'959

May 5.

SUPREME COURT REPORTS [1959] Supp.

THE INDIAN MOLASSES CO. (PRIVATE) LTD. v.

THE COMMISSIONER OF INCOME-TAX, WEST

BENGAL. (B. P. SINHA, J. L. KAPUR and

M. HIDAYATULLAH, JJ.)

Income-tax-Deduction - Business expendit11re-Payment of sums for getting annuities to provide pension-Liability depending on contingency-Expenditure, meaning of-Indian Income-tax Act, z922 (XI of z922), s. Io(2)(xv).

With a view to provide a pension to H who was the managing director of the appellant company, after his retirement at the age of 55 years on September 20, 1955, the company executed a trust deed on September 16, 1948, in favour of three trustees to w horn the company paid a sum of Rs. l,09,643 and further undertook to pay annually Rs. 4,364 for six consecutive years.

The trustees undertook to hold the said sums upon trust to spend the same in taking out a Deferred Annuity Policy with an Insurance Society in the name of the trustees but on the life of H under which a certain sum of money was payable annually to H 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 company, take out instead a different kind of policy for the benefit of both H and his wife, with a further provision for H's wife should H die before he attained the age of 55. On January 12, f949, the trustees took out a policy, wherein the amount of Deferred Annuity to be paid per annum was fixed according as whether both H and his wife were living on September 20, 1955, or one of them died earlier.

The policy also contained, inter alia, two clauses: "(1) Provided the 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 Option Anniversary. (2) 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 Gran tees of a sum equal to a returu of all the premiums which shall have been paid under this Contract without interest after proof 'thereof and subject as hereinbefore provided."

The appellant company paid the initial sum and the yearly premia for some years before H died.

For the assessment years 1949-50, 1950-51, 1951-52 and 1952-53, the appellant claimed a deduction of these sums from its profits _or gains under s. l0(2)(xv)

of the Indian Income-tax Act, 1922, but the Income-tax authoriz959 ties disallowed the claim on the ground that the sums claimed did not amount to expenditure within the meaning of the section.

The Indian The appellant's contention was that payment of pension was an Moasses Co. expenditure of a revenue character and so also the payment of a (Prwate) Ltd. lump sum to get rid of a recurring liability to pay such pension v. and that expenditure on insurance was not contingent, because The Commissioner though the contingency related to life and depended on it, the of Incorpe-tax, probabilities were estimated on actuarial calculations and, that West Bengal the expenditure was, therefore, real.

Held, that expenditure which is deductible for the purposes of income-tax under s. ro(2)(xv) of the Indian Income-tax Act, 1922, is one which must be 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, on the terms of the deed of trust, money was placed in the hands of trustees for the purchase of annuities of different kinds, if required, but to be returned if the annuities were not bought, and the clauses in the policy taken out by the trustees showed that till September 20, 1955, the appellant had dominion through the trustees over the premia paid. The payment to the trustees was therefore towards a liability depending on a contingency. Consequently, the amount claimed was not liable to be deducted as an expenditure under s. ro(2)(xv) of the Act.

Cases on English Income-tax law reviewed.

CIVIL

APPELLATE

JURISDICTION: Civil Appeal No. 395 of 1957.

Appeal by special leave from the judgment and order dated December 21, 1955, of the Calcutta High Court in Income-tax Reference No. 15 of 1954.

A. C. Sampath Iyengar, Dipak Dutta Choudhury and B. N. Ghosh, for the appellant.

M. C. Setalvad, Attorney-General for India, R. Ganapathy Iyer, R.H. Dhebar and D. Gupta, for the respondent.

1959. May 5. The Judgment of the Court was delivered by

HIDAYATULLAH, J.-The Indian Molasses Co. (Pri- Hidayat"llah J. vate) Ltd., Calcutta (hereinafter called the assessee Company), have brought this appeal, with the special leave of this Court granted on November 9, 1956, against the judgment of the High Court of Calcutta dated December 21, 1955, in Income-tax Reference

1959 No. 15 of 1954.

The question of law referred to the

The Indian High Court was : Molasses Co. " 'Whether on the facts and in the circumstances (Pdvate) Ltd. of the case, and on a true construction of the Trust ' v.

Deed, dated 16th September, 1948, and the Policy The Commissioner dated the 13th January, 1949, the payments made by

01 Income-tax, the assessee Company and referred to in paragraph 4

West Bengal b t't t ' d't ' 'th' th . f' a ove cons I u e expen I ure w1 m e meanmg o Hidayatnllah J. that word in section 10(2)(xv) of the Indian Income. tax Act, 1922, in respect of which a claim for deduction can be made, subject to the other conditions mentioned in that clause being satisfied".

