Judgement

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 yarn and cloth in Bangalore. In 1914 it started a Provident Fund for the benefit of the monthly rated employees and this fund was called "The Staff Provident Fund". Subsequently another fund was started 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 :

(1) Staff Provident Fund : Company s contributions upto 31-10-1952 89,605-9-2

Proportionate interest thereon 19,596-8-7 1,09,202-1-2

(2) Workmen s Provident Fund : Company s contribution upto 31-10-952 1,83,190-13-2

Proportionate interest thereon. 9, 379-2-5 1,92,569-15-10

3,01,772-1-7

2. The assessee came within the first schedule to the Provident Funds Act and therefore it applied under Section 17 for exemption from the operation of the provisions of that Act. A provisional exemption was given on 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 Funds Act. Following some correspondence between the Commissioner and the assessee the latter sought for the cancellation of exemption by means of a letter dated 11th July, 1955. The Provident Fund Commissioner cancelled the exemption granted under section 17 of the Provident Funds Act and required the assessee to comply with all its provisions and the Scheme framed thereunder and further to transfer all the provident fund s accumulations to the Employees Provident Fund immediately. In accordance with the communication from the Commissioner, the assessee transferred an amount which included a sum of Rs. 3,01,772-1-7 which represented the assessee 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 of 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 Appellate Assistant Commissioner but it failed. The assessee appealed 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 :

(1) Whether the provisions of Section 58K of the Income-tax Act apply to the transfer of the sum of Rupees 3,01,772-1-7 to the Regional Provident Fund Commissioner?

(2) If the answer to the above question is in the negative, whether the sum of Rs. 3,01,882-1-7 is allowable as 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.

3-4. 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 exemp