S. Ranganathan, J.:— The two questions which have been referred to us in this matter by the Income-tax Appellate Tribunal are mutually connected. The questions have been framed in the following terms:
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sums of Rs. 8,42,378 and Rs. 2,07,838 were admissible deductions under section 10(2)(xv) for the assessment years 1956-57 and 1957-58?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the income from interest of Rs. 1,59,245 and Rs. 1,27,925 were to be excluded from the total income of the assessee-company for the assessment years 1956-57 and 1957-58?”
2. The reference arises out of the assessment to income-tax of M/s. Delhi Cloth & General Mills Co. Ltd., Delhi. The assessment years are 1956-57 and 1957-58, the relevant previous years being the years which ended on June 30, 1955, and June 30, 1956, respectively. The assessee-company runs a provident fund for its employees known as “D. C.M Employees Provident Fund, 1952”. The rules and regulalations of the provident fund appear to have been framed in 1952, but a trust deed in respect of the fund was executed only on July 28, 1954. The assessee-company was exempted from the operation of the Employees’ Provident Fund Scheme of 1952 apparently because the terms and conditions of the provident fund already established by it coupled with the trust deed were quite beneficial to the employees concerned. This exemption was granted by a notification of the Central Provident Fund Commissioner dated October 17, 1957, under s. 17 of the Act above referred to. The company also applied to the Commissioner of Income-tax, Delhi and Rajasthan, for the recognition of the provident fund under the provisions of the Indian I.T Act, 1922. The recognition was granted by the Commissioner by his order dated October 10, 1957. But the recognition so granted was directed to take effect from September 30, 1955.
3. Between July 28, 1954, when the trust deed was executed and September 30, 1955, with effect from which date the provident fund was recognised by the I.T authorities, the assessee had contributed various sums to the above provident fund. The amount contributed during the accounting year which ended on June 30, 1955 was Rs. 8,42,378 and the amount contributed during the accounting year which ended on June 30, 1956, was Rs. 2,07,838. The investments of the provident fund also yield-ed income by way of interest. The income which accrued during the accounting year which ended on June 30, 1955 was Rs. 1,59,245 and during the subsequent year it was Rs. 1,27,925. The assessee claimed for the two assessment years, with which we are concerned, that the amounts contributed by it to the provident fund were deductible under s. 10(2)(xv) of the Indian I.T Act, 1922, in the computation of its business income. It was also pointed out that the interest income referred to above had really accrued to the provident fund which vested in trustees and that, there- fore, the interest income was the income of the trustees of the provident fund and not that of the assessee-company. These claims were rejected by the ITO and on appeal by the AAC but were subsequently accepted by the Appellate Tribunal and hence the present reference at the instance of the revenue.
4. The difficulty in the present case arose because the ITO was of the opinion that there had been no actual payment or transfer of the amounts referred to earlier from the company to the fund. What had actually happened was that the company opened a ledger account in the name of the Employees’ Provident Fund Trust in respect of each of the three units run by the company. The funds contributed by the company were transferred to this account and similarly the account was credited with the monthly provident fund deductions from the employees’ wages and debited with loans advanced to employees as well as payments made to the outgoing employees. The company's contribution to the provident fund was credited to this account at the end of the year by a debit to wages and salaries account. The closing credit balance in the account was carried over from year to year. Similarly, the provident fund investments were recorded in the books of the company and were carried over from year to year. The ITO was of the opinion that these entries were not sufficient to pass the dominion over the fund to the trustees of the provident fund, and that the proprietary rights over the contributions continued to vest in the company itself. He was of opinion that the mere creation of a trust was not enough but that the funds consisting of the employees’ contributions should cease to be under the proprietary control of the assessee. The mere creation of a book liability, whether in favour of the employees or trustees, according to the ITO, was not equivalent to payment and did not entitle the company to a deduction. For the same reasons, he was of opinion that the interest earned in the name of the trust continued to belong to the assessee-company itself. On this line of thinking, the ITO held that the assessee had not incurred any expenditure by way of a payment to a provident fund which could be allowed under s. 10(2)(xv) and that the interest on the securities of the provident fund would also represent the company's income. For the disallowance of the contribution made by the assessee to the provident fund, the ITO also relied upon the provisions of s. 10(4)(c) of the Indian I.T Act, 1922, which provided that nothing contained in s. 10(2)(xv) shall be deemed to authorise “any allowance in respect of a payment to a provident or other 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” in the case of the recipient employees.
5. 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 assessee 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 assessee. The auditors in their report, referred to above, suggested that an independent set of complete books of account 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 assessee-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 assessee 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 assessee.
