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Commissioner Of Income-Tax (Central) Calcutta v. Turner Morrison & Co. Ltd.
Structured Summary of the Opinion
Factual and Procedural Background
This reference arises under S. 256(1) of the Income-tax Act, 1961 at the instance of the Commissioner of Income-tax (Central), Calcutta, concerning Messrs Turner Morrison & Co. Private Ltd. (the assessee) for the assessment year 1962-1963 (previous year: calendar year 1961).
The Income-tax Officer disallowed Rs. 1,75,000 out of Rs. 3,91,150 claimed as Directors' remuneration on the ground that the payment was excessive and unreasonable. The Income-tax Officer also disallowed a claim of Rs. 6,826 as contribution to a Provident Fund in East Pakistan; that Fund was recognised by Pakistan authorities but not by Indian revenue authorities.
On appeal, the Appellate Assistant Commissioner deleted the disallowance of Rs. 1,75,000 (i.e., allowed the full directors' remuneration claim) and directed the Income-tax Officer to allow the Rs. 6,826 contribution after satisfying himself that the Fund was constituted under an irrevocable trust.
The Revenue appealed to the Tribunal. The Tribunal, following its earlier order in the assessment year 1961-1962 for the same assessee, upheld the Appellate Assistant Commissioner's decision on directors' remuneration and addressed the deductibility of the Pakistan Provident Fund contribution, indicating that the key question was whether the payment was merely an appropriation in the accounts or a payment beyond the assessee's control to an outside body, and that deduction would be allowed for the Pakistan PF if it was set up under an irrevocable trust.
Two questions were referred to the Court from the Tribunal's order (see below).
Legal Issues Presented
- Whether on the facts and in the circumstances of the case the Tribunal was right in law in allowing the entire remuneration to the directors as an admissible deduction for the purpose of assessment under the Income-tax Act?
- Whether, on the facts and in the circumstances of the case, the contribution made by the assessee to a Provident Fund recognised in Pakistan but not in India could be allowed as a deduction in computing the income earned in Pakistan under the Income-tax Act in India?
Arguments of the Parties
Revenue's Arguments (Mr. B.L. Pal, Counsel)
- Where an assessee claims a deduction for contributions to a Provident Fund, the specific provision S. 36(1)(iv) of the Income-tax Act, 1961 must be satisfied; that section permits deduction only in respect of payments to Provident Funds recognised in India, and a foreign Provident Fund falling outside that section cannot give rise to a deduction.
- It made no difference whether the income was earned in India or in Pakistan because, for a resident assessee, incomes from multiple places are pooled and permissible deductions are allowed against the pooled income (relying on the Supreme Court decision in Commissioner of Income-tax, Bombay v. C. Parakh & Co. (India) Ltd., 29 ITR 661).
- Cited an earlier decision of this Court (Carew & Co. Ltd. v. Commissioner of Income-tax, West Bengal III, 104 ITR 471) applying the Parakh principle.
Assessee's Arguments (Mr. R.N. Dutt, Counsel)
- Section 36(1)(iv) applies categorically to Provident Funds recognised in India and therefore cannot be the basis for allowing contributions to a foreign Provident Fund.
- The correct question is whether, in computing income arising in Pakistan, the payments made to the foreign Provident Fund are allowable as general business expenditure under S. 37 of the Income-tax Act, 1961 (i.e., expenditure laid out wholly and exclusively for the purposes of the business and not being capital or personal in nature).
- Both the Appellate Assistant Commissioner and the Tribunal proceeded on the basis of S. 37 (general business expenditure) rather than S. 36(1)(iv).