The question was answered in the negative.

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 September 20, 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 September 16, 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 (£ 326-14 sh.) for six consecutive years, and the trustees agreed to execute a declar.ation 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 ont 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 annum payable during their joint lives from the date of Harvey's superannuation and during the lifetime of the survivor, provided further that if Harvey died before he attained the age of 55 years the

I959 annuity payable to Mrs. Harvey would be £ 611-12-0 during her life. It was further provided that should f The Indian Harvey die before attaining the age o 55 years, the Molasses co. trustees would stand possessed of the capital value of (Private) Ltd. the Deferred Annuity Policy, upon trust to purchase v • . therewith an annuity for Mrs. Harvey with the above The Commissioner

Insurance Company or another Insurance Company 0! Income-tax, of repute. The other conditions of the deed of trust West Bengal need not be considered, because they do not bear upon Hidayatullah J. the controversy.

In furtherance of these presents, the trustees took out a policy on .January 12, 1949. In addition to conditions usual in such policies, it provided for the following benefits : Amount per annum of deferred Annuity. £ 563-5-8 p. a. if both Mr. and Mrs. Harvey be living on September 20, 1955. £ 720-0-0 p. a. if Mrs.

Harvey should die before September 20, 1955, leaving Harvey surviving her. £ 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 be reproduced:

"Provided the 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 Option Anniversary." Two other clauses of the second schedule of the Policy may also be quoted: (III) "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

1959 the Grantees of a sum equal to a return of all the premiums which shall have been paid under this Contract The Indian Molasses co. without interest after proof thereof and subject as (Private) Ltd. herein before provided. v. (IV) The Grantees shall before the Option Annin, Commissioner versary and after it has acquired a Surrender Value

01 Income-tax, be entitled to surrender the Contract for a Cash Pay- West Bengal ment equal to a return of all the premiums (at the

Hidayatullah f. yearly rate) which have been paid less the first year's premium or five per cent. of the Capital Sum specified in the Special Provision of the First Schedule whichever shall be the lesser sum, provided that if the Deferred Annuity has been reduced an equivalent reduction in the guaranteed Surrender Value as calcu- • lated 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 called the Act), which provides: . "Such profits 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 or vocation. " This claim 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 Company's business, and if so, whether it was of a capital nature, because in the Tribunal's opinion there was no expenditure at all. The reason why the Tribunal held this way may be stated in its own words :

"Clauses (I) and (II) do not contain any provision having a material bearing upon Clause (III).

Therefore if it happens that both Mr. and Mrs. Harve:y die before 20th September, 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 1959 Trustees should have any beneficient interest in these moneys, there would be a resultant trust in favour of The Indian Molasses Co. the Company in respect of the m_oneys thus far paid (Private Ltd.) out. In other words, what has been done amounts to v. a provision for a contingency which may never arise. The Commissioner Such a provision can hardly be treated as payment to of Income-tax, an employee whether of remuneration or pension or West Bengal gratuity, and cannot be a proper deduction against Hidayatullah J. 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 the Case:

" In the 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 assessee's business and, if so, whether the expenditure was in the nature of capital or revenue expenditure. " The learned 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.

It observed:

"This Court 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 Tribunal's

r959 appellate order. I am, therefore, of opinion that the

The Ind; an question should be taken as covering only the ground Molasses co. upon which the Tribunal held the payments to be not (Private) Lid. allowable as deductions as not embracing any other v. ground. " The Commissioner We must express our regret that the case took the of Income-tax, course it did. The order of assessment was passed as

rVest Bengal .c b k 9 d lar ac as 1 52, an seven years have now passed

Hidayatullah J. during which only one question out of three is before the Courts for decision. Section 10(2)(xv) was analysed by the learned Chief Justice in these words :

" It w'ill be noticed that three ingredients of the clause lie on the surface of its language. In order that a deduction may be claimed under its provisions, it must be proved first that there was an expenditure, secondly, that the expenditure was not in the nature of a capital expenditure-I am leaving aside the personal expenses-and, thirdly, that it was laid out or expended wholly and exclusively for the purposes of the assessee's business-I am leaving out profession or vocation. "

We must not be understood as finding fault with the Divisional Bench. It decided the question as framed. It is the Tribunal which referred the question in this form, keeping to itself the right to decide about the other ingredients of the clause later. \Vhether the question can be answered in the bland form it is posed, is a matter to which we will have to address ourselves presently. But it appears to us that this is a very unsatisfactory way to go about the business.

