ISSAC J. - 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.'
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.
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.
The learned counsel for the the assessee contends before us that, in view of the finding of the Appellate Tribunal that the amount for which the assessee claimed deduction is an expenditure laid out wholly and exclusively for the purpose of the business, the assessee is entitled to the deduction under section 37(1) of the 1961 Act. The revenue relies on rule 14(1) in Part A of Schedule IV, and submits that the aforesaid amount shall be deemed to of the nature of capital expenditure. In answer to the above contention, assessees learned counsel submits that the transfer mentioned in sub-rule (1) of rule 14 must be a voluntary transfer by the employer and not a transfer effected by operation of law, and that the trust and the trustees mentioned in the said sub-rule must also be a trust or trustees created by the employer. In support of this contention he relied on sub-rule (2) of rule 14. We shall now read rule 14 :
'14. (1) Where an employer, who maintains a provident fund (whether recognised or not) for the benefit of his employees and has not transferred the fund or any portion of it, transfers such fund or portion to trustees in trust for the employees participating in the fund, the amount so transferred shall be deemed to be of the nature of capital expenditure.
(2) When an employee participating in such fund is paid the accumulated balance due to him therefrom, any portion of such balance as represents his share in the amount so transferred to the trustees (without addition of interest, and exclusive of the employees contributions and interest thereon) shall, if the employer has made effective arrangements to secure that tax shall be deducted at source from the amount of such share when paid to the employee, be deemed to be an expenditure by the employer within the meaning of section 37, incurred in the previous year in which the accumulated balance due to the employee is paid.'
Both under the 1922 Act and the 1961 ACt, when an employer, who has created a provident fund for the benefit of the employees by deduction out of the salary or wages payable to the employees and also by contribution, if any, made by the employer, pays any amount due to an employees out of the above fund, he is bound and entitled to deduct the income-tax payable in respect of the amount so paid, as if it formed the total income of the employee to whom the amount is paid. The purport of the above rule appears to be to achieve the object of the aforesaid statutory provision, in a case where the employer transfers the provident fund created by him to trustees in trust for the employees. Rule 14 provides that, if in making such a transfer, the employer has made effective arrangements to secure that tax shall be deducted at source from the amounts paid out of the said fund to employees, the amounts so paid shall be deemed to be an expenditure by the employer within the meaning of section 37, incurred in the previous year in which the said amounts were paid; and that, in the absence of any such effective arrangements, the whole fund when the employer transfers to the trustees shall be deemed to be of the nature of capital expenditure. This matter is put in a different form in rut 14. Sub-rule (1) provides that the provident fund transferred to the trustees in trust for the benefit of the employees shall be deemed to be in the nature of capital expenditure. The deeming provision shows that it would be treated as capital expenditure, though actually it may not be so. Sub-rule (2) states that, if the employer has made effective arrangements to deduct tax at source from the amount paid to an employee by the trustee shall be deemed to be revenue expenditure of the employer. Sub-rule (2) deals with 'the amount so transferred'; and obviously the reference is to the amount transferred as mentioned in sub-rule (1). Sub-rule (2) is clearly a proviso or qualification to sub-rule(1). The effective arrangement by an employer for securing the deduction of tax at the source as mentioned in sub-rule (2) is impossible unless the transfer mentioned in sub-rule (1) is a transfer made by the employer, and the trust and the trustees are also creations of the employer. It follows, therefore, that rule 14(1) would not apply to a transfer of the provident fund by operation of the provisions of the Employees Provident Funds Act, 1952, and the Scheme made thereunder in trust to the trustees created under the said Act.
The assessees learned counsel referred us to a Division Bench decision of the High Court of Bombay in Mysore Spinning & . v. Commissioner of Income-tax in support of his contention. It is a case which arose under the 1922 Act. Sections 10(2)(xv) and 58K of that Act correspond respectively to section 37 and rule 14 in Part A of Schedule IV of the 1961 Act. That was also a case where the accumulated balance of a non-recognised provident fund was transferred by operation of the Employees Provident Funds Act, 1952, and the Scheme thereunder to the board of trustees appointed under the said Act. The same question as mooted before us in the present case was raise in that case also; and their Lordships upheld the contention of the assessee that section 58K of the 1922 Act would apply only to a voluntary transfer made by the employer to a trust created by him. The learned counsel for the revenue first contended that the above decision would not apply to this case. He pointed out that the word 'transfer' is defined in the 1961 Act, while there is no such definition in the 1922 Act, that the said definition would comprise a voluntary transfer as well as a transfer by operation of law; and that transfer of provident fund by an employer to the Provident Fund Commissioners required by the Employees Provident Funds Act was a transfer of a capital asset as defined in the 1961 Act, and it would, therefore, fall under rule 14(1). The learned counsel contended that the absence of a definition of 'transfer' in the 1922 Act made all the difference, that the Bombay High Court was concerned with a case which arose under the 1922 Act, and that the reasoning stated in that decision cannot hold good in the light of the statutory definition of 'transfer' contained in the 1961 Act. We are not prepared to accept contention of the learned counsel. The discussion contained in the decision of the Bombay High Court whether the transfer mentioned in section 58K of the 1922 Act would take in only a voluntary transfer or also a transfer by operation of law assumed that, in the absence of any provision to the contrary, it would comprise both voluntary and involuntary transfers. Section 2 of the 1961 Act, which contains the definitions, states that the words defined therein would have the meaning given in the said definitions only unless the context otherwise requires. Therefore, while there can be no doubt that 'transfer', as defined in this Act, would include a transfer by operation of law, that definition would not apply, if from the context in which the word 'transfer' is used, it is clear that if means only a voluntary transfer. We have already stated our reasons for holding that transfer in rule 14(1) in Part A of Schedule IV in the 1961 Act means only a voluntary transfer. The Bombay High Court, in dealing with the above question , said :
'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 transfers the provident fund maintained by him to trustees, to get allowance in respect of his contributions at the time those contributions are paid to the employee, by making effective arrangements to secure that the tax shall be deducted at source from the amount of such share when paid to the employee. The position in contemplation of the legislature is one where it is possible for an employer to make effective arrangements to secure that the tax shall be deducted at source from the amount of such share when paid to the employee. Such a possibility can exist and can only exist when the employer of his own volition is making a trust and is transferring the provident fund maintained by him to trustees to hold it in trust for his employees. The meaning of the word transfer thus stood controlled by the provisions of sub-section (2) of section 58K.'
