Decided on July 25,1968



ISSAC, J - (1.) THIS is a reference by the Madras Branch of the Income-tax Appellate Tribunal under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as the 1961 Act), on the application of the assessee. The question referred is : ''Whether, on the facts and in circumstances of the case, the Appellate Tribunal was right in law in holding that the amount of Rs. 18,578 transferred by the assessee to the Provident Fund Commissioner under the provisions of the Employees Provident Funds Act, 1952, was a capital expenditure within the meaning of rule 14(1) of Part A of Schedule IV of the Income-tax Act, 1961, and was, therefore, not a permissible deduction under section 37(1) of the Act.''
(2.) THE Appellate Tribunal was furnished a very clear statement of the case; and it is enough if we quote paragraphs 2 and 3 of that statement for the facts of the case : ''THE assessee is a private limited company carrying on business in printing and paper. THE assessee-company was maintaining a private provident fund account for its employees which was, however, not a recognised fund. In the accounting year ended 31st December, 1961, relevant to the assessment year 1962-63, the company came under the purview of the Employees Provident Funds Act, 1952, and the Scheme framed thereunder. As per paragraph 8 of the Scheme, if any of the employees of the company were members of a private provident fund at the commencement of the Scheme, the accumulations in the private provident fund standing to the credit of such employees should be remitted into the State Bank of India to the credit of the employees provident fund account No. 1; and all the amounts relating to the provident fund accumulations lying invested in securities should be transferred to the employees provident fund; and the securities thus transferred to the central board of trustees, employees provident fund, should be sent to the Regional Provident Fund Commissioner. THErefore, the Regional Provident Fund Commissioner directed to the assessee-company to transfer to him the entire amount standing to the credit of the provident fund account of the company together with the accumulated employees contribution. In accordance with this direction, the assessee-company transferred the entire amount standing in the fund account to the Provident Fund Commissioner in April, 1961. THE amount thus transferred by the assessee-company to the Commissioner included a sum of Rs. 18,578 representing the employers contribution to the provident fund account of its existing employees from the start of the fund for which income-tax had already been paid in the previous years, as the fund was not a recognised fund. In its income-tax return for 1962-63 the assessee claimed allowance for this amount in computing its assessable income for that year. The Income-tax Officer rejected this claim on the ground that the company had not actually paid the amount to its employees but only transferred the amount to the State Provident Fund Commissioner and that, therefore, it would amount to a capital expenditure under section 58K(1) of the Income-tax Act, 1922, corresponding to rule 14(1) of Schedule IV, Part A, of the Income-tax Act, 1961.'' The assessee filed an appeal from the order of the Income-tax Officer first before the Appellate Assistant Commissioner and then before the Appellate Tribunal, both without success; and it, therefore, moved the Appellate Tribunal for referring the above question for decision to this court.
(3.) THE Appellate Tribunal found that - (i) the sum of Rs. 18,578 claimed as deduction by the assessee was an expenditure laid out wholly and exclusively for the purpose of the business of the assessee and that the assessee, would, therefore, be entitled to allowance of this amount under section 37(1) of the 1961 Act provided the expenditure did not come within the category of capital expenditure; (ii) Rule 14(1) of Part A of Schedule IV to the 1961 Act which corresponded to section 58K(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as the 1922 Act), characterised the amount transferred by an employer to maintain a provident fund for the benefit of the employees in trust for the employees participating in the fund as a capital expenditure; (iii) in the present case, the assessee had transferred the aforesaid amount to the provident fund established under the Employees Provident Funds Act, 1952, and the amounts so transferred actually vested in the trustees appointed by the Government under this Act; (iv) it did not matter whether the trustees to whom the amount stood transferred were trustees appointed by the assessee or created by a statute; and (v) sub-rule (2) of rule 14 of Part A of Schedule IV to the 1961 Act applied only to amounts actually paid out of the accumulated balance due to the employees. In the result, the Appellate Tribunal held that the amount of Rs. 18,578 which the assessee transferred to the Provident Fund Commissioner as required by the Employees Provident Funds ACt, 1952, was in the nature of a capital expenditure and was not liable to deduction in determining the total income of the assessee.;

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