Perhaps, the Tribunal decided this case in this way and referred the question it did, because it felt that if this Court in Allahabad Bank Ltd. v. Commissioner of Income-tax, West Bengal (1 ) was able to decide whether a particular outlay was ' expenditure ' without reference to the other ingredients of cl. (xv), the same could be done in this case also. That case, however, was very different in its facts. Thero, certain contributions on trust for payment of pensions to employees were held not to be ' expenditure ', because on the original trust failing, the money was

(t) (1954] S.C.R. 195.

deemed to be held by the trustees on a resulting trust r959 for the benefit of the maker. If the same can be said The Indian in this case, namely, that the money coninued to Molasses co. belong to the assessee Company 'in the account years, (Private) Ltd. its payment to the trustees or the Insurance Company v. notwithstanding, there may be a possibility of answer- The Commissioner ing the question as was done in the decision of this of Income-tax, C t td 'l' B t 'f h l t .

West Bengal our 01 e ear ier. u I sue a c ear-cu proposition cannot be laid down, then, obviously, there is Hidayatullah J. considerable difficulty in deciding what is 'expenditure ' within the clause, without reference to the rest of its provisions. Of course, to find the meaning of the word 'expenditure ', a dictionary is all that is needed, but to go further and to decide whether the outlay in this case was ' expenditure ', the context in which the word is used in the clause cannot successfully be left out.

Mr. Sampath Iyengar for the assessee Company complained before us of the narrowness of the question, though before the High Court he was opposed to any extension of the ambit of the question. The following passage from the judgment of the Chief Justice shows the respective attituds of the Department and the assessee Company before the Bench:

"Mr. Meyer contended that that language entitled him to argue not only that there had been no expenditure in fact at all, but also that even assuming that there had been an expenditure in the sense of a physical spending, still the expenditure was not such as could be claimed as an allowance under the clause against the profits of the relevant accounting year in view of the fact that it was, in any event, an expenditure made to meet a contingent liability.

Mr. S. Iyengar, who appeared on be'half of the assessee, objected to the scope of the question being so enlarged and he referred to the appellate order of the Tribunal which had proceeded on a single ground. "

The learned Attorney-General who appeared for the Department at once conceded the difficulty of answering the question, but contended that the question in its present form could be answered, though he agreed that if it could not, the Court would be free to say so.

r959 We cannot help saying that though the Tribunal may Th, Indian be at liberty to decide a case as appears best to it, Molasses Co. there is considerable hardship to the tax-payers, if (Private) Ltd. questions of law are decided piecemeal and repeated

The C v. . . references to the High Court are necessary. The juris- 0'"'""·"0"" d' t' f th H' h C t . d . d 1 . of Inconie-tax.

IC 10n o e Ig our IS a visory an consu tative, west Brngol and questions of interpretation of the law in this attenuated form can well be avoided.

This will tend Hidayatullah J. to cut down the duration of litigation.

In deciding that the payment of the lump sum and premia was not 'expenditure ', different views were expressed as the case progressed. The Income-tax Officer held that in the absence of a written agreement covering the conditions of service, remuneration, etc., the arrangement could only be taken as a provision for a gratuity, more so as there was a provision in the deed of trust for payment of an annuity to Mrs. Harvey in the event of Harvey's demise.

According to him, there were so many alternative arrangements for the disbursement of the money laid out, that it was impossible to say what shape the annuity would ultimately take and till certain events happened, the ' expenditure ' w!ts not effective. Following, therefore, the case in Atherton v. British Insulated and H elsby Cables, Ltd. (1 ) and distinguishing Hancock v. General Reversionary and Investment Co. Ltd. ('), the claim for deduction was rejected by the Income-tax Officer.

The Appellate Assistant Commissioner considered that in the absence of an agreement the payment must be regarded as an ex gratia payment of a capital nature, so long as the trust intervened. The Appellate Assistant Commissioner also commented upon the existence of a provision for Mrs. Harvey's pension which could not be a part of the agreement. He was thus of the opinion that the case fell within the rule laid down in Atherton's case (1).

This opinion of the Tribunal which has already been reproduced earlier, was shortly that there was no 'expenditure' yet and this was only an allocation of funds for an 'expenditure', which might or might not be incurred in the future.

The High Court analysed the terms of the deed of

(1) (1925) 10 Tax Cas. 155.

(2) (1918) 7 Tax Cas. 358.

trust, and pointed out that there were two contingenr959 cies in which money was likely to revert to the asses- The Indian see Company. The first contingency was if both Har- Molasses co. vey and Mrs. Harvey died before September 20, 1955. (P, ivate) Ltd.

The second contingency was due to an omission in v.

cl. (III) to provide for a pension to Harvey, if Mrs. The Commissioner Harvey died before the above date. In that event, 01 Income-tax, the trust would have failed, unless a policy was taken West Bengal out under cl. (II). The High Court held that if any Hidayatullah J.