6. It is from this order of the Tribunal that the Commissioner has come up on reference before us.
7. The deductibility of the contributions made by the assessee 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 assessee 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 assessee-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 cl. 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 cl. 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 cl. 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 cl. 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 assessee 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 assessee 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 assessee 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 assessee. The terms of the trust deed read with the rules and regulations create a liability against the assessee 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 assessee 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 amounts contributed by the assessee 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 assessee at one stage, merely to constitute the assessee into a banker for the trustees. It is incorrect to say that the assessee would continue to be the owner of these amounts and the interest income. So far as the allowability 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 Colton 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 assessee 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 assessee cannot also be sustained.
8. The second objection to the deductibility of the payments made to the provident fund is based on the provisions of s. 10(4)(c) of the Act, which has been extracted earlier. The argument of the department is that in the absence of any provision in the trust deed it cannot be said that the assessee has made effective arrangements for the deduction of tax at source from the payments that would be made out of the provident fund. In support of this contention, reliance is placed on the decision of the Allahabad High Court in Hindustan Commercial Bank Ltd. v. CIT, [1962] 46 ITR 910. On the other hand, on behalf of the assessee, our attention is drawn to the decision of the Bombay High Court in the case of Mysore Spinning and Manufacturing Co. Ltd. v. CIT, [1966] 61 ITR 572. In that case, the assessee-company had started a provident fund for the benefit of its staff in 1914, and another fund for the benefit of workmen in 1949. The funds were not “recognised funds” within the meaning of the I.T Act and the employees and the assessee contributed regularly to the funds till 1952. The Employees’ Provident Funds Act, 1952, was passed in 1952, and to comply with the terms of this Act, the accumulated funds were transferred to the Provident Fund Commissioner in 1956. Out of this amount Rs. 3,01,772 represented the contributions which had been made by the assessee till 1952 and the assessee claimed in the assessment year 1957-58 that this amount should be deducted from its income as business expenditure under s. 10(2)(xv). The department resisted this claim, firstly, under s. 58k of the i.t act and, secondly, under the provisions of s. 10(4)(c) of the Act. The High Court of Bombay negatived the stand taken by the department on both the grounds. It was held that s. 58K was not applicable and that, therefore, the contributions made by the assessee could not be deemed to be capital expenditure under that section. We are not concerned with that aspect of the matter here. So far as s. 10(4)(c) of the Act is concerned the court observed (pp. 595, 596):
“It is the argument of Mr. Joshi that it was, therefore, necessary for the assessee to have made effective arrangements to secure that tax shall be deducted at source from the payments made from the provident fund. Referring to paragraph 72 of the Scheme, Mr. Joshi argues that the board of trustees are directed to pay the entire accumulations at the credit of the employee to him without making any deductions. Thus no effective arrangements had been made for deducting the tax at source at the time the payment is made to the employees from the provident fund. The pro- visions of section 10(4)(c) therefore operate as a bar on the claim made by the assessee for deduction of the said amount. It is indeed true that no provision has been made in paragraph 72 for deduction of any tax. But the argument advanced overlooks that the fund constituted under the Act by reason of the provisions of section 9 of the Act is a recognised provident fund within the meaning of Chapter IX-A of the Act. Section 58H, which forms part of Chapter IX-A, enjoins a duty on the trustees of a recognised provident fund to deduct tax payable from the accumulated balances. The statutory provident fund being a recognised provident fund, it casts a duty on the trustees of the statutory provident fund that they shall at the time when an accumulated balance due to an employee is paid, deduct therefrom the income-tax payable. The statute itself thus having made a provision for deducting the income-tax at source in section 58H, there was no necessity of making separate provision in respect thereof in paragraph 72 of the Scheme. The position thus that emerges is that the expenditure of Rs. 3 lakhs and odd incurred by the assessee-company is to meet the statutory liability of making contributions to the provident fund. In respect of these contributions effective arrangement has been made by reason of the provisions in section 58H for deducting at source the tax payable thereon. It therefore cannot be said that it was necessary for the assessee to have made any such arrangement at the time it transferred the accumulated balance to the provident fund.”
9. It is further pointed out that this decision has been confirmed by the Supreme Court in Commissioner Of Income Tax, Bombay v. Mysore Spinning And Manufacturing Company Limited, [1970] 78 ITR 4.
