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TMI Blog1966 (2) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... Provident Fund". Both these funds were not recognised provident funds under Chapter IX-A of the Income-tax Act. To both these provident funds the assessee-company as well as the employees continued to contribute. Now Parliament enacted the Employees' Provident Funds Act which came into force on 31st October, 1952. The amounts standing to the credit of these two funds on the date the Employees' Provident Funds Act came into force so far as they are referable to the contributions by the assessee-company stood as follows : (i) Staff Provident Fund : Rs. As. Ps. Company's contributions up to 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 up to 31-10-1952 1,83,190 13 2 Proportionate interest thereon 9,379 2 5 1,92,569 15 10 Total of 1 and 2 above 3,01,772 1 7 The assessee-company was one of the companies that came within the purview of the First Schedule of the Employees' Provident Funds Act, hereinafter referred to as the Act. The assessee-company therefore was governed by the provisions of the Act. The assessee-company applied under section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid contentions. The Judicial Member and the Accountant Member in separate but concurring orders held that there was a transfer of the fund to the trustees which came within the scope of section 58K, that it was therefore capital expenditure within the meaning of the said provision, that there was no scope for the application of section 10(2)(xv) as the amount was deemed to be capital expenditure and that this amount cannot be claimed as a deduction from the computation of commercial profits for the purpose of section 10(1) as it was an expenditure and not a loss. On an application made under sub-section (1) of section 66 the Tribunal has stated the case referring the following two questions of law to this court: "(1)Whether the provisions of section 58K of the Income-tax Act apply to the transfer of the sum of ₹ 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 ₹ 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act. Before we proceed to consider the relevant provisions of Chapter IX-A in which section 58K occurs and the relevant provisions of the Employees' Provident Funds Act and the scheme framed thereunder, it would be useful to consider what the position was prior to the introduction of Chapter IX-A on the statute book. Section 6 of the Income-tax Act enumerates the various heads of income chargeable to income-tax in the manner provided in the Act. Salaries is one of the heads. Section 7 deals with salaries. Sub-section (1) of section 7 provides that profits in lieu of, or in addition to, any salary of an assessee shall be deemed to be salary due on the date when the sum is received. Explanation 2 to the said sub-section provides that any payment due to or received by an assessee from a provident fund, to the extent to which it does not consist of contributions by the assessee or interest on such contributions, is a profit received in lieu of salary for the purposes of this section. In other words, prior to the coming into force of Chapter IX-A, an employee had to suffer tax on the amounts in the provident fund representing the employer's contribution to the provident fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnised by the Income-tax Commissioner and the important ones out of them are clauses (b), (e) and (f). Clause (b ) provides that the contributions of an employee in any year shall be a definite proportion of his salary for that year and shall be deducted by the employer from the employee's salary in that proportion at each periodical payment of such salary in that year, and credited to the employee's individual account in the fund. Clause (e) provides that the fund shall be vested in two or more trustees or in the official trustee under a trust which shall not be revocable save with the consent of all the beneficiaries. Clause (f) provides that the employer shall not be entitled to recover any sum whatsoever from the fund, save in cases where the employee is dismissed for misconduct or voluntarily leaves his employment otherwise than on account of ill-health or other unavoidable cause before the expiration of the term of service specified in this behalf in the regulations of the fund. Thus it would be seen that for an employer to get the provident fund constituted by him recognised by the Income-tax Commissioner, he had to create a trust and had to vest the fund in two or m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 58H provides: "The trustees of a recognised provident fund, or other person authorised by the regulations of the fund to make payment of accumulated balances due to employees, shall, at the time an accumulated balance due to an employee is paid, deduct therefrom any income-tax payable under sub-section (3) of section 58G and any income-tax and super-tax payable on an employee's total income as determined under sub-section (3) of section 58J, and sub-sections (4) to (9) of section 18 shall apply as if the sum to be deducted were income-tax payable under the head' Salaries '." Section 58-I relates to the maintenance of accounts of recognised provident funds. Section 58J relates to the duties cast on the authorities concerned to make an account in a particular way of the accumulated balances received in the newly recognised provident fund and ascertain the tax payable, if any, in respect of any part of these balances. Then comes section 58K. We have already reproduced sub-section (1) of section 58K. Sub-section (2) of section 58K runs : "When an employee participating in such fund is paid the accumulated balance due to him therefrom, any portion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the fund. The transfer of the fund thus contemplated under section 58K, in our opinion, is a voluntary transfer by an employer of the provident fund maintained by him to the trustees to hold it in trust for the benefit of his employees. It is indeed true that the expression "transfer" in its wider amplitude is capable of including a voluntary as well as an involuntary transfer. But having regard to the scheme of the Chapter as well as the provisions of section 58K, the meaning to be given to the word "transfer" occurring in sub-section (1) of section 58K has to be limited to a voluntary, transfer. The provisions of sub-sections (1) and (2) of section 58K indicate that it is an integrated scheme enabling an employer, who transfers the provident fund maintained by him to trustees, to get allowance in respect of his contributions at the time those contributions are paid to the employee, by making "effective arrangements to secure that the tax shall be deducted at source from the amount of such share when paid to the employee." The position in