- of these two circumstances happened, then there would have been a resulting trust in favour of the assessee Company, and it would have been entitled to get back all the money laid out by it. We must say here that the High Court was in error as to the second of the two contingencies because the policy which was taken out provided for all the three alternatives, and pension was payable to both or either survivor, though in different sums. Even in the trust deed, the three alternative pensions were provided as follows : £ 720, if the annuity was payable to Harvey alone; or £ 558-1-0, during the joint lives of both or survivor; or £ 611-12-0,. to Mrs. Harvey if Harvey died before September 20, 1955. The special provision in the policy, however, covered the first contingency of both the prospective annuitants dying before September 20, 1955, and if that happened, the assessee Company would have, if it chose to surrender the policy, got back the sum of£ 10,169 subject to a written notice of the intention to surrender being received by the Insurance Company within thirty days preceding September 20, 1955.

The High Court then observed in addition that there was no ' instant necessity ' for the expenditure, nor was the money ' laid out for a business purpose of an instant character', nor did it bring in a 'present asset which would always remain an asset in that form, the money having gone for ever'. The High Court pointed out that there was always a -possibility of a resulting trust in favour of the Company and the money could not, therefore, be held to have been expended. The conclusion of the High Court, therefore, was that the assessee Company must be held to have

'959 set apart ' tentatively' a sum of money in order that it might be available for the payment of a' gratuity' The Indian Molosoes co. to Harvey and Mrs: Harvey, but there being' no pro- (P•ivatc) Ltd. vision for the application of tbe money in the event of

v. those contingencies not occurring and no annuity being n, Commfasiouer payable to any one', there was no 'expenditure ' in of Income-tax. any real and practical sense of the term '.

We; I Bengal Th h' 1 d e arguments mt 1s appea have range , as they

Hidayatullah ;. did before the High Court, over a very wide field. No useful purpose will be served in following them through all their convolutions. The main points urged on behalf of the assessee Company are that payment of pension is an expenditure of a revenue character and so also the payment of a lump sum to get rid of a recurring liability to pay such pension. This is illustrated from some English cases, and reference is made also to Ch. IX-B of the Act. It is also submitted that in so far as payment by the assessee Company was concerned, it was, i_n point of fact, made, and this was ' expenditure ' within the dictionary meaning of the word. The argument of the Department is that by 'expenditure 'is meant a laying out of money for an accrued liability and not for a contingent liability, which contingency may or may not take place; that the present 1trrangement was only a setting apart of money for a contingent liability and till the liability became real, there was no expenditure. The assessee Company, however, contends that expenditure on insurance is not contingent, because though the contingency relates to life and depends on it, the probabilities are great being estimated on actuarial calculations and the expenditure is real.

Both sides rely on a large number of English decisions.

We shall now consider the arguments in detail and refer to those authorities, which are relevant.

In dealing with cases expounding the English In. come-tax law, it must always be borne in mind that the scheme of legislation there is not the same as in our country. No doubt, a certain amount of assistance can, with caution, be taken from them, but the problems under our Income-tax laws must be resolved, in the ultimate analysis, with reference to our laws.

It has been ruled under the English statute that

I959 sums paid to an employee as pension or gratuity are The Indian deductible as money laid out and expended for the Molasses co. purpose of trade, profession or vocation. See Smith v. (Private) Ltd.

Incorporated Council of Law Reporting for England v. and Wales (1). It has also been ruled that a single The Commissioner payment to avoid the recurring liability of an emploof Income-tax, 1 d d Th l d

West Bengal yee's pension is a so a proper e notion. e ea ing case on the subject is Hancock v. General Reversionary Hidayatullah J. and Investment Go. Ltd. (2). In that case, the taxpayer was under a liability to pay a pension to a retired actuary, and pension had, in fact, been paid for some years. Subsequently, the tax-payer purchased an annuity for the employee, which he accepted in place of his pension. The sum paid in purchasing the annuity was allowed as a deduction in computing the tax-payer's profits, it being held that it was money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation.

On the other hand, a sum which a company put into a fund for the relief of invalidity, etc., was held not to be an admissible deduction, and the case last cited was distinguished. See Rowntree & Go. Ltd. v.

Curtis (3).

Pollock, M. R., drew pointed attention to the words of Lush, J., in the earlier case, where' he observed at p. 698 :-

"It seems to me as impossible to hold that the fact that a lump sum was paid instead of a recurring series of annual payments alters the character of the expenditure, as it would be to hold that, if an employer made a voluntary arrangement with his servant to pay the servant a year's salary in advance instead of paying each year's salary as it fell due, he would be making a capital outlay.'', and added that Lush, J., had described the actuarial payment made in Hancock's case- (2) as a pension in another form, which could not be said of the invalidity, claims for which were wholly uncertain. warrington, L. J., pointed out that the test to apply was fir:; t

(r) [r9r4] 3 K. B. 574; 6 Tax Cas. 477.

