Case: The Indian Molasses Co. (Private) Ltd Vs. The Commissioner Of Income-Tax, Westbengal

2. The facts of the case are as follows: One John Bruce Richard Harvey was the managing Director of the assessee Company in 1948. He had by then served the Company for 13 years, and was due to retire at the age of 55 years on 20-9-1955. There was it appears, an agreement by which the Company was under an obligation to provide a pension to Harvey after his retirement. On 16-9-1948, the Company executed a Trust Deed in favour of three trustees to whom the Company paid a sum of ? 8,208-19-0 (Rs. 1,09,643) and further undertook to pay annually Rs. 4,364 (? 326-14sh) for six consecutive years, and the trustees agreed to execute a declaration of trust. The trustees undertook to hold the said sums upon trust to spend the same in taking out a deferred Annuity Policy with the Norwich Union Life Insurance Society in the name of the trustees but on the life of Harvey under which ? 720 per annum were payable to Harvey for life from the date of his superannuation. It was also provided in the deed that notwithstanding the main clause the trustees would, if so desired by the assessee Company, take out instead a deferred longest life policy, with the said Insurance Company, in their names, but in favour of Harvey and Mrs. Harvey for an annuity of ? 558-1-0 per aunum payable during their joint lives from the date of Harveys superannuation and during the lifetime of the survivor, provided further that if Harvey died before he attained the age of 55 years the annuity payable to Mrs. Harvey would be ? 611-12-0 during her life. It was further provided that should Harvey die before attaining the age of 55 years, the trustees would stand possessed of the capital value of the Deferred Annuity Policy, upon trust to purchase therewith an annuity for Mrs. Harvey with the above Insurance Company or another Insurance Company of repute. The other conditions of the deed of trust need not be considered, because they do not bear upon the controversy.3. In furtherance of these presents, the trustees took out a policy on 12-1-1949. In addition to conditions usual in such policies, it provided for the following benefits :Amount per annum of deferred Annuity. Pound 563-5-8 p. a. if both Mr. and Mrs. Harvey be living on September 20, 1955.Pound, 720-0-0 p. a. if Mrs. Harvey should die before September 20, 1955 leaving Harvey surviving her.Pound, 645-0-0 p. a. if Harvey should die before September 20, 1955 leaving Mrs. Harvey surviving him. There was a special provision which must bethe contract is in force and unreduced, the Grantees (i. e. the trustees) shall be entitled to surrender the Annuity on the Option Anniversary (i. e. Sept. 20, 1955) for the Capital sum of ? 10,169 subject to written notice of the intention to surrender being received by the Directors of the Society within the thirty days preceding the Optionother clauses of the second schedule of the Policy may also be"If both the Nominees shall die whilst the Contract remains in force and unreduced and before the Option Anniversary the said funds and Property of the Society shall be liable to make repayment to the Grantees of a sum equal to a return of all the premiums which shall have been paid under this Contract without interest after proof thereof and subject as hereinbefore provided.(IV) The Grantees shall before the Option Anniversary and after it has acquired a surrender Value be entitled to surrender the Contract for a Cash Payment equal to a return of all the premiums (at the yearly rate) which have been paid less the 1st years premium or five per cent, of the Capital Sum specified in the Special Provision of the First Schedule whichever shall be the lessor sum, provided that if the Deferred Annuity has been reduced an equivalent reduction in the guaranteed Surrender Value as calculated above will be made.The assessee Company paid the initial sum and the yearly premia for some years before Harvey died. In the assessment years 1949-50, 1950-51, 1951-52 and 1952-53, it claimed a deduction of these sums from its profits or gains under S. 10 (2)(xv) of the Indian Income-tax Act (hereinafter the Act), whichprofits or gains shall be computed after making the following allowances, namely,. ... .... .... ...., .... .... .... ....any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) paid out or expended wholly and exclusively for the purposes of such business, profession orclaim was disallowed by the Department and the Appellate Tribunal. The Tribunal held that it was not necessary to decide if the expenditure was wholly or exclusively for the purposes of the Companys business, and if so, whether it was of a capital nature, because in the Tribunals opinion there was no expenditure at all. The reason why the Tribunal held this way may be stated in its own(I) and (II),do not contain any provision having a material bearing upon Clause (III). Therefore, if it happens that both Mr. and Mrs. Harvey die, before 20-9-1955 all the payments till made through the Trustees to the Insurance Society will come back to the Trustees and as there is not the slightest trace of any indication anywhere that the Trustees should have any beneficient interest in these moneys, there would be a resultant trust in favour of the Company in respect of the moneys thus far paid out. In other words, what has been done amounts to a provision for a contingency which may never arise. Such a provision can hardly be treated is payment to an employee whether of remuneration or pension or gratuity, and cannot be a proper deduction against the incomings of the business of the Company for the purpose of computing its taxable profits. In short, there has been no expenditure by the Company yet; there has been only an allocation of a part of its funds for an expenditure which may (or may not) have to be incurred in future.The Tribunal, however, referred the above-stated question for the opinion of the High Court. The High Court noticed the limited scope of the question, and pointed out that the tribunal had stated at the end of the Statement of thethe event of the High Court holding that there was an expenditure in this case, it would still be necessary for the Tribunal whether the money was laid out or expended wholly and exclusively for the purposes of the assessees business and, if so, whether the expenditure was in the nature of capital or revenuelearned Chief Justice of the Calcutta High Court (Sarkar J. concurring) felt the difficulty of the question. He analysed the ingredients of Cl. (XV), and pointed out that the question referred to but one such ingredient. The Divisional Bench; however, did not call for an additional statement of fact, or ask that the rest of the matter be referred, so, that the whole of the question involved might get disposed of. ItCourt has always construed questions referred to it with a certain degree of strictness and has not allowed any point to be canvassed before it which had not been raised before the Appellate Tribunal and which was not covered by the Tribunals appellate order. I am, therefore, of opinion that the question should be taken as covering only the ground upon which the Tribunal held the payments to be not allowable as deductions as not embracing any other ground."

Court's reasoning:
37. These cases may help to determine the nature of the contract with the insurance company but cannot help in the solving of the question whether the payments to the insurance company were expenditure. That insurance of human lives involves a contingency relating to the duration of human life is a very different proposition from the question whether the payment in the present case to the trustees was towards a contingent liability or towards a liability depending on a contingency.38. In our opinion, the payment was not merely contingent but the liability itself was also contingent.Expenditure which is deductible for income-tax purposes is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure.In the present case, nothing more was done in the account years.The money was placed in the hands of trustees and/or the insurance company to purchase annuities of different kinds, if required, but to be returned if the annuities were not bought and the setting apart of the money was not a paying out or away of these sums irretrievably.39. In our opinion, the question was correctly answered by the Calcutta High Court.