Income Tax Appellate Tribunal - Nagpur
Commissioner Of Income-Tax, C.P. & U.P. vs Central India Spinning And Weaving Co. ... on 18 October, 1938
Equivalent citations: [1939]7ITR187(NAG)
JUDGMENT
STONE, C.J. - This matter comes before the Bench by way of a case stated by the Commissioner of Income-tax on the petition of the assessee. It raises a point of construction of Section 58-K (2) of the Indian Income-tax Act and as one takes this view or that will depend on whether the assessee is entitled to a deducted of Rs. 46,675-12-4 or not. The facts can be shortly stated.
Section 58-K, together with a number of other section, substantially altered the income-tax law relating to deductions that were permissible in respect of transfers of provident funds. Prior to the amending Act of 1929, where there had been established by an employer a provident fund not vested in any trustees but remaining in substance the employers fund, if the employer constituted a trust fund and transferred that fund to trustees he was in effect transferring money from himself to trustees and the sum so transferred was permitted to be treated as an expenditure that could be set against income in the year of transfer. After the amendments effected in 1929, of which Section 58-K is one, where there was such a transfer the employer (transferor) was not permitted so to deduct the amount of the fund transferred. In other words, the principle enunciated by the House of Lords in British Insulated and Helsby Cables v. Atherton (10 Tax Cases 155) was given statutory effect in India. At the same time, although the employer was not permitted to make that deduction in arriving at his net income, whenever out of that fund there was paid to members of the provident fund sums, these sums could, with certain deductions, be allowed as deductions from the employers income. The question is : What deduction has one to make ? Does one deduct the proportion of the sums so paid out referable to the employers contributions prior to transfer or does not deduct the proportion of the sum so paid referable to the employers contributions plus interest thereon earned up to the time of transfer ? Put into figures, on the facts here present, that can be expressed : Is the correct deduction Rs. 72,534-2-11 or that sum plus Rs. 46,675-12-4 ? The relevant provisions of the Act are as follows : S. 58-K (2) :- "When an employee participating in such fund is paid the accumulated balance due to him therefrom, any portion of such balance as represents hi share in the amount so transferred to the trustee (without addition of interest and exclusive of the employees contributions and interest thereon) shall be deemed to be an expenditure by the employer within the meaning of clause (ix) of sub-section (2) of Section 10, incurred in the year in which the accumulated balance due to the employee is paid"
It is said on behalf of the Commissioner that the words "any portion of such balance as represents his share in the amount so transferred to the trustee (without addition of interest............)" mean that you have to deduction arriving at the employers "share" the interest that has been earned by the employers contributions. On the other hand, it is said that the true construction is that when you transfer the fund to trustees you transfer a fund composed of two things : the employers shares and the employees share. After that fund is not transferred the trustees would invest it and the fund would grow by interest on the invested fund so that in time one would have a fund comprising the old fund made up of employers share and employees share, interest on that fund and new contributions to that fund. The new contributions do not enter into the story. The interest on that fund has not to be taken into account, but the employer is entitled to a deduction dependent upon the amount of his share in the old fund and the share comprises two things : his contributions and interest thereon up to the date of transfer.
The order of the Income-tax Officer, Nagpur, dated the 27th of November 1934 considers this question and it is apparent that the conclusion he arrived at is due to the fact that he considered that the words "without addition of interest" were words of exclusion shutting out not the interest added to the fund but the interest earned by the employers contributions up to the date of transfer. His order uses however, language towards the end which seems to point the other way, for, after setting out the interpretation now urged by the non-applicants, he observes :
"Such an interpretation is clearly untenable as the words accumulated balance in the provision mean the balance to the credit of an employees and the word interest therefore, must refer to the interest on the amount transferred to the trustees. This interpretation is further supported by the fact that such interest is not taxable in the hands of the employees in the year of receipt."
It is the argument of the non-applicant that the words "without interest" mean "without taking into account the interest earned on the fund after it has been transferred to the trustees." We think that that is the proper construction, because, had it been intended to exclude the interest earned on the employers contributions up to the time of the transfer the language would have been different in many particulars.
The Commissioner of Income-tax, Central and United Provinces, commences his opinion in the following way :
"The accumulated balance due to an employees consists of the following 4 items : (a) employers contribution (b) interest on the above (c) employees contribution, (d) interest on the same."
We stop to observe that those four items, in our opinion, correctly represent not the accumulated balance but the transferred fund. To arrive at the accumulated balance one has to add a fifth ingredient, viz., the interest earned on the transferred fund. But apart from that criticism we think that the Commissioner correctly breaks up the fund into those four parts. Of two of those parts the sub-section speaks when it executed the employees contributions and the interest thereon. It seems to be the scheme of the Act that the employer is to have the advantage of deductions in respect of money which he has contributed to the fund together with the increase to the fund which is money has earned prior to the time of the transfer of the fund to the trustees. He is not to have any benefit in respect of employees contributions or interest thereon up to that time and he is not to have benefit in respect of any interest that is earned by the fund after transfer. The words "his share" cannot be given the meaning "his contributions" without doing violence to the language of the sub-section. No reason can be given for using "his share" in the earlier part and "employees contributions" later on in the same sub-section. If the Legislature was thinking in terms of contributions they would have said "his contributions". "His share" in our opinion means the first two of the four items which the Commissioner has mentioned, that is to say, the employers contributions and interest thereon up to the date of transfer. That means that here this assessee was entitled to have taken into account not only the Rs. 72,534-2-11 but also Rs. 46,675-12-4.
The question raised in the case stated is answered as follows :
The interpretation of Section 58-K (2) is as above indicated and the petitioners are entitled to allowance in respect of Rs. 46,675-12-4 in the year of account.
The Rs. 100 deposited with the Commissioner will now be refunded. Costs to be paid to the non-applicants Rs. 60.
Reference answered accordingly.