(2) (r9r8) 7 Tax Cas. 358.

(3) [1925] r K. B. 328; 8 Tax Cas. 678.

'959 whether there was an expenditure which he held there was, and next whether it could be said to be wholly The Indian Molasses co. and exclusively for the purposes of the trade which, in (Private) Ltd. his opinion, could not be said of the expenditure in v. that case. The words of the learned Lord Justice on The Commissioner the first proposition have a bearing upon tho present

01 Income-tax. case, and may be reproduced here (at p. 703) : West Bengal

" I • 1 d • h M L tt h am me me to agree wit r. a er m 1s Hidayatullah J. contention that the money has actually been expended.

There is nothing like a resulting trust in favour of the company although there is that provision which I have already called attention to in the trust deed, that one of the things which might be done would be to abrogate altogether the trust or the provisions of the deed and to substitute other rules and prov1s10ns.

But it seems to me that that cannot be said to be a resulting trust in favour of the company having regard to the other objects which are pointed out as those to which the scheme was directed." Similarly, a sum of money paid to the trustees to form a nucleus of a pension fund for the benefit of some of its employees by a company was also not held to be an admissible deduction in Atherton's case (1).

Viscount Cave, L. C., recalled the test laid d_own in a rough way by Lord Dunedin in Vallambrosa Rubber Co. v.

Farmer (2) (at p. 192) that,

"capital expenditure is a thing that is going to be spent once and for all and income expenditure is a thing which is going to recur every year", but added that it was not and wa.s not meant to be a decisive test. The Lord Chancellor observed, however, that,

"when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital."

(r) (1925) 10 Tax Cas, 155.

(2) (1910) 5 Tax Cas. 529.

Again, in Morgan Crucible Co. Ltd. v. The Commis- '959 sioners of Inland Revenue (1), the payment to an insur- The Indian ance company to take out a policy was held not to be Molasses co. an admissible deduction. There, the company operat- (Private) Ltrl. ed a scheme for payment of pensions to retired or v. incapacitated employees, reserving to itself the uncon- The Commissioner

trolled discretion to vary or cease payment of penofw 1"1cBomc-ta1x, .

Wh . 'd h d d d es enga s10ns. en pens10ns were pa1 , t ey were e ucte but when the company took out a policy, without Hidayatullah J. informing their employees, for payment to itself of annuities equal to the pensions, it was held that by this the company had acquired an asset .and this was in the nature of a capital asset.

Rowlatt, J., in distinguishing Hancock's case (2), observed that unlike that case the liability to pay pensions was not got rid of and that the company had acquired an asset.

The learned Judge continued (at p. 317):

" It is true they have got an asset which would give them, in all probability, nothing on balance, because they use it to pay these pensions ; but they have got an asset; they had not any pension fund to pay these pensions with, and now they have got an insurance company which will in the future not extinguish the liability but countervail it and they

have got the command of this policy to the extent that they are entitled to get their capital money-I say ' capital money ' without prejudice-back from the insurance company on surrendering the policies."

From these cases, there are deducible certain principles of a fundamental character. The first is that capital expenditure cannot be attributed to revenue and vice versa. Secondly, it is equally clear that a payment in a lump sum does not necessarily make the payment a capital one. It may still possess revenue character in the same way as a series of payments.

Thirdly, if there is a lump sum payment but there is no possibility of a recurrence, it is probably of a capital nature, though this is by no means a decisive test.

Fourthly, if the payment of a lump sum closes the

(r) [1932] 2 K. B. 185; r7 Tax Cas. 311, 317.

(2) (1918) 7 Tax Cas. 358.

z959 liability to make repeated and periodic payments in the future, it may generally be regarded as a payment The Indian Molasses co. of a revenue character (Anglo-Persian Oil Go. Ltd. v. (Private) Ltd.

Dale) (1), and lastly, if the ownership of the money v. whether fn point of fact or by a resulting trust be still The Commissioner in the tax-payer, then there is acquisition of a capital of Income-tax, asset and not an expenditure of a revenue character.

West Bengal S'd b 'd ' h h ' ' 1 th th 1 e y SI e wit t ese prmmp es, ere are o ers

Hidayatullah J. which are also fundamental. The Income-tax law.does not allow as expenses all the deductions a prudent trader would make in computing his profits. The .money may be expended on grounds of commercial expediency but not of necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character.

Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the trader's pocket.

Thus, in finding out what profits there be, the normal accountancy practice may be to a.How as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the Income-tax laws do not take every such allowance as legitimate for purposes of tax.

