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G. Krishnamurthy, Senior Vice President

1. The issue in this case is perhaps res integra so far as our knowledge is concerned. It is quite interesting too.

2. The assessee belongs, as we are told in the course of the hearing, to Indian Revenue Service working elsewhere in the Government on deputation. While filing return of income for the year under appeal 1981-82, disclosing income from salary, the assessee claimed that the amount of city compensatory allowance received by him was exempt from tax on the authority of the decision of the Gujarat High Court in the case of CIT v. S.G. Pgnatale [1980] 124 ITR 391. Besides, he also claimed deduction in respect of the repayment of instalment of loan taken from the general provident fund under Section 80C of the Income-tax Act 1961 ('the Act'). Also, claimed deduction was in respect of contribution made towards C.G.H.S. The ITO allowed neither of these claims. By taking the gross salary and allowing therefrom standard deduction and deduction under Section 80C as per salary certificate or normal year contribution to general provident fund and, deduction under Section 80-I of the Act the ITO completed the assessment. The matter was then taken on appeal before the AAC, who agreed with the ITO and, dismissed the assessee's claims as untenable and unmaintainable. Aggrieved by this order a further appeal was filed before the Tribunal, disputing the disallowances of all these three claims but at the time of hearing' dispute with regard to contribution to C.G.H.S. was not pressed. The interesting point is, however, not the claim for deduction of city compensatory allowance but the claim for deduction of instalment of repayment of the loan taken from the general provident fund under Section 80C.

4. Coming to the main point, the assessee made a deduction of Rs. 4,440 under the general provident fund and Rs. 600 under compulsory deposit scheme and Rs. 1,876 under life insurance premia aggregating to Rs. 6,976. Out of the sum of Rs. 4,440, Rs. 2,400 represented contribution towards provident fund and the balance of Rs. 2,040 towards repayment of loan taken earlier from the general provident fund. The ITO allowed relief under Section 80C only on the other amount excluding the repayment of loan as in his opinion, this amount was not eligible for relief under Section 80C. We have, therefore, to go to Section 80C to see whether the claim made by the assessee is permissible or not. Section 80C appears under Chapter VIA of the Act which provided for deductions to be made in computing total income. Section 80C provided for deduction in respect of contributions made to life insurance premia and provident fund. Sub-section (1) of this section provided for the aggregate of the sums to be allowed as deductions and Sub-section (2) provided how these sums have to be aggregated. Clause (a) of Sub-section (2) of Section 80C provided that where the assessee is an individual, any sums, specified in stated clause, is paid in the previous year by the assessee out of his income chargeable to tax, the same will be allowed as a deduction subject to the limits provided in Sub-section (1). Sub-clauses (i) and (ii) of Clause (a) of Sub-section (2) deal with the premia paid on life insurance ; with which we are not concerned in this appeal. Sub-clause (iii) provided for the deduction made on account of provident fund, with which we are concerned. We would like to, therefore, reproduce what it contains :

(iii) as a contribution to any provident fund to which the Provident Funds Act, 1925 (19 of 1925), applies ;