- Relied on the Supreme Court decision in Commissioner of Income-tax, Bombay v. Mysore Spinning & Mfg. Co. Ltd., 78 ITR 4, where transfers from unrecognised provident funds were held deductible as expenditure for the purposes of business profit computation under the earlier statute.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-Tax, Calcutta v. Turner Morrison & Co. Private Ltd., 93 ITR 385 | Previous decision of this Court on the identical question relating to directors' remuneration in earlier assessment years (1952-53 and 1953-54). | The Court followed this earlier decision and answered Question No. 1 in the affirmative and in favour of the assessee (i.e., allowed the entire directors' remuneration). |
| Commissioner of Income-tax, Bombay v. C. Parakh & Co. (India) Ltd., 29 ITR 661 (Supreme Court) | Principle that where an assessee carries on the same business at several places, profits are to be pooled and expenses deducted in the aggregate for a resident assessee; presence of foreign branches does not alter pooling for residents. | Cited by Revenue to support the view that foreign income and Indian income should be pooled for deduction purposes; the Court recorded the citation but did not accept Parakh as preventing the Tribunal's approach to computing foreign income separately under S.37 in this case. |
| Carew & Co. Ltd. v. Commissioner of Income-tax, West Bengal III, 104 ITR 471 | Application of the Parakh principle by this Court. | Cited by Revenue in support of pooling principle; Court noted the citation but proceeded to allow deduction under S.37 for the foreign Provident Fund contribution. |
| Commissioner of Income-tax, Bombay v. Mysore Spinning & Mfg. Co. Ltd., 78 ITR 4 (Supreme Court) | Held that amounts transferred from unrecognised provident funds (or amounts spent in that accounting period) were deductible as expenditure incurred exclusively for the purposes of business under the corresponding provision in the earlier Act. | The Court followed this decision to support the view that the contribution to the Pakistan Provident Fund could be deducted as expenditure in computing the foreign (Pakistan) income under S.37; Question No. 2 was answered in the affirmative in favour of the assessee referencing this authority. |
Court's Reasoning and Analysis
The Court analysed the matter by reference to the relevant statutory provisions and the factual findings recorded by the lower authorities and the Tribunal:
- The Court examined the statutory definition of a "recognised provident fund" in S. 2(38) of the Income-tax Act, 1961 and the deduction provision in S. 36(1)(iv), together with the rules in Part A of the Fourth Schedule. The rules require, inter alia, that "all employees shall be employed in India, or shall be employed by an employer whose principal place of business is in India."
- From these provisions the Court concluded that contributions to a Provident Fund in Pakistan cannot be claimed as a deduction under S. 36(1)(iv), because that section and the recognition rules presuppose an Indian-recognised Provident Fund (i.e., funds meeting the Part A conditions).
- The Court then addressed whether the Pakistan contribution could be deducted under any other head. It turned to S. 37(1) (general business expenditure) which allows deduction of expenditure (not covered by sections 30 to 36 and not being capital or personal expenditure) laid out wholly and exclusively for the purposes of the business.
- The Tribunal had computed the foreign (Pakistan) income by deducting the contribution to the foreign Provident Fund as an expenditure allowable for the purpose of earning that foreign income, taking into account whether the contribution was merely an appropriation in the books or a payment to an outside body beyond the assessee's control, and applying the test of whether the Fund was constituted under an irrevocable trust.
- The Court agreed with the Tribunal's approach and reasoning, being satisfied that the contribution to the Pakistan Provident Fund could be treated as an allowable business expenditure for the computation of the Pakistan income under S. 37, and relied on the Supreme Court decision in Mysore Spinning & Mfg. Co. Ltd. as supporting authority.
- For the directors' remuneration issue (Question No. 1), the Court followed its earlier decision in Commissioner of Income-Tax, Calcutta v. Turner Morrison & Co. Private Ltd. (93 ITR 385) which had addressed the identical question on similar facts and decided in favour of the assessee.
The Court explicitly stated that it saw "no reason to differ from the view taken by the Tribunal" concerning the foreign Provident Fund contribution.
Holding and Implications
Holding: The Court answered both referred questions in the affirmative and in favour of the assessee.
Direct effects on the parties:
- The disallowance of Rs. 1,75,000 out of Rs. 3,91,150 claimed as Directors' remuneration was rejected; the entire remuneration claim was allowed (Question No. 1 decided for the assessee, following the Court's earlier decision reported at 93 ITR 385).
- The contribution of Rs. 6,826 to the Provident Fund in Pakistan (recognised by Pakistan authorities but not by Indian revenue) was held to be deductible in computing the income earned in Pakistan as an allowable business expenditure under S. 37, not under S. 36(1)(iv) (Question No. 2 decided for the assessee, following the Tribunal and the Supreme Court authority in Mysore Spinning).
- There was no order as to costs.
