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PETITIONER: COMMISSIONER OF INCOME TAX

       Vs.

RESPONDENT: SIRPUR PAPER MILLS

DATE OF JUDGMENT:       18/03/1999

BENCH: S.P.Bharucha, R C Lahoti

JUDGMENT:

Bharucha, J.

     In  these  appeals the question that we are  concerned with reads thus :

     "Whether  on the facts and in the circumstances of the case, the Appellate Tribunal was justified in confirming the order  of the Commissioner of Income-tax (Appeals) that  the entire  initial contribution made to the superannuation fund is allowable deduction?"

     The  High Court declined to call for its reference and the  Revenue  is in appeal.  The High Court relied upon  its earlier  judgment  in the case of Hyderabad Asbestos  Cement Products Ltd., 172 ITR 762.  The Revenue had filed a Special Leave Petition against this judgment but it was dismissed on the ground of undue delay.

     The facts of these appeals are similar.  The facts now set out are of Civil Appeal No.2398 of 1994.

     The assessee had in the relevant Assessment Year (A.Y. 1981-82)  made a contribution to an approved  superannuation fund.   For  the  current year the  amount  contributed  was Rs.2,70,911/-  and  for  the  past  five  years  it  was  an aggregated  amount of Rs.2,14,785/-, calculated on the basis of  25%  of the employees’ dues on account of past  service. The  Income  Tax Officer allowed the deduction only  to  the extent  of  80% of the aggregate contribution and spread  it out  over  a period of five years.  For so doing, he  relied upon  a notification dated 21.10.1965 issued by the  Central Board  of  Direct  Taxes.   The assessee  appealed  and  the Commissioner  of Income-Tax (Appeals) allowed the  deduction in  full.  The order of the C.I.T.  (Appeals) was upheld  by the  Income Tax Appellate Tribunal.  The application of  the Revenue  to refer the question aforestated to the High Court for  consideration was rejected both by the Tribunal,  under Section 256(1), and by the High Court, under Section 256(2). The  High  Court,  as aforesated, followed its  decision  in Hyderabad Asbestos Cement Products Limited.

     Having  regard  to  the fact that  the  Special  Leave Petition  filed  by  the  Revenue against  the  judgment  in Hyderabad  Asbestos Cement Products Ltd.  was dismissed on a

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technical  ground,  we  have heard these  appeals  on  their merits.

     Section  36(1)(iv)  of the Income Tax Act  deals  with deductions  on  account  of   contributions  to   recognised provident  funds and approved superannuation funds.  Section 36(1)(iv)  reads  thus  :   "Section  36(1)  The  deductions provided  for  in the following clauses shall be allowed  in respect  of the matters dealt with therein, in computing the income referred to in section 28.........

     (iv) any sum paid by the assessee as a employer by way of  contribution  towards a recognised provident fund or  an approved  superannuation fund, subject to such limits as may be  prescribed for the purpose of recognising the  provident fund  or approving the superannuation fund, as the case  may be;   and subject to such conditions as the Board may  think fit  to specify in cases where the contributions are not  in the  nature  of  annual contributions of  fixed  amounts  or annual  contributions  fixed  on   some  definite  basis  by reference to the income chargeable under the head ‘Salaries’ or  to the contributions or to the number of members of  the fund."

     Rules  87  &  88 of the Income Tax  Rules.   1962  are relevant.    They   read  thus:    "87.    Ordinary   annual contributions  -  The  ordinary annual contribution  by  the employer  to  a fund in respect of any  particular  employee shall not exceed twenty-five per cent of his salary for each year  as reduced by the employer’s contribution, if any,  to any provident fund (whether recognised or not) in respect of the same employee for that year.

     88.   Initial contributions - Subject to any condition which  the Board may think fit to specify under clause  (iv) of  sub- section (I) of section 36, the amount to be allowed as  a deduction on account of an initial contribution  which an  employer may make in respect of the past services of  an employee admitted to the benefits of a fund shall not exceed twenty-five  per cent of the employee’s salary for each year of  his  past  service with the employer as reduced  by  the employer’s  contribution,  if  any, to  any  provident  fund (whether  recognised or not) in respect of that employee for each such year."

