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Commissioner of Income-tax Vs. Lakshmi Ratan Cotton Mills Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 783 of 1970
Judge
Reported in[1976]104ITR319(All)
ActsIncome Tax Act, 1922 - Sections 10(2) and 10(4); Employees' Provident Funds Act, 1952 - Sections 9
AppellantCommissioner of Income-tax
RespondentLakshmi Ratan Cotton Mills Co. Ltd.
Appellant AdvocateR.R. Misra, Adv.
Respondent AdvocateAshok Gupta and ;Kameshwar Prasad, Advs.
Excerpt:
.....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. the observations made by the auditors in the balance-sheet of the assessee clearly indicated that the provident fund dues had not..........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.....
Judgment:

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 purposesof 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.'

3. 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.

4. 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).

5. 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.

6. 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.

7. 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 the assessee and which is wholly laid out or incurred (expended) for purposes of such business, profession or vocation. It is not disputed that an expenditure by way of contribution towards the provident fund dues of the employees is the expenditure which is laid out wholly and exclusively for purposes of the assessee's business and it is not an expenditure which could be described as a capital expenditure or personal expenditure of the assessee. Accordingly, if such an expenditure has been incurred by the assessee, it would be liable to be deducted in computing the assessee's taxable profits or gains of business, subject however to the provisions of Section 10(4)(c) which provides that nothing in Section 10(2)(xv) would be deemed to authorise any allowance in respect of payment to a provident or other fund established for the benefit of the employees unless the employer has made effective arrangements to secure that tux shall be deducted at source from any payment made from the fund which is taxable under the head 'Salaries'. The finding recorded by the Tribunal indicates that in this case the assessee had made effective arrangements to secure deduction of tax at source from payments made out of the fund as required by Section 10(4)(c) of the Act. This sub-section merely prohibits granting of an allowance under Section 10(2)(xv) of the Act unless an arrangement of the nature specified therein has been made. It does not provide that allowance claimed under Section 10(2)(xv) would be admissible only when the concerned amount has actually been paid by the assessee. Accordingly, if the expenditure claimed by the assessee as an allowance under Section 10(2)(xv) is in respect of payment to provident or other fund established for the benefit of the employees, the conditions mentioned in Section 10(4)(c) of the Act creating a bar to the admissibility of the claim made by the assessee would not be there and if making of the credit entries in favour of the trustees of the Employees' Provident Fund indicates that the expenditure as contemplated by Section 10(2)(xv) of the Act had been incurred by the assessee, the assessee will be entitled to claim it as an allowance under that sub-section.

8. Learned counsel for the department urged that use of the words 'allowance in respect of payment to provident or other fund', in Section 10(4)(c) of the Act, indicates that the section contemplates that before an allowance in respect of an expenditure incurred by an assesses 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 amount 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-lax v. Bombay Burma Trading Corporation Ltd., Nedungadi Bank Ltd. v. Commissioner of Income-tax and Burma Corporation Ltd. v. Commissioner of Income-tax.

9. We are unable to accept the submission made by the learned counsel for the revenue. Section 10(4)(c) of the Act provides for a contingency in which while computing the profits and gains of the business of an assessee an allowance in respect of an expenditure under Section 10(2)(xv) shall not be made. Accordingly, that section has to be interpreted in the light of the provisions contained in Section 10(2)(xv). Viewed in this light the expression 'allowance in respect of payment to provident or other fund' used in Section 10(4)(c) merely means an allowance in respect of an expenditure laid out or expended in connection with payment to a provident or other fund for the benefit of the assessee's employees, which expenditure is admissible as an allowance under Section 10(2)(xv). It follows that the expression 'allowance in respect of payment to provident or other fund' in Section 10(4)(c) has been used in the sense of an expenditure byway of provident fund contribution which is laid out or expended wholly and exclusively in connection with the assessee's business. If in given circumstances, an assessee can say that contribution to Employees' Provident Fund is an expenditure which is laid out or expended, as contemplated by Section 10(2)(xv) of the Act, wholly and exclusively, in connection with its business its claim for an allowance would be a claim in respect of payment of provident fund as contemplated by Section 10(4)(c). If under Section 10(2)(xv) of the Act, there can arise a claim for an allowance without actually incurring the expenditure or making the payment, that claim for purposes of Section 10(4)(c) would continue to be a claim in respect of payment to a fund, notwithstanding that no actual payment to the fund has been made by the assessee. Section 418 of the Indian Companies Act (wrongly referred to as 417, which has no relevance to the employees' contribution to Employees' Provident Fund, in the auditor's report) provides that all moneys contributed or received or accruing by way of interest to a provident fund constituted by a company shall within fifteen days from the date of contribution, receipt, or accrual, as the case may be, be deposited in a post office savings bank account or in a bank in the manner indicated 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 an expenditure by way of company's contribution to Employees' Provident Fund can be said to have laid out or to have taken place.

