that no distinction need be drawn regarding individual holding and shareholding held by joint family for purposes of applying rule 75. decision of learned Commissioner (Appeals) in this regard is bereft of any authority. Neither any section nor rule was discussed nor any authority was considered before coming to such conclusion. In our opinion, this conclusion of learned Commissioner (Appeals) cannot be justified under law. Under section 2(31), there are seven categories of persons coming under Under section 2(31), there are seven categories of persons coming under definition of 'person'. In said definition, 'individual' and 'HUF' were mentioned separately as two out of seven categories coming under definition of 'person'. charging section, namely, section 4 of Act excepts income-tax to be levied in respect of total income of previous year or previous years of every person. In view of above, it is very difficult to appreciate decision of learned Commissioner (Appeals) that no distinction need be drawn between shareholding of HUF and individual shareholding for purposes of rule 75. Therefore, we are of opinion that rule 75 applies in such case where employee of employer company holds more than 10 per cent of total shareholding. If individual shareholding of employee falls short of 10 per cent holding, then said rule does not apply. For purpose of calculating individual shareholding fact that employee holds some of shareholdings in representative capacity either as karta of his HUF or partner of firm, etc., should be ignored and such shareholding in representative capacity should not be clubbed or aggregated with individual shareholding. Therefore, on this point, we reverse finding of learned Commissioner (Appeals). 3. Now let us come to question whether rule 75 applies to scheme provided under Employees' Provident Funds and Miscellaneous Provisions Act and contributions made under that scheme both by employer and employee. Section 2(38) defines 'recognised provident fund'. Two kinds of provident funds come under definition. first is one governed by rules contained in Part of Fourth Schedule, i.e., 'Recognised Provident Fund', which is hereinafter called as 'Scheduled Provident Fund'. second is provident fund maintained under scheme framed under Employees' Provident Funds and Miscellaneous Provision Act. Certain rules are framed and are to be satisfied before 'Scheduled Provident Funds' are recognised and continued to be recognised by Commissioner (Appeals). question is whether set of rules meant to govern 'Scheduled Provident Funds' apply to provident funds maintained under Employees' Provident Funds and Miscellaneous provision Act both of which come under definition of 'Recognised Provident Fund'. On common sense point even layman can say that rules meant to govern 'Schedule Provident Funds' do not govern provident funds under Employees' Provident Funds and Miscellaneous Provisions Act for simple reason that if both kinds are governed by same set of rules why provident funds maintained under Employees' Provident Funds and Miscellaneous Provisions Act should be made to govern by provisions of that Act and for what earthly purpose Employees' Provident Funds and Miscellaneous Provisions was enacted at all. So, it is apparent that two kinds of provident funds referred to above are governed by two different set of rules and provisions. For instance, recognition and continuation of recognition by Commissioner for 'Schedule Provident Fund' is essential to fulfil definition of 'recognised provident fund'. So in case of 'Schedule Provident Fund' it should not only be recognised at inception but it should continue to be recognised during relevant accounting year. However, in case of scheme under Employees' Provident Funds and Miscellaneous Provisions Act, no recognition by Commissioner is necessary. Further, neither in definition given in section 2(38) nor in Part of Fourth Schedule, it is stated that rules and conditions contained in Part of Fourth Schedule apply to schemes framed under Employees' Provident Funds and Miscellaneous Provisions Act. Also section 10(1) of Employees' Provident Funds and Miscellaneous Provisions Act states that amount standing to credit of any member in fund shall not in any way be capable of being assigned or charged and shall not be liable to attachment under any decree or order of any Court in respect of any debt or liability incurred by member and neither official assignee appointed under Presidency Towns Insolvency Act, 1909, nor any receiver, appointed under Provincial Insolvency Act, 1920, shall be entitled to, or have any claim on, any such amount. Sub-section (2) of same section is as follows: "(2) Any amount standing to credit of member in Fund or of exempted employee in provident fund at time of his death and payable to his nominee under scheme or rules of provident fund shall, subject to any deduction authorised by said scheme or rule, vest in nominee and shall be free from any debt or other liability incurred by deceased or nominee before death of member or of exempted employee." However, this privilege or protection afforded to employee under However, this privilege or protection afforded to employee under above provisions do not appear to have been provided to employee contributing to 'Scheduled Provident Fund'. learned departmental representative brought to our notice that section 9 of Employees' Provident Funds and Miscellaneous Provisions Act is as follows: "For purpose of Indian Income-tax Act, 1922, Fund shall be deemed to be recognised Provident Fund within meaning of Chapter IX-A of this Act." provident fund under Employees' Provident Funds and Miscellaneous Provisions Act shall vest in Central Board constituted under section 5A of Employees' Provident Funds and Miscellaneous Provisions Act and scheme framed under said Act should provide all or any