The Indian Molasses Co. (Private) Ltd.
Vs. The Commissioner of Income-Tax, West Bengal [1959] INSC 60 (5 May 1959)
HIDAYATULLAH, M.
SINHA, BHUVNESHWAR P.
KAPUR, J.L.
CITATION: 1959 AIR 1049 1959 SCR Supl. (2)
964
CITATOR INFO :
R 1964 SC1722 (9) R 1970 SC2067 (2,6) D 1986
SC 383 (7) R 1986 SC 484 (24)
ACT:
Income-tax-Deduction -Business
expenditure-Payment of sums for getting annuities to provide pension-Liability
depending on contingency-Expenditure, meaning of-Indian Income-tax Act, 1922
(XI Of 1922), S. 10(2)(XV).
HEADNOTE:
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 whom the company paid a sum
of Rs.
1,09,643 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 His wife should H die before he attained the age Of 55.
On January 12, 1949, 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: " (i) 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 pound 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 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." 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. 10(2)(XV)
965 of the Indian Income-tax Act, 1922, but the Income-tax authorities
disallowed the claim on the ground that the sums claimed did not amount to
expenditure within the meaning of the section. The appellant's contention was
that payment of pension was 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 and that expenditure on insurance was not contingent, because though
the contingency related to life and depended on it, the probabilities were
estimated on actuarial calculations and, that the expenditure was, therefore,
real.
Held, that expenditure which is deductible
for the purposes of income-tax under s. 10(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. IO(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, B. 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. (Private) Ltd., Calcutta
(hereinafter called the assesses 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 Incometax Reference,
966 No. 15 of 1954. The question of law referred to the High Court was:
" Whether on the facts and in the
circumstances of the case, and on a true construction of the Trust Deed, dated
16th September, 1948, and the Policy dated the 13th January, 1949, the payments
made by the assessee Company and referred to in paragraph 4 above constitute
'expenditure' within the meaning of 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 pound 8,208-19-0
(Rs. 1,09,643) and further undertook to pay annually Rs. 4,364 (pound 326-14
sh.) 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 pound 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 pound 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 967
annuity payable to Mrs. Harvey would be pound, 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 2 Insurance Company or another Insurance Company of repute. The other
conditions of the deed of trust need Dot be considered, because they do not
bear upon 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 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 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 pound 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 unredressed and before the Option
Anniversary the said funds and Property of the Society shall be liable to make
repayment to 968 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 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 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, 1651-52 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 (1) and (II) do not contain
any provision having a material bearing upon Clause (111). Therefore if it
happens that both Mr. and Mrs. Harvey 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 969 slightest trace of any indication
anywhere that the Trustees should have any beneficent 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 as payment to an employee whether of remuneration or pension or
gratuity, and cannot be a proper deduction against the incoming 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 assesses' 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 Tribanal and which was not covered by the Tribunal's 122 970 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. " We must
express our regret that the case took the course it did. The order of
assessment was passed as far back as 1952, and seven years have now passed
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 will 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 expenditureI 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. Whether 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. There, certain contributions on trust for payment of pensions to
employees were held not to be I expenditure', because on the original trust
failing, the money was (1) [1954] S.C.R. 195.
971 deemed to be held by the trustees on a
resulting trust for the benefit of the maker. If the same can be said in this
case, namely, that the money continued to belong to the assessee Company in the
account years, its payment to the trustees or the Insurance Company
notwithstanding, there may be a possibility of answering the question as was
done in the decision of this Court cited earlier. But if such a clear-cut
proposition cannot be laid down, then, obviously, there is considerable
difficulty in deciding what is I expenditure ' within the clause, without
reference to the rest of its provisions. Of course, to find the meaning of the
word I expenditure ', a dictionary is ill that is needed, but to go further and
to decide whether the outlay in this case was I 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 be was opposed to any extension of the ambit of the question. The
following passage from the judgment of the Chief Justice shows the respective
attitudes of the Department and the assessee Company before the Bench:
" Mr. Meyer contended 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 behalf 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.
972 We cannot help saying that though the
Tribunal may be at liberty to decide a case as appears best to it, there is
considerable hardship to the tax-payers, if questions of law are decided
piecemeal and repeated references to the High Court are necessary. The
jurisdiction of-the High Court is advisory and consultative, and questions of
interpretation of the law in this attenuated form can well be avoided.
This will tend 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 I expenditure' was not effective. Following,
therefore, the case in Atherton v. British Insulated and Helsby Cables, Ltd.
(1) and distinguishing Hancock v. General Reversionary and Investment Co. Ltd.
(2), 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 Iona 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 I 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.
973 trust, and pointed out that there were
two contingencies in which money was likely to revert to the assessee Company.
The first contingency was if both Harvey and
Mrs. Harvey died before September 20, 1955. The second contingency was due to
an omission in el. (III) to provide for a pension to Harvey, if Mrs. Harvey
died before the above date. In that event, the trust would have failed, unless
a policy was taken out under 61. (II). The High Court held that if any 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:
pound 720, if the annuity was payable to
Harvey alone; or pound 558-1-0, during the joint lives of both or survivor;
or pound 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 pound 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 974 set
apart I tentatively' a sum of money in order that it might be available for the
payment of a I gratuity ' to Harvey and Mrs. Harvey, but there being I no
provision for the application of the money in the event of those contingencies
not occurring and no annuity being payable to any one', there was no I
expenditure' in any real and practical sense of the term'.