A distinction is made between an actual liability in praesenti and a liability de futuro which, for the time being, is only contingent. The former is deductible but not the latter. The case which illustrates this distinction is Peter Merchant Ltd. v. Stedeford (').

No doubt, that case was decided under the system of Income-tax laws prevalent in England, but the distinction is real. What a prudent trader sets apart to meet a liability, not actually present but only contingent, cannot bear the character of expense till the liability becomes real.

We may here refer to two other cases. In Alexander Howard & Go. Ltd v. Bentley ('), a business of blouse and gown manufacture was carried on by one A. C.

Howard. His three brothers were employed by him.as salaried managers. In 1933 A. C. Howard remarried

(1) [1932] I J(. B. 124; 16 Tax Cas. 253.

(2) (1948) 30 Tax Cas, 496.

(3) (1948) 30 Tax Cas 334.

and under pressure from his brothers a company was r959 formed and the directors were authorised to enter into The Indian an agreement to purchase the business. A. C. Howard h

."''vlolass11s Co. was the governing director oft e company and his (Private) Ltd. three brothers, permanent directors. The company also v. entered into a service agreement with them, and Art. The Commissioner

107 thereof provided: 01 Incoine-tax, " After the death of the said Alexander Charles West Bengal Howard and during such time as his legal personal Hidayatullah J. representatives shall hold at least Ten Thousand Shares in the Company, any widow surviving him shall receive out of the profits of the Company an annuity of One Thousand Pounds per annum during her life." This service agreement was executed on January 3,

1934. In 1943 by a deed of release A. C. Hmvard released to the company all right to a claim in respect of the annuity in consideration of the payment to him of a sum of£ 4,500.

This amount was based upon the findings of an actuary. The taxpayer submitted that the sum pa.id in redemption of the annuity was a proper charge against revenue, and was deductible.

The Commissioners held against the company on two main grounds. They held that in order to decide whether the sum paid to obtain release of the annuity was properly allowable as a deduction, they had to decide first whether the annuity itself would have been properly chargeable to revenue, (Anglo-Persian Oil Co. Ltd. v. Dale (1) and Bean v. Doncaster Amalgamated Collieries Ltd. (2) per Lord Simon at pp. 311-312); and they helu next that the redemption of the annuity freed the company from a contingent liability and the company had thus secured only an enduring advantage.

Singleton, J., before whom the case came in appeal, affirmed the decision.

He pointed out that this was not a case of a company providing an annuity or pension for an employee, "for" (to quote him) " the wife of Mr. Alexander Charles Howard had notliing whatever to do with the Company".

If, therefore,

(r) [1932/ r K. B: Il{; r6 Tax Cas. 253.

(2) (r9i6) '27 Tax Cas, 296.

1959 the original annuity was not chargeable to revenue,

The Indian the sum of£ 4,500 paid to avoid it, could not also be.

Molasses co.

The other case is Southern Railway of Peru Ltd. v. (P, ivate) Ltd.

Owen('). In that case, the English compa.ny was v. bound to provide compensation to all its employees on The Commission" the termination of their services. Legislation to this of Income-tax, effect was deemed to be a part of the contract of West Bengal • S h . h d. . ] . serv10e. uc ng t arose on rnmrnsa or on termma-

Hidayatullah J. tion of the employment by the employer after proper notice.

The compensation was an amount egufLl to one month's salary for every year of service. There were, however, certain exceptions under which the compensation was not payable. The company sought to deduct an amonnt equal to the burden cast on it each yefLr but the claim was refused. It WfLS held by majority that though 'the company was entitled to chfLrge against one year's receipts the cost of making provision for the retirement payments which would ultimately be payable as it had the benefit of the employees' services during that year, provided the present value of the future payments could be fairly estimated', since the factor of discount was ignored in making the deduction, the claim could not be entertained.

These two cases illustrate the propositions that the recurring liability of a pension which is compressed into a lump payment should itself be a legal obligation, and that, if contingent, the present value of the future payments should be fairly estimable. IC the pension itself be not payable as an obligation, and if t.here be a possibility that no such payment may be necessary in the future, the whole of the amount cannot be deducted but only the present value of the future liability, if it can be estimated. It is significant that the case in Sun Insurance Office v. Clark(') was applied to the last corollary.

