We pay our salesmen a turnover commission on top of salary and contribute to the provident fund on both. Is the contribution on the commission deductible?
Yes. The Supreme Court held that commission payable to salesmen as a term of the contract of employment, at a fixed percentage of turnover, is salary within rule 2(h) of Part A of the Fourth Schedule, so the provident fund contribution referable to it is deductible under section 36(1)(iv). Salary and wages both mean remuneration for work done, and it makes no difference that one part is measured by time and the other by turnover; the whole remuneration partakes of the character of salary. The Court also held that while recognition of the fund stands, the assessing authorities cannot question whether it meets the conditions for recognition.
Decided by the Supreme Court (Supreme Court of India; P.N. Bhagwati, R.S. Pathak and V.D. Tulzapurkar JJ. Judgment by Tulzapurkar J) on 1978-12-14, reported as (1979) 117 ITR 1; 1979 (2) SCC 354; AIR 1979 SC 607; 1979 SCR (2) 788; (1979) 1 Taxman 1 (SC). It bears on section 36(1)(iv), section 17(1), section 256(1) of the Income Tax Act 1961, in Salary & Perquisites and Deductions & Disallowances matters.
Two holdings, both still worked with. The first is on what salary means: a payment does not cease to be salary because it is measured by output rather than by time, provided it is remuneration under the contract of employment. The Court distinguished Bridge and Roof, which construed basic wages under the Provident Funds Act on a scheme peculiar to that Act, and held that the 1941 Board circular could not cut down the true construction of the rule, adding that the circular was aimed at commissions that do not partake of the character of salary at all. The second holding travels much further than provident funds. Where an approval or recognition granted by the Commissioner is in force for a year, the assessing officer must proceed on the footing that its conditions are satisfied, and cannot sit in judgment over it; his remedy is to refer the matter to the Commissioner for withdrawal.
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The assessee maintained a provident fund which the Commissioner of Income-tax had recognised in 1937, after the nature of the commission payable to its salesmen had been brought to his notice, and the recognition continued in the years in issue. Rule 2 of its provident fund scheme defined salary to include not only fixed monthly salary but also commission and dearness allowance. As a term of the contract of employment, each salesman was paid, in addition to monthly salary, commission at a fixed percentage of the turnover he achieved, and the assessee computed its provident fund contribution on both. For assessment years 1962-63, 1963-64 and 1964-65 it claimed the whole contribution under section 36(1)(iv). The Income-tax Officer disallowed the part referable to commission, on the footing that salary in rule 2(h) of Part A of the Fourth Schedule does not include commission. One Appellate Assistant Commissioner rejected the assessee's appeal and another allowed two. The Tribunal held for the assessee on both the character of the commission and the fund's compliance with rule 4(c). The High Court answered for the Department, relying on a Board circular of 16 January 1941 and on Bridge and Roof Co.
The appeals were allowed with costs and both questions answered in favour of the assessee. The commission paid to the salesmen falls within salary as defined in rule 2(h) of Part A of the Fourth Schedule, so the sums of Rs 95,421, Rs 1,00,564 and Rs 1,17,969 representing the proportionate contributions referable to commission are deductible under section 36(1)(iv). Salary is defined both in section 17 and in rule 2(h), and each definition serves a different purpose; since the question concerned contributions to a recognised fund and their deduction under section 36(1)(iv), rule 2(h) applied. The fund satisfied rule 4(c). The Court added that where recognition granted by the Commissioner is in force for a year, the taxing authorities must proceed on the basis that the fund satisfies all the conditions in rule 4 and cannot sit in judgment over it; if they think a condition has been contravened they may refer the question of withdrawal to the Commissioner under rule 3.
Conceptually salary and wages mean the same thing, remuneration or payment for work done or services rendered, and the Court declined to treat the mode of measurement as decisive. Where under the contract of employment part of the remuneration is a fixed monthly sum and part is a percentage of the turnover the employee achieves, the entire remuneration determined on both bases partakes of the character of salary. On the 1941 circular, the Court held that if the commission is covered by salary on the true construction of the rule, the Board's view cannot detract from that legal position; and in any event the circular is directed at commissions that do not partake of the character of salary. On Bridge and Roof, the Court showed why it does not govern. That case construed basic wages in section 2(b) of the Provident Funds Act, 1952, where the exclusion of commission in clause (ii) had to be read with the inclusion of dearness allowance in section 6, and the basis found for the scheme was that what is payable in all concerns and earned by all permanent employees is included, while what is not is excluded. That reasoning belongs to a different statute and does not apply here. On recognition, the Court reasoned from judicial discipline and the need for certainty and uniformity: recognition granted and subsisting for a year implies that the conditions are met, and allowing each assessing authority to reopen it year by year would produce chaos, when the Act itself gives the Commissioner ample power to withdraw recognition.