of matters provided in Second Schedule to said Act. scheme under Employees' Provident Funds and Miscellaneous Provisions Act contemplates contributions from employees employed by regular employers as well as contractors also. So provisions under Second Schedule should be observed or fulfilled in case of Employees' Provident Funds and Miscellaneous Provisions Act whereas provisions of Part of Fourth Schedule would govern 'the Scheduled Provident Fund'. There are clear indications under provisions of 1961 Act themselves that two kinds should be treated differently even for tax purposes. For instance, section 17(1)(vi) and (vii) of Act deal with 'Scheduled Provident Funds' but they do not concern themselves to provident funds falling under Employees' Provident Funds and Miscellaneous Provisions Act which are as follows: "17. For purposes of sections 15 and 16 and of this section,- (1) 'Salary' includes- (i) wages; (ii) to (v) ** ** ** (vi) annual accretion to balance at credit of employee participating in recognised provident fund, to extent to which it is chargeable to tax under rule 6 of Part of Fourth Schedule; and (vii) aggregate of all sums that are comprised in transferred balance as referred to in sub-rule (2) of rule of 11 of Part of Fourth Schedule of employee participating in recognised provident fund, to extent to which it is chargeable to tax under sub-rule (4) thereof;" Therefore, we are of opinion that rules governing 'Scheduled Provident Funds' in Part of Fourth Schedule do not govern Provident Funds maintained under Employees' Provident Funds and Miscellaneous Provisions Act. learned Commissioner (Appeals) gave another finding that rule 75 was not only framed in pursuance of rule 15(1)(b) of Part of Fourth Schedule but also intended to cover provisions of section 36(1)(iv). We feel that this finding is of doubtful veracity. Section 36(1)(iv) is as follows: "(1) deductions provided in following clauses shall be allowed in respect of matters dealt with therein, in computing income referred to in section 28: (i) to (iii) ** ** ** (iv) any sum paid by assessee as employer by way of contribution towards recognised provident fund or approved superannuation fund, subject to such limits as may be prescribed for purpose of recognising provident fund or approving superannuation fund, as case may be; and subject to such conditions as Board may think fit to specify in cases where contributions are not in nature of annual contributions of fixed amounts or annual contributions fixed on some definite basis by reference to income chargeable under head 'Salaries' or to contributions or to number of members of fund;" So above provisions disclose that limits are expected to be prescribed for purpose of recognising provident fund. question of recognition does not arise as already discussed above to provident funds maintained under Employees' Provident Funds and Miscellaneous Provisions Act but such recognition is essential only for 'Scheduled Provident Funds'. Therefore, in our opinion, assuming that rule 75 is meant to govern prescribed limits under section 36(1)(iv) does not conclude matter either way or does not help determine real controversy in matter. We have to determine for which category of provident funds, limits mentioned in section 36(1)(iv) are intended. In our considered opinion, prescribed limits under section 36(1)(iv) are limited for purpose of recognising provident fund. When once provident fund was recognised, purpose of limits contemplated under section 36(1)(iv) was over. In this view limits set out in rule 75 cannot be said to be limits under section 36(1)(iv) after provident fund was already recognised. learned departmental representative brought to our notice Employees' Provident Fund Rules. Chapter III in those rules deal with membership to fund. In paragraph No. 11(1), inter alia, it is provided that Board on recommendation of company may at its discretion admit employee whose monthly salary exceeds Rs. 1,600 as member of fund and thereupon such admission of such member is governed by these rules. Rule 14 prescribes rate of contribution to be made by employee. rate of contribution made by employee is equal to contribution of employer. Rule 15 speaks of voluntary contribution. Each month further sum not exceeding one-fifth of his salary and this contribution shall be deducted in s m e manner as laid down in rule 14(3) for deduction of member's contribution and amount deducted and retained as aforesaid will be dealt with as prescribed in said rule. Shri Radhakrishnamurthy, learned departmental representative, submitted that Employees' Provident Funds and Miscellaneous Provisions Act would govern only case of employees drawing less than Rs. 1,600 per month as salary and it is only at discretion of employer, provisions of that Act and Employees' Provident Fund Rules would be made applicable to officers drawing more than Rs. 1,600 per month as emolument, it is only by concession that provisions of Employees' Provident Funds and Miscellaneous Provisions Act are made applicable to him and, therefore, in his case scheme of contribution under Employees' Provident Funds and Miscellaneous Provisions Act is made applicable by way of understanding and so Provisions of Employees' Provident Funds and Miscellaneous Provisions Act do not apply to him strictly. It is also stated that accounts of employers who are contributing to provident fund under Employees' Provident Funds and Miscellaneous Provisions Act, while drawing Rs. 1,600 per month would be maintained separately. We are not impressed with this argument nor does it lead us anywhere. Rule 11(1) of Provident Fund Rules is self explanatory and runs counter to argument of learned departmental representative. 