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Hindustan Commercial Bank Ltd. v. Commissioner Of Income-Tax, U.P
Structured Summary of the Opinion (Brijlal Gupta, J.)
Factual and Procedural Background
This is a reference under section 66(1) of the Income-tax Act. The specific question referred to the court asked whether, in computing the business profits of the assessee company for the calendar years 1945 and 1946, the contributions made by the assessee to the Hindustan Commercial Bank Ltd. Employees' Provident Fund under the fund's rules and regulations prior to April 30, 1946, should be deducted under section 10(2)(xv) of the Indian Income-tax Act, 1922.
The assessee is a public limited bank that adopted rules and regulations for an employees' provident fund in 1944 and appointed three trustees by an indenture dated July 28, 1945. The fund obtained recognition under the Commissioner of Income-tax for Chapter IXA with effect from June 30, 1946. The contested contributions were Rs. 33,458 in calendar year 1945 and Rs. 23,246 in the succeeding calendar year. The Income-tax Officer disallowed the deductions for the relevant assessment years on the ground that, prior to June 30, 1946, the fund was not a recognised fund under Chapter IXA.
On appeal, the Appellate Assistant Commissioner refused to allow the assessee to raise the point for assessment year 1946–47 by way of an additional ground, and for assessment year 1947–48 the Assistant Commissioner refused the claim for the same reason—lack of recognition at the time of the contributions. The assessee further appealed to the Income-tax Appellate Tribunal, which considered the assessee's argument that the contributions were wholly and exclusively for the purpose of business and met the conditions of section 10(4)(c), but the Tribunal rejected the claim on the ground that mere appointment of trustees and the statutory obligation to deduct tax did not amount to an “effective arrangement” as required by section 10(4)(c). The Tribunal stated a case for opinion to this Court, leading to the present reference.
Legal Issues Presented
- Whether in computing the business profits of the assessee company for the calendar years 1945 and 1946 the contributions made by the assessee to the Hindustan Commercial Bank Ltd. Employees' Provident Fund under the rules and regulations of the fund prior to April 30, 1946, should be deducted under section 10(2)(xv) of the Indian Income-tax Act, 1922.
- Whether, for the purpose of section 10(2)(xv), the assessee had “made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund” within the meaning of section 10(4)(c), given the appointment of trustees and the statutory framework (including section 7 Explanation 2 and section 18(2)).
- Whether the amount of contribution made by the assessee to the provident fund was in the nature of capital expenditure and not deductible as revenue expenditure by operation of the provision identified as section 58K (and quoted as section 68K(1) in the opinion), which deems transferred funds to trustees to be of the nature of capital expenditure.
Arguments of the Parties
Assessee's (Bank's) Arguments
- The contributions were expenditure laid out or expended wholly and exclusively for the purpose of its business and therefore allowable under section 10(2)(xv).
-
The assessee had satisfied the condition in section 10(4)(c) that it had “made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund,” because:
- trustees were appointed by indenture dated July 28, 1945 and vested with the duty to administer the fund and make payments; and
- under Explanation 2 to section 7 the payments from the provident fund were taxable as “profits in lieu of salary” to the extent specified, and section 18(2) requires a person responsible for paying income chargeable under salaries to deduct tax at the time of payment—therefore the trustees were under a legal obligation to deduct tax and this amounted to an effective arrangement.
- The fund's rules and resolutions had been framed with Chapter IXA requirements in view (e.g., certain regulations and promises to amend regulations to meet the Commissioner of Income-tax's approval), evidencing an intention to satisfy statutory conditions.
Respondent/Department's Arguments (as recorded)
- The Income-tax Officer and the Appellate Assistant Commissioner disallowed the deductions because the fund was not a recognised fund under Chapter IXA at the time contributions were made.
- A preliminary objection was raised that, under the provision referred to as section 58K (quoted as section 68K(1) in the opinion), where an employer transfers a provident fund to trustees in trust for employees, the amount so transferred is deemed to be of the nature of capital expenditure, and hence not deductible as revenue expenditure under section 10(2)(xv).
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The Court concentrated on the correct interpretation and application of the words in section 10(4)(c): “has made effective arrangements to secure the deduction of tax at source from any payments made from the fund.” The Court paraphrased the provision into three requirements:
- The assessee should have made an arrangement;
- The arrangement should be to secure that tax was deducted at source from payments made from the fund; and
- The arrangement should be effective.
The Court observed that, prima facie, whether these requirements were satisfied in a particular case is largely a question of fact (whether an arrangement was made, its purpose, and its effectiveness). The Tribunal had found, on the materials, that merely appointing trustees for administration did not constitute an “effective arrangement” to secure deduction at source.
