Madras H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding, notwithstanding the provisions of s. 161 of the IT Act, 1961, that interest to the extent of Rs. 366 in the asst. yr. 1975-76 and Rs. 2,490 in the asst. yr. 1976-77, which was interest received by the assessee in excess of the rate prescribed in cl. (b) of r. 6 of Part A of the Fourth Schedule to the IT Act, 1961, did not qualify for deduction under s. 80L of the IT Act,1961 ?

High Court Of Madras

M.C. Muthanna vs. CIT

Sections 15, 17, 80L, SCH. IV PART A RULE 6

Asst. Year 1975-76, 1976-77

Ratnam & Bakthavatsalam, JJ.

Tax Case Nos. 622 & 623 of 1979

24th January, 1989

Counsel Appeared

Janardhana Raja, for the Assessee : C.V. Rajan, for the Revenue

RATNAM, J.:

In these references at the instance of the assessee under s. 256(1) of the IT Act, 1961 (hereinafter referred to as “the Act”), the following common question of law has been referred to this Court for its opinion:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding, notwithstanding the provisions of s. 161 of the IT Act, 1961, that interest to the extent of Rs. 366 in the asst. yr. 1975-76 and Rs. 2,490 in the asst. yr. 1976-77, which was interest received by the assessee in excess of the rate prescribed in cl. (b) of r. 6 of Part A of the Fourth Schedule to the IT Act, 1961, did not qualify for deduction under s. 80L of the IT Act,1961 ?”

2. The assessee is an individual and was employed in Bombay Burmah Trading Corporation Limited. The assessee was a member of an approved provident fund constituted by the company for which recognition was granted under s. 58B(1) of the Indian IT Act, 1922, by an order of the CIT, Bombay, on 3rd Feb., 1938. The fund was constituted under certain rules and was a contributory provident fund. By virtue of the rules, the fund came into possession of certain moneys. One of the rules governing the fund and its administration provided for the investment of the funds received by the trustees and for the payment of interest realised thereby to the members. The assessee received interest from the investments made out of the amounts belonging to the provident fund and such interest, to the extent prescribed in cl. (b) of r. 6 of Part A of the Fourth Schedule to the Act, was excluded from the assessment. The excess interest was assessed under the head “Salary” as per s. 17(1)(vi) of the Act, as could be gathered from the order of the AAC, though the assessee claimed that a deduction ought to have been allowed to the extent admissible under s. 80L of the Act in respect of the said amount. Such interest so assessed in the asst. yr. 1975-76 was Rs. 366 and Rs. 2,490 in the asst. yr. 1976-77. The order of assessment in respect of the relevant assessment years proceeded on the footing that the aforesaid amounts had been added back. In the appeals preferred by the assessee reiterating that the excess interest disallowed should be deducted under s. 80L of the Act, which provided for deduction of interest from certain specified investments, the AAC took the view that the source for the said amounts is the employment of the assessee and his membership in the company’s provident fund and by virtue of s. 17(1)(vi) of the Act and r. 6 of Part A of the Fourth Schedule to the Act, the amounts were rightly assessed under the head “Salary” as per s. 17 of the Act and, therefore, there is no question of permitting any deduction under s. 80L of the Act. Aggrieved by this, the assessee preferred appeals before the Tribunal and the Tribunal was of the view that as the stand taken by the assessee and the Department were the same as those considered in a decision of a Special Bench of the Tribunal in I.T.A. Nos. 1172 and 1173 (Mad) of 1977-78 dt. 25th Feb., 1978, that decision would govern the appeals preferred by the assessee and for the very same reasons set out in that decision, the assessee was not entitled to the relief under s. 80L of the Act on the aforesaid amounts in either of the two assessment years. Inasmuch as the Tribunal had, in disposing of the appeals preferred by the assessee, merely made a reference to the reasoning in its earlier order, the reasons given by the Tribunal in that order, which forms part of the stated case, may also be briefly noticed. The Tribunal opined that the interest amounts paid to the assessee would be “salary” only for limited purposes and would not partake of the nature of “salary” and that the trustees were the owners of the fund and the investment of the funds was for the benefit of the beneficiaries and not on their behalf and that as the interest was paid to the assessee and others only on behalf of the trustees of the fund, such interest does not emanate from any of the sources mentioned in s. 80L of the Act and, therefore, the deduction under s. 80L of the Act would not be available. Consequently, the Tribunal dismissed the appeals.