Broader implications: The opinion rests on applying existing statutory provisions and earlier authorities (including this Court's own prior decision and the Supreme Court's decision in Mysore Spinning). The Court did not frame or declare any novel legal principle beyond applying those authorities to the facts; the immediate practical consequence is allowance of the two challenged deductions for the assessee as described above.
Additional procedural note: Banerji, J. agreed with the judgment of Sen, J.
Sen, J.:— In this reference under S. 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax (Central) Calcutta, Messrs Turner Morrison & Co. Private Ltd. of 6, Lyons Range, Calcutta-1, the assessee, was assessed to income-tax for the assessment year 1962-1963. The relevant previous year corresponding to the said assessment year 1962-1963 is the calendar year 1961. The Income-tax Officer in making the assessment disallowed a sum of Rs. 1,75,000/- out of the sum of Rs. 3,91,150/- claimed by the assessee as having been paid as Directors' remuneration. The Income-tax Officer held that such payment to the extent of the said sum of Rs. 1,75,000/- was excessive and unreasonable.
2. Further, the assessee had paid a sum of Rs. 6,826/- as contribution to a Provident Fund in East Pakistan where the assessee carried on business during the said assessment year. The Provident Fund was recognised by the Pakistan authorities but not by the Indian revenue authorities. The assessee claimed a deduction for the said sum of Rs. 6,826/- which was disallowed by the Income-tax Officer.
3. On appeal, the Appellate Assistant Commissioner held that the Income-tax Officer was not justified in disallowing the said sum of Rs. 1,75,000/- out of the directors' remuneration and deleted such disallowance. The Appellate Assistant Commissioner further directed the Income-tax Officer to allow the said sum of Rs. 6,826/- contributed to the Provident Fund in Pakistan after satisfying himself that such Fund was constituted under an irrevocable trust.
4. The Revenue preferred a further appeal to the Tribunal. The Tribunal following its earlier order made in the assessment year 1961-1962 in the case of the same assessee upheld the decision of the Appellate Assistant Commissioner observing that the remuneration paid to the Directors could not be described as excessive and the full claim should be allowed. So far as the contribution to the Provident Fund in Pakistan was concerned it was contended by the Revenue before the Tribunal that under S. 36(1)(iv) only payments to the Provident Fund recognised in India could be allowed and not payment to any other Provident Fund. The Tribunal held inter alia as follows:—
“…………….if an employee is working outside India a fund is set up in the foreign territory concerning these foreign employees, the question of payment in the foreign country to a Provident Fund recognised in India does not arise. We would be concerned with the computation of the foreign income and this is to be determined by deducting the expenditure allowable for the purpose of earning the foreign income. In this context, the question would be whether an alleged payment to a Provident Fund is merely an appropriation in the accounts, the assessee retaining full control over the amount, or whether the payment is to an outside body and is beyond the assessee's control. As the Appellate Assistant Commissioner has correctly observed, the payment would have to be deducted in computing the Pakistan income, if the Provident Fund has been set up under an irrevocable trust.”
5. From the aforesaid order of the Tribunal the following questions have been referred:—
1. “Whether on the facts and in the circumstances of the case the Tribunal is right in law in allowing the entire remuneration to the directors as admissible deduction for the purpose of assessment under the Income-tax Act?”
2. “Whether on the facts and in the circumstances of the case, the contribution made by the assessee to a Provident Fund recognised in Pakistan but not in India could be allowed as a deduction in computing the income earned in Pakistan under the Income-tax Act in India?”
6. In the assessment years 1952-1953 and 1953-1954 the same question relating to the remuneration of the Directors arose in the assessment of the same assessee. In Commissioner of Income-Tax, Calcutta v. Turner Morrison & Co. Private Ltd., reported in 93 ITR at page 385 the identical question on almost similar facts was answered by this court in favour of the assessee. Following this decision we answer question No. 1 in the affirmative and in favour of the assessee.
