# COMMISSIONER OF INCOME TAX, BOMBAY v. MYSORE SPINNING & MFG. CO. LTD. Apri: ,o, 1970

- **Citation:** [1971] 1 S.C.R. 468
- **Court:** Supreme Court of India
- **Decided:** 1971
- **Case number:** Civil Appeals No. 1760 of 1967
- **Bench:** J. C. Shah, K. S. Hegde, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-bombay-v-mysore-spinning-mfg-co-ltd-apri-o-1970-5085
- **Pages:** 6

## Headnote

Indian Income-tax 1922, s. 58K( 1) a.nd s. !0(2)(xv)-Private Provi-
.dent Fund started by assessee company for its en1ployees-Acct11nulation.v
paid into Employees Provident Fund under the
E111ployees Provident.
Funds Act 19 of 1952-Payment whether of a capital nature within tlie
meaning of s. 58K(l) of the Income-tax Act~Whether <11/owable expen ..
diture under section 10(2) (xv).
The assessee company-respondent herein-carried on the business o'i
manufacture and sale of yarn and cloth. It started in 1914 a Provident
Fund for the benefit of its monthly rated employees.
Subsequently, another fund was started. These funds were not recognised under the provisions of Chapter IXA of the Income-tax Act, 1922.
The employees.
and the company made contributions to the two funds 'from time to time.
The Employees Provident Funds Act 19 of 1952 came into force on 3 lst
October, 1952.
Under directions given by the Provident Fund Commissioner the assessee company transferred to the statutory Employees Providend Fund all the accumulations in the two private funds maintained by
it including its own contributions thereto made upto October 31, 1952.
The said contributions amounted to Rs. 3,01,772-1-7.
In income-tax proceedings for the assessment year 1957-58, the company claimed deduction of the above amount of Rs.
3,01,772-1-7
from its income.
The
Income-tax Officer, the Appellate
Assistant
Commissioner
as
well as
Income-tax Appellate Tribunal disallowed the claim.
In re'ference however the High Court decided in favour of the Company.
The Commissioner of Income-tax appealed to this Court. The questions that fell
for considerations were: (i) whether
the payment in question by
the
assessee company was capital expenditure within the meaning of s. 58K(l)
of Income-tax Act and (ii) whether the said payment could be allowed
as a deduction under section 10(2) (xv) of the Income-tax Act?
HELQ : (i) For the application
of sub-s. (I) of section 58K
the
following conditions must be satisfied : (1) The employer should have
maintained a Provident Fund for the benefit of his employees: (:!) There
.. should have been a transfer of such fund or operation thereof to trustees:
(3) Such transfer should have been in trust 'for the employees participlting in the fund. [472 C-D]
·
In the present case the third condition was not satisfied. The common
statutory fund created under the Provident Funds Act was meant not for
the employees of the assessee only but also for employees of hundreds of
other employers who were covered_ by -1ne Act.
It was not restricted to
!he employees of the assessee and it could never be said that they alone
participated in that 'fund.
In such a situation s. 58K was not applicabl,.
[412 E: H-473 Al
(ii) The expenditure was incurred in the relevant accounting year.
It was something which had gone irretrievably.
The amount in question
had -been spent- 'and paii out in the year of accounting, and was, therefore,
A
B
c
D
E
F
G
H
A
B
c
D
F
G
C,l.T, v. MYSORE SPNG. & MFG. co. (Grover, /.)
469
allowable as expenditure incurred exclusively for the purpose of the business.
The conditions of s. · 10(2) (xv) had, therefore, been fully satisfied
in the present case, f473 B-C}

## Text

468
COMMISSIONER OF INCOME TAX, BOMBAY
v.
MYSORE SPINNING & MFG. CO. LTD.
Apri: ,o, 1970
(J. C. SHAH, K. S. HEGDE AND A. N. GROVER, JJ.]
Indian Income-tax 1922, s. 58K( 1) a.nd s. !0(2)(xv)-Private Provi-
.dent Fund started by assessee company for its en1ployees-Acct11nulation.v
paid into Employees Provident Fund under the
E111ployees Provident.
