H.N. Seth, J. - (1.) AT the instance of the Commissioner of Income-tax, Kanpur, the Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, has stated the case and referred the following question in respect of the assessment year 1958-59, for the opinion of the court: "Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,24,877 paid by the assessee to the Employees' Provident Fund under the Employees Provident Funds Act, 1952, was an allowable deduction ?"
(2.) THE assessee is a limited company known as M/s. Laxmi Ratan Cotton Mills Co. Ltd., Kanpur. It had formulated a provident fund scheme, applicable to its employees, in accordance with the provisions of the Employees Provident Funds Act, 1952. However, this scheme had not been recognised by the Commissioner of Income-tax as provided in Chapter IX-A of the Indian 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 was not admissible as an allowance. In appeal, the Appellate Assistant Commissioner held that while recognising the assessee's provident fund scheme under Chapter IXA with effect from 31st May, 1963, the Commissioner of Income-tax had directed that the assessee would be given appropriate relief even in respect of its contribution made for the period prior to the date of recognition. THE Income-tax Officer was bound to follow that direction. Accordingly, he could not disallow the claim made by the assessee merely on the ground that in the relevant assessment year the scheme did not stand recognized. THE Appellate Assistant Commissioner further pointed out that the amount credited by the assessee in the Employees' Provident Fund account vested in the trustees and the expenditure had to be allowed as it had been incurred wholly for purposes of the assessee's business. THE only circumstance in which such an allowance could be disallowed has been mentioned in Section 10(4)(c) of the Indian Income-tax Act, 1922, which provides that the allowance in respect of payment of provident fund or other fund established for the benefit of employees would not be allowed unless the employer had made effective arrangements to secure that the tax shall be deducted at the source from any payment which is taxable under the head "Salaries". Since in this case, effective arrangements for deduction of tax at the source had been made, the sum credited to the Employees' Provident Fund account had to be allowed as a deduction. Accordingly, he accepted the assessee's contention that the addition of Rs 1,24,877 made by the Income-tax Officer on this score had to be deleted. Being aggrieved by this decision of the Appellate Assistant Commissioner, the Income-tax Officer took the matter up in appeal before the Appellate Tribunal. Memorandum of appeal filed by the Income-tax Officer shows that in respect of the assessee's claim with regard to the provident fund contribution made by it in the year 1958-59, he challenged the order of the Appellate Assistant Commissioner on the following ground : "That the Appellate Assistant Commissioner has erred in law and on facts in allowing a sum of Rs. 1,74,877 on account of contribution to provident fund when it was unrecognised." The Income-tax Appellate Tribunal, by its order dated 29th August, 1968, dismissed the appeal filed by the Income-tax Officer and observed that the aforesaid point raised by the department stood concluded against it by its earlier decisions. It appears that the Tribunal made 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 lie 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 the provident fund dues had not been paid as required by Section 417 of the Companies Act, 1956. This showed that the amount had actually not been paid and no expenditure allowable under Section 10(2)(xv) of the Act had been incurred by the assessee. Learned counsel for the assessee objected to this new line of argument and contended that at no stage did the department contend that the assessee's contribution did not result in incurring of an expenditure contemplated by Section 10(2)(xv) of the Act. Accordingly, the department should not, be permitted to raise this argument in appellate proceedings for the first time. He explained that the assessee had been keeping its accounts on mercantile basis and contended that as the amount in question had been physically paid to the trustee before the assessment was made, the necessary condition for claiming the allowance under Section 10(2)(xv) read with Section 10(4)(c) of the Act was fully made out. The Tribunal held that the departmental representative was not barred from raising the argument as in its opinion it did not require any investigation into fact and it raised a pure question of law. However, it observed that the Income-tax Officer was legally bound to follow the order of the Commissioner, dated 20th May, 1963, directing him to allow to the assessee benefit on account of its contribution to the Employees' Provident Fund even for the period prior to the recognition of the scheme. Accordingly, the question sought to be raised by the Income-tax Officer did not arise for consideration. The Tribunal further observed that the department had allowed the assessee relief in accordance with the directions issued by the Commissioner in respect of other years and the amount had actually been made over to the trustees subsequently. In the circumstances, there would be nothing wrong in directing the Income-tax Officer to follow the instructions issued by the Commissioner. The Tribunal, therefore, held that the Appellate Assistant Commissioner was right in concluding that the amount in question was allowable as deduction. Subsequently, at the instance of the Commissioner of Income-tax, the Income-tax Appellate Tribunal stated the case and referred the aforesaid question for the opinion of this court. When the aforesaid reference came up for hearing before a Division Bench of this court, it pointed out that Section 9 of the 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 with Section 10(4)(c) of the Act. Section 10(4)(c) of the Act provides that an allowance in respect of the employer's, contribution to the provident fund cannot be made unless the employer had made some effective arrangement to secure that tax shall be deducted from any payment made from the fund which is taxable under the head "Salaries". The Tribunal did not deal with this aspect of the case and as such had not given a finding whether or not the assessee had made any such arrangement. The learned judges also observed that for deciding the question referred by the Tribunal, it would be necessary to find out as to how payments were made to the fund. In order to determine whether the credit entries made by the assessee would amount to payment within the meaning of Section 10(4)(c), it would be necessary to know the nature of entries, viz., as to whether the credit entries were in favour of the trustees or in favour of the employees concerned, etc. The Income-tax Appellate Tribunal was, accordingly, directed to record additional findings on the basis of the material already on the record, on the question as to whether the contribution in question could be allowed under Section 10(2)(xv) read with Section 10(4)(c).
(3.) THE Tribunal has submitted a supplementary statement of the case. It observed that various provisions contained in the Income-tax Act dealing with the question of recognition of a provident fund scheme are not relevant for purposes of deciding the point in controversy. Allowing or disallowing of the expenditure in dispute could be properly considered under Section 10(2)(xv) provided conditions specified elsewhere in the Act, including those of Section 10(4)(c) are fulfilled. Along with the supplementary statement the Tribunal also attached a copy of the account showing that in its books the assessee had credited the amount in question in the account of the trustees of the Employees' Provident Fund. We fully share the view expressed by the earlier Bench that for purposes of determining whether the assessee is entitled to claim the amount contributed by it towards the provident fund of its employees, as allowable deduction in computing its income, the provisions of Chapter IX-A are not relevant. In the first place, as provided in the Employees' Provident Funds Act, the scheme framed in accordance with that Act would, for the purposes of the Income-tax Act, be 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 as 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 au 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.;