1968 (7) TMI 5 - HC - Income Tax

Amount transferred by the assessee to the Provident Fund Commissioner under the provisions of the Employees Provident Funds Act - held that it is not a capital expenditure within the meaning of rule 14(1) of Part A of Schedule IV of the IT Act, 1961

Summary

Issues Involved:
1. Whether the amount transferred to the Provident Fund Commissioner was a capital expenditure.
2. Whether the amount transferred was deductible under section 37(1) of the Income-tax Act, 1961.
3. Interpretation of Rule 14(1) and (2) of Part A of Schedule IV of the Income-tax Act, 1961.
4. Applicability of the Bombay High Court decision in Mysore Spinning & Manufacturing Co. Ltd. v. Commissioner of Income-tax.

Detailed Analysis:

1. Capital Expenditure:
The primary issue was whether the amount of Rs. 18,578 transferred by the assessee to the Provident Fund Commissioner under the Employees' Provident Funds Act, 1952, constituted a capital expenditure. The Appellate Tribunal held that this amount was indeed a capital expenditure as per rule 14(1) of Part A of Schedule IV of the Income-tax Act, 1961. The Tribunal reasoned that the transfer of the provident fund to the trustees appointed by the government under the Employees' Provident Funds Act, 1952, vested the amount in the trustees, making it a capital expenditure.

2. Deductibility under Section 37(1):
The assessee contended that since the amount was laid out wholly and exclusively for the purpose of the business, it should be deductible under section 37(1) of the Income-tax Act, 1961. However, the Tribunal found that the amount would be deductible only if it did not fall within the category of capital expenditure. Given the Tribunal's classification of the amount as capital expenditure, it was not deemed deductible under section 37(1).

3. Interpretation of Rule 14(1) and (2):
The Tribunal's interpretation of Rule 14(1) was that any transfer of a provident fund to trustees, whether recognized or not, would be classified as capital expenditure. The assessee argued that Rule 14(1) should apply only to voluntary transfers by the employer and not to transfers mandated by law. The court examined Rule 14 and concluded that sub-rule (1) would not apply to transfers made by operation of the Employees' Provident Funds Act, 1952. The court reasoned that sub-rule (2), which deals with effective arrangements for tax deduction at source, implied that the transfer in sub-rule (1) should be voluntary and the trustees should be created by the employer.

4. Applicability of the Bombay High Court Decision:
The assessee relied on the Bombay High Court decision in Mysore Spinning & Manufacturing Co. Ltd. v. Commissioner of Income-tax, which held that section 58K of the 1922 Act (corresponding to Rule 14 of the 1961 Act) applied only to voluntary transfers by the employer. The revenue argued that the definition of "transfer" in the 1961 Act included transfers by operation of law, unlike the 1922 Act. However, the court found that the context in which "transfer" is used in Rule 14 indicated that it referred only to voluntary transfers. The court endorsed the reasoning of the Bombay High Court that the scheme of Rule 14 necessitates a voluntary transfer by the employer to trustees created by the employer.

Conclusion:
The court concluded that the transfer of Rs. 18,578 by the assessee to the Provident Fund Commissioner was not a capital expenditure under Rule 14(1) of Part A of Schedule IV of the Income-tax Act, 1961. Consequently, the amount was deductible under section 37(1) of the Act. The court answered the reference in favor of the assessee and against the Commissioner of Income-tax, directing that a copy of the judgment be forwarded to the Appellate Tribunal as required by section 260(1) of the 1961 Act. The parties were directed to bear their own costs.