JUDGMENT H.N. Seth, J.
1. The assessee in both the references is the Allahabad District Co-operative Bank Ltd., Allahabad. Whereas the assessment years involved in I.T.R. No. 374 of 1974 are 1966-67 to 1968-69, that involved in I.T.R. No. 230 of 1975 is the year 1969-70.
2. For the assessment years involved in the two references, the assessee claimed deduction of Rs. 1,201, Rs. 3,272, Rs. 2,814 and Rs. 422, being the amounts which it claimed to have contributed towards the Employees' Provident Fund set up under the provisions of the U.P. Co-operative Societies Act. For the assessment year 1968-69, it also claimed a deduction of Rs. 2,380, the amount of interest paid by it to the said fund.
3. The ITO rejected the claim made by the assessee on the finding that the assessee did not set up any Employees' Provident Fund in accordance with law. The fund had been created by mixing up the employees' contribution, the contribution made by the bank, 1/4th of the business profit and the interest paid by the bank. This fund had been invested in securities, namely, debentures, land mortgages, national plan certificates, etc. These investments made by the bank yielded income to it. Contributions to a fund which had not been set apart in trust and which formed part of income-earning funds of the bank cannot be allowed as deduction. This view of the ITO was affirmed in appeal by the AAC. Being aggrieved, the assessee went up in appeal before the Income-tax Appellate Tribunal which held that even though the assessee's claim was not allowable under Section 36(1)(iv) of the I.T. Act, 1961 (as the contribution had not been made to a recognised provident fund), it was none the less the assessee's statutory liability under Section 63 of the U.P. Co-operative Societies Act, 1965. Such contributions were thus in the nature of expenditure wholly and exclusively laid out for the purposes of business and were allowable as deduction under Section 37(1) of the I.T. Act, 1961.
4. At the instance of the revenue, the Income-tax Appellate Tribunal has stated the case and has referred the following question of law for the opinion of this court:
"Whether, on the facts and in the circumstances of the case, the contributions made by the assessee to the Employees' Provident Fund set up under Section 63 of the U.P. Co-operative Societies Act, 1965, was an allowable expenditure under Section 36(1)(iv) (sic) of the I.T. Act, 1961 ? "
5. When the two references came up for hearing before this court, it observed that even though the ITO had in these cases recorded a clear finding that the assessee did not set apart the reserved fund in trust and that the fund created by it formed part of the income-earning fund of the bank, the Tribunal did not record any finding on these factual aspects of the case. It assumed that the liability created by Section 63 of the U.P. Co-operative Societies Act, 1965, read with rr. 201 to 204, being statutory liability, was allowable as an expense. This court pointed out that Section 63 of the U.P. Co-operative Societies Act required the co-operative societies to establish a contributory provident Fund to which all contributions made by the employees as well as by the society had to be credited. A contributory provident fund was not to be used in the business of the society and is not to form part of the assets of the society. Rule 203 provides that the interest accrued on the investments of the contributory provident fund has to be credited to the credit of individual employee in proportion to the balance standing to his credit at the close of the preceding co-operative year. Rule 204 lays down the mode for investment of such fund. The Tribunal did not go into this question and record its finding on the question if the assessee had in fact established such a contributory provident fund which was not being used in the business of the society and which did not form part of the assets of the society. There was also no finding if any interest was, as required by r. 204, credited to the account of the employee. It, therefore, vide its order dated 13th February, 1978, called upon the Tribunal to draw up a supplementary statement of the case giving its findings on various aspects indicated in the order,
6. The Appellate Tribunal has accordingly drawn up a supplementary statement of the case. The findings recorded by the Tribunal are that the assessee had set up a contributory provident fund to which the amounts contributed by the employees as also the contributions made by the assessee were credited. In the balance-sheet, the amount of provident fund was shown on the liabilities side. On the assets side, the investments made by the assessee in National Savings Certificates, Government securities and other securities have been shown, and in each of the relevant years such investments aggregate to more than the amount of the Employees' Provident Funds liability of the assessee. The assessee had, before the Tribunal, admitted that none of such securities had been separately allocated to the provident fund. All the securities were purchased by the bank in its own name. The interest derived from such securities was being credited to the profit and loss account of the assessee and in its turn the assessee credited interest in the provident fund account of the employees and debited its profit and loss account by that amount. The Tribunal noticed that whereas the assessed derived interest on Government securities at the rate of 5 per cent., it credited the provident fund account of the assessee with interest calculated at the rate of 6 per cent. In the result, the Tribunal found that the bank had set up an Employees' Provident Fund in accordance with Section 63 of the U.P. Co-operative Societies Act. Accounts of each employee had been maintained by the bank to which it credited the employees' contribution, employer's contribution as also the interest. The requirement of Rule 203 was, therefore, fully met. However, the requirement of Clauses (a) and (b) of Sub-section (2) of Section 63 and of Rule 204 were not met because the balance in the Employees' Provident Fund Account remained invested in the business of the assessee and it formed part of the assets of the society. The mere fact that in each year the balance in the security accounts held by the society and shown in the profit and loss account was more than the balance in the provident fund account was not sufficient to show that any of the securities so held were for and on behalf of the Employees' Provident Fund. In fact, the assessee conceded before the Tribunal that when the securities were purchased by the society, they were not specifically allocated to the provident fund account. There appeared to be merit in the department's contention that the securities were held by the society as stock-in-trade in accordance with the regulations under which it works. Mere holding of the securities, therefore, as its stock-in-trade, would not amount to their being held as part of the Employees' Provident Fund.
