Provident fund interest to former employees is not exempt and must be subjected to withholding under interest tax rules.

Interest credited by a recognised provident fund to accounts of members who had already ceased employment was not exempt under section 10(12) read with Part A of the Fourth Schedule, because the limited conditions in rule 8 were not satisfied. The credits were therefore subject to tax deduction at source under section 194A, and the fund was correctly treated as an assessee in default under section 201 read with section 201(1A). Section 192 did not apply, because the payment was interest to former employees and did not retain the character of salary once service had ended.

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Issues: (i) Whether interest credited by a recognised provident fund to the accounts of members who had ceased to be in employment of the employer was exempt under section 10(12) read with Part A of the Fourth Schedule to the Income-tax Act, 1961, so as to exclude liability to deduct tax at source under section 194A. (ii) Whether such credits, if not exempt, could be brought within section 192 as salary instead of section 194A.

Issue (i): Whether interest credited by a recognised provident fund to the accounts of members who had ceased to be in employment of the employer was exempt under section 10(12) read with Part A of the Fourth Schedule to the Income-tax Act, 1961, so as to exclude liability to deduct tax at source under section 194A.

Analysis: Section 10(12) grants exemption only to the accumulated balance due and becoming payable to an employee participating in a recognised provident fund, to the extent provided in rule 8 of Part A of the Fourth Schedule. The definition in rule 2(f) ties the expression to the balance standing to the credit of an employee on the date he ceases to be an employee. Rule 8 allows exclusion from total income only in the contingencies specifically stated therein, namely continuous service of five years or more, cessation on account of ill-health or reasons beyond the employee's control, or transfer of the accumulated balance to another recognised provident fund on re-employment. The credits in question were made after the employees had retired or otherwise ceased to be in employment, and none of the conditions in rule 8 applied. The amounts therefore did not qualify for exemption. Rule 9 and rule 10 of Part A of the Fourth Schedule contemplate deduction of tax at source where rule 8 is inapplicable.

Conclusion: The credits were not exempt, and the assessee was liable to deduct tax at source under section 194A; the assessee was correctly treated as in default under section 201 read with section 201(1A).

Issue (ii): Whether such credits, if not exempt, could be brought within section 192 as salary instead of section 194A.

Analysis: The character of the payment as salary depends on the statutory setting in which it arises. Where the employee continues in service, provident fund credits may fall within the salary framework. But once employment has ceased and the case does not fall within the limited situations preserved by rule 8, the payment does not acquire the character of salary for purposes of withholding. The credit made by the fund was interest, and section 194A specifically governs deduction from income by way of interest. The reliance placed on the cited precedent was held inapposite because it concerned a continuing employee and not ex-employees who had ceased service.

Conclusion: Section 192 was not applicable; deduction, if any, had to be made under section 194A.

Final Conclusion: The provident fund's credits to retired or otherwise separated employees were held taxable outside the exemption in section 10(12), and the fund's failure to deduct tax at source on such interest justified the default finding under the withholding provisions.

Ratio Decidendi: For a recognised provident fund, interest credited after cessation of employment is not exempt under section 10(12) unless it satisfies rule 8 of Part A of the Fourth Schedule, and in the absence of such exemption the payer must deduct tax at source under section 194A rather than section 192.

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