Provident fund interest after retirement remains taxable and subject to withholding where statutory exemption conditions are not met.

Interest credited by a recognised provident fund to accounts of retired employees was held not to fall within the exemption in section 10(12) because that relief is confined to accumulated balances payable on cessation of service and only within the conditions in rule 8 of Part A of the Fourth Schedule. As the credits were made after employment had ended and did not satisfy the statutory contingencies, the amounts remained taxable interest under section 194A. The fund was therefore required to deduct tax at source, and its treatment as an assessee in default under sections 201 and 201(1A) was upheld.

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Issues: Whether interest credited by a recognized provident fund to the accounts of retired employees, who had ceased to be in employment and were not covered by the conditions in the Fourth Schedule, was exempt under section 10(12) of the Income-tax Act, 1961; and whether the fund was therefore liable to deduct tax at source under section 194A and could be treated as in default under sections 201 and 201(1A).

Analysis: Section 10(12) exempts only the accumulated balance due and becoming payable to an employee participating in a recognized provident fund, and that exemption is confined to the extent provided in rule 8 of Part A of the Fourth Schedule. Read with rule 2(f), the expression refers to the balance due on the date the employee ceases to be in service. The credited amounts in question were made after cessation of employment, and the case did not fall within any of the contingencies in rule 8, namely continuous service of five years or more, termination for reasons beyond the employee's control, or transfer of balance to another recognized provident fund on obtaining other employment. Rule 10 further contemplates deduction of tax at source where the accumulated balance is includible in total income. The plea that the amount should be treated as salary was rejected because the employment link had ceased, and the amount credited was interest within the ambit of section 194A. The arguments based on mutuality, past acceptance by the Revenue, and alleged technical breach were held not to alter the statutory obligation.

Conclusion: The credits to the accounts of retired employees were not exempt under section 10(12), and the assessee-fund was bound to deduct tax at source under section 194A. The finding that it was an assessee in default under sections 201 and 201(1A) was upheld against the assessee.

Final Conclusion: The tax demand and default consequences were sustained because post-retirement interest credits did not qualify for exemption under the recognized provident fund rules and remained subject to withholding tax.

Ratio Decidendi: Exemption under section 10(12) is available only to accumulated balances falling within rule 8 of Part A of the Fourth Schedule, and interest credited after cessation of employment outside those conditions is taxable interest on which tax must be deducted at source under section 194A.

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