1962 (4) TMI 109 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of contributions to an unrecognized provident fund under Section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Interpretation of "effective arrangements" under Section 10(4)(c) for tax deduction at source.
3. Applicability of Section 58K regarding capital expenditure.

Issue-wise Detailed Analysis:

1. Deductibility of Contributions to an Unrecognized Provident Fund:
The primary issue was whether the contributions made by the assessee company to the Hindustan Commercial Bank Ltd. Employees' Provident Fund prior to its recognition on June 30, 1946, could be deducted under Section 10(2)(xv) of the Indian Income-tax Act, 1922. The assessee argued that these contributions were an expenditure laid out wholly and exclusively for the purpose of its business. However, the Income-tax Officer disallowed the claim on the grounds that the fund was not recognized under Chapter IXA during the relevant periods. The Appellate Assistant Commissioner upheld this decision, and the Income-tax Appellate Tribunal also rejected the claim, stating that merely appointing trustees did not constitute "effective arrangements" as required by Section 10(4)(c).

2. Interpretation of "Effective Arrangements" under Section 10(4)(c):
The court examined the interpretation of the phrase "effective arrangements to secure the deduction of tax at source" from Section 10(4)(c). The requirements were paraphrased as follows: the assessee should have made an arrangement, the arrangement should secure that tax was deducted at source from the payments made from the fund, and the arrangement should be effective. The Tribunal found that no effective arrangements were made merely by appointing trustees. The court noted that the rules and regulations of the provident fund did not specifically mandate the trustees to deduct tax before making payments. The court concluded that the mere appointment of trustees without specific obligations did not meet the criteria for an effective arrangement.

3. Applicability of Section 58K Regarding Capital Expenditure:
A preliminary objection was raised by the department, arguing that the contributions were in the nature of capital expenditure under Section 58K and thus not deductible under Section 10(2)(xv). Section 58K(1) states that if an employer transfers a provident fund to trustees, the amount transferred is deemed to be capital expenditure. The court rejected this objection, noting that there was no transfer of any fund by the assessee to the trustees. The trustees were appointed on July 28, 1945, and the contributions were made subsequently. There was no evidence of any transfer of an accumulated balance to the trustees. Hence, Section 58K did not apply.

Conclusion:
The court concluded that the assessee did not make effective arrangements to secure the deduction of tax at source as required by Section 10(4)(c). Therefore, the contributions could not be deducted under Section 10(2)(xv). The preliminary objection regarding capital expenditure under Section 58K was also rejected. The reference was answered in the negative, and the assessee was ordered to pay the costs of the reference assessed at Rs. 200.