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Recognised PFs: effect of cancellation of registration

The correct inference is that it is not liable to tax

HTL LTD. was a public sector company till October 2001 when the PF account of officers was maintained by HTL Employees' PF Trust. Since disinvestment, in October 2001, the company has been under the private management and has since been referred to BIFR, due to erosion of net worth due to accumulated losses. Consequent to this, the PF Commissioner has withdrawn the exemption given for the operation of PF Trust and directed for the transfer of funds of all employees' to the EPFO from the EPF Trust with effect from October 1, 2004. The PF Commissioner has also directed for distribution of the surplus amount (generated due to excess income earned out of the investment made by the Trust over and above its admissible expenses) available with PF Trust to the EPF account of the employees on pro-rata basis, based on the PF accumulation in the individual's account as on October 1, 2004, being the date of transfer of accounts to EPFO.

HTL is deducting income-tax on the surplus amount transferred to the PF account of the individual employees and it is pertinent to mention here that the TDS is deducted from the current salary on the said credited amount which is not disbursed as on date. This results in hardship for us.

We seek your opinion as to whether the surplus amount transferred to employees' PF account is taxable and is there any provision available for exemption under the Income-tax Act?

The above communication received from HTL Ltd. Officers' Welfare Association raises a problem faced by employees, when a recognised provident fund later gets derecognised and brought into the Employees Provident Fund Scheme administered by the PF Commissioner. Such issues arise in many other cases where recognition gets withdrawn. Since the employees are not getting any immediate cash benefit, but only a credit transferred to the employees provident fund account, subject to regulations, it should not be liable to tax, so that there should be no need for tax deduction at source. Sec. 10(11) exempts any payment from a provident fund to which the Provident Fund Act, 1925 applies or from any other provident fund set up by the Central Government and notified by it in this behalf in the Official Gazette. If even payment in cash to the employee is not liable to tax, it should be odd, if it is taxed, when there is only transfer of funds from only provident fund to another. If it is treated as taxable, it should also be considered as eligible for tax rebate under section 88 as contribution to Employees' Provident Fund administered by Provident Fund Commissioner. The correct inference is that it is not liable to tax.

Since it is stated that tax has already been deducted, the only course for the employees is to claim refund by filing their returns.

S. RAJARATNAM

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