Funds Act 19 of 1952-Payment whether of a capital nature within tlie
meaning of s. 58K(l) of the Income-tax Act~Whether <11/owable expen ..
diture under section 10(2) (xv).
The assessee company-respondent herein-carried on the business o'i
manufacture and sale of yarn and cloth. It started in 1914 a Provident
Fund for the benefit of its monthly rated employees.
Subsequently, another fund was started. These funds were not recognised under the provisions of Chapter IXA of the Income-tax Act, 1922.
The employees.
and the company made contributions to the two funds 'from time to time.
The Employees Provident Funds Act 19 of 1952 came into force on 3 lst
October, 1952.
Under directions given by the Provident Fund Commissioner the assessee company transferred to the statutory Employees Providend Fund all the accumulations in the two private funds maintained by
it including its own contributions thereto made upto October 31, 1952.
The said contributions amounted to Rs. 3,01,772-1-7.
In income-tax proceedings for the assessment year 1957-58, the company claimed deduction of the above amount of Rs.
3,01,772-1-7
from its income.
The
Income-tax Officer, the Appellate
Assistant
Commissioner
as
well as
Income-tax Appellate Tribunal disallowed the claim.
In re'ference however the High Court decided in favour of the Company.
The Commissioner of Income-tax appealed to this Court. The questions that fell
for considerations were: (i) whether
the payment in question by
the
assessee company was capital expenditure within the meaning of s. 58K(l)
of Income-tax Act and (ii) whether the said payment could be allowed
as a deduction under section 10(2) (xv) of the Income-tax Act?
HELQ : (i) For the application
of sub-s. (I) of section 58K
the
following conditions must be satisfied : (1) The employer should have
maintained a Provident Fund for the benefit of his employees: (:!) There
.. should have been a transfer of such fund or operation thereof to trustees:
(3) Such transfer should have been in trust 'for the employees participlting in the fund. [472 C-D]
·
In the present case the third condition was not satisfied. The common
statutory fund created under the Provident Funds Act was meant not for
the employees of the assessee only but also for employees of hundreds of
other employers who were covered_ by -1ne Act.
It was not restricted to
!he employees of the assessee and it could never be said that they alone
participated in that 'fund.
In such a situation s. 58K was not applicabl,.
[412 E: H-473 Al
(ii) The expenditure was incurred in the relevant accounting year.
It was something which had gone irretrievably.
The amount in question
had -been spent- 'and paii out in the year of accounting, and was, therefore,
A
B
c
D
E
F
G
H
A
B
c
D
F
G
C,l.T, v. MYSORE SPNG. & MFG. co. (Grover, /.)
469
allowable as expenditure incurred exclusively for the purpose of the business.
The conditions of s. · 10(2) (xv) had, therefore, been fully satisfied
in the present case, f473 B-C}
CIVIL APPELLATE JURISDICTION: Civil Appeals No. 1760 of
1967.
Appeals rrom the judgment and order dated February 1, 2,.
1966 of the Bombay High_ Court in 1ncome-tax Reference No. 60
of 1961.
B. Sen, S. K. Aiyar and B. D. Sharma, for the appella,nt.
M. C. Chagla and A. K. Verma, for the reipondent.
The Judgment of the Court was delivered by
Grover, J.
This is an appeal by certificate from a judgment
of the Bombay High Court in an Income-tax reference.
The respondent Company which is the assessee carries on business of the
manufacture and sale of yam and cloth in Bangalore.
In 1914
it started a Provident Fund for the benefit of tile monthly rated
employees and this fund was called "The Staff Provident Fund''.
Subsequently another fund was start~d known as the "Workmen
Provident Funds''.
These funds were .not recognised under. the
provisions of Chapter IXA of the Income-tax Act, 1922 (hereinafter called the Act).
The employees and the assessee made contributions to the two funds from time to time.