So far, we have dealt with the principles which underlie leading cases decided in England, some of w hicb were in the forefront of the arguments. 'Ve have already stated that the English decisions should be read with considerable caution. Under the English Income-tax Act, the law is stated in a negative

(I) [1957] A.G. 334-

(2) [1912] A.G. 443.

fom. Section 137 of 15 & 16, Geo. 6 & 1 Eliz. 2, c. 10, r959 which prescribes the general rules rrgarding deduc- The Indian tions is expressed in the negative, and r. (a) which was Molasses co. applicable to the cited cases reads as follows: (Private) Ltd. "Subject to the provisions of this Act, in computv. ing the profits or gains to be charged under Case I or The Commissioner Case II of schedule D, no sum shall be deducted in ofwlnco3me-ta1x, est enga respect of-

. (a) any disbursements or expenses, not being Hidayatullah J. money wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation." In these several cases, emphasis was sometimes laid on the words "wholly and exclusively", sometimes on " laid out or expended " and som.etimes on " for the purposes of the trade ... ". It was the nature of the liability or the time of payment or the value of the payment or all of them which determined whether the amount should be deducted or not.

Clause (xv) of s. 10(2) of the Act, with which we are concerned, reads as follows :

10. "Business-(1) The tax shall be p>tyable by an assessec under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him.

(2) Such profits or gains shall be computed after making the following allowances, namely-

(xv) any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly an<l exclusively for the purpuse of such business, profession or vocation."

This section, though it enacts affirmatively what is stated in the negative form in the English statute, is substantially in pari materia with the English enactment and would have justified our considering the English authorities as aids to the interpretation thereof.

But there is no case directly on what is 'expenditure ', and if the authorities under the English statute

r959 were to be of real assistance, the whole of -tho matter should have been before us.

The question, however, The Indian I" h Molams Co. 1mits t e approach to whether the payments made (P, foalc) Ltd. towards the policy were 'expenditure ' within cl. (xv). v. ' Expenditure' is equal to 'expense' and 'expense' is The Commission" money laid out by calculation and intention though in

01 Income-tax, many uses of the word this element may not be pre-

West Bengal t I I f k h ' sen , as w 1en we spear o a JO eat anot er s expense.

llidayatullah J. But the idea of 'spending' in the sense of 'paying out or away' money is the primary meaning and it is with that meaning that we are concerned. 'Expenditure' is thus what is 'paid out or away' and is something which is gone irretrievably.

To be an allowance within cl. (xv), the money paid out or away must be (a) paid out wholly and exclusively for the purpose of th.e business and further

(b) must not be (i) capital expenditure, (ii) personal expense or (iii) an allowance of the character described in els. (i) to (xiv). But whatever the character of the expenditure, it must be a paying out or away, and

"\l'C are uot concerned with the other qualifying aspects of R1rnh expenditure stated in the clause either affirmatively or negatively.

So, the question is whether in a business sense the amount was spent, that is to say, paid out or away.

To discuss this, we must go to the terms of the policy.

No doubt, under the general terms of the policyan annuity was to be provided for the Harveys.

We are not concerned with Mrs. Harvey, because she had no claim to the annuity or pension any more than Mrs.

Howard had in Alexander Howard & Go. Ltd. v. Bentley (1) already discussed by us elsewhere. That consideration involves a finding on whether an annuity to Mrs. Harvey was an expense made wholly and exclusively for the purpose of the business, and that is not a matter open to us by the limited question posed. In any event, the provision for a pension or annuit.y to Mrs. Harvey cannot rank higher than an ftnnuit,, to Harvey, and the matter can be considered on the "limited aspect that a pension or annuity to Harvey was also contemplated.

(r) (1948) 30 Tax Cas. 334

In the years of account the assessee Company did z959 hand out to the trustees, the sums of money for which The Indian deduction is claimed.

But was the money spent in so Molasses co. far as the assessee Company was concerned ? Harvey (Private) Ltd. was then alive and it was not known if any pension to v. him would be payable at all. Harvey might not have The Commissioner d b H h b of Income-tax hve to e 55 years. e might even ave a andoned West Bengal' his service or might have been dismissed. Till September 20, 1955, the assessee Company had dominion Hidayatullah J. through the grantees over the premia paid, at least in two circumstances. They are to be found in the special provision, and the third clause of the second schedule of the policy. These provisions have been quoted already, but may again be reproduced:

"Special provision: Provided the contract is in force and unreduced, the Grantees shall be entitled to surrender the Annuity on the Option Anniversary 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 Option Anniversary." CL (III): "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."

To be a payment which is made irrevocably there should be no possibility of the money forming, once again, a part of the funds of the assessee Company.