the taxing authorities should proceed on the basis that the recognition granted and available for any particular assessment year implies that the Provident Fund satisfies all the conditions under Rule 4
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Handle my notice → Ask a CA on WhatsAppYes. The Supreme Court held that commission payable to salesmen as a term of the contract of employment, at a fixed percentage of turnover, is salary within rule 2(h) of Part A of the Fourth Schedule, so the provident fund contribution referable to it is deductible under section 36(1)(iv). Salary and wages both mean remuneration for work done, and it makes no difference that one part is measured by time and the other by turnover; the whole remuneration partakes of the character of salary. The Court also held that while recognition of the fund stands, the assessing authorities cannot question whether it meets the conditions for recognition. This was decided by the Supreme Court (Supreme Court of India; P.N. Bhagwati, R.S. Pathak and V.D. Tulzapurkar JJ. Judgment by Tulzapurkar J) and bears on section 36(1)(iv), section 17(1), section 256(1) of the Income Tax Act 1961. It is reported as (1979) 117 ITR 1; 1979 (2) SCC 354; AIR 1979 SC 607; 1979 SCR (2) 788; (1979) 1 Taxman 1 (SC). Two holdings, both still worked with. The first is on what salary means: a payment does not cease to be salary because it is measured by output rather than by time, provided it is remuneration under the contract of employment. The Court distinguished Bridge and Roof, which construed basic wages under the Provident Funds Act on a scheme peculiar to that Act, and held that the 1941 Board circular could not cut down the true construction of the rule, adding that the circular was aimed at commissions that do not partake of the character of salary at all. The second holding travels much further than provident funds. Where an approval or recognition granted by the Commissioner is in force for a year, the assessing officer must proceed on the footing that its conditions are satisfied, and cannot sit in judgment over it; his remedy is to refer the matter to the Commissioner for withdrawal. If it applies to you, the first step is this: Make the commission a term of the contract of employment and fix it by a stated percentage of turnover, so that it is remuneration and not a discretionary allowance.
The assessee maintained a provident fund which the Commissioner of Income-tax had recognised in 1937, after the nature of the commission payable to its salesmen had been brought to his notice, and the recognition continued in the years in issue. Rule 2 of its provident fund scheme defined salary to include not only fixed monthly salary but also commission and dearness allowance. As a term of the contract of employment, each salesman was paid, in addition to monthly salary, commission at a fixed percentage of the turnover he achieved, and the assessee computed its provident fund contribution on both. For assessment years 1962-63, 1963-64 and 1964-65 it claimed the whole contribution under section 36(1)(iv). The Income-tax Officer disallowed the part referable to commission, on the footing that salary in rule 2(h) of Part A of the Fourth Schedule does not include commission. One Appellate Assistant Commissioner rejected the assessee's appeal and another allowed two. The Tribunal held for the assessee on both the character of the commission and the fund's compliance with rule 4(c). The High Court answered for the Department, relying on a Board circular of 16 January 1941 and on Bridge and Roof Co. The matter was decided on 1978-12-14 by the Supreme Court (Supreme Court of India; P.N. Bhagwati, R.S. Pathak and V.D. Tulzapurkar JJ. Judgment by Tulzapurkar J). On those facts the Supreme Court held as follows. The appeals were allowed with costs and both questions answered in favour of the assessee. The commission paid to the salesmen falls within salary as defined in rule 2(h) of Part A of the Fourth Schedule, so the sums of Rs 95,421, Rs 1,00,564 and Rs 1,17,969 representing the proportionate contributions referable to commission are deductible under section 36(1)(iv). Salary is defined both in section 17 and in rule 2(h), and each definition serves a different purpose; since the question concerned contributions to a recognised fund and their deduction under section 36(1)(iv), rule 2(h) applied. The fund satisfied rule 4(c). The Court added that where recognition granted by the Commissioner is in force for a year, the taxing authorities must proceed on the basis that the fund satisfies all the conditions in rule 4 and cannot sit in judgment over it; if they think a condition has been contravened they may refer the question of withdrawal to the Commissioner under rule 3.
