Provident fund contributions and tax-deduction arrangement: mere trustee appointment is insufficient, and deduction was disallowed.

Employees' provident fund contributions were held not deductible as business expenditure because section 10(4)(c) required an effective arrangement made by the assessee to secure deduction of tax at source, and the mere existence of trustees or a general statutory deduction obligation was insufficient. The provision was given independent meaning and could not be treated as redundant. The capital-expenditure objection under section 58K(1) also failed, because that deeming rule applied only where an existing provident fund or accumulated balance was transferred to trustees, which did not occur on the facts. The reference was therefore answered against the assessee on deductibility, while the section 58K(1) objection was inapplicable.

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Issues: (i) Whether the assessee's contributions to the employees' provident fund were deductible as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922 in view of section 10(4)(c); (ii) Whether the amount contributed to the provident fund was capital expenditure within section 58K(1) of the Indian Income-tax Act, 1922.

Issue (i): Whether the assessee's contributions to the employees' provident fund were deductible as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922 in view of section 10(4)(c).

Analysis: The statutory condition in section 10(4)(c) required not merely an obligation somewhere in the tax law to deduct tax at source, but an arrangement made by the assessee which was effective for securing such deduction. The fund rules did not impose any specific mandatory duty on the trustees to deduct tax before payment, and the mere appointment of trustees or the existence of statutory deduction obligations was not enough to amount to an arrangement made by the assessee. The provision had to be given independent content and could not be treated as redundant.

Conclusion: The contributions were not deductible under section 10(2)(xv); the answer on this issue was in the negative and against the assessee.

Issue (ii): Whether the amount contributed to the provident fund was capital expenditure within section 58K(1) of the Indian Income-tax Act, 1922.

Analysis: Section 58K(1) applied only where an employer transferred an existing provident fund or a portion of it to trustees in trust for employees. On the facts, there was no transfer of any existing fund or accumulated balance to trustees; the trustees were appointed and contributions were made thereafter. The statutory deeming provision therefore did not apply.

Conclusion: The preliminary objection based on section 58K(1) failed and the contribution was not treated as capital expenditure on that ground.

Final Conclusion: The reference was answered adversely to the assessee, holding that the contributions were not allowable as business deduction and that the capital-expenditure objection was inapplicable on the facts.

Ratio Decidendi: For section 10(4)(c), an effective arrangement must be one affirmatively made by the assessee to secure deduction of tax at source, and a mere statutory obligation or appointment of trustees without a specific deducting arrangement is insufficient.

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