7. Section 37 of the I.T. Act, 1961, lays down that an expenditure (not being an expenditure of the nature described in Sections 30 to 36 and Section 80VV and not being in the nature of capital expenditure or personal expenditure of the assessee) laid out and expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head " Profits and gains of business or profession ". It is not disputed that the fund that has to be established under Section 63 is not a recognised provident fund within the meaning of Section 36(1)(iv) of the I.T. Act, and that the expenditure claimed by the assessee is not an expenditure of the nature described in Sections 30 to 36 and Section 80VV of the Act. Accordingly, such an expenditure would qualify for deduction under Section 37 only if it can be shown that it was incurred wholly and exclusively for the purposes of the business of the assessee.
8. The only reason stated by the assessee for claiming that this amount credited by it as employer's contribution to the provident fund account of its employees is that in connection with its business, the assessee was by Section 63 of the U.P. Co-operative Societies Act required to establish a provident fund and to make its own contribution thereto in accordance with the provisions of the Act and the Rules framed thereunder. In the circumstances any contribution made by the assessee to the Employees' Provident Fund, which neither is a recognised fund as contemplated by Section 36 of the Act nor is it a f and established in accordance with some statutory provision, would not qualify as an expenditure laid out exclusively for the purposes of the assessee's business.
9. Section 63(1) of the U.P. Co-operative Societies Act enjoins upon a co-operative society to establish a contributory provident fund for the benefit of its employees, to which are to be credited all contributions made by the employees and the society. Sub-section (2) of Section 63 provides the incidence of such funds and lays down that the fund should be such which is not used in the business of the society and does not form part of its assets. As such a fund is established for the benefit of the employees, it cannot be used for the business of the society and is not to form part of its assets. Clauses (c) and (d) give the fund an immunity from attachment and any other process of the court as also from being charged or being made liable for any debt or" outstanding demand against the co-operative society. Such an immunity obviously is not intended to be given to a fund which, though created for the benefit of the employees, continues to form part of the assets of the society and which fund continue to be used in connection with its business.
10. Merely because Section 63(1) makes it obligatory for a society, like the assessee, to establish a fund, it does not mean that such a fund comes into existence of its own. The society has to take steps to establish such a fund and its liability to make contributions to it accrues and arises only when such fund has been established. According to the findings arrived at by the Tribunal, as mentioned in the supplementary statement of the case, the society had been showing the entire balance of the Employees' Provident Fund (which includes the contributions made both by the employer and the employees) at the end of the year, on the liabilities side of the balance-sheet. The amount of Government securities held by the society were shown on the assets side of the balance-sheet. The amount spent in purchasing Government securities is not referable to the amount of the Employees' Provident Fund. Further, the changes made in the extent of such security held by the society bears no connection with the change occurring in the amount held by the society in the Employees' Provident Fund. The Tribunal, therefore, concluded that the balance of the Employees' Provident Fund remained invested in the assessee's business and continued to form part of its assets. The assessee, therefore, did not create an Employees' Provident Fund of the nature specified in Section 63. Accordingly, it did not, under Section 63 of the Act, become liable to make any contribution to the fund of the nature established by it. Since the expenditure in question, incurred by the assessee, is not referable to the liability accruing under Section 63 of the U.P. Co-op. Societies Act, the same cannot be said to have been laid out wholly and exclusively for the purposes of the assessee's business and it does not, in our opinion, qualify for deduction under Section 37 of the I.T. Act.
11. In the result, we answer the question referred to us in the negative and in favour of the department. The Commissioner shall be entitled to costs which are assessed at Rs. 250.