Now reading Clause (a) and Sub-clause (in) of that sub-section together, it emerges that where the assessee is an individual any sums paid in the previous year by the assessee out of his income chargeable to tax as a contribution to any provident fund to which the Provident Funds Act, 1925 applies will be allowed as a deduction at the rates specified in subsection (1) of Section 80C. Apparently, three ingredients have to be satisfied before a deduction under Section 80C could be claimed and allowed ; one is the assessee must be an individual and secondly, the sums paid in the previous year must be out of his income chargeable to tax and, thirdly, as a contribution to any provident fund to which the Provident Funds Act applies. There was some debate before us whether the sum paid by the assessee was out of his income chargeable to tax. This argument arose because the repayment of the instalment of loan was at the first blush thought to have been paid not out of the income chargeable to tax but later on when it was known that the amount was deducted from the salary payable to the assessee in the accounting year, which was the income under computation, this controversy ended and this point was given up. We do not now have to dwell on this issue except to state that the instalment towards repayment of loan was paid out of the salary income of the assessee chargeable to tax. The second question is whether the instalment paid towards repayment of loan was a contribution to any provident fund to which the Provident Funds Act applies. The learned Counsel for the assessee submitted and rightly too that the expression 'contribution' was not defined in the Act but in the Fourth Schedule which dealt with the recognised provident funds. It defined the expression 'contribution' as" 'contribution' means any sum credited by or on behalf of any employee out of his salary, or by an employer out of his own moneys, to the individual account of an employee, but does not include any sum credited as interest ;" The argument of the learned Counsel for the assessee is that this definition could be taken as the definition for the purpose of Section 80C also and if this is the definition of the word 'contribution', most certainly the instalment paid towards repayment of loan was credited to the individual account of the employees and, therefore, it was a contribution made by an assessee towards provident fund. Merely because it was a repayment of a loan, the argument proceeded, it could not be said that it ceased to be a contribution to the provident fund. The learned Counsel placed utmost reliance upon this expression to emphasise his view that even a repayment of a loan to provident fund is nonetheless a contribution to the provident fund entitled to deduction under Section 80C provided the other conditions are satisfied. Section 80C according to him did not make a distinction between an original contribution made to a provident fund or to a contribution made to the provident fund by way of repayment of loan taken from the provident fund. With the withdrawal of money by way of loan, the provident fund balance got depleted and with the repayment it again got restored to its original amount providing, however, for the variations on account of interest. Since in the ultimate analysis the repayment of loan had to be credited to the individual account of the employee, it partook the character of a contribution to the provident fund.

7. In this case, Rs. 2,400, was the contribution towards general provident fund and Rs. 2,040 was by way of repayment of loans. The yearly contribution of Rs. 2,400 got increased by Rs. 2,040. The total amount of contribution made by the assessee, thus, became as Rs. 4,440. This was adjusted by the employer, the Government, a part towards yearly contribution and another part towards repayment of loan. If, we look at the problem from the point of view of the employee, the amount contributed is Rs. 4,440 towards provident fund. But if we look at it from the point of view of the employer, a part contribution was towards annual contribution and another part towards repayment of loan. Both were credited to the provident fund account. Thus, looked at from the employee's point of view, the arisal of need to deduct more by reason of compulsion of repayment of the loans taken earlier, the total amount deducted from his salary and credited to the account of the provident fund was Rs. 4,440. These are only two requirements to bring that amount within the meaning of the word 'contribution' defined in the Provident Fund Act, namely, deduction from salary and crediting to provident fund account, then, in our view, those requirements are satisfied. There is no question of the contribution made by an assessee being adjusted towards a separate account called repayment of the loan. Therefore, the total amount contributed by the assessee towards contributions to provident fund is not only the yearly contribution of Rs. 2,400 but also the amount contributed towards repayment of loan. It is well to note, that Section 80C only speaks of contribution to provident fund. It does not speak of splitting up of the contribution into yearly contribution and repayment of loans. If we interpret the contribution as excluding repayment of loan, we thought, we will be rewriting the section. Thus, the entire amount should qualify for deduction subject to the limits set out in Section 80C(1). As regards the argument of the learned departmental representative that the assessee in this process is getting double deduction, we are not able to subscribe to this view because double deduction in the first instance postulates deduction of the same amount twice, which is not the case here. Secondly, what was allowed as a deduction in the earlier years before the loan was taken was different from the amount now deducted because the amount, now, deducted from the salary is assumed the character enhanced contribution. It is like this. An employee may decide to deduct from his salary Rs. 1,000 per month and in the next year be may decide to deduct Rs. 2,000 per month. The sum of Rs. 2,000 deducted will be the contribution made and the amount of Rs. 4,440 now deducted from the assessee's salary is in the nature of the enhanced amount of contribution we have just referred to, although the motivating factor for the enhanced deduction was the obligation to repay the loan taken from the general provident fund. The employer, the Government might have provided several forms to distinguish repayment of loans from the annual contribution. They are to be understood as a means for facilitating proper and accurate accounting. But from the employee's point of view, the amount deducted from the salary even though towards repayment of loan is contribution made to a provident fund although it is to repay the loan and, therefore, is a contribution within the meaning of Sub-section (2)(b)(iii) of Section 80C and, therefore, entitled to the deduction subject to the limits specified in Section 80C(1). We, therefore, accept the assessee's claim on this account and direct the ITO to compute the income accordingly.