1970 (4) TMI 22 - SC - Income Tax

Transfer of accumulated balance to employee s provident fund - Portion of amount transferred representing employees contribution could not be deemed to be capital expenditure under s. 58K

Summary

Issues:
1. Interpretation of section 58K of the Income-tax Act regarding the transfer of funds to trustees.
2. Allowability of deduction under section 10(2)(xv) for the transferred amount in the computation of assessable business profits.

Analysis:

The case involved an appeal from the Bombay High Court regarding the transfer of funds by an employer to trustees under the Income-tax Act. The respondent company, engaged in the manufacture and sale of yarn and cloth, had two provident funds - "The Staff Provident Fund" and the "Workmen's Provident Fund". The company sought exemption under the Employees' Provident Funds Act, which was provisionally granted but later canceled by the Provident Fund Commissioner. The company transferred an amount, including its contributions up to October 1952, to the Regional Provident Fund Commissioner. The company claimed a deduction for this transfer in the assessment year 1957-58, which was disallowed by the Income-tax Officer and the Appellate Assistant Commissioner.

The main issues revolved around the interpretation of section 58K of the Income-tax Act. The High Court analyzed the provisions of Chapter IXA of the Act and observed that the transfer of the fund under section 58K was voluntary and involved the employer transferring the accumulated balances to trustees for the benefit of employees. The High Court also examined the Provident Funds Act and the scheme framed thereunder, concluding that the transfer was not to trustees but to the fund itself. The High Court held that the deduction claimed by the assessee was allowable under section 10(2)(xv) and that section 10(4)(c) did not bar the deduction.

Section 58K of the Act stipulates conditions for the treatment of funds transferred by an employer to trustees. The Supreme Court concurred with the High Court's decision, emphasizing that the transfer in this case was not made to trustees in trust for the employees participating in the fund. The Court highlighted that the fund under the Provident Funds Act was not limited to the company's employees but encompassed employees from various employers covered by the Act. Therefore, the essential conditions for applying section 58K were not met.

Regarding the second issue of deduction under section 10(2)(xv), the Court agreed with the High Court that the expenditure incurred for the transfer was allowable as it was spent for the business purpose and satisfied the conditions of section 10(2)(xv). The Court dismissed the appeal, upholding the High Court's decision and ruling in favor of the assessee for the deduction claimed under section 10(2)(xv) in the computation of assessable business profits.