Holding

The 21 Oct 1965 Notification is ultra vires; the deduction must be allowed in full in the year of payment.

Summary

Sirpur Paper Mills made contributions to an approved superannuation fund amounting to Rs 2,70,911 for the current year and Rs 2,14,785 for the preceding five years. The assessing officer allowed a deduction of only 80% of the contributions and spread it over five years, relying on a Central Board of Direct Taxes notification dated 21 Oct 1965. The Commissioner of Income Tax (Appeals) allowed the full deduction, a decision upheld by the Income Tax Appellate Tribunal. The Revenue sought a reference to the High Court, which was denied, and appealed to the Supreme Court. The Court held that the notification’s conditions – limiting the deduction to 80% and requiring it to be amortised over five years – exceed the Board’s powers under Section 36(1)(iv) of the Income Tax Act, 1961, whereas the 25% salary cap is permissible. Consequently, the full amount of the contribution must be allowed as a deduction in the year of payment, and the appeals were dismissed.

Issues considered

Whether the 1965 Notification imposing an 80% limit on the deductible amount and a five‑year spread of the deduction is within the powers of the Central Board of Direct Taxes under Section 36(1)(iv) of the Income Tax Act, 1961.
Whether contributions to an approved superannuation fund are fully deductible in the assessment year of payment despite the conditions in the Notification.

Legislation cited

Income Tax Act, 1961s. 256(1), s. 256(2), s. 36(1)(iv)
Income Tax Rules, 1962s. 87, s. 88

Subjects

Income TaxSection 36superannuation funddeductionnotificationultra viresassessment yeartax contribution

Judgment

A COMMISSIONER OF INCOME TAX
v.
SIRPUR PAPER MILLS ETC. ETC.

MARCH I 8, 1999
-
......

B (S.P. BHARUCHA AND R.C. LAHOTI, JJ.]

Income Tax Act, 1961/Income Tax Rules, 1962

S.36(J)(iv)/Rules B7 and BB-Contributions towards recognised
C provident fund or approved superannuation fund-Deductions-Notification
dated 21. 10.1965 issued by Central Board ofDirect Taxes imposing conditions
that only BO% of the amount actually paid can be allowed as deduction and
that 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-Held, there is no justification for both the conditions-
D High Court was right in holding that the Notification goes beyond the power
of the Board u/s.36(1)(iv).
The respondent-assessee in the previous year relevant to the assessment
year 1981-82 made contributions to approved super-annuation fund emounting
to Rs. 2,70,911 for the current year, and for the past five years an aggregate
E amount of Rs. 2,14, 785, calculated on the basis of 25% of the employees'
dues on account of past services. The Income Tax Officer, relying upon a
Notifica_tion dated 21.10.1965 issued by the Central Board of Direct Taxes,
allowed the deduction only to the extent of 80% and spread it out over a
period of five years. On appeal, the Commissioner of Income Tax (Appeals)
allowed the deduction in full and his order was upheld by the Income Tax
F Appellate Tribunal. The application of the Revenue for referring to the High
Court the question whether the Tribunal was right in confirming the order
of the CIT (Appeals) was rejected both by the Tribunal and the High Court.
Aggrieved, Revenue tiled the present appeals.

Dismissing the appeals, this Court L
G
HELD : 1.1. The High Court was right in holding that the Notification
dated 21.10.1965 goes beyond the powers conferred on the Central Board of
Direct Taxes under s. 36 (i)(iv) of the Income Tax Act, 1961.
(16-A; 14-E-FJ

H Hyderabad Asbestos Cement Products Ltd. v. G. Ramanujumu Naidu
10
C.l.T. v. SIRPUR PAPER MILLS 11

- and Y.J. Anjaneyulu, 172 ITR 762, apprqved.