10. In our opinion, it is not necessary for the purpose of this case to consider the interpretation of s. 10(4)(c) vis-a-vis “recognised provident funds” that has been adopted by the Bombay High Court and the extent to which it is in conflict with the observations of the Allahabad High Court in Hindustan Commercial Bank Ltd.'s case, [1962] 46 ITR 910. On behalf of the assessee, it has been urged that since the Supreme Court has confirmed the decision of the Bombay High Court the point regarding section 10(4)(c) must also be treated as concluded though the Supreme Court has not in its judgment touched upon the interpretation of s. 10(4)(c). There is some force in this argument for, in the Bombay case, the assessee could not get the benefit of the deduction unless it fulfilled the requirements of both s. 10(2)(xv) and s. 10(4)(c). The Bombay High Court held that the terms and conditions of allowance under both the sections were satisfied. Though the Supreme Court has touched only upon the terms of s. 58K, it could not have upheld the decision of the Bombay High Court unless by implication, it is taken to have also agreed with the Bombay High Court as to the interpretation of s. 10(4)(c) without an elaborate discussion.
11. It is perhaps possible to distinguish the case of a recognised provident fund (dealt with by the Bombay High Court) from an unrecognised provident fund (dealt with by the Allahabad High Court) and involved in the present case. A provident fund can be got recognised only if the employer takes steps to comply with the provisions of the Employees’ Provident Funds Act or Chap. IX-A of the Indian I.T Act, 1922. While, therefore, s. 58H ensures deduction of tax at source in the case of such a provident fund, the applicability of that section is made possible only by certain voluntary acts of the employer. So it can be said that the provisions of s. 10(4)(c) are fulfilled in the case of a recognised provident fund. In the case of an unrecognised provident fund, however, tax deduction at source is ensured wholly by the statutes and not by any act of the employer, as held by the Allahabad High Court. However, it is unnecessary to go into the above issue in the present case and rest the decision on s. 7(1) read with s. 18(2) as done by the Tribunal. Our attention has been drawn to the discussion in the assessment order which shows that the assessee had placed before the ITO a letter written by the assessee-company to the secretary of the provident fund soon after it was constituted. The managing agents of the company on December 7, 1954, drew the attention of the secretary of the trust to the statutory obligations under the I.T Act for deduction of income-tax at source and requested him to confirm that he would fulfil this obligation. On December 13, 1954, the secretary gave a reply stating that he was quite conscious of the provisions of the law and confirmed that the tax would be deducted at source when found necessary. These two letters must be read in the context of the important fact that under the trust deed the trustees were all employees of the company. Under cl. 5 of the trust deed, the board of trustees was to consist of 10 members, of whom 5 were the representatives of the company and 5 were members of the fund. If the number of the trustees was increased then the proportion of the two groups of representatives has to be kept up. Under cl. 16 the accounts of the trust were to be duly audited by a chartered accountant appointed by the board of trustees with the approval of the directors of the company. In the light of these provisions, the correspondence assumes great importance. It possesses sufficient weight and authority and constitutes an effective reminder by the employer to the trustees of their obligations in this respect. The trustees could, in the face of this correspondence, fail to discharge this obligation only on pain of being hauled up for breach of trust. In our opinion, the above provisions, coupled with the mandate in the correspondence, can be fairly described as constituting the effective arrangements contemplated in s. 10(4)(c). In fact, learned counsel for the respondent was not able to explain precisely what type of “effective” arrangements any employer can make for the effective deduction of tax at source in a case where the fund is proposed to be vested in the trustees. It would appear indisputable that a specific provision in the trust deed itself, that the trustees should deduct such tax, would be sufficient compliance with s. 10(4)(c). But such a provision in a trust deed cannot have much greater weight, significance or sanction in law than a statutory provision or a separate agreement or arrangement between the employer and the trustees to like effect. There is, therefore, considerable force in the Bombay view that when the statute itself provides that tax has to be deducted at source from any payments made out of the provident fund, the absence of an enabling clause in the trust deed would not affect the assessee's claim for deduction. However, even assuming that the mere presence of a provision in the statute is not enough and that some positive act on the part of the employer is necessary, the facts in this case showing that at the time of constitution of the trust, the attention of the board of trustees had been specifically invited to their duty in this respect bring the case within the requirements of the section. There is nothing more which the employer could do to ensure that tax is deducted at source when payments are made from the fund. It is true that the language of the clause is somewhat wide but we are unable to see any practical method open to the employer in this regard than the insertion of a provision in the trust deed or the execution of a separate agreement with the trustees or the issue of some directions or instructions to the auditors, trustees or bankers to ensure such deduction. If some such formal as well as informal arrangement could be treated as an effective arrangement for purposes of s. 10(4)(c), there is no reason why the correspondence in the present case, read in the context of the constitution of the board of trustees, cannot itself be taken to amount to provision of the effective arrangements envisaged in s. 10(4)(c).
12. For the reasons mentioned above, we are of opinion that the Tribunal was correct in answering both the issues in favour of the assessee. We, therefore, answer the questions referred to us in the affirmative and in favour of the assessee on both the issues. As the Commissioner has failed, he will pay the costs of the reference to the assessee. Counsel's fee Rs. 300.