     In  exercise  of  the   powers  conferred  by  Section 36(1)(iv),   the  Board  issued   the   notification   dated 21.10.1965 which was relied upon by the assessing authority. It  reads thus :  "Contributions to approved  superannuation fund - Conditions specified under clause (iv) of sub-section (1) for the purposes of deduction of certain contributions:

     In  exercise of the powers conferred by clause (iv) of sub-  section (1) of section 36 of the Income Tax Act,  1961 (43  of  1961),  the Central Board of  Direct  Taxes  hereby specified  the  following  conditions for the  deduction  of contributions,  not  being  annual  contributions  of  fixed amounts or annual contributions fixed on some definite basis by  reference  to  the  income  chargeable  under  the  head ‘Salaries’  or  to  the contributions or to  the  number  of members of the fund namely :-

     1.   The  total amount of contribution that  shall  be taken  into  account for the purposes of  this  notification shall  not  exceed  twenty-five per cent of  the  employee’s

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salary  for each year of his past service with the  employer as  reduced  by the employer’s contribution, if any, to  any provident  fund  (whether recognised or not) in  respect  of that employee for each such year.

     2.   Subject  to condition 1, eighty per cent  of  the amount  actually paid by the employer by way of contribution during any previous year shall be the deductible allowance.

     3.   One-fifth  of such deductible allowance shall  be allowed in the assessment year relating to the previous year in which the amount was actually paid and the balance of the deductible  allowance shall be allowed in equal  instalments for  each  of  the four  immediately  succeeding  assessment years."

     The question, therefore, that we are concerned with is whether  the  said  notification   goes  beyond  the  powers conferred  on the Board under Section 36(1)(iv), as was held by  the High Court in the case of Hyderabad Asbestos  Cement Products Ltd.  and reaffirmed in the orders under appeal.

     Section  36(1)(iv) states that the deductions provided in  the  clauses thereof "shall be allowed"  when  computing income under Section 28.  Clause (iv) lists as so deductible any  sum  paid  by  the assessee as an employer  by  way  of contribution  towards  a  recognised provident  fund  or  an approved  superannuation fund, subject to limits that may be prescribed  for  the purposes of recognition of these  funds and subject also to such conditions as the Board might think fit  to specify in cases where the contributions are not  in the  nature  of  annual contributions of  fixed  amounts  or annual  contributions  fixed  on   some  definite  basis  by reference to the income chargeable under the head ‘Salaries’ or  to the contributions or to the number of members of  the fund.

     The  contributions  in  the   instant  case  were  not payments for recognition or approval and, therefore, outside the  limits  that could be prescribed under clause  (iv)  in that behalf.

     It  is  arguable that the contributions made here  are annual  contributions of fixed amounts but, for the purposes of these appeals, we will proceed on the basis that they are not  and  that  the Board was, therefore, entitled  to  make conditions  that  would  apply.  Even so,  the  question  is whether  the  conditions  which were laid down in  the  said notification  fall  outside the power of the Board  in  this behalf.

     For  this  purpose,  the  said  notification  must  be analysed.   The first condition is that the total amount  of the  contribution  shall  not exceed 25% of  the  employees’ salary  and  there  is no dispute that this is  a  condition which  the  Board was empowered to impose, having regard  to the provisions in this behalf in Rule 88.

     The  second  condition is that only 80% of the  amount actually paid by the employer can be allowed as a deduction. This  really  falls into two parts;  one is the  requirement that  the amount must be actually paid and the other is that the  deduction shall only be of 80%.  Taking the second part first,  we see no justification for it.  The Section  states that  the deduction shall be wholly allowed.  It permits the

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Board  to specify conditions but conditions cannot have  the effect  of curtailing the scope of the deduction granted  by the  Section.   The amplitude of the deduction permitted  by the Section cannot be cut down under the guise of imposing a "condition".   In  fact,  this  is not a  condition  but  an impermissible  attempt  to rewrite the Section.  As  to  the second  part, in the cases before us the payment had in fact been made and we do not need to dilate;  but we should point out that Section 36(1)(iv) itself speaks of "any sum paid".

     The last condition imposed by the said notification is that the deduction shall be spread out equally over a period of  five years commencing with the assessment year  relating to the previous year in which the amount was paid.  This too is no "condition" but a provision super-added to the Section which  does  not  contemplate any such distribution  of  the deduction.   Under the Section the deduction is available in the  assessment year relating to previous year in which  the payment was made and it must be so granted.

     We think, in the circumstances, that the view taken by the  Andhra  Pradesh  High Court in the  case  of  Hyderabad Asbestos Cement Products Ltd.  is substantially correct.  We use  the qualifying word ‘substantially’ because it has  not been  necessary  for us in these proceedings to go into  the correctness  of  its  view  that the Board  could  not  have required actual payment of the contribution.

     The appeals are dismissed.  No order as to costs.