Case Note & Summary
The appeal was brought by the Commissioner of Income Tax, Assam and Nagaland against a judgment of the High Court of Assam and Nagaland in an income-tax reference. The assessee, a manager of a Tea Estate under the managing agency of M/s. Gillanders Arbuthnot & Co. Ltd., retired during the previous year relevant to assessment year 1963-64 and received Rs. 27,948/- as interest on his own contributions to an unrecognised provident fund. The Income-tax Officer assessed this amount as income from other sources, which was confirmed by the Appellate Assistant Commissioner. On further appeal, the Income-tax Appellate Tribunal held that the receipt was profits in lieu of salary under Section 17 of the Income-tax Act, 1961, and since it had not been assessed as salary, the assessment order was illegal. At the instance of the Commissioner, the Tribunal referred the question whether the amount was assessable under Section 56 to the High Court. The High Court answered in the negative, holding that the receipt could not be considered salary and was exempt under Section 17(3)(ii). The Supreme Court allowed the Revenue's appeal, holding that interest on any investment is income under Section 2(24). Section 17(3)(ii) excludes payments from a provident fund to the extent of the assessee's own contributions and interest thereon from the definition of 'profits in lieu of salary', meaning the receipt is not salary. Section 17 is a definitional provision only and does not grant exemptions or deductions. Since the receipt was not chargeable under any of the heads A to E of Section 14, it fell under the residuary head 'income from other sources' under Section 56(1). The Court answered the referred question in the affirmative in favour of the Department and made no order as to costs.
Headnote
A) Income Tax - Salary and Profits in Lieu of Salary - Exclusions from Salary Definition - Income-tax Act, 1961, Sections 17(1)(iv), 17(3)(ii) - Interest on assessee's own contributions to an unrecognised provident fund is income under Section 2(24) but is expressly excluded from 'profits in lieu of salary', thus it is not salary; Section 17 defines salary only and does not grant exemptions or deductions. Held that receipt of Rs. 27,948 is not salary and cannot be assessed under the head 'Salaries' (Paras 1-8).
B) Income Tax - Income from Other Sources - Residuary Head under Section 56 - Income-tax Act, 1961, Sections 14, 56(1) - Since the receipt is income but not chargeable under heads A to E of Section 14, it is chargeable under the residuary head 'income from other sources' under Section 56(1); High Court erred in treating Section 17(3)(ii) as exempting the amount. Held that interest on own contributions to unrecognised provident fund is assessable under Section 56 (Paras 1-8).
Issue of Consideration
Whether the amount of Rs. 27,948/- representing interest on the assessee's own contributions to an unrecognised provident fund was assessable under the residuary Section 56 of the Income-tax Act, 1961.
Final Decision
Appeal allowed; the answer given by the High Court was discharged and the question referred to the High Court was answered in the affirmative and in favour of the Department. No order as to costs.
Law Points
- Interest on investment is income under Section 2(24)
- Section 17(3)(ii) excludes own contributions and interest from 'profits in lieu of salary'
- such receipt is not salary
- Section 17 is a definitional provision
- not an exemption
- income not chargeable under heads A to E of Section 14 falls under residuary head 'income from other sources' under Section 56
Case Details
1971 LawText (SC) (01) 35
Civil Appeal No. 1174 of 1967
K.S. Hegde, J.C. Shah, A.N. Grover
1971 AIR 725, 1971 SCR (3) 438, 1971 SCC (1) 466
Jagadish Swarup, Solicitor-General, G. C. Sharma, R. N. Sachthey, B. D. Sharma, T. A. Ramachandran
Commissioner of Income Tax, Assam and Nagaland etc.
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Nature of Litigation
Income-tax reference appeal before the Supreme Court involving the question of taxability of interest on the assessee's own contributions to an unrecognised provident fund.
Remedy Sought
The Revenue sought to set aside the High Court judgment and have the referred question answered in the affirmative, holding the interest amount taxable under Section 56 of the Income-tax Act, 1961.
Filing Reason
The High Court had held that the receipt was not taxable as it was exempt under Section 17(3)(ii), which the Revenue contended was erroneous.
Previous Decisions
Income-tax Officer assessed the amount as income from other sources; Appellate Assistant Commissioner affirmed; Income-tax Appellate Tribunal held receipt was profits in lieu of salary under Section 17 and assessment as income from other sources was illegal; High Court of Assam & Nagaland answered the question in the negative, holding receipt not salary and exempt under Section 17(3)(ii).
Issues
Whether the amount of Rs. 27,948/- representing interest on the assessee's own contributions to an unrecognised provident fund was assessable under the residuary Section 56 of the Income-tax Act, 1961.
Submissions/Arguments
The Revenue argued that Section 17(3)(ii) did not exempt the receipt but only excluded it from the definition of 'profits in lieu of salary', and the receipt was income under Section 2(24) falling under Section 56 as income from other sources.
Ratio Decidendi
Interest on an investment is income under Section 2(24). Section 17(3)(ii) of the Income-tax Act, 1961 excludes any payment from a provident fund to the extent it consists of the assessee's contributions or interest on such contributions from the definition of 'profits in lieu of salary', meaning such receipt is not salary. Section 17 defines salary only and does not provide exemptions or deductions. Since the receipt is not chargeable under any of heads A to E of Section 14, it is chargeable as 'income from other sources' under Section 56(1).
Judgment Excerpts
The receipt of an interest on any investment is a gain made by the investor and therefore the same is 'income'.
Section 17 has nothing to do either with deductions or with exemptions. It is merely a provision defining the expression 'salary'.
As the income in question is not salary and the same cannot be said to be either interest on the securities; income from house property; profits and gains of business or profession or capital gains, it has to be considered as 'income from other sources' and brought to tax under s. 56.
Section 56(1) provides that income of every kind which is not to be excluded from the total income under the Act shall be chargeable to income-tax under the head income 'from other sources' if it is not chargeable to income-tax under any of the heads specified in s. 14 items 'A' to 'E'.
Procedural History
Income-tax Officer assessed the interest amount as income from other sources for assessment year 1963-64. Appellate Assistant Commissioner affirmed. Income-tax Appellate Tribunal held the receipt was profits in lieu of salary under Section 17 and assessment as income from other sources was illegal. At the instance of the Commissioner, the Tribunal referred the question of law to the High Court. The High Court of Assam & Nagaland answered the question in the negative, holding the amount not taxable/exempt under Section 17(3)(ii). The Commissioner appealed to the Supreme Court by certificate.
Acts & Sections
- Income-tax Act, 1961: 2(24), 14, 15, 17, 56