The Employees'
Provident Funds Act (to be referred to as the Provident Funds
Act) came into force on 31st October,
1952. The amounts
standing to the credit of the two funds on that date so far as they
are referable to the contributions 'by the Company stood as
follows :
(I) Staff Provident Fund :
Company's contributions upto
31-10-1952
Proportionate interest thereon
(2) Workmen's Provident Fund :
Company's contribution upto
31-10-1952.
Proportionate interest thereon
89,605-9-2
19,596-8-7
1,83,190-13-2
9,379-2-5
1,09,202·1-9
1,92,569-15-10
3,01,772-1-7
The assessee Clime within the first schedule to the Provident
Fund Act and therefore it applied under section 17 for exemption
from the operation of the provisions of that Act.
A provisional
exemption was given op 1st July; 1953.
The assessee was however, informed that pending the grant of exemption it need not
make any payment of the accumulations to the Regional Provident Fund Commissioner, as was enjoined under the Provident
470
SUPREME COURT REPORTS
[1971] 1 S.C.R.
Fund Aot.
Following some correspondence between the Com-
. J missioner and the assessee the latter sought cancellation of the
exemption by means of a letter dated 11th July, 1955.
The Pro-
"ident Fund Commissioner cancelled the e'Xemption granted under
section 17; of the Provident Funds Act and required the assessee to
comply with all its provisions and the Scheme framed the~under
and further to transfer all the provident fund's accumulations to
1he Employees Provident Fund immediately. In accordance with
the communication from the Commission~r. the assessee transferred an amount which included a sum of Rs. 3,01, 772-1-7
which represented the assessee's contribution to the two funds upto
31st October, 1952. The assessee claimed deduction in the assessment for the assessment year 1957-58 on account of the transfer
cf the amount of Rs. 3,01,772-1-7 to the Provident Fund Commissioner. The Income Tax Officer disallowed this claim on the
ground that the amount in question was allowable to be treated
'as capital expenditure' under the provisions of section 58K of the
Act.
An appeal was taken to the Appellant Assistant Commissioner but it failed.
The assessee appealed to the
Appellate
Tribunal. The Tribunal held that there was a transfer of the
fund to Trustees which came within the scope of Section 58K of
the Act and therefore the 'amount was not deductible nor could the
deductions be allowed under section 10( 1) or Section 10(2)(xv).
The assessee sought reference and the following two
questions
were referred :
( l) Whether the provisions of Section 58K of the
Income-tax Act apply to the transfer of the sum
of Rs. 3,0l,772-l-7•to the Regional Provident
Fund Commissioner ?
(2) If the itnswer to the above question is in the
negative, whether the sum of Rs. 3,01,772-1-7 is
allowable as a deduction in arriving at the commercial profits under section 10(1) or is an
allowable deduction under section 10(2)(xv) of
the Income-tax Act in the computation of the
assessable "business" profits.
The High Court examined in detail the provisions contained in
Chapter IXA of the Act.
It was observed that the.scheme of section 58K in that Chapter was that though an employer could not
claim any allowance at the time he transferred his own accumulated.· contributions to the Provident Fund to the trustees, he
could claim exemption in respect thereof at the time his share of
contributions was paid to the employee provided arrangements
were made to deduct from those amounts the income-tax payable
by his employee.
The transfer of the fund contemplated under
section 58K was a voluntary transfer by an employer of the Provident Fund maintained by him to the trustees to hold it in trust for
A
8
c
D
E
F
•
u
H
A
c.1.T. v. MYSORE SPNG. & MFG. co. (Grover,/.)
471
the benefit of his employees.
The High Court, however, proceeded to consider the matter even on the assumption that the transfer
of the fund contemplated by sertion 58K( l) would also include
involuntary transfer.
According to the High Court the position
that emerged on a consideration of the materials provisions of the
Provident Funds Act and the Scheme framed thereunder was as
B
follows:
c
D
For the administration of the statutory Provident Fun<l which
came into existence and stood constituted on the framing of the
Scheme, a Board of trustees called the Central Board ot Trustees
was constituted. Onthe framing of the Scheme and the constitution of the statutory Provident Fund the employers in the industries
to which the Provident Funds Act applied were required to transfer the accumulated balances of the Provident Fund, if any, which
had been maintained by them.