If this condition be not fulfilled and there is a possibility of there being a resulting trust in favour of the

Company, then the money has not been spent, i.e., pa'id out or away, but the amount must be treated as set apart to meet a contingency. There is a distinction between a contingent liability and a payment depending upon a contingency. The question is whether in the years of account, one can describe the assessee Company's liability as contingent or merely depending

z959 upon a contingency. In our opinion, the liability was contingent and not merely depending upon a contin- The Indian Molasses Co. gency (P1iva") Ltd. hat such a distinction is real was laid down in the

v. . . speech of Lord Oaksey in Southern Railway of Peru The Commimoner Ltd. v. Owen (1), and was recognised generally in the of Income-tax h f th h L L d N h r West Bengal' speehc es. oh ot erf haw or s. r, O\fv, t e 9us 1oh11 is w at 1s t e e11ect o t e 'payment o premia m t e

Hidayatnllah J. present case ?

Learned counsel for the assessee Company referred us to the provisions of Chapter IX-B of the Act, particularly ss. 58R, 588 and 58V thereof.

We regret we are not able to see how these provisions help in the matter. We are not concerned with the provisions of this Chapter,. because the allowance does not fall within any of the provisions, 31nd . we have only to decide the question whether the amounts paid to purchase the policy involved an expenditure in the accounting years.

Next learned counsel relied upou Joseph v. Law Integrity Insurance Company, Limited('), Prudential Insurance Company v. Inland Revenue Commissioners (3) and In re National Standard Life Assurance Corporation(') to show that there was no contingent liability but a liability depending on a contingency, namely, the duration of life, the probabilities of which were estimated on actuarial calculations.

No doubt, these cases deal with insurance of human life but the observations therein are not material here. In the first of these cases, it was held that the kind of policies which were issued were policies of insurance on human lives, and that the company was carrying on the business of life insurance contrary to its memorandum of association and the policies were ultra vires the company.

The policies were also illegal within s. 1 of the Assurance Companies Act, 1909. In this context, the definition that ' a policy of life insurance ' means ' any instrument by which the payment of monies, by or out of the funds of an assurance company, on the

(1) [1957] A.C. 334.

(3) [1904] 2 K.B. 658.

(2) [1912] 2 Ch. 58r.

(4) [1918] l Ch. 427, 430.

happening of any contingency depending on the durar959 tion of human life, is assured or secured ' was referred The Indian to. The policies issued by the company, £hough osten- Molasses co. sibly called 'investment policies ' were held to be (Private) Ltd. really life insurance policies. The next case arose v. under s. 98 of the Stamp Act, 1891. It was held that The Commissioner a contract by which in consideration of the payment of Income-tax. b f kl .

West Bengal y a person o a wee y premium, a sum certain was payable to him on his attaining the age of 65 or, in Hidayatullah J. the event of his dying earlier, a smaller sum was to be paid to his executors, was a policy of insurance upon a contingency depending upon a life within the meaning of the section. In the last case, the question arose under s. 30 of the Assurance Companies Act, 1909, and it was decided that a certificate-holder held a policy on human life because money was payable not only at the expiration of a certain number of years but all premiums were repayable in the event of death to the legal representative.

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.

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

IZf

<959 the setting apart of the money was not a paying out or away of these sums irretrievably.

The Indian Molasses co.

In our opinion, the question was correctly answered (Private) Ltd. by the Calcutta High Court.

We, therefore, dismiss v. the appeal with costs.

The Commissioner of Income-tax,

West Bengal

H idayatullah J.

I959

May 5.

Appeal dismissed.

M/S. SARUPCHAND HUKAMCHAND & CO.

UNION OF INDIA AND OTHERS

(S. R. DAS, C. J., N. H. BHAGWATI and

M. HIDAYATULLAH, JJ.)

Income-tax--Assessment of unregistered firni treated as registered by Income-tax Officer-Appeal against orders of assessment- Finding of profit reversed and fresh assessment dirccted-Effect- Duty of Income-tax Officer-Indian Income-tax Act, I922 (XI of I922), SS. 23(5)(b), 24(2)(d) and JI(4).

The Income-tax Officer found that the assessee, an unregistered firm, had made a profit in the assessment year I940-4r. He treated it as registered under s. 23(5)(b) of the Act, assessed the partners and carried the profit to their individual returns, making no demand on the firm.

For the next t\vo assess1nent years, hoVvever, the firm \\'as assessed as unregistered firm.

For all the three assessment years, the Income-tax Officer treated the firm as" resident and ordinarily resident". The firm appealed against all these assessments.

The appeals were all consolidated and heard together by the Appellate Assistant Commissioner.

He found that the firm was non-resident, the computation of income n1ade by the Income-tax Officer was erroneous, that in the assessment year 1940-41 there was a loss and during the subsequent years the firm had made profits.

He, therefore, directed the Income-tax Officer to modify the assessments accordingly.

Thereupon the Income-tax Officer gave relief to the partners for the year 1940-41 and directed certain refunds to be made to them. The firm was not satisfied and moved both the Income-tax Officer and the Appellate Assistant Commissioner