The Court then considered whether, even if the matter were partly one of law, the facts and the rules amounted to an arrangement. It noted that the provident fund rules and regulations in this case did not contain a specific provision making it mandatory on the trustees to deduct tax before payment. The question posed was whether appointment of trustees without imposing a duty upon them to deduct tax (leaving it to their discretion) could be regarded as an arrangement to secure deduction of tax and, more particularly, an “effective arrangement.” The Court answered that question in the negative.
The Court distinguished between a statutory obligation and a voluntary arrangement made by the assessee. It accepted that section 7 Explanation 2 and section 18(2), read together, might impose an obligation on the person who makes payments chargeable under “salaries” to deduct tax at the time of payment. However, the Court emphasised that a statutory duty imposed by law is not the same as an arrangement “made by the assessee.” The term “arrangement made by an assessee” in section 10(4)(c) requires a voluntary act of the assessee; the statute may impose duties, but the provision requires an additional effective arrangement undertaken by the assessee to ensure proper discharge of that obligation. The Court reasoned that the provision in section 10(4)(c) must have meaning and not be rendered redundant by treating statutory obligations alone as satisfying it.
The Court further noted that for a recognised provident fund section 58H contains a specific mechanism for trustees to deduct tax before payment; that specific provision does not apply to unrecognised funds, which reinforces the need for an arrangement distinct from mere statutory duty. The Court remarked that, although the assessee framed rules to meet Chapter IXA requirements and ultimately obtained recognition, the mere formulation of regulations and appointment of trustees without expressly imposing the obligation of deduction could not be characterised as an “effective arrangement” under section 10(4)(c).
Regarding the preliminary objection under the provision described in the opinion as section 58K (and quoted as section 68K(1)), which deems amounts transferred to trustees to be capital expenditure, the Court found that the provision applied only where there was an actual transfer of a fund or portion thereof by the employer to the trustees. In the present case there was no evidence of any transfer of any accumulated balance to trustees after their appointment, nor of contributions made prior to appointment of trustees; the trustees were appointed by indenture on July 28, 1945 and the contributions in question were made in calendar year 1945 and the succeeding calendar year. Consequently, the deeming provision did not apply and the preliminary objection failed.
On the basis of the foregoing analysis, the Court concluded that the deduction claimed by the assessee under section 10(2)(xv) could not be allowed for the contributions made prior to recognition, because the assessee had not made an effective arrangement as contemplated by section 10(4)(c).
Holding and Implications
Holding: The Court's conclusion is stated as follows:
REFERENCE ANSWERED IN THE NEGATIVE.
Implications:
- The deductions claimed by the assessee under section 10(2)(xv) for the contributions made to the provident fund prior to its recognition are not allowable because the assessee did not "make effective arrangements" within the meaning of section 10(4)(c) to secure deduction of tax at source from payments made from the fund.
- The preliminary departmental objection that the contributions were capital in nature under the deeming provision referred to in the opinion (section 58K / quoted section 68K(1)) was rejected because that provision applies only where there has been a transfer of the fund to trustees; no such transfer was shown on the record.
- The reference is remitted to the Income-tax Appellate Tribunal, Allahabad, with the negative answer as stated by this Court. The assessee was ordered to pay the costs of the reference, assessed at Rs. 200.
- The opinion addresses the direct effect on the parties (disallowance of the claimed deduction and payment of costs). The opinion does not purport to announce any broader principle beyond the interpretation and application of section 10(4)(c) to the facts before the Court.
Reference answered accordingly.
Brijlal Gupta, J.:— This is a reference under section 66(1) of the Income-tax Act. The question which has been referred to this court for opinion is:
“Whether in computing the business profits of the assessee company for the calendar years 1945 and 1946 the contributions made by the assessee company to the Hindustan Commercial Bank Ltd. Employees' Provident Fund under the rules and regulations of the fund prior to April 30, 1946, should be deducted under section 10(2)(xv) of the Indian Income-tax Act, 1922?”
2. The reference relates to the assessment years, 1946–47 and 1947–48, relevant to the previous years, the calendar years 1945 and 1946 for purposes of income-tax assessment and the chargeable accounting period, April 1, 1946, to December 31, 1946, corresponding to the assessment year 1947–48, for purposes of business profits tax assessments.