Similarly, trustees of the private
Provident Fund constituted by an employer were also required to
transfer the accumulated balances to the statutory Provident Fund.
Such employers were further required to make their own annual
contributions according to the prescribed limit to that fun<l.
The
Board of trustees and the Officers administering the fund were
required to opeil a Provident Fund account and in that account a
separate account was maintained of each member
sho11 ing
the
balance to his credit containing the contributions of the employer.
The High Court was of the view that a trust in its true sen~e had
not been constituted by the Provident Funds Act or the Scheme
E
and that the transfer was not to the trustees but to the fund.
The·
first question was answered in the negative and in favour of the
assessee.
The answer to the second question was given in
the
affirmative, it being held that the deduction claimed was allowable
under section I 0 ( 2 )(xv) and that the provisions of section
10(4)(c) did not operate as a bar to the claim made by the
assessee for deduction of the amount in question.
F
G
H
Section 58K of the Act was in these terms :
"58K. TREATMENT OF FUND TRANSFERRED
BY EMPLOYER TO TRUSTEE :
(Ii 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 porfion of it, transfers such fund or
portion to trustees in trust for the employees
participating in the fund, the amount . so trans·
ferred 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 repre·
472
SUPREME COURT REPORTS
(1971] l S.C.R.
sents his share in the amount so transferred to
the trustee (without addition of interest, and
exclusive of the employee's 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 [clause
(xv)] of subsection ( 2) of section I 0, incurred in the year in
whic.h the accumulated balance due to the em"
ployee is paid.
For the application of sub-section (1) the following conditions
must be satisfied :
( 1 ) The employer should have maintained a Provident Fund for the benefit of his employees;
(2) There should have been a transfer of such fund
or portion thereof to trustees;
(3) Such transfer should have been in trust for the
employees participating in the fund.
·
It has not been shown that the view taken by the High Court
that the transfer in the present case was not made to any trustees
1s unfounded.
But we need express no opinion on the point
because in our judgment the third condition could not be regarded
as having been satisfied.
The transfer was nut made to trustees
in trust for the employees participating in the fund.
The common statutory fund created under the Provident Funds Act is
meant not for the employees of the assessee only but it is meant
for employees of hundreds of other employers who are covered by
that Act.
In other words the employees of the assessee alone did
not participate in that fund. It is very doubtful whether the Provident Funds Act and the Scheme thereunder can be said to
create a trusnn the sense in which that word is used in section
58K (1) merely because the Board managing the Scheme was
called the Board of Trustees.
The members of the Board did not
become trustees in the legal sense.
They were appointed to
administer the fund which vested in them only for the purpose of
administration.
It could well be said that the essential ingredient
of a ttust, namely, reposing of confidence by the author of the
trust in the trustees for the purpose of carrying out his desires.
wishes and directions and the acceptance of those obligations by
the trustees was absent in the present case.
It is, however, not
necessary to examine in detail this aspect of the matter because as
observed before th!! fun<l under the Provident Funds Act. was not
restricted to the employees of the assessee only and it could never
A
B
c
D
E
F
G
H
•
C.O.T. v. MYSORE SPNG. & MFG. co. (Grover, /.}
473
be said that they alone participated in that fund.
In such a situation section 58K could not be made applicable .
Hardly any argument was addressed on the decision of the
High Court on the second question.
The expenditure was incurred in the relevant accounting year. It was something which
B had gone irretrievably. The amount in question had been spent
and paid out in the relevant year of. accounting, and was therefore allowable as expenditure incurred exclusively for the purpose
of the business.
It is not suggested that is was incurred for any
other purpose.
The conditions of section 10(2) (xv) had been
fully satisfied in the present case.
c
In the result we concur in the answers given by the High
Court.
The appeal fails and is dismissed with costs.
G.C.
Appeal dismissed.