Commissioner of Income Tax, Bombay Vs.
Mysore Spinning & Mfg. Co. Ltd. [1970] INSC 121 (30 April 1970)
30/04/1970 GROVER, A.N.
GROVER, A.N.
SHAH, J.C.
HEGDE, K.S.
CITATION: 1970 AIR 1785 1971 SCR (1) 468 1970
SCC 202
ACT:
Indian Income-tax 1922, s. 58K(1) and s.
10(2) (xv)-Private Provident Fund started by assessee company for its
employees-Accumulations paid into Employees Provident Fund under the Employees
Provident Funds Act 19 of 1952-Payment whether of a capital nature within the
meaning of s. 58K(1) of the Income-tax Act-Whether allowable expenditure under
section 10(2)(xv).
HEADNOTE:
The assessee company-respondent
herein-carried on the business of ,manufacture and sale of yarn and cloth. It
started in 1914 a Provident Fund for the benefit of its monthly rated
employees. Subsequently, another fund was started. These funds were not
recognised under the provisions of Chapter IXA of the Income--tax Act, 1922.
The employees and the company made contributions to the two funds from time to
time. The Employees Provident Funds Act 19 of 1952 came into force on 31st
October, 1952. Under directions given by the Provident Fund Commissioner the
assessee company transferred to the statutory Employees Providend Fund all the
accumulations in the two private funds maintained by it including its own
contributions thereto made upto October 31, 1952. The said contributions
amounted to Rs. 3,01,772-1-7. In income-tax proceedings for the assessment year
1957-58, the company claimed deduction of the above amount of Rs. 3,01,772-1-7
from its income. The Income-tax Officer, the Appellate Assistant Commissioner
as well as Income-tax Appellate Tribunal disallowed the claim.
In reference how-ever the High Court decided
in favour of the Company. The Commissioner of Income-tax appealed to this
Court. The questions that fell for considerations were : (i) whether the
payment in question by the assessee company was capital expenditure within the
meaning of s.
58K(1) of Income-tax Act and (ii) whether the
said payment could be allowed as a deduction under section 10(2) (xv) of the
Income-tax Act?
HELD : (i) For the application of sub-s. (1)
of section 58K the following conditions must be satisfied : '(1) The employer
should have maintained a Provident Fund for the benefit of his employees; (2)
There should have been a transfer of such fund or operation thereof to
trustees;
(3) Such transfer should have been in trust
for the employees participating in the fund. [472 C-D] In the present case the
third condition was not satisfied.
The common statutory fund created under the
Provident Funds Act was meant not for the employees of the assessee only but
also for employees of hundreds of other employers who were covered by the Act.
It was not restricted to the employees of the assessee and it could never be
said that they alone participated in that fund. In such a situation s. 58K was
not applicable. [412 E; H-473 A] (ii)The expenditure was incurred in the
relevant accounting year. It was something which had gone irretrievably. The
amount in question had been spent and paid out in the year of accounting, and
was, therefore, 469 allowable as expenditure incurred exclusively for the
purpose of, the business. The conditions of s. 10(2)(xv) had, therefore, been
fully satisfied in the present case.
[473 B-C]
CIVIL APPELLATE JURISDICTION: Civil Appeals
No. 1760 of 1967.
Appeals from the judgment and order dated
February 1, 2, 1966 of the Bombay High Court in Income-tax Reference No. 60 of
1961.
B. Sen, S. K. Aiyar and B. D. Sharma, for the
appellant.
M. C. Chagla and A. K. Verma, for the
respondent.
The Judgment of the Court was delivered by
Grover, J. This is an appeal by certificate from a judgment of the Bombay High
Court in an Income-tax reference. The respondent Company which is the assessee
carries on business of the manufacture and sale of yam and cloth in Bangalore.