Learned counsel for the assessee submitted, referring to the rules of the provident fund, that the interest realised by the trustees by the investment of the funds of the trust would qualify for the benefit of deduction under s. 80L of the Act and that it is not necessary that the assessee himself should be the owner of the funds so invested in order to claim the benefit of s. 80L of the Act. Reliance was also placed by learned counsel in this connection on the decision reported in CIT vs. Smt. Shakuntala Banerjee (1979) 120 ITR 837 (All) : TC26R.457. On the other hand, learned counsel for the Revenue contended that having regard to the provision contained in cl. (b) of r. 6 of Part A of the Fourth Schedule r/w ss. 15 to 17 of the Act, it is clearly seen that the amounts received by the assessee would partake of the character of “salary” for purposes of the Act and that, therefore, there is no question of claiming the benefit of deduction under s. 80L of the Act. It was further submitted that the trustees are the owners of the fund and the assessee. as a beneficiary, has rights against the trustees and the trustees held and invested the funds for the benefit of and not on behalf of the assessee and rule 17 of the provident fund rules providing for payment of interest to every member did not in any way negative the relationship between the assessee, as a beneficiary, and the trustees as the owners of the fund and the trustees being the legal owners are the persons who may claim the benefit of deduction under s. 80L of the Act and not the assessee. The decision relied on by learned counsel for the assessee was also sought to be distinguished on the ground that it related to a private trust and not a provident fund, as in this case, attracting cl. (b) of r. 6 of Part A of the Fourth Schedule and the other related provisions and, therefore, that decision would be inapplicable. In reply, learned counsel for the assessee pointed out that the question whether the amounts received by the assessee would fall under the head “Salary” for purposes of the Act has not been made the subject-matter of the reference at the instance of the Revenue and cannot be considered in this reference before the Court at the instance of the assessee and the proper course for the Revenue would have been to ask for a reference on that question negatived by the Tribunal in the appeals before it. Reliance was placed in this connection on the decision reported in E.I.D. Parry Ltd. vs. CIT (1988) 69 CTR (Mad) 69 : (1988) 174 ITR 11 (Mad) : TC13R.470. However learned counsel for the Revenue pointed out that the main question referred for the opinion of the Court related to the claim made by the assessee for deduction under s. 80L of the Act and in considering the question whether the amounts did not qualify for deduction under s. 80L of the Act, it would be open to the Court to consider all aspects which have fairly a direct bearing on the dispute and comprised within the framework of the question already referred.

Before proceeding to consider the merits of the claim of the assessee for deduction under s. 80L of the Act, we may dispose of the ancillary submission on behalf of the Revenue as well as the assessee whether the question that the amounts received by the assessee could be regarded as “Salary” can be considered. These amounts were no doubt received by the assessee, but the amounts represented interest earned by the trust on an investment of the money belonging to the trust by the trustees in banks and other securities. Whether the amounts so received by the assessee could be regarded as income by way of interest on deposits with a banking company within the meaning of s. 80L(1)(c)(vi) of the Act and included in the gross total income of the assessee would be a relevant aspect in the consideration of the claim for deduction under s. 80L of the Act made by the assessee. It is obvious that if the interest on the investment made by the trustees of the provident fund and distributed to the assessee partakes of the character of “Salary” under the provisions of the Act, then, it would not qualify for the benefit of deduction under s. 80L of the Act. Indeed, in the orders of the AAC and also the Tribunal, this aspect had been dealt with and we are of the view that this is only a closely related aspect with reference to the question referred. It may be useful to refer to the decision of the Supreme Court in CIT vs. Scindia Steam Navigation Co. Ltd. (1961) 42 ITR 589 (SC), where, discussing the scope of a reference under s. 66 (1), (2) and (5) of the Indian IT Act, 1922, the Supreme Court has pointed out that when a question is raised before the Tribunal and is dealt with by it, it is clearly one arising out of its order and that where the question itself was under issue, as in this case before the Tribunal regarding the claim to the benefit of a deduction under s. 80L of the Act, it will be an over-refinement of the position to hold that each aspect of the question is itself a distinct question for purposes of s. 66(1) of the Act. We may also refer to the question framed which deals with the qualification for deduction under s. 80L of the Act of the amount of interest received by the assessee during the assessment years in question. Implicit within the framework of the question so referred is the question of the amount of interest received by the assessee not qualifying for deduction under s. 80L of the Act owing to the amount not falling under the description of the categories of income enumerated in s. 80L of the Act. We may usefully refer in this connection to the decision of the Supreme Court in Bhanji Bagawandas vs. CIT (1968) 67 ITR 18 (SC), where it has been pointed out that a question may be a single one having its impact on one point. or it might be a complex one, involving more than one aspect and requiring to be tackled from different standpoints and where the question itself was under issue, it will be an over-refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of s. 66(1) of the Act. In the view we have taken that the question as referred is comprehensive enough to permit consideration of the character, for purposes of the Act, of the interest received by the assessee, it is unnecessary to refer to the decision in E.I.D. Parry Ltd. vs. CIT (supra), as that decision may not apply having regard to the terms in which the question referred has been couched in this case. Earlier, it has been noticed how the AAC in the course of his order has found that the amounts received by the assessee are assessable as part of his “Salary” as per s. 17(1)(vi) of the Act and in the course of its order, the Tribunal has also proceeded to consider the character of the interest received by the assessee. While doing so, the Tribunal has referred to cl. (b) of r. 6 of Part A of the Fourth Schedule and to ss. 15 to 17 of the Act, but had concluded that the interest income received by the assessee does not partake of the nature of “Salary”, but retained its character as interest income.