contemplation of the legislature is one where it is possible for an employer to make effective arrangements to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a scheme for the establishment of provident funds under this Act for employees or for any class of employees and specify the factories or the class of factories to which the said Scheme shall apply. Section 6 required the employer to contribute six and a quarter per cent, of the basic salary of his employee to the provident fund and also required the employee to contribute an equal amount to the provident fund. The employee, however, was given an option to make certain additional contributions if the Scheme so permitted. Sub-section (3) of section 6 provided: "Where under the provisions of any Scheme, any board of trustees is constituted for administering the Fund, such board of trustees shall be a body corporate under the name specified in the Scheme, having perpetual succession and a common seal and shall by the said name sue and be sued." Section 8 empowered the appropriate Government to recover as arrears of land revenue if the employer failed to pay the contributions and the amounts which he was required under the law to pay. Section 9 provided that for the purposes of the Indian Income-tax Act, 1922, the Fund shall be deemed to be a recognised provident fund wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entral board to the State board. Paragraph 4 relates to the setting up of a regional committee for the State till a State board is constituted. Paragraph 5 relates to terms of office of the chairman and trustees of the various boards. Paragraph 6 relates to the resignation of the chairman and members of the board of trustees. Paragraph 7 relates to cessation and restoration of trusteeship. Paragraph 8 relates to disqualifications for trusteeship. Paragraph 9 relates to the removal of the trustees. Paragraph 10 relates to certain procedure that is required to be followed by members of the board if they leave India. Paragraph 11 relates to meetings. Paragraph 12 relates to notice of meetings. Paragraph 13 relates to chairman who is to preside at the meetings. Paragraph 14 relates to quorum. Paragraph 15 relates to disposal of business at the meeting. Paragraph 16 relates to minutes of the meetings. Paragraph 17 provides that no act or proceeding of a board shall be rendered ineffective merely on the ground that there is a defect in its constitution. Paragraph 18 relates to the fees and allowances payable to the members. Chapter III comprises of paragraphs 19 to 25 which relate to app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r's contribution is deduction of that contribution from his wages directly by the employer and paying it directly to the fund by the employer. Paragraph 49 requires a separate account to be maintained called the "Central Administration Account " for recording all administrative expenses of the fund including such administrative charges as the fund may be authorised to recover. Paragraph 50 which relates to the provident fund account provides that the aggregate amount received as the employers' and the employees' contributions to the fun d shall be credited to an account to be called the "Provident Fund Account". Paragraph 52 empowers the board to invest the amounts under its control in the manner specified in that paragraph. Paragraph 53 provides that subject to the provisions of the Act and of this Scheme, the fund shall not be expended for any purpose other than for the payment of sums standing to the credit of the individual members of the fund or to their nominees or heirs or legal representatives in accordance with the provisions of the Scheme. Paragraph 59 requires a separate account to be opened in respect of each member, in which there shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stries to which the Employees' Provident Funds Act has been made applicable are required to transfer the accumulated balances of the provident fund, if any had been maintained by them. Similarly, the trustees of the private provident fund constituted by an employer, to whom the employer had entrusted the provident fund for the benefit of his employees, are also required to transfer the accumulated balances to the statutory provident fund. Such employers are further required to make their own annual contributions according to the prescribed limit to the statutory provident fund. The employers are also required to deduct from the wages paid to their employees who are members of the provident fund, the amounts equivalent to their contributions to the provident fund and forward the same to the provident fund every year or at such intervals as may be directed. If an employer fails to transfer the accumulated balances as the case may be or if the employer fails to send annual contributions, the amount in arrears could be recovered from the employer by the appropriate Government as arrears of land revenue. Now the board of trustees and the officers administering the fund are required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated balances to the fund, but he is directed to transfer all pass-books and books of account to the board. The board and the fund are not terms interchangeably used in the Scheme, but on the other hand the fund is recognised as a separate entity from the board. Mr. Joshi on the other hand contends that all the requirements of a legal trust have been complied with. The fund is vested in the board of trustees. The paragraphs providing for the appointment of the board of trustees, their removal, the manner in which they have to transact the business, are the paragraphs which are commonly found in a trust deed. All elements which are necessary to constitute a trust in the legal sense have been fully complied with. It is indeed true that vesting of the property in a trustee is one of the essential conditions for the formation of a trust in the legal sense. It is also true that under the provisions of the Act as well as the Scheme, the provident fund constituted under the Scheme vests in the Central Board of Trustees. It is, however, necessary to notice that these are not the only requirements for the constitution of a trust. In our opinion, the other essential ingredients for the const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strict sense has been created. The passages both in Halsbury and in Underbill only indicate that the provisions of certain enactments may give rise to a constructive trust casting certain obligations on certain persons which are in the nature of a trust. The question to be considered here is whether a trust in its legal sense has been constituted under the Act or the Scheme framed thereunder. We have already stated that one of the essential requirements for formation of a trust in a legal sense is reposing of confidence by one in another and the