Conceptually salary and wages mean the same thing, remuneration or payment for work done or services rendered, and the Court declined to treat the mode of measurement as decisive. Where under the contract of employment part of the remuneration is a fixed monthly sum and part is a percentage of the turnover the employee achieves, the entire remuneration determined on both bases partakes of the character of salary. On the 1941 circular, the Court held that if the commission is covered by salary on the true construction of the rule, the Board's view cannot detract from that legal position; and in any event the circular is directed at commissions that do not partake of the character of salary. On Bridge and Roof, the Court showed why it does not govern. That case construed basic wages in section 2(b) of the Provident Funds Act, 1952, where the exclusion of commission in clause (ii) had to be read with the inclusion of dearness allowance in section 6, and the basis found for the scheme was that what is payable in all concerns and earned by all permanent employees is included, while what is not is excluded. That reasoning belongs to a different statute and does not apply here. On recognition, the Court reasoned from judicial discipline and the need for certainty and uniformity: recognition granted and subsisting for a year implies that the conditions are met, and allowing each assessing authority to reopen it year by year would produce chaos, when the Act itself gives the Commissioner ample power to withdraw recognition. In the words reproduced by the source cited on this page: "the taxing authorities should proceed on the basis that the recognition granted and available for any particular assessment year implies that the Provident Fund satisfies all the conditions under Rule 4"
It was decided by the Supreme Court on 1978-12-14 and is reported as (1979) 117 ITR 1; 1979 (2) SCC 354; AIR 1979 SC 607; 1979 SCR (2) 788; (1979) 1 Taxman 1 (SC). Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 36(1)(iv), section 17(1), section 256(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were allowed with costs and both questions answered in favour of the assessee. The commission paid to the salesmen falls within salary as defined in rule 2(h) of Part A of the Fourth Schedule, so the sums of Rs 95,421, Rs 1,00,564 and Rs 1,17,969 representing the proportionate contributions referable to commission are deductible under section 36(1)(iv). Salary is defined both in section 17 and in rule 2(h), and each definition serves a different purpose; since the question concerned contributions to a recognised fund and their deduction under section 36(1)(iv), rule 2(h) applied. The fund satisfied rule 4(c). The Court added that where recognition granted by the Commissioner is in force for a year, the taxing authorities must proceed on the basis that the fund satisfies all the conditions in rule 4 and cannot sit in judgment over it; if they think a condition has been contravened they may refer the question of withdrawal to the Commissioner under rule 3. It arises in Salary & Perquisites and Deductions & Disallowances matters, on section 36(1)(iv), section 17(1), section 256(1) of the Income Tax Act 1961, and was decided by Supreme Court of India; P.N. Bhagwati, R.S. Pathak and V.D. Tulzapurkar JJ. Judgment by Tulzapurkar J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Note which definition of salary applies. The Court applied rule 2(h) of Part A of the Fourth Schedule, not section 17, because the question was about a recognised provident fund. If an officer questions whether your recognised fund or approved scheme still meets its conditions, answer that the recognition is in force and that only the Commissioner can withdraw it. Do not let a Board circular be used to narrow a provision; where the construction of the rule is clear, the circular cannot detract from it.
Still good law. The source page records the decision as widely followed, both on the meaning of salary and on the effect of a subsisting recognition. It construes section 36(1)(iv) and the Fourth Schedule as they stood for assessment years 1962-63 to 1964-65; the limits prescribed for contributions and the wording of the Schedule have been altered since, so read the provisions in force for your year. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The batch line gave the year as 1979, which is the year of the reports; the judgment is dated 14 December 1978 and that date is used. The Court applied rule 2(h) of Part A of the Fourth Schedule and did not decide what salary means for other purposes, expressly noting that the section 17 definition serves a different purpose. It did not lay down that every commission is salary; the reasoning depends on the commission being remuneration under the contract of employment at a fixed percentage of turnover. The harvested page carries a reporter's headnote above the judgment, which has been disregarded. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed with costs and both questions answered in favour of the assessee. The commission paid to the salesmen falls within salary as defined in rule 2(h) of Part A of the Fourth Schedule, so the sums of Rs 95,421, Rs 1,00,564 and Rs 1,17,969 representing the proportionate contributions referable to commission are deductible under section 36(1)(iv). Salary is defined both in section 17 and in rule 2(h), and each definition serves a different purpose; since the question concerned contributions to a recognised fund and their deduction under section 36(1)(iv), rule 2(h) applied. The fund satisfied rule 4(c). The Court added that where recognition granted by the Commissioner is in force for a year, the taxing authorities must proceed on the basis that the fund satisfies all the conditions in rule 4 and cannot sit in judgment over it; if they think a condition has been contravened they may refer the question of withdrawal to the Commissioner under rule 3.
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