We respectively endorse the reasoning contained in the above passage.
In the above view of the matter, no further question arises. We shall, however, refer to another contention which the learned counsel advanced before us. He submitted that the decision of the Bombay High Court is based upon the view that a trust in the legal sense was not created under the Employees Provident Funds Act, 1952, and the Scheme framed thereunder, that the transfer of the provident fund under the said Act and the Scheme was to the 'fund' and not to trustees, and that section 58K of the 192 Act would not, therefore, apply to a transfer made as required by the said Act. The learned counsel submitted that the above view was obviously wrong. He referred us to the following passage contained in the above decision :
'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 entrustment of the property at the time of constitution of the trust by the settlor or the author of the trust to the trustees in whom he places confidence. None of the provisions either of the Act or of the Scheme show that this element has been fulfilled. We have already referred to the relevant provisions of the Act as well as the Scheme. At the time the Act was passed neither the fund was in existence nor the board of trustees had been constituted. The Act only empowered the Central Government to frame a scheme. The Scheme when framed constituted the fund. The initial contributions to the fund are by the employers and the fund are by the employers and the fund vests in the board of trustees. The further contributions made are also by the employer and the employees. Thus it would be seen that the property which is administered by the board of trustees was the property of the employer and the employees. That property under the provisions of the Act is required to be transferred to the statutory fund which vests in the board of trustees. In the circumstances it cannot be said that the vesting of the property in the board is the result of any confidence reposed in them by the owners of the property, viz.,the employers and the employees. On the other hand, the real position appears to be that, as a result of the statute, persons, whether they like it or nor, are compelled to contribute to the fund and thus a fund comes into existence. It is that fund which, as a result of the Scheme framed under the legislation, gets vested in the board of trustees for the purpose of administration of the fund in accordance with the provisions of the Act and the Scheme. These being the provisions, in our opinion, a trust in its true sense has not been constituted by the Act or the Scheme.
The other argument of Mr. Palkhiwala that the transfer of Rs. 3,01,722-1-7 by the assessee-company to the fund is not a transfer to the trustees, is also not without substance. It is indeed true that the provident fund constituted under the Scheme vests in the trustees, but that does not mean that every transfer of accumulations made to the provident fund stands vested in the board of trustees prior to the issuance of a notification in the Gazette of India in respect thereof. On the other hand, the scheme envisaged in paragraph 28, and in particular the provisions of clause (5) thereof, indicates that after the accumulated 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.'
The learned counsel invited our attention to section 5 of the Employees Provident Funds Act, 1952. Sub-sections (1) empowers the Central Government to frame a scheme to be called the Employees Provident Fund scheme for the establishment of the provident funds for the employees of industrial and other establishments, and to establish a fund in accordance with the provisions of this Act and the scheme. Sub-section (1A) of section 5 reads as follows :
'The fund shall vest in, and be administered by, the Central Board constituted under section 5A.'
He also referred us to section 5A, which empowers the Central Government to appoint a board of trustees, who constitute the Central Board. Sub-section (3) indicates that the fund is vested in the Central Board. Section 15(2) required compulsory transfer of accumulations of the provident fund established by an employer to the fund established under the Employees Provident Funds Scheme. Paragraph 28 of the Scheme deals with the mode of transfer of the accumulations as required by section 15(2) to the fund. The learned counsel also took us through a few more relevant provisions of the above Act and the Scheme, in support of his contention that the view of the Bombay High Court contained in the passage extracted above cannot be sustained in the light of the above provisions contained in the said Act and the Scheme. There is considerable force in this contention; but we need not examine this question, as we have already held that the words 'trust' and 'trustees' used in rule 14(1) in Part A of Schedule IV of the 1961 Act mean only 'trust' and 'trustees' created by an employer for the purpose of transferring the provident fund for the benefit of the employees, and that these words do not include within their meaning 'trustees' and 'trust' created by a statute.
Lastly, it was contended by the learned counsel for the revenue that at the 1922 Act did not contain any provision empowering the Central Board or the Provident Fund Commissioner to deduct the tax at source, while paying the provident fund due to an employee, whereas section 192(4) of the 1961 Act makes an express provision, and that the decision of the Bombay High Court was influenced by the absence of such a provision in the 1922 Act. We do not think that this contention is correct. Section 58H of the 1922 Act contains a provision similar to section 192(4) of the 1961 Act. We may, however, point out that the above provision shows that the statute itself has made an effective arrangements to deduct tax at the source, when amounts are paid to employees out of an accumulated provident fund transferred to the Central Board under the Employees Provident Funds Act, 1952. In such a case, there is no scope for the application of section 58K of the 1922 Act or rule 14 in Part A of Schedule IV of the 1961 Act, as the case may be. This lends further support to the view which we have already expressed.
In the result, we answer the question referred to us in the negative, namely, in favour of the assessee and against the Commissioner of Income-tax. A copy of this judgment would be forwarded to the Appellate Tribunal as required by section 260(1) of the 1961 Act, In the circumstances of this case, we would direct the parties to bear their costs.