We are. however, unable to agree with the view taken by the Tribunal. Rule 2(e) of Part A of the Fourth Schedule states that “annual accretion”, in relation to the balance to the credit of an employee, means the increase to such balance in any year, arising from contributions and interest. Under r. 6(b), that portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund as consists of interest credited on the balance to the credit of the employee in so far as it exceeds one-third of the salary of the employee or is allowed at a rate exceeding such rate as may be fixed by the Central Government in this behalf by notification in the Official Gazette, shall be deemed to have been received by the employee in that previous year and shall be included in his total income for that previous year and shall also be liable to income- tax. Thus, interest credited on the balance in excess of one-third of the salary of the employee or in excess of the rate exceeding the rate fixed by the Central Government is deemed to have been received by the employee in the previous year and should also be included in his total income for the previous year and shall be liable to income- tax. There is no dispute that the amounts of Rs. 366 and Rs. 2,490 represented such excess in accordance with r. 6(b) referred to earlier. Under s. 17(1)(vi) of the Act, for the purpose of ss. 15, 16 and 17, “Salary” includes the annual accretion to the balance at the credit of an employee participating in a recognised provident fund to the extent to which it is chargeable to tax under r. 6 of Part A of the Fourth Schedule. Thus, by the application of rule 6(b) and s. 17(1)(vi), it follows that the excess interest credited which is declared to be liable to tax under r. 6 is included in the expression “Salary” for purposes of ss. 15, 16 and 17 of the Act. Sec. 15 of the Act provides for the different heads of salary chargeable to income-tax and s. 16 of the Act provides for certain deductions while computing the income chargeable under the head “Salary”. The interest income in excess of the permissible limit referred to in cl. (b) of r. 6 of Part A of the Fourth Schedule is by the combined operation of r. 6(b) and s.

17(1)(vi) of the Act to be “Salary” for purposes of ss. 15 and 16 of the Act. Sec. 15 of the Act, after enumerating the categories of income falling under the head “Salary”, also provides for their chargeability to income-tax under the head “Salary”. It follows, therefore, that the interest amount paid in excess of the permissible limit under r. 6(b)has to be treated as salary and also treated as such for purposes of assessment. Unfortunately, the Tribunal has taken the view that the payment of excess interest can be considered to be salary only for certain limited purposes, viz., apportioning it to a particular head of income for purposes of classification and no more. While so doing, the Tribunal has referred to the following observations of Lord Asquith in East End Dwellings Co. Ltd. vs. Finsbury Borough Council (1952) AC 109, at p. 132: “If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it . … The statute says that you must imagine a certain state of affairs, it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.” Despite referring to the aforesaid passage which cautions against the boggling of the imagination when it comes to the inevitable corollaries of treating an imaginary state of affairs as real, the Tribunal has permitted its imagination to boggle.

The Tribunal would accept that the excess interest paid to the assessee in accordance with r. 6(b) would be “salary”, but for limited purposes. In other words, the Tribunal, while accepting that it is bidden to treat the interest in excess of the prescribed rate in cl. (b) of r. 6 of Part A of the Fourth Schedule as “salary” for purposes of the Act, had failed to give full effect to the inevitable corollaries of that state of affairs in that it had pigeon holed such income as one intended for arriving at the total income, not in any manner affecting the nature of the income. We are unable to agree with this line of reasoning. When under cl. (b) of r. 6 read with s. 17(1)(vi) of the Act and s. 15 of the Act, the payment of excess interest is deemed to be included in the “salary” income and also assessable as such, it cannot be said that it is only for the purpose of classification and not for other purposes, inclusive of assessment as such. We, therefore, hold that the interest payment received by the assessee in these cases would really partake of the character of “salary” as decided by the AAC and there is, therefore, no question of the assessee claiming the benefit of deduction under s. 80L of the Act.