7. On question No. 2, Mr. B.L Pal learned Counsel for the Revenue, has contended that where an assessee claimed a deduction in respect of the amounts paid by way of contribution to a Provident Fund the provision S. 36(1)(iv) of the Income-tax Act of 1961 which specifically dealt with payments to Provident Funds and under which such deduction could be claimed had to be satisfied and if any payment to a Provident Fund did not fall within the four corners of the said section the assessee was not entitled to any deduction. He submitted further that it made no difference in the instant case whether the income arose in India or in Pakistan because the entire income would be pooled and all permissible deductions would be allowed in assessing such income. In support of his proposition he cited a decision of the Supreme Court in the case of Commissioner of Income-tax, Bombay v. C. Parakh & Co. (India) Ltd., reported in 29 ITR. page 661. It was held by the Supreme Court in that case that where an assessee carried on the same business at a number of places for the purpose of S. 10 of the Indian Income-tax Act 1922 they should be deemed to be only one business and the net profits thereof had to be ascertained by pooling together the profits earned in all the branches and deducting all the expenses, and the fact that some of the branches were in foreign territory would make no deference to the position, if the assessee was a resident and ordinarily resident within India. Mr. Pal also cited a decision of this Court in the case of Carew & Co. Ltd. v. Commissioner of Income-tax. West Bengal III, reported in 104 ITR at page 471 where the principle laid down in the case of C. Parakh & Co. (India) Ltd. (supra) was applied.
8. Mr. R.N Dutt, learned Counsel for the assessee, has contended on the other hand that there was no question of the assessee claiming a deduction under S. 36(1)(iv) of the Income-tax Act, 1961 inasmuch as the said section categorically applied to Provident Funds recognised in India and not foreign Provident Funds. He submitted that the real question was whether in computing the income arising in Pakistan, money laid out by the assessee in the foreign Provident Fund for the purpose of carrying on of the business would be allowable as a general expenditure under S. 37 of the Income tax Act, 1961 as an expenditure not in the nature of capital expenditure or personal expenses but laid out or expended wholly and exclusively for the purpose of business or profession. He submitted further that both the Appellate Assistant Commissioner and the Tribunal had in the instant case proceeded on the basis of S. 37 and not on the basis of S. 36(1)(iv).
9. In support of his contentions Mr. Dutt cited a decision of the Supreme Court in the case of Commissioner of Income-tax, Bombay v. Mysore Spinning & Mfg. Co. Ltd. reported in 78 ITR at page 4, where the assessee had transferred the accumulations in two unrecognised Provident Funds to the Employees Provident Fund set up under the Employees' Provident Fund Act, 1952 and claimed deduction of the amount of the transfer in computing its profits. It was held that the amount in question had been spent and paid out in the relevant accounting period, and was deductible as expenditure incurred exclusively for the purpose of the business of the respondent under S. 10(2)(xv) of the Indian Income-tax Act, 1922.
10. To appreciate the controversies in the case it is necessary to consider the relevant sections in the Act.
11. Section 2(38) of the Income-tax Act, 1961 defines a recognised Provident Fund inter alia as follows:—
“‘recognised provident fund’ means a provident fund which has been and continues to be recognised by the Commissioner in accordance with the rules contained in Part A of the Fourth Schedule,…………….”
12. Section 36(1)(iv) permits deduction of sums paid by way of contribution to a recognised Provident Fund and reads inter alia as follows:—
“any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund…………….subject to such limits as may be prescribed for the purpose of recognising the provident fund;…………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”.
13. The rules relating to a recognised Provident Fund as contained in Part A of the Fourth Schedule lay down conditions to be satisfied by recognised Provident Funds and the first condition which a recognised Provident Fund is to satisfy is
“(a) all employees shall be employed in India, or shall be employed by an employer whose principal place of business is in India;”
14. Reading the statutory provisions it is amply clear that sums contributed to a Provident Fund in Pakistan can never be claimed by way of deduction under S. 36(1)(iv). The question which arises is whether deduction can be claimed under any other head. Section 37(1) of the Income-tax Act, 1961 which corresponds to S. 10(2)(xv) of the earlier Act of 1922 provides as follows:—
“37 General—(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ‘Profits and gains of business or profession’”.
15. It appears to us that the Tribunal correctly appreciated the question involved and proceeded to compute the foreign income of the assessee. In such computation the Tribunal proceeded by deducting the contribution to the foreign Provident Fund as expenditure allowable for the purpose of earning the foreign income for the determination or computation of such income. We see no reason to differ from the view taken by the Tribunal and following the decision of the Supreme Court in Mysore Spinning and Mannfacturing Co. Ltd. We answer the question No. 2 in the affirmative and in favour of the assessee. There will be no order as to costs.
Banerji, J.:— I agree.
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