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PETITIONER: COMMISSIONER OF INCOME TAX, BOMBAY

       Vs.

RESPONDENT: MYSORE SPINNING & MFG.  CO.  LTD.

DATE OF JUDGMENT: 30/04/1970

BENCH: GROVER, A.N. BENCH: 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  pro- visions  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 Pro- vidend  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

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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]

JUDGMENT: 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.                      1,83,190-13-               2  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

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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  Com- missioner 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 thereunder 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  Com- missioner.  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 transf er 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

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the materials provisions of the Provident Funds Act and  the Scheme framed thereunder 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 therefrom, any portion of such balance  as               repre-               472               sents  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

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             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 thereunder 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  in- curred  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. 4 74