4. Now let us consider famous case of Supreme Court in Gestetner Duplicators (P.) Ltd. v. CIT [1979] 117 ITR 1. first question that was considered was, whether commission paid comes under expression 'salary' within meaning of rule 2(h) in Part of Fourth Schedule. revenue cited earlier decision of Supreme Court in Bridges & Roofs Co. Ltd. v. Union of India AIR 1963 SC 1474 in which it was held that 'production bonus' does not form part of 'basic wages' as defined under section 2(b) of Employees' Provident Funds and Miscellaneous Provisions Act. So by applying parity of reasoning, revenue wanted to contend that when 'bonus' does not form part of 'wages', commission paid in case before Hon'ble Supreme Court cannot also form part of 'salary' within meaning of rule 2(h) of Part of Fourth Schedule. Hon'ble Supreme Court distinguished decision in Bridges & Roofs Co. Ltd.'s case (supra) as follows: "In first place, it was case under Employees' Provident Funds Act, 1952, where this Court was required to construe expression 'basic wages' as defined in section 2(b) of that Act and to decide whether 'production bonus' was included in that expression and it was in that context that this Court made observations to effect that said expression as defined therein did not include any bonus, commission or other similar allowances. Secondly, as against definition of 'basic wages' in section 2(b)(ii) which excluded any dearness allowance, house rent allowance, over-time allowance, bonus, commission or n y other similar allowance, section 6 of Act provided for inclusion of dearness allowance for purposes of contribution and, therefore, this Court was concerned with trying to discover some basis for inclusion of dearness allowance and retaining allowance (if any) in section 6 of that Act and Court found that basis for inclusion in section 6 and exclusion in clause (ii) of section 6 but whatever was not payable by all concerns and was not earned by all employees of concern was excluded for purposes of contribution and all employees of concern was excluded for purposes of contribution and that is why commission or similar allowance were excluded from definition of 'basic wages', for commission and allowances were not necessarily to be found in all concerns nor were they necessarily earned by all employees of same concern. It is, therefore, clear that ratio of decision and observations made by this Court in different contexts in that case would be inapplicable to facts of present case." From above, it can be seen that their Lordships of Supreme Court always maintained distinction between 'Scheduled Provident Fund' on one hand and provident fund under Employees' Provident Funds and Miscellaneous Provisions Act on other. basis on which contribution by employee as well as employer under Employees' Provident Funds and Miscellaneous Provisions Act has to made is term 'basic wages' which does not include production bonus, DA, house rent allowance, over-time allowance, whereas, contribution, both by employee as well as employer, should be made under 'Scheduled Provident Funds' scheme on basis of 'salary' as defined under rule 2(h) of Part of Fourth Schedule which includes 'commission' also as decided in Gestetner Duplicators (P.) Ltd.'s case (supra) by Hon'ble Supreme Court. It is also decided by Hon'ble Supreme Court in Gestetner Duplicators (P.) Ltd.'s case (supra) that there is no difference between 'wages' and 'salary'. From all above, we have to conclude that rule 15(1)(b) governing 'Scheduled Provident Funds' does not apply to provident fund under Employees' Provident Funds and Miscellaneous Provisions Act. fortiori rule 75 does not apply to provident fund under Employees' Provident Funds and Miscellaneous Provisions Act. Assuming without admitting that our above finding is not correct under law, even then rule 75 does not apply to facts of case, as conditions set out therein were all not fulfilled in present case. employee as 'individual' did not hold more than 10 per cent in total shareholding in assessee-company. 5. Section 36(1)(iv) concerns itself only in contribution of employer towards provident fund of its employees and it does not concern itself with employee's contribution. So, in any view of matter, even in case where rule 75 has to be applied, it should be held that Rs. 3,000 is admissible sum under section 36(1)(iv) in hands of employer and excess only should be disallowed in its hands. That means in this case, Rs. 680 should have been held as excess in any view of matter. Commissioner (Appeals) held that amount of Rs. 2,132 should be disallowed which according to us is wrong. 6. Though our above conclusions or discussions were not all found in any single order but yet some of our conclusions are found supported by previous orders rendered either by this Tribunal or Tribunals elsewhere, which are listed below: 1. Tribunal, Madras Bench 'A', Hyderabad in IT Appeal Nos. 1473 to 1475 (Hyd.) of 1977-78 for assessment years 1973-74 to 1975-76. 2. order passed by Hyderabad Bench 'B' in case of ITO v. J. & J. Dechane Lab. (P.) Ltd. [IT Appeal Nos. 1563, 1564 and 1575 (Hyd.) of 1982, dated 17-8-1983] for assessment years 1978-79 to 1980-81. 3. Our own order as Hyderabad Bench 'B' passed in case of Nath Laboratories (P.) Ltd. v. ITO [IT Appeal Nos. 145 and 146 (Hyd.) of 1982, dated 29-3-1983] for assessment years 1977-78 and 1978-79. 4. order of Madras Bench 'B' in ITO v. Raab Pipe Works (P.) Ltd. [1982] 1 SOT 198. Ultimately, we hold that no part of contribution made by assessee- company towards scheme framed under Employees' Provident Funds and Miscellaneous Provisions Act should be disallowed. Therefore, we hold that amount of Rs. 3,632 paid as contribution of assessee-company towards provident fund of its managing director, Shri Janardhana Rao, should be allowed in full under section 36(1)(iv). 7. In result, appeal succeeds. *** VELJAN HYDRAIR (P) LTD. v. INCOME TAX OFFICER
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