JUDGMENT
K.K. Usha, J.
1. Questions, identical in nature, involving interpretation of Sections 36 and 37 of the Income-tax Act, 1961, are referred in these cases. They are as follows :
Income-tax Reference No. 81 of 1989 :
“Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction of the contribution of Rs. 16,359 made to the unrecognised Executive Staff Provident Fund ?”
Income-tax Reference No. 82 of 1989 :
“Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction of the contribution of Rs. 90,220 made to the unrecognised Executive Staff Provident Fund ?”
2. These questions of law arise out of the consolidated order dated September 11, 1987 of the Income-tax Appellate Tribunal, Cochin Bench, in I. T. A. Nos. 134 and 135/Coch. of 1984, in respect of the assessment years 1978-79 and 1979-80. The assessee, a public limited company, carrying on the business of manufacture and sale of coir products, claimed deduction of an amount of Rs. 16,359 for the assessment year 1978-79 and an amount of Rs. 90,220 for the assessment year 1979-80 being contributions made by it to the Executive Staff Provident Fund. According to the assessee, the Executive Staff Provident Fund of the company being unrecognised, it is entitled to claim deduction by virtue of the provisions contained in Section 37 of the Income-tax Act, even though it may not be eligible for such deduction under Section 36(1)(iv). The Income-tax Officer disallowed the claim of the assessee holding that when Section 36(1)(iv) has provided for a specific deduction for the contribution made to a recognised provident fund, the Legislature should be taken to have implied that contribution to a fund, not recognised, would not fall for deduction under the provisions of Section 37.
3. On appeal by the assessee, the Commissioner of Income-tax (Appeals) allowed the deduction claimed under Section 37, following the decision of the Tribunal dated August 19, 1980, in I. T. A. No. 238/Coch. of 1978-79 filed by the assessee itself. The Department thereupon filed I. T. A. Nos. 134 and 135/Coch. of 1984, appeals before the Tribunal. Following its earlier decision, the Tribunal rejected the contention taken by the Department and allowed the claim of the assessee for deduction of its contribution to the Executive Staff Provident Fund, under Section 37 of the Income-tax Act.
4. Certain facts are not disputed in this case. The Executive Staff Provident Fund to which contribution was made by the assessee is an unrecognised provident fund. The trustees of the fund had made arrangements for deduction of tax as required under Section 40(a)(iv) of the Income-tax Act. With these undisputed facts in the background, we will examine the contentions raised by the Revenue and the assessee.
5. According to the Revenue, when there is a specific provision made in Section 36(1)(iv) of the Income-tax Act, 1961, for deducting payments to a fund, for meeting the liability in respect of provident fund, such deduction can be claimed only under Section 36(1)(iv). Admittedly, the assessee is not entitled to such deduction in terms of the above provision. It was further contended that the claim made by the assessee is in respect of a liability which is in the nature of a liability falling under Section 36(1)(iv) and, therefore, the words within brackets “not being expenditure of the nature described in sections 30 to 36” found in Section 37(1) would preclude the assessee from claiming the benefit of Section 37(1). Counsel appearing on behalf of the Revenue relied on two decisions in CIT v. Carborundum Universal Ltd. [1977] 110 ITR 621 (Mad) and Calcutta State Transport Corporation v. CIT [1977] 108 ITR 922 (Cal), to substantiate the above contention. These decisions had been placed before the Tribunal and it is seen that the Tribunal had also considered the same.
6. As rightly contended by counsel appearing on behalf of the assessee, the answer to the above contention raised by the Revenue is found in the judgment of this court in CIT v. High Land Produce Co. Ltd. [1976] 102 ITR 803. In the above decision, this court considered similar contentions raised by the Revenue in the matter of deductions towards gratuity liability and it was held that even though the claim for deduction towards gratuity liability cannot be made under Section 36(1)(v) of the Income-tax Act, there is nothing standing in the way of the assessee claiming deduction under Section 37(1). After referring to a decision of the Calcutta High Court in Liberty Cinema v. CIT [ 1964] 52 ITR 153, wherein the scope of Section 10(2)(xv) of the Indian Income-tax Act, 1922, similar to Section 37(1) of the Income-tax Act, 1961, was considered, this court observed (at p. 807) :
“The residuary nature of the provision in Section 37(1) will, therefore, have to be given its full play. Bearing in mind the reason for the introduction of the words within brackets not being expenditure of the nature described in Sections 30 to 36, we have to remember that those words do not preclude certain species of liabilities but only exclude consideration of liabilities which would fall under any of those sections.”
7. This court held that the mere fact that a claim will not fall under any of the Sections 30 to 36 will not automatically make the claim unsustainable under Section 37(1) of the Act as well. The above decision was taken in appeal before the Supreme Court by the Revenue and the Supreme Court affirmed the same (vide CIT v. High Land Produce Co. Ltd., [1986] 158 ITR 419), The two decisions relied on by the Revenue, which took a contrary view, cannot be treated as good law in view of the above-mentioned decision of the Supreme Court. We, therefore, reject the contentions raised by the Revenue that the assessee is not entitled to claim deduction under Section 37(1) in respect of its contribution to the Executive Staff Provident Fund, since the claim will not come under Section 36(1)(iv).
8. Counsel appearing on behalf of the Revenue put forward another contention on the basis of rule 14(1) of the Fourth Schedule to the Income-tax Act, 1961, that the amount paid by the assessee towards the Executive Staff Provident Fund should be treated as a capital expenditure. Rule 14(1) is extracted below :
“14. Treatment of fund transferred by employer to trustee.–(1) Where an employer, who maintains a provident fund (whether recognised or not) for the benefit of his employees and has not transferred the fund or any portion of it, transfers such fund or portion to trustees in trust for the employees participating in the fund, the amount so transferred shall be deemed to be of the nature of capital expenditure.”
9. A reading of the above rule would show that its provisions would apply only when the employer who maintains a provident fund, whether recognised or not, transfers such fund or portion of it to the trustees in trust for the employees participating in the fund. When a specific question was put to counsel appearing on behalf of the Revenue as to whether the Revenue has got a case, that there was such transfer of a provident fund already maintained by the assessee to the trust at a subsequent stage, the answer was in the negative. If that be the position, the provisions contained in rule 14(1) have no application to this case.
10. Reliance was made by the Revenue on the provisions contained in rule 14(2) to contend that the assessee is not entitled to claim the deduction during the relevant years 1978-79 and 1979-80. Rule 14(2) reads as follows :
“(2) When an employee participating in such fund is paid the accumulated balance due to him therefrom, any portion of such balance as represents his share in the amount so transferred to the trustees (without addition of interest, and exclusive of the employee’s contributions and interest thereon) shall, if the employer has made effective arrangements to secure that tax shall be deducted at source from the amount of such share when paid to the employee, be deemed to be an expenditure by the employer within the meaning of Section 37, incurred in the previous year in which the accumulated balance due to the employee is paid.”
11. We are convinced that there is no merit in this contention also. As mentioned earlier, it is the admitted case of both sides that the trustees of the fund had made arrangements for deduction of tax as required under Section 40(a)(iv) of the Income-tax Act. This would make the assessee eligible for exemption under Section 37 for the assessment years 1978-79 and 1979-80.
12. In the light of the above, we answer the questions referred in I. T. R. Nos. 81 and 82 of 1989 by stating that the Tribunal was right in allowing the deduction of the contribution made by the assessee to the unauthorised Executive Staff Provident Fund. We thus answer the questions referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue.
13. We direct the parties to bear their respective costs in these tax referred cases.
14. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.