10. 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 on 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) laid out or expended the amount of its Employees' Provident Fund in the relevant accounting year when it became liable to pay the same to the trustees of Employees' Provident Fund. The claim for allowance of this amount as an expenditure, therefore (even though the provident fund contribution had not been paid to the trustees of the fund), related to an allowance in respect of payment of Employees' Provident Fund, as contemplated by Section 10(4)(c) of the Act. In the circumstances, the bar created by Section 10(4)(c) of the Act in respect of admissiblity of such a claim under Section 10(2(xv) did not apply and the assessee was entitled to claim that as an allowance under the Act.

11. So far as the decision in the case of Commissioner of Income-tax v. Bombay Burma Trading Corporation Ltd. is concerned, we find that the main point for consideration that arose for consideration there was whether interest paid by a company on its contributions to the Employees' Provident Fund was a perquisite in addition to the salary or wages of the employees of the company. It was held that it was a sum that accrued to the members of the provident fund under a contract of service with the company and as such it fell within the ambit of the term 'salaries' as used in Section 7(1) of the Income-tax Act, 1961. Upon a true construction of Section 7(1), unless and until the salary has been received by the employee and had been paid by the company to him, such salary could not be assessed to income-tax. After considering the facts of that case, Page, Chief Justice, made the following observations and held that the amount of interest accruing neither became receivable by the employee nor payable by the company ; accordingly no question of assessing the same to tax arose :

'In my opinion only when the employee's service with the company has been terminated in such circumstances that under the scheme the amount standing to the credit of the employee in the provident fund becomes payable to and is received by him. Unless and until the employment of the member of the provident fund has been determined in the manner prescribed in that behalf under the scheme, the employee has no right of property in the amount of the company's contribution standing to his credit in the fund. Further, so long as the employee has not become entitled to receive payment of the amount standing to his 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.'

12. 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 (1) 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 the same to the employee, mere making of book entries did not result in payment of the amount to the employee and while computing the profits and gains of the company no allowance for the same could be granted. However, in the case before us we find that the amount in question had been credited to the account of the trustees of the Employees' Provident Fund who were entitled to receive the same and the assessee was under an obligation to pay the same to the trustees at the time when the relevant entries Were made in the account books. The question whether in a case where an assessee maintained his books on mercantile system, and the liability to pay the amount credited to the provident fund had accrued, the assessee would be entitled to claim such an amount as an allowance in computing its profits or gains of business was neither gone into nor was it adjudicated upon. Accordingly, the revenue cannot derive any advantage from the observations made in the case reported in Commissioner of Income-tax v. Bombay Burma Trading Corporation Ltd. Similarly, reliance on the cases of Nedungadi Bank Ltd. v. Commissioner of Income-tax and Burma Corporation Ltd. v. Commissioner of Income-tax appears to be equally misplaced. In none of these cases the question, viz., whether while computing the profits or gains of business of an assessee who keeps its accounts on mercantile system, an allowance in respect of assessee's contribution to Employees' Provident Fund can be made even though the liability to incur that expenditure had accrued but the amount had actually not been paid, neither arose for consideration, nor was it discussed. These cases do not lay down that the expression 'in respect of payment to provident fund' used in Section 10(4)(c) means actual payment of money.

13. In the result, we find that the Income-tax Officer was not justified in rejecting the claim of the assessee merely on the ground that its provident fund scheme was not recognised under Chapter IX-A of the Indian Income-tax Act, 1922. Under the scheme the liability for employer's contribution towards the provident fund had accrued in the relevant accounting year and the assessee actually credited the account of the trustees of the Employees' Provident Fund with that amount in that very year. In this view of the matter the assessee was entitled to claim allowance in respect of this expenditure which had been laid out for purposes of the assessee's business and which expenditure cannot be said to be a capital expenditure or personal expenditure of the assessee. This allowance wasclaimed in respect of payment of provident fund dues of the employees with regard to which the assessee had made effective arrangements for the deduction of tax at the source under the head 'Salaries'. Accordingly, the bar created in respect of the scheme under Section 10(4)(c) did not come into operation. The assessee was, therefore, entitled to claim this expenditure as an allowance under Section 10(2)(xv).

14. In the result, we answer the question in the affirmative and in favour of the assessee. He would be entitled to receive the costs of this reference, which we assess at Rs. 200.


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