3. The assessee is a public limited company carrying on banking business. Some time prior to January 1, 1944, it decided to institute an employees' provident fund. Accordingly, it appears that the managing director drew up certain rules and regulations of the fund. These rules came to be considered at a meeting of the board of directors of the bank. On July 24, 1944, the main principles to govern the fund were settled and a trustee committee comprising of three persons was appointed. The three persons were: 1. Sardar Bahadur Sardar Gurbux Singh, Director, Central Board, 2. L. Kishanchand Puri, Managing Director and 3. Sardar Balwant Singh, Chief Accountant. It was also resolved that the provident fund rules may be amended to suit the requirements of the income-tax department. ‘On July 28, 1945, an indenture was executed between the bank and the three persons mentioned above who were appointed trustees of the fund and who were charged with the duty to administer the fund in accordance with the rules and regulations of the fund. The fund was granted recognition by the Commissioner of Income-tax for purposes of Chapter IXA of the Income-tax Act with effect from June 30, 1946. The question which has arisen in this reference relates to the contributions made by the bank to the fund prior to June 30, 1946. A sum of Rs. 33,458 was contributed in the calendar year 1945 and a sum of Rs. 23,246 in the succeeding calendar years. It is the deductibility of these two sums of monies under section 10(2)(xv) which is in question in this reference in the assessment years already mentioned above. The Income-tax Officer disallowed the claim on the ground that prior to June 30, 1946, to which period the claim related, the fund was not a recognised fund under Chapter IXA. The bank did not raise the point in its memorandum of appeal to the Appellate Assistant Commissioner for the assessment year 1946–47. It sought permission to raise it by an additional ground of appeal but the Appellate Assistant Commissioner did not allow it to raise the additional ground. In the appeal for the subsequent year 1947–48, it did raise the point, but the Appellate Assistant Commissioner refused the claim for the same reason for which it had been refused by the Income-tax Officer, namely, that the fund was not a recognised fund under Chapter IXA and the amount of contribution by the bank could not be allowed to be deducted.
4. The bank went up in further appeals to the Income-tax Appellate Tribunal and before the Tribunal it raised the point in this way. It urged that its contribution to the fund in the two assessment years in question was an expenditure laid out or expended wholly and exclusively for the purpose of its business and as such allowable under section 10(2)(xv). It urged that the conditions for allowance under section 10(2)(xv) provided for under section 10(4)(c) had been satisfied. The relevant portion of the provisions in section 10(4)(c) is as follows:
“……………Nothing in clause (xv) of sub-section (2) shall be deemed to authorise any allowance in respect of a payment to a provident fund………..established for the benefit of employees unless the employer has made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are taxable under the head ‘Salaries’.”
5. It urged that its contribution to the provident fund was “taxable under the head ‘salaries’“and that it had” made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund” by appointment of trustees of the fund and in whom under the indenture dated July 28, 1945, the fund vested and who were charged with the duty of administering the fund including the duty of making payments therefrom. It urged that under Explanation 2 to section 7 the contribution made by it to the fund was “taxable under the head ‘salaries’.”
6. Section 7(1) provides for payment of tax under the head “salaries”, inter alia, in respect of “profits in lieu of salary”. The material portion of Explanation 2 provides:
“A payment due to or received by an assessee……………from a provident…………..fund is to the extent to which it does not consist of contributions by the assessee or interest on such contributions a profit received in lieu, of salary for the purposes of this sub-section….”
7. It was urged that the trustees of the fund who were charged with the duty of making payments from the fund were under a statutory obligation to deduct income-tax and super-tax on the amount payable at the time of making the payments. Section 18(2) is as follows:
“Any person responsible for paying any income chargeable under the head ‘Salaries’ shall, at the time of payment, deduct income-tax and super-tax on the amount payable at a rate representing the average of the rates applicable to the estimated total income of the assessee under this head:
Provided that such person may, at the time of making any deduction, increase or reduce the amount to be deducted under this subsection for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct”.
8. On the basis of the above facts and the further fact that the contributions made by the bank were put in a separate bank account and on the basis of the above statutory provisions it was urged that the bank had made effective arrangements as contemplated by section 10(4)(c) and was entitled to the deduction of the amounts contributed under section 10(2)(xv). The Income-tax Appellate Tribunal overruled the argument in the following words:
“Effective arrangement must be such that by such arrangement either no tax is deductible or where a tax is deductible some arrangement has been made to secure the payment of the said tax to the revenue. Merely throwing a legal obligation on a person responsible for the payment of the salary would not……. result in the effective arrangement as contemplated in…….. section 10(4)(c)”.
9. In due course the bank applied to the Tribunal for the statement of a case to this court and the Tribunal acceded to the request and accordingly made the present reference.
10. It has been urged before us that the view taken by the Tribunal is legally erroneous. The consideration of the question depends upon the interpretation of the following words in section 10(4)(c):
“…….. Has made effective arrangements to secure the deduction of tax at source from any payments made from the fund.”
11. The requirements of this provision may be paraphrased as follows:
1. The assessee should have made an arrangement;
2. The arrangement should be to secure that tax was deducted at source from the payments made from the fund; and
3. That the arrangement should be effective.
12. Prima facie the question whether the above requirements were or were not satisfied in a particular case would be a question of fact. No question of law would seem to be involved in the question whether or not any arrangement had been made, the purposes of those arrangements, and the effectiveness of the arrangements made. Upon a consideration of the materials the Tribunal has recorded the finding that no effective arrangements were made to secure the deduction of tax at the source by merely appointing trustees for the administration of the fund.
