Exempt provident fund interest retains tax-free character where delay-related interest is attributable to the accumulated balance.

Interest paid for delay in disbursement of provident fund accumulation was treated as part of the exempt fund balance rather than separate taxable income. Applying section 5(3)(b) of Part A of the Fourth Schedule to the Income-tax Act, 1961, the interest attributable to an employee's accumulated provident fund balance retained the same exempt character as the underlying provident fund amount. As a result, the interest could not be brought to tax and the related addition was deleted.

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Issues: Whether interest received by an employee on delayed payment of provident fund money was taxable, or whether it retained the exempt character of the provident fund accumulation.

Analysis: Under section 5(3)(b) of Part A of the Fourth Schedule to the Income-tax Act, 1961, where the accumulated balance due to an employee is retained in the fund, the fund may also consist of interest in respect of such accumulated balance. The interest paid for delay in disbursement was treated as part of the provident fund accumulation and, since the provident fund itself was exempt, the connected interest could not be subjected to tax.

Conclusion: The interest on delayed provident fund payment was not taxable and the addition was deleted.

Ratio Decidendi: Interest attributable to an exempt provident fund accumulation retains the same exempt character and cannot be taxed as separate income.

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