In 1914 it started a Provident Fund for the
benefit of the monthly rated employees and this fund was called "The Staff
Provident Fund". Subsequently another fund was started known as the
"Work-men Provident Funds". These funds were, not recognised under
the provisions of Chapter IXA of the Income-tax Act, 1922 (hereinafter called
the Act). The employees and the assessee made contributions to the two funds
from time to time. The Employees' Provident Funds Act (to be referred to as the
Provident Funds Act) came into force on 31st October, 1952. The amounts
standing to the credit of the two funds on that date so far as they are
referable to the contributions by the Company stood as follows :
(1) Staff Provident Fund:
Company's contributions upto 31-10-1952
89,605-9-2 Proportionate interest thereon 19,596-8-7 1,09,202-1-9 (2) Workmen's
Provident Fund :
Company's contribution upto 31-10-1952.
1,83,190-132 Proportionate interest thereon9,379-2-5 1,92,569-15-10
3,01,772-1-7 The assessee came within the first schedule to the Provident Fund
Act and therefore it applied under section 17 for exemption from the operation
of the provisions of that Act.
A provisional exemption was given on 1st
July, 1953. The assessee was, however, informed that pending the grant of
exemption it need not make any payment of the accumulations to the Regional
Provident Fund Commissioner, as was enjoined under the Provident 470 Fund Act.
Following some correspondence between the Commissioner and the assessee the
latter sought cancellation of the exemption by, means of a letter dated 11th
July, 1955.
The Provident Fund Commissioner cancelled the
exemption granted under section 17, of the Provident Funds Act and required the
assessee to comply with all its provisions and the Scheme framed there under
and further to transfer all the provident fund's accumulations to the Employees
Provident Fund immediately. In accordance with the communication from the
Commissioner, the assessee transferred an amount which included a sum of Rs.
3,01,772-1-7 which represented the assessee's contribution to the two funds
upto 31st October, 1952. The assessee claimed deduction in the assessment for
the assessment year 1957-58 on account of the transfer of the amount of Rs.
3,01,772-1-7 to the Provident Fund Commissioner. The Income Tax Officer
disallowed this claim on the ground that the amount in question was allowable
to be treated ,as capital expenditure' under the provisions of section 58K of
the Act. An appeal was taken to the Appellant Assistant Commissioner but it
failed. The assessee appealed to the Appellate Tribunal. The Tribunal held that
there was a transfer of the fund to Trustees which came within the scope of
Section 58K of the Act and therefore the amount was not deductible nor could
the deductions be allowed under section 10(1) or Section 10(2 (xv). The
assessee sought reference and the following two questions were referred :
(1) Whether the provisions of Section 58K of
the Income-tax Act apply to the transfer of the sum of Rs. 3,01,772-1-7 to the
Regional Provident Fund Commissioner ? (2) If the answer to the above question
is in the negative-, whether the sum of Rs. 3,01,772-1-7 is allowable as a
deduction in arriving at the commercial profits under section 10(1) or is an
allowable deduction under section 10(2) (xv) of the Income-tax Act in the
computation of the assessable "business" profits.
The High Court examined in detail the
provisions contained in Chapter IXA of the Act. It was observed that the scheme
of section 58K in that Chapter was that though an employer could not claim any
allowance at the time he transferred his own accumulated contributions to the
Provident Fund to the trustees,, he could claim exemption' in respect thereof
at the time his share of contributions was paid to the employee provided
arrangements were made to deduct from those amounts the income-tax payable by
his employee. The transfer of the fund contemplated under section 58K was a
voluntary transfer by an employer of the Provident Fund maintained by him to
the trustees to hold it in trust for 471 the benefit of his employees. The High
Court, however, proceeded to consider the matter even on the assumption that
the transfer of the fund contemplated by section 58K(1) Would also include
involuntary transfer. According to the High Court the position that emerged on
a consideration of the materials provisions of the Provident Funds Act and the
Scheme framed there under was as follows :
For the administration of the statutory
Provident Fund which came into existence and stood constituted on the framing
of the Scheme, a Board of trustees called the Central Board of Trustees was
constituted. On the framing of the Scheme and the constitution of the statutory
Provident Fund the employers in the industries to which the Provident Funds Act
applied were required to transfer the accumulated balances of the Provident
Fund, if any, which had been maintained by them. Similarly, trustees of the
private Provident Fund constituted by an employer were also required to
transfer the accumulated balances to the statutory Provident-Fund.