1.2. Notificatio.n dated 21.10.1965 imposes three conditions. The first
conditions that the total amount of the contribution shall not exceed 25%
of the employees' salary is a condition which the Board was empowered to
A

impose having regard to the provisions in this behalf in Rule 88 of the
Income Tax Rules, 1962. (15-C-D) B
1.3. There is no justification for the second condition that only 80%
of the amount actually paid by the employer can b~ allowed as a deduction.
Section 36 of the Income Tax Act, 1961 states that the deduction shall be
wholly allowed. Section 36(1 )(iv) itself speaks of "any sum paid." It permits
the Board to specify conditions but conditions cannot have the effect of c
curtailing the scope of th~ deduction granted by the Section. The amplitude
of the deduction p~rmitted 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 re-write the Section. (15-D-F)

1.4. The last condition that the deduction shall be spread out equally. D
over a period of five years commencing with the assessment year relating
to the previous year in which the amount was paid, is no condition but a
provision superadded to the Section which does not contemplate any such
distribution of the deduction. Under the Section th~ deduction is available in
the assessment year relating to previous year in which the payment was
made and it must be so granted. (15-G]
E
'
2. The contribu~ions in the instant case were not payments for
recognition or approval and, therefore, outside the limits that could be
prescribed under clause (iv) ofs.36(1) in that behalf. (15-Al

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2398 of 1994 F
Etc. Etc.

From the Judgmel;lt and Order dated 12.2.92 of the Andhra Pradesh High
Court in I.T.C. No. 26of1991.

T. L.V. Iyer, M.L. Verma, Joseph Vellapally, D.A. Dave, S. Rajappa, G
Jaideep Gupta, IlK. Prasad, Ms. Pumima Singh, Suman J. Khaitan, P. Venugopal,
'· P.S. Sudhir, K.J. J~hn, Rajiv Shakdhar, U.A. Rana, Arun Pednekar, Gaurab
Banerjee, Mrs. Nandini Gore, Mrs. M. Karanjawala, R.N. Karanjawala and
) Haris Beeran for the appearing parties.

The Judgment of the Court was delivered by H
12 SUPREME COURT REPORTS [1999) 2 S.C.R.

A 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
B 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
C 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
D 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
E spread it out over a period of five years. For so doing, he relied upon a
notification dated 21. l 0 .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
F by the Tribunal, under Section 256(1 ), and by the High Court, under Section
256(2). The High Court, as aforestated, followed its decision in Hyderabad
Asbestos Cement Products Limited.

Having regard to the fact that the Special Leave Petition filed by the
G Revenue against the judgment in Hyderabad Asbestos Cement Products Ltd.
was dismissed on a 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
H funds. Section 36(1 )(iv) reads thus :
C.l.T. v. SIRPUR PAPER MJLLS [BHARUCHA, J.) 13
"Section 36(1) The deductions provided for in the following clauses A
• 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
I
contribution towards a recognised provident fund or an approved
• superannuation fund, subject to such limits as may be prescribed for B
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 C
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 :
D
"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.
E
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 F
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 G
"'* issued the notification dated 21. l 0.1965 which was relied upon by the assessing
authority. It reads thus :

"Contributions to approved superannuation fund - Conditions
specified under clause (iv) of sub-section (I) for the purposes of
deduction of certain contributions : H
14 SUPREME COURT REPORTS [1999] 2 S.C.R.

A In exercise of the powers conferred by clause (iv) of sub- section
(l) of section 36 ofthe Income Tax Act, 1961 (43of1961), 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
B contributions or to the number of members of the fund namely :-

l. The total amount of contribution that shall be taken into account
for the purposes of this notification shall not exceed twenty-five per

c
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.

. 2. Subject to condition 1, eighty per cent of the amount actually
• •

paid by the employer by way of contribution during any previous year
D 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
b~ allowed in equal instalments for each of the four immediately
E 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(l)(iv), as was held by the High Court in the case of Hyderabad Asbestos
Cement Products Ltd. and reaffirmed in the orders under appeal.
F - ..
Sec.tion 36(l)(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 s~m paid by the assessee as an employer by
way of contribution towards a recognised provident fund or an approved
G 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
H fund.
C.l.T. v. SIRPUR PAPER MILLS [BHARUCHA, J.] 15

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

clause (iv) in that behalf.

It is arguable that the contributions mad~ 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 B
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 C
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 D
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 Board to specify conditions but conditions E
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 thai Section 36(l)(iv) F
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. G
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 H
16 SUPREME COURT REPORTS [1999) 2 S.C.R.

A 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.

B The appeals are dismissed. No order as to costs.

RP. Appeals dismissed.

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