1971 (9) TMI 57 - HC - Income Tax

A question of law relating to the construction of section 58K(2) of the Indian Income-tax Act, 1922, arises for consideration in this reference Two Banks amalgamated with Bank C the provident fund accounts of the first two banks were closed and the funds were distributed among the employees under orders of court - whether the third bank is entitled to claim the payments as expenditure u/s10(2)(xv) r.w.s. 58K(2) Indian Income-tax Act, 1922

Issues Involved:
1. Construction of Section 58K(2) of the Indian Income-tax Act, 1922.
2. Applicability of Section 10(2)(xv) read with Section 58K(2) for deduction claims.
3. Impact of bank amalgamation on the rights and liabilities concerning provident fund payments.

Detailed Analysis:

1. Construction of Section 58K(2) of the Indian Income-tax Act, 1922
The primary issue in the judgment revolves around the interpretation of Section 58K(2) of the Indian Income-tax Act, 1922. The section stipulates that when an employee participating in a provident fund is paid the accumulated balance due, any portion of such balance representing the employer's share in the amount transferred to trustees (without addition of interest and exclusive of the employee's contributions and interest thereon) shall be deemed an expenditure by the employer within the meaning of Section 10(2)(xv), incurred in the year in which the accumulated balance is paid.

The court opined that Section 58K(2) is intended to cover normal cases of payment of provident fund dues to an employee on termination of employment by the trustees in whom the fund has vested in trust for the employee. This section postulates the existence of the fund, trustees, the employer, and the employee who is being paid on cessation of employment. It is not intended to cover cases where the trust in favor of the employees comes to an end, and the trust fund is distributed based on a court order.

2. Applicability of Section 10(2)(xv) read with Section 58K(2) for Deduction Claims
The United Bank of India Ltd. claimed deductions for provident fund payments under Section 10(2)(xv) read with Section 58K(2). The Income-tax Officer rejected these claims, stating that the payments were not made by the employer and that the provident fund was not part of the balance-sheet of the amalgamated banks as of December 31, 1949. The Appellate Assistant Commissioner upheld this decision, noting that the United Bank of India Ltd. was neither the employer nor the contributor to the provident fund.

The Tribunal, however, accepted the assessee's argument that by virtue of sub-sections (5) and (6) of Section 44A of the Banking Companies Act, 1949, the amalgamation had the effect of putting the respondent-bank in place of the amalgamating units. Therefore, all rights and liabilities of the amalgamating banks devolved on the assessee. The Tribunal concluded that the new unit, namely the assessee, stepped into the shoes of the four banks, and the amalgamating banks lost their separate legal existence.

3. Impact of Bank Amalgamation on the Rights and Liabilities Concerning Provident Fund Payments
The court examined whether the United Bank of India Ltd., as the successor to the amalgamated banks, could claim the benefits under Section 58K(2). The court noted that the provident fund was distributed amongst the employees pursuant to the decrees made by Bachawat J. on the basis that the trust had become extinct. The liquidation and distribution of the funds were not considered payments of the accumulated balance due within the meaning of Section 58K(2).

The court held that Section 58K(2) is intended to apply to payments made by the trustees in the usual course in accordance with the regulations of the fund to the employee on cessation of employment. Since the provident fund was distributed on the basis of court orders and not on the termination of employment, the requirements of Section 58K(2) were not satisfied.

Conclusion:
The court concluded that the United Bank of India Ltd. could not claim the benefit of deduction under Section 58K(2) or Section 10(2)(xv) independently. The requirements of Section 58K(2) were not met, and the provisions of Section 26(2) were not of material consequence. The question was answered in the negative, against the assessee and in favor of the department. No order as to costs was made due to the peculiar facts of the case and the involvement of a nationalized bank.

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