13. If on the other hand the question is considered to be a question partly of fact and partly of law then it is noticeable that in the rules and regulations of the provident fund there was no specific provision charging the trustees with the mandatory duty of deducting the tax due from the provident fund before it was paid to an employee. The question which therefore arises is, whether the mere appointment of trustees without even imposing any obligation on them to deduct tax before making the payment and leaving it to them in the discharge of their duties for the administration of the trust to deduct or not to deduct the tax before making a payment out of the provident fund, can be called an arrangement to secure deduction of tax and not merely this, but whether such an arrangement can be characterised as an effective arrangement. To this question the answer can only be in the negative.
14. It may also be noted that in the case of a recognised provident fund section 58H makes specific provision for deduction by the trustees of such a fund of tax due on any sum of money paid to an employee before the payment is made. This provision of course does not apply in the case of an unrecognised provident fund. It was, however, argued by learned counsel for the assessee that the combined effect of the provisions in section 7, Explanation 2, as it stood at the material time, and section 18(2) is that, even in the case of an unrecognised provident fund, the person making payment on account of the provident fund to an employee is under a legal obligation to deduct the tax due before making the payment. It is not necessary for the purposes of this case to decide the question finally whether this is really the effect of those provisions, but even if it is assumed that the effect is to cast a legal obligation upon the person making the payment for deduction of tax before making the payment, it is very different from saying that the particular assessee has “made any arrangement”, much less an “effective arrangement” to secure the deduction of tax. The making of an arrangement is the voluntary act of the assessee conditioned by his volition. It is very different from an obligation cast by the statute. Such an obligation can in no way be described as an “arrangement made by an assessee”. The law requires an effective arrangement in addition to the duty imposed by law. The law imposes an obligation but it may also, i.e, in addition, require an arrangement for ensuring the proper discharge of the obligation; so the provision has been made that there must be an arrangement to ensure that the obligation is discharged. The provision in section 10(4)(c) must be given a meaning; it must have contents and must not be thought to be overlapping with section 18(2) and as such redundant.
15. What appears to have happened in this case is that with a view to obtain recognition for the fund the assessee framed certain rules and regulations on the lines of the requirements under Chapter IXA. It is for that reason that we find that in the resolution for creating the fund and in the rules themselves it is emphasised that the requirements of the Income-tax Act regarding a recognised provident fund shall be kept in view, e.g, in regulation 9 it was provided that the accounts shall be kept in the form under the Provident Fund Relief C.B.R Rules. In regulation 25, it was provided that such additions or alterations shall be made in the regulations by the committee of trustees as might meet with the approval of the Commissioner of Income-tax and in regulation 30 it was provided that if there was anything in the regulations which was repugnant to the requirements of any provision in Chapter IXA the regulation shall, to that extent, be of no effect. As it happened subsequently the fund was recognised but it appears to have been forgotten that the mere formulation of the regulations and the appointment of trustees without any specific obligation being cast on the trustees for deduction of tax at the source could not be called an arrangement, much less an effective arrangement to secure the deduction of tax at the source. In the absence of such arrangement having been made by the assessee a mere legal obligation would not amount to an arrangement so as to satisfy the requirements of section 10(4)(c). It follows that the deduction claimed cannot be allowed under section 10(2)(xv) and the question referred to this court should be answered in the negative.
16. Before parting with the case a preliminary objection raised by learned counsel for the department may be noticed. The objection was that having regard to the provisions of section 58K the amount of contribution made by the assessee to the provident fund was in the nature of capital expenditure and was not revenue expenditure capable of deduction under section 10(2)(xv). Section 68K(1) runs as follows:
“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.”
17. The short answer to this objection is that in this case there was no transfer of any fund by the assessee to the trustees and the provision applies only to a case where there is such a transfer. It may be recalled that the rules and regulations were framed in 1944. Nothing, however, appears to have been done in pursuance of these rules and regulations. The trustees themselves were appointed only on July 28, 1945, under the indenture of trust executed on that day. The contribution of the first sum of money was made by the assessee to the fund in the calendar year 1945 and of the other sum of money in the succeeding calendar year. There is nothing on the record to show that any contribution was made to the fund prior to the appointment of trustees or that any accumulated balance in any such fund was transferred to the trustees after their appointment. The provisions of section 58K have, therefore, no application. The preliminary objection had, therefore, no force and was rejected. The reference should be returned to the Income-tax Appellate Tribunal, Allahabad, with the answer as stated above under the seal of the court and the signature of the Registrar. The assessee should pay the costs of the reference assessed at Rs. 200.
18. Reference answered accordingly.
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