Irrevocable provident fund trust contributions can be deductible business expenditure, and trust investment income may escape the assessee's tax base.

Provident fund contributions made under an irrevocable trust deed were treated as real business expenditure under mercantile accounting, because the fund had effectively vested in the trustees and the liability was not merely a book entry; the deduction was therefore allowable. Interest earned on the trust's investments was held to belong to the trust, not the assessee, once the fund had been validly transferred, so it was not taxable in the assessee's hands. The discussion also notes that the trust structure and tax-deduction arrangements were considered sufficient to avoid the bar in section 10(4)(c).

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Issues: (i) Whether the assessee was entitled to deduction of amounts contributed to its employees' provident fund as business expenditure. (ii) Whether interest earned on the provident fund investments was assessable as the assessee's income, and whether section 10(4)(c) barred the deduction claimed.

Issue (i): Whether the assessee was entitled to deduction of amounts contributed to its employees' provident fund as business expenditure.

Analysis: The provident fund had been created under a trust deed providing for irrevocable vesting of the fund in the trustees. The book entries did not merely create a paper liability; read with the trust deed and the accounting method followed by the assessee, they reflected a real and effective transfer of the fund to the trust. The liability undertaken under the trust deed, in the context of mercantile accounting, constituted expenditure for the purpose of business.

Conclusion: The deduction for the assessee's provident fund contributions was allowable and the answer was in favour of the assessee.

Issue (ii): Whether interest earned on the provident fund investments was assessable as the assessee's income, and whether section 10(4)(c) barred the deduction claimed.

Analysis: Once the trust deed had irrevocably vested the fund in the trustees, the income arising from its investments belonged to the trust and not to the assessee. As to section 10(4)(c), the correspondence between the company and the trustees, read with the trust structure and the duty to deduct tax at source, was treated as sufficient effective arrangement for compliance.

Conclusion: The interest income was not taxable in the assessee's hands, and section 10(4)(c) did not defeat the claim; the answer was in favour of the assessee.

Final Conclusion: The reference was answered against the Revenue and the assessee succeeded on both questions, with the contributions allowed as business expenditure and the trust income excluded from the assessee's total income.

Ratio Decidendi: A provident fund validly and irrevocably vested in trustees under a trust deed is a distinct trust fund, and contributions made under the trust obligations by an assessee following mercantile accounting can constitute deductible business expenditure; corresponding income of the trust is not assessable in the assessee's hands where the fund has been effectively transferred and tax-deduction arrangements are adequately secured.

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