other accepting the obligations arising out of the confidence for the benefit of certain other persons. No provision in the Act or the Scheme indicates that this essential requirement for the constitution of a valid trust has been complied with. The second essential condition, in our opinion, is entrustment of the property at the time of the constitution of the trust by the settlor or the author of the trust to the trustees in whom he places confidence. None of the provisions either of the Act or of the Scheme show that this element has been fulfilled. We have already referred to the relevant provisions of the Act as well as the Scheme. At ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ification mentioned in clause (5) of paragraph 28 of the Scheme that the accumulations transferred to the fund vest in the board of trustees. It necessarily follows that at the date the accumulations are transferred, the transfer is not to the trustees but to the fund. For reasons stated above, in our opinion, the transfer contemplated by sub-section (1) of section 58K of the Act is a voluntary transfer and not a compulsory or involuntary transfer of the fund as a result of the provisions of the Act. In our opinion, also, no trust as such has been created under the Act or the Scheme framed thereunder, nor is there any element of transfer of the fund by the assessee-company to trustees as such involved in the transfer of accumulated balances of ₹ 3,01,772-1-7 to the Regional Provident Fund Commissioner. Our answer to the first question is in the negative and this brings us to the second question. Mr. Palkhivala contended that the assessee-company is entitled to claim deduction of the said sum of ₹ 3 lakhs and odd in the computation of the profits for the assessment year under sub-section (1) of section 10 or under clause (xv) of sub-section (2) of section 10 of the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of capital expenditure; what the Income-tax Officer said was that the sum so spent ' shall be deemed to be of the nature of capital expenditure' because of the legal fiction created by the provisions of section 58K(1). Hence, it would be fallacious to examine the nature of the spending of the sum of ₹ 3 lakhs odd by applying the tests laid down in several judicial pronouncements; for they relate to the determination of the real nature of that expenditure and not its fictional nature endowed upon it by any legal fiction created by a statute for certain purposes. " We have already said that in our opinion sub-section (1) of section 58K has no application. It necessarily follows that the fiction enacted in the said sub-section (1) is not attracted to the aforesaid expenditure of ₹ 3 lakhs and odd. As already pointed out, the Income-tax Officer had not contended before the Tribunal that even apart from the provisions of section 58K(1) the expenditure in its real nature was a capital expenditure. On the other hand, the stand was that though it was not capital in nature, by reason of the provisions of section 58K(1) it had to be deemed to be of a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot now ask for deduction when he is required to transfer the accumulated balances to the statutory provident fund. With respect, we find it difficult to accept the aforesaid contentions of Mr. Joshi. We do not find any limitation in the language of clause (xv) to restrict the expenditure mentioned therein to an expenditure relating to the carrying on of the business in that year. All that is said is, it must be an expenditure incurred in that year and it must be an amount expended wholly and exclusively for the purpose of the business of the assessee. The limitations mentioned in this clause are, it should not be an expenditure which is covered by or which falls under clauses (i) to (xiv) of sub-section (2) of section 10 and it should not be an expenditure of a capital nature or personal expenses of the assessee. There is no further limitation that the expenditure must necessarily be an expenditure required for the purposes of carrying on the business of that year. There would be ample authority to show that an expenditure incurred to meet any liability of the business accruing in that year is an expenditure wholly and exclusively laid out for the purposes of the business and there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied staff. The said sum had been actuarially ascertained to be necessary to enable past years of service of the then existing staff to rank for pension. The question that fell for consideration was whether the expenditure was capital or revenue in nature. The observations read by Mr. Joshi at page 191 are in the following terms: "With reference to the provision last mentioned, and to the similar injunction contained in rule 1 of Case I, it has been pointed out on several occasions .... that the Act does not contain any express allowance or enumeration of deductions ; and that effect can only be given to these provisions by holding that, when a deduction is proper to be made in order to ascertain the balance of profits and gains for any year, it ought to be made notwithstanding the First Rule applicable to Case I and section 159, provided that it is not prohibited by the terms of the Act and Rules. From this it follows that in determining whether a particular item may or may not be deducted from profits, it is necessary first to inquire whether the deduction is expressly prohibited by the Act, and then, if it is not so prohibited, to consider whether it is of such a nature th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions to the provident fund and not to the transfer of accumulated balances in the hands of the employer to the provident fund. Further, the terms of clause (c) of sub-section (4) of section 10 indicate that the arrangement that has to be made at the time of payment of the provident fund is to secure that tax shall be deducted at source from any payment made from the fund which are taxable under the head "salaries". It thus postulates two things: that the payments received by an employee from the provident fund are taxable under the head "salaries". The second thing it postulates is that the arrangements are required to be made by the employer for securing the payment of tax. If these two conditions are not satisfied, clause (c) of sub-section (4) of section 10 does not come into operation. It is not in dispute that the employer's contributions when received by an employee on retirement would be taxable in his hands as salary. One condition, therefore, is fulfilled. It is the argument of Mr. Joshi that it was, therefore, necessary for the assessee to have made effective arrangements to secure that tax shall be deducted at source from the payments made from th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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