In order to ascertain whether the interest received by the assessee would otherwise fall within s. 80L of the Act, it has to be found out whether such interest income can be construed as interest from securities or bank deposits, etc. The provident fund, as noticed earlier, had been recognised under s. 58B(1) of the IT Act, 1922, by the CIT, Bombay. The funds invested are trust funds and they comprised the contribution of the employees as well as the interest accrued thereon. The contribution by an employee like the assessee would be repayable on his leaving the service. There is a specific provision under rule 13 of the rules framed in relation to the provident fund to the effect that the crediting of the employer’s fixed and optional contributions and interest shall not confer on any member any right in respect thereof except such as is expressly provided by these Rules. Rule 22 of the Rules provides for recoupment of the employer’s contribution in specified cases and r. 23 provides for forfeiture of the employer’s contribution in certain other cases. It is thus seen that under the rules, on the employee leaving the service, the entire amount of contributions, both by the assessee and also the employer, as well as interest thereon, become payable to the employee or his heirs, subject to the provisions of recoupment or forfeiture. It is in the context of these rules governing the provident fund that the real nature of the relationship between the assessee and the trust has to be considered. No doubt, the funds of the trust are vested in the trustees, who are also the legal owners of the funds and the other trust properties. However, the trustees hold the property for the benefit of the beneficiaries and not on their behalf. This distinction is fine but appreciable and has been clearly brought out in the decision of the Supreme Court in W.O. Holdsworth vs. State of Uttar Pradesh (1958) 33 ITR 472 (SC). It has clearly been pointed out that the definitions of “trustee”, “beneficiary”, “beneficial interest”, “trust property” and “trust money” emphasise that the trustee is the owner of the trust property and the beneficiary has rights only against the trustee as owner of the trust property and the trustee is the legal owner and the property vests in him as such. It has also been further laid down that the trust property is held by the trustee for the benefit of the beneficiaries, but such property is not held on their behalf and the expressions “for the benefit of” and “on behalf of” connote different concepts in that the former denotes a benefit enjoyed by another thus bringing in a relationship as between a trustee and a beneficiary or cestui que trust, while the latter contemplates an agency bringing about a relationship between principal and agent between the parties, one of whom is acting on behalf of another. The principles laid down in the decision of the Supreme Court would, in our view, govern this case also.

The assessee as a member of the provident fund had only a right against the trustees, who are the owners of the trust funds even in respect of the contribution of the assessee as well as the interest accruing thereon and till the assessee left the service, the amounts were not repayable and the contribution and the interest thereon by the employer did not confer any right as such on the member contributing. The trustees in this case were thus the owners of the trust funds and had also invested them for the benefit of the employees and not as their agents and though under r. 17 of the Provident Fund Rules payment of interest to every subscriber on the amount standing to his credit could be made, that would not in any manner alter the character of the funds held and invested by the trustees as one on behalf of the employees. The trustees have, therefore, to be considered as the legal owners and the interest received by them by the investment of the trust funds in bank deposits might perhaps qualify for deduction under s. 80L of the Act in their hands, if that interest could be assessed. But inasmuch as the trustees had not acted as the agents of the employees, it follows that the assessee cannot, for purposes of s. 80L of the Act, be considered to have included in the gross total income any income by way of interest on deposits in the banking company. In other words, the excess interest paid to the assessee over the prescribed rate cannot be income of the nature contemplated under s. 80L of the Act and, therefore, the assessee cannot claim the benefit of deduction under s. 80L of the Act.

We may now briefly refer to the decision in CIT vs. Smt. Shakuntala Banerjee (supra), relied on by learned counsel for the assessee. That related to a private trust and the distinction pointed out, viz., trustee acting “for the benefit of” and “on behalf of the beneficiary” has not been borne in mind. We are, therefore, of the view that that decision cannot be of any assistance to the assessee. We, therefore, hold that the Tribunal was quite right in its conclusion that the interest received by the assessee in the asst. yrs. 1975-76 and 1976-77 in excess of the rate prescribed in cl. (b) of r. 6 of Part A of the Fourth Schedule did not qualify for deduction under s. 80L of the Act. We answer this reference accordingly against the assessee. The Revenue will be entitled to the costs of this reference. Counsel’s fee Rs. 500. One set.

[Citation : 177 ITR 501]

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