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TMI Blog1974 (7) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act, 1922, until he passed an order dated 28th October, 1963, which provided for the recognition of a provident fund scheme under Chapter IX-A of the Indian Income-tax Act, 1922, with effect from 31st May, 1963. The order further contained an endorsement requiring the Income-tax Officer to grant relief to the assessee in respect of its contribution to the provident fund scheme made in earlier years as well. Under the aforesaid scheme, for the year 1958-59, the company became liable to pay a sum of Rs. 1,24,877 as its own share of contribution towards the provident fund of its employees. The supplementary statement of the case indicates that in the year relevant to that year, the assessee-company credited the aforesaid amount, in the account of the trustees of the Employees' Provident Fund and claimed an allowance in respect thereof under section 10(2)(xv) of the Indian Income-tax Act, 1922. However, the Income-tax Officer disallowed the claim on the ground that the contribution made to an unrecognised provident fund as not admissible as an allowance. In appeal, the Appellate Assistant Commissioner held that while recognising the assessee's provident fund scheme under Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid observation under some misapprehension. Accordingly, the department made an application under section 35 of the Income-tax Act, and the matter was reargued before it. The Tribunal agreed with the Appellate Assistant Commissioner that in view of the order dated 28th October, 1963, passed by the Commissioner of Income-tax, recognising the assessee's provident fund scheme with retrospective effect and directing that the benefit of recognition be given to it even for the period during which the scheme did not stand recognised, the Income-tax Officer was not justified in disallowing the sum of Rs. 1,24,877 on the ground that the provident fund scheme framed by it had not been recognised. Before the Tribunal, the departmental representative urged that in any case the assessee was not entitled to claim deduction in respect of the amount said to have been contributed by it towards the Employees' Provident Fund till such time the amount was not actually paid to the trustees of the fund, and mere making of book entry did not result in actual payment of the amount by the assessee. The observations made by the auditors in the balance-sheet of the assessee clearly indicated that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Employees' Provident Funds Act, 1952, provides that even for purposes of Chapter IX-A of the Indian Income-tax Act, 1922, the fund so created under the Act would be deemed to be a recognised fund. In the circumstances, the order passed by the Commissioner recognising the scheme lost all significance. By virtue of section 9 of the Employees' Provident Funds Act, the fund shall be deemed to be recognized even for purposes of Chapter IX-A of the Income-tax Act, from the date it came into existence. According to the learned judges. Chapter IX-A of the Indian Income-tax Act, 1922, merely deals with the recognition of provident fund. That Chapter did not deal with the question of allowance being made in respect of contributions to the fund made by the employer. Section 58K merely permits a deduction of the employer's share of contribution when a payment is made to an employee from out of the fund. It does not deal with the allowance of periodical contributions made by an employer to the fund. In the context the only material question is whether, the employer can claim an allowance in respect of the contributions made by it to the Employees' Provident Fund under section 10(2)(xv) read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act, deemed to be recognized. Moreover, the consequences of recognition of the scheme under Chapter IX-A of the Indian Income-tax Act, 1922, as pointed out by the earlier Bench relate to entirely different matters and they have no relevance on the question whether contributions to Employees' Provident Fund are and if so, in what circumstances, allowable, is deduction in computing the assessee's income. No provision (other than Chapter IX-A of the Act) which provides for the consequences flowing from, recognition of a provident fund scheme by the Commissioner of Income-tax has been brought to our notice. Accordingly, the question whether after making the credit entries in favour of the trustees of the provident fund account, the assessee can claim an allowance in respect of that amount will depend on the interpretation of section 10(2)(xv) read with section 10(4)(c) of the Indian Income-tax Act 1922. Section 10(2)(xv) of the Income-tax Act provides that while computing the profits and gains of a business, profession or vocation liable to income-tax, an allowance is to be made in respect of an expenditure which is not of the nature of capital expenditure or personal expenses of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section contemplates that before an allowance in respect of an expenditure incurred by an assessee towards its contribution to Employees' Provident Fund can be allowed as deduction, it must actually be paid to the fund. Merely because the assessee makes an entry in the books crediting the account of the fund, it does not mean that any money has been paid to the fund. In this connection he also invited our attention to the fact that in the balance-sheet the auditors of the assessee-company had noted that the provisions of section 417 of the Companies Act had not been complied with. This indicated that the amount of the Employees' Provident Fund was not deposited in the relevant accounting year in a post office or a bank, in the manner contemplated by section 417, and unless the assessee deposited the provident fund amount in that manner, it could not be said that it had been paid to the fund and the bar created by section 10(4)(c) of the Act prohibiting its being allowed as an expenditure under section 10(2)(xv) of the Act is not lifted. In support of his argument learned counsel for the revenue relied upon the decision in the cases of Commissioner of Income-tax v. Bombay Burma Trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated therein. This section merely places an obligation on the company to dispose of its contribution to Employees' Provident Fund or money received or accruing to that fund in a particular manner. It has absolutely no bearing on the question as to when tn expenditure by way of company's contribution to Employees' Provident Fund can be said to have laid out or to have taken place. It is not disputed that the assessee in this case maintained its books on mercantile system. It is now well-settled that where books are kept by an assessee on mercantile system an expenditure, under section 10(2)(xv) is deemed to be incurred on the date when the liability for the same accrues. If the liability for the expenditure in question accrued during the relevant accounting year and the assessee took steps to make the corresponding entries in its books for purposes of section 10(2)(xv), it will be taken that notwithstanding the fact that the liability has not actually been met (inasmuch as the money has not in fact been paid), the expenditure with regard to that liability was incurred (i.e., laid out or expended) in that year. Accordingly, in this case the assessee for purposes of section 10(2)(xv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s credit in the provident fund the company is empowered under the scheme, ' to employ the moneys of the fund in the Corporation's own business and/or to invest them in such other manner as they deem fit,' and, in my opinion, until the sum representing the contributions of the company standing to the credit of the employee in the provident fund has been paid by or on behalf of the company to the employee as provided in the scheme, the amount of such contributions could not be deducted by the company under section 10(2)(x) from the profits and gains of the company assessable to income-tax in any particular year of assessment as being an expenditure incurred solely for the purposes of earning such profits and gains. " We find that in the aforesaid case the amount of interest had been credited to the employees' account maintained by the company but at the relevant time neither the amount standing to the credit of the employees nor the interest added thereto had become payable to the employee. Learned Chief justice emphasised this aspect of the case and held that so long as the employee did not have a right to receive the amount, or the company was not under an obligation to pay t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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