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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 ..... nt 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ively under section 10(2)(xv) of the Income-tax Act. The contention of department, on the other hand, was that section 58K of the Income-tax Act was applicable to the facts of the case and the amount therefore cannot be allowed as a deduction, inasmuch as it amounted to capital expenditure within the meaning of sub-section (1) of section 58K of the Income-tax Act and in this view of the matter the appeal was dismissed. The assessee-company took a further appeal to the Tribunal and reiterated 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trust and the transfer of the fund under the provisions of the said Act is a transfer to the trustees who are enjoined with a duty to hold the fund in trust for the employees participating in the fund. The provisions of sub-section (1) of section 58K have been fully complied with and the expenditure incurred by the assessee has to be treated as a capital expenditure under the said section and, therefore, not allowable as a deduction under section 10(2)(xv) or section 10(1) of the Income-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. Explana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any employee out of his salary, or by an employer out of his own moneys, to the individual account of an employee, but does not include any sum credited as interest. Section 58B empowers the Commissioner of Income-tax to accord recognition to any provident fund which in his opinion satisfies the conditions prescribed in section 58C. Section 58C enumerates various conditions which have to be satisfied by an employer constituting a provident fund if he wants to get it recognised 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 whatsoeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y him to the recognised provident fund up to the limit mentioned in section 58F. Tax is payable only in respect of excess. The employee further does not suffer any tax on the yearly contributions of the employer to his account and interest thereon, provided the yearly contributions and the rate of interest does not exceed the limits mentioned in section 58E. Section 58G deals with provision relating to exemption of accumulated balance from income-tax and super-tax. Section 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 cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Looking at the provisions of Chapter IX-A in its entirety as well as looking at the scheme envisaged by the provisions of section 58K, it becomes apparent that the Chapter as well as section 58K deals with the creation of a trust by an employer for entrusting to it the provident fund maintained by him for the benefit of his employees and entrusting all the accumulated balances to the trustees to hold on trust for the benefit of his employees participating in 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 tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act on the date it was enacted became applicable to the industry run by the assessee-company. Clause (h) in section 2 provides: 'Fund' means the provident funds established under a Scheme. Clause (j ) provide : 'Member' means a member of the Fund. Clause (1) provides: 'Scheme' means a scheme framed under this Act. Section 5 empowered the Central Government to frame 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner in which the central board of trustees is constituted and it provides that, subject to the provisions hereinafter contained, the fund shall vest in and be administered by the board of trustees (hereinafter referred to as the Central Board ). Clause (2) relates to the constitution of the State board of trustees and clause (3) relates to transfer of certain funds by the central 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gazette of India, declare that the subscribers of such Provident Fund have now become members of the Fund and that the accumulations aforesaid have now become vested in the board. Chapter V relates to the subsequent contributions to be paid by the employer as well as the employees. It may generally be stated that the manner of recovery of the employee's or member'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 Sch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustees state-wise or region-wise are also allowed to be constituted and in the administration these boards are assisted by various officers who work under the control of the board, the highest among them being the Provident Fund Commissioner. On the framing of the Scheme and the constitution of the statutory provident fund, the employers in the industries 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 interva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st, the transfer that takes place under sub-section (2) of section 15 or under paragraph 28 of the Scheme is a transfer to the fund and it is not a transfer to the trustees. Laying emphasis on the provisions of sub-clauses (i), (ii) and (iii ) of clause (1) of paragraph 28 of the Scheme he argued that the employer is directed to transfer the accumulated 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty is in one person, and the equitable right to the beneficial enjoyment thereof is in another, in which case they are called constructive trusts. In our opinion, none of these two passages take the matter any further in ascertaining whether under the Employees' Provident Funds Act or the Scheme framed thereunder the trust in its 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 entru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed balances have been transferred to the fund, the Commissioner has to issue a notification in the Gazette of India declaring that the subscribers of a provident fund have now become members of the statutory provident fund and that the transferred accumulations have now become vested in the board. The provisions show that it is only after the notification 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 qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ountant Member also had taken a similar view. This is what he observes in paragraph 12 of his order: It is not the Income-tax Officer's case that the spending of the sum of ₹ 3 lakhs in the account year which the assessee-company claimed to deduct under section 10(2)(xv) is as a matter of fact and really an expenditure 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y could have settled the provident fund on trust after satisfying the conditions of section 58C of the Act and having got it recognised under the provisions of section 58B of the Act and could have claimed annually deductions in respect of the contributions made by it to the fund. It not having done so, cannot 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 necessari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further. Facts in that case were : The respondent-company had claimed a deduction in computing its profits for income-tax purposes of a lump sum of 31,784 which it had contributed irrevocably as the nucleus of a pension fund established by a trust deed for the benefit of its clerical and technical salaried 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther. Turning to the provisions of section 10(4)(c), it does not say in terms that it has application only to the yearly contributions to the provident fund and not to the lump sum contributions to the provident fund. There is, therefore, no warrant to restrict it only to the yearly contributions 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 ..... 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