Indian Kanoon - Search engine for Indian Law

6. The Income-tax Appellate Tribunal, which reversed the conclusions of the ITO and the AAC, was of opinion that the lower authorities were in error in holding that the fund had not been transferred to the trust and that the assessed continued to have dominion over them. They referred to the terms of the trust deed and also pointed out that the chartered accountant of the board of trustees had given a report on February 13, 1956, which showed that a substantial part of the securities belonging to the trust had been transferred to the trustees till the date of the report. Though separate principal books of account for the trust fund were not maintained, all the transactions pertaining to the provident fund had been accounted for in an allocation register compiled from the books of the assessed. The auditors in their report, referred to above, suggested that an independent set of complete books of accounts be maintained by the trust. In view of the foregoing circumstances, the Tribunal was of opinion that the mere fact that the accounts of the fund of the trust were incorporated in the account books of the assessed-company would not undo the vesting of the fund irrevocably in the trustees by virtue of the trust deed dated July 28, 1954. Regarding the objection of the ITO based on s. 10(4)(c), the Tribunal agreed that there was no provision in the trust deed casting upon the trustees a duty to deduct tax at source from the payments made out of the fund. Having regard, however, to the decision of the Bombay High Court in Mysore Spinning and Manufacturing Co., Ltd. v. CIT [1966] 61 ITR 572, the Tribunal was of opinion that the embargo in s. 10(4)(c) would not apply to the present case as there were statutory provisions in s. 7(1) read with s. 18(2) for the deduction of tax at source in respect of the payments made out of the fund. The Tribunal, therefore, held that the assessed was entitled to claim deduction in respect of the contributions made by it to the provident fund after July 28, 1954. As the Tribunal had held that the assets of the trust had been irrevocably vested in the trustees, it held consequently that the income from the assets of the trust were liable to be excluded from the total income of the assessed.

7. It is from this order of the Tribunal that the Commissioner had come up on reference before us.

8. The deductibility of the contributions made by the assessed to the provident fund as well as the taxability or otherwise of the interest income from the investments of the trust in the hands of the assessed are mutually connected issues because the ITO has rested his conclusion so far as both these items are concerned on the ground that there has been no effective parting of funds from the assessed-company to the trust. We agree with the Tribunal that there is absolutely no basis for this conclusion of the ITO. The provident fund is administered under the rules and regulations as well as the trust deed dated July 28, 1954. Under para. 3 of the trust deed, the company declared that the company had transferred and assured unto the trustees thereof, all and singular, the cash and property in India described in clause 10 thereof and all rights, title thereto or interest therein, to hold the same unto the trustees for ever upon an irrevocable trust with and subject to the terms, powers, provision and declarations mentioned therein. Under clause 4, it was declared that the fund shall vest in and be administered by the present board of trustees and their successors in the trust. It was further declared that the property described in clause 10 shall vest and be deemed to have vested in the board of trustees and their successors for the time being from the date of the deed and that the trustees shall apply the trust property for the execution, advancement and furtherance of the objects of the trust in accordance with the rules of the fund and subject to the instructions issued by the Government from time to time. The assets described in clause 10 comprised of the contributions made to the fund by the members as well as the company, accumulations transferred from the old fund, any accumulation or accretions to the fund by way of interest or otherwise and any securities purchased with the accumulations or accretions. There is, therefore, a clear and effective trust created by the assessed in respect of the provident fund. It is true that mere book entries are not sufficient to constitute a trust. But in the present case, the position is not that of mere book entries made at the instance of the assessed which can be altered or modified at its sweet will and pleasure. The contributions and the assets of the fund are entered no doubt only in the books of the assessed in a separate account. But having regard to the terms of the trust deed it is difficult to hold that the ownership in the fund continues to vest in the assessed. The terms of the trust deed read with the rules and regulations create a liability against the assessed in respect of the amounts which it had to contribute to the fund every year. This liability created under the terms of the trust deed, in the context of the fact that the assessed is following the mercantile system of accounting, would certainly amount to a payment or expenditure within the meaning of s. 10(2)(xv) of the Act. Similarly, these entries are sufficient to vest the amount contributed by the assessed as well as the other funds pertaining to the trust in the trust itself. The effect of the book entries in the context of the trust deed is, as stated by the assessed at one stage, merely to constitute the assessed into a banker for the trustees. It is incorrect to say that the assessed would continue to be the owner of these amounts and the interest income. So far as the allow ability under s. 10(2)(xv) on this aspect of the matter is concerned, we may refer to the decision of the Allahabad High Court in CIT v. Lakshmi Ratan Cotton Mills. Co. Ltd. [1976] 104 ITR 319, which has held that a deduction can be claimed on the basis of such entries made in the account books. We are, therefore, of opinion that the assessed cannot be denied the benefit of deduction for the contributions made by it to the provident fund on the above ground mentioned by the ITO. Likewise, the taxing of the interest income in the hands of the assessed cannot also be sustained.