Such employers were further required to make
their own annual contributions according to the prescribed limit to that fund.
The Board of trustees and the Officers administering the fund were required to
open a Provident Fund account and in that account a separate account was
maintained of each member showing the balance to his credit containing the
contributions of the employer. The High Court was of the view that a trust in
its true sense had not been constituted by the Provident Funds Act or the
Scheme and that the transfer was not to the trustees but to the fund The first
question was answered in the negative and in favour of the assessee. The answer
to the second question was given in the affirmative, it being held that the
deduction claimed was allowable under section 10 (2) (xv) and that the
provisions of section 10 (4) (c) did not 'operate as a bar to the claim made by
the assessee for deduction of the amount in question.
Section-58K of the Act was in those terms
"58K. TREATMENT OF FUND TRANSFERRED BY EMPLOYER TO TRUSTEE:
(1) Where an employer who maintains a
provident fund (whether recognised or not) for the benefit of his employees and
has not transferred the fund or any portion of it, transfers such fund or
portion to trustees in trust for the employees participating in the fund, the
amount so transferred shall be deemed to be of the nature of capital
expenditure;
(2) When an employee participating in such
fund is paid the accumulated balance due to him there from, any portion of such
balance as re presents his share in the amount so transferred to the trustee
(without addition of interest, and exclusive of the employee's contributions and
interest thereon) shall, (if the employer has made effective arrangements to
secure that tax shall be deducted at source from the amount of such share when
paid to the employee,) be deemed to be an expenditure by the employer within
the meaning of [clause (xv)] of sub section (2) of section 10, incurred in the
year in which the accumulated balance due, to the employee is paid.
For the application of sub-section (1) the
following conditions must be satisfied:
(1) The employer should have maintained a Provident
Fund for the benefit of his employees;
(2) There should have been a transfer of such
fund or portion thereof to trustees;
(3) Such transfer should have been in trust
for the employees participating in the fund.
It has not been shown that the view taken by
the High Court that the transfer in the present case was not made to any
trustees is unfounded. But we need express no opinion on the point because in
our judgment the third condition could not be regarded as having been
satisfied. The transfer was not made to trustees in trust for the employees
participating in the fund. The common statutory fund created under the
Provident Funds Act is meant not for the employees of the assessee only but it
is meant for employees of hundreds of other employers who are covered by that
Act.
In other words the employees of the assessee
alone did not participate in that fund. It is very doubtful whether the
Provident Funds Act and the Scheme there under can be said to create a trust in
the sense in which that word is used in section 58K (1) merely because the
Board managing the Scheme was called the Board of Trustees. The members of the
Board did not become trustees in the legal sense. They were appointed to
administer the fund which vested in them only for the purpose of
administration. It could well be said that the essential ingredient of a trust,
namely, reposing of confidence by the author of the trust in the trustees for
the purpose of carrying out his desires, wishes and directions and the
acceptance of those obligations by the trustees was absent in the present case.
It is, however, not necessary to examine in detail this aspect of the matter
because as observed before the fund under the Provident Funds Act, was not
restricted to the employees of the assessee only and it could never 4 73 be
said that they alone participated in that fund. In such a situation section 58K
could not be made applicable.
Hardly any argument was addressed on the
decision of the High Court on the second question.' The expenditure was incurred
in the relevant accounting year. It was something which had gone irretrievably.
The amount in question had been spent and paid out in the relevant year of
'accounting, and was therefore allowable as expenditure incurred exclusively
for the purpose of the business. It is not suggested that is was incurred for
any other purpose. The conditions, of section 10(2) (xv) had been fully
satisfied in the present case.
In the result we concur in the answers given
by the High Court. The appeal fails and is dismissed with costs.
G.C. Appeal dismissed.
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