1966 (9) TMI 3 - HC - Income Tax

Whether the sum of Rs. 4,796 paid to the Regional Provident Fund Commissioner is an allowable deduction - Held, yes

Summary

Issues Involved:
1. Allowability of the deduction under the Income-tax Act for the contribution to the Employees' Provident Fund.
2. Determination of the year in which the expenditure was incurred.
3. Applicability of the Employees' Provident Funds Act, 1952 based on the number of employees.

Issue-wise Detailed Analysis:

1. Allowability of the Deduction under the Income-tax Act:
The central question was whether the sum of Rs. 4,796 paid to the Regional Provident Fund Commissioner is an allowable deduction for the assessment year 1961-62. The assessee, a limited company, claimed this amount as a deduction, arguing that it was compelled to make the contribution by an order of the Regional Provident Fund Commissioner during the relevant accounting year. The Tribunal initially disallowed the deduction, stating that the liability arose from April 18, 1956, and should have been claimed in earlier assessment years. However, the court concluded that the liability was only irrevocably incurred during the relevant accounting year, thus making the expenditure allowable for the assessment year 1961-62.

2. Determination of the Year in which the Expenditure was Incurred:
The court examined when the impugned expenditure could be said to have been incurred by the company. Although the liability was retrospectively applied from April 18, 1956, the actual determination and enforcement by the Regional Provident Fund Commissioner occurred on February 17, 1960. The court emphasized that until the dispute regarding the number of employees was settled, no liability to make a deposit under the Act could be said to have accrued. The court held that the liability was irrevocably incurred during the relevant year of account when the payment was made, thus making it deductible for that year.

3. Applicability of the Employees' Provident Funds Act, 1952:
The applicability of the Employees' Provident Funds Act, 1952, hinged on whether the assessee employed fifty or more persons. The assessee had bona fide disputed this, believing it had less than fifty employees until November 2, 1958. The court noted that the Act imposes liability only if the establishment employs fifty or more persons. The Regional Provident Fund Commissioner's decision on February 17, 1960, confirmed the applicability of the Act from April 18, 1956, based on an inspector's report. However, the court found that the liability to contribute to the Provident Fund was only irrevocably incurred when this decision was made, not when the inspector's report was submitted.

Conclusion:
The court concluded that the expenditure of Rs. 4,796 was incurred in the relevant accounting year and was thus an allowable deduction for the assessment year 1961-62. The court applied the principles from Supreme Court decisions in Commissioner of Income-tax v. Swadeshi Cotton and Flour Mills Private Ltd. and Commissioner of Income-tax v. Gajapathy Naidu, emphasizing that a liability becomes payable when it is amicably settled or determined by a competent authority. The reference was answered in favor of the assessee, with costs assessed at Rs. 250.