The arguments in this appeal have ranged, as
they 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, in point of fact, made, and this was I expenditure' within the dictionary
meaning of the word. The argument of the Department is that by I expenditures
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
arrangement 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.
975 It has been ruled under the English
statute that sums paid to an employee as pension or gratuity are deductible as
money laid out and expended for the purpose of trade, profession or vocation.
See Smith v. Incorporated Council of Law Reporting for England and Wales (1).
It has also been ruled that a single payment to avoid the recurring liability
of an employee's pension is also a proper deduction. The leading case on the
subject is Hancock v. General Reversionary and Investment Co. Ltd. (1). 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,
& Co. Ltd. v. Curtis (3).
Pollock, M. R., drew pointed attention to the
words of Lush, J., in the earlier case, where lie 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 first (1) [1914] 3 K.
B. 574 ; 6 Tax Cas. 477.
(2) (1918) 7 Tax Cas. 358.
(3) [1925] 1 K. B. 328; 8 Tax Cas. 678.
976 whether there was an expenditure which he
held there was, and next whether it could be said to be wholly and exclusively
for the purposes of the trade which, in his opinion, could not be said of the
expenditure in that case.
The words of the learned Lord Justice on 'the
first proposition have a bearing upon the present case, and may be reproduced
here(at p. 703) :
I am inclined to agree with Mr. Latter in his
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 provisions. But it seems to me
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 down 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 was 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." (1) (1925) 10 Tax Cas. 155.
(2) (1910) 5 Tax Cas. 529.
977 Again, in Morgan Crucible Co. Ltd. v. The
Commissioners of Inland Revenue (1), the payment to an insurance company to
take out a policy was held not to be an admissible deduction. There, the company
operated a scheme for payment of pensions to retired or incapacitated
employees, reserving to itself the uncontrolled discretion to vary or cease
payment of pensions. When pensions were paid, they were deducted -but when the
company took out a policy, without, 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 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 (1) [1932] 2 K. B. 185 ; 17 Tax Cas. 311, 317.
(2) (1918) 7 Tax Cas. 358.
123 978 liability to make repeated and
periodic payments in the future, it may generally be regarded as a payment of a
revenue character (Anglo-Persian Oil Co. Ltd. v. Dale) (1), and lastly, if the
ownership of the money whether in point of fact or by a resulting trust be
still in the tax-payer, then there is acquisition of a capital asset and not an
expenditure of a revenue character.
Side by side with these principles, there are
others 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
allow 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 present 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 (2). 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 & Co. Ltd v. Bentley (3), 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]
1 K. B. 124; 16 Tax Cas. 253.
(2) (1948) 30 Tax Cas. 496.
(3) (1948) 30 Tax Cas. 334.
979 and under pressure from his brothers a
company was formed and the directors were authorised to enter into an agreement
to purchase the business. A. C. Howard was the governing director of the
company and his three brothers, permanent directors. The company also entered
into a service agreement with them, and Art. 107 thereof provided :
" After the death of the said Alexander
Charles Howard and during such. time as his legal personal 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. Howard 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 pound 4,500.
This amount was based upon the findings of an
actuary. The taxpayer submitted that the sum paid 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 held 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 nothing whatever
to do with the Company ". If, therefore, (1) [1932] 1 K. B. 124; 16 Tax
Cas. 253.
(2) (1946) 27 Tax CaS. 296.
980 the original annuity was not chargeable
to revenue, the sum of pound 4,500 paid to avoid it, could not also be.
The other case is Southern Railway of Peru
Ltd. v. Owen (1).
In that case, the English company was bound
to provide compensation to all its employees on the termination of their
services. Legislation to this effect was deemed to be a part of the contract of
service. Such right arose on dismissal or on termination of the employment by
the employer after proper notice. The compensation was an amount equal 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 amount equal to the burden cast on it each year but the claim was
refused. It was held by majority that though 'the company was entitled to charge
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. If the pension
itself be not payable as an obligation, and if there 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 (2)
was applied to the last corollary.
So far, we have dealt with the principles
which underlie leading cases decided in England, some of which were in the
forefront of the arguments. We 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.C. 334.
(2) [1912] A.C. 443.
981 form. Section 137 of 15 & 16, Geo. 6
& I Eliz. 2, c. 10, which prescribes the general rules regarding deductions
is expressed in the negative, and r. (a) which was applicable to the cited
cases reads as follows:
" Subject to the provisions of this Act,
in computing the profits or gains to be charged under Case I The Case 11 of
schedule D, no sum shall be deducted in respect of(a) any disbursements or
expenses, not being 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 sometimes 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
payable by an assessee under the head I 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 and exclusively for the purpose 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 I expenditure and if the
authorities under the English statute 982 were to be of real assistance, the
whole of the matter should have been before us. The question, however, limits
the approach to whether the payments made towards the policy were expenditure
within cl.(xv). I Expenditure' is equal to I expense' and 'expense' is money
laid out by calculation and intention though in many uses of the word this
element may not be present, as when we speak of a joke at another's expense.
But the idea of I spending' in the sense of I paying out or away' money is the
primary meaning and it is with that meaning that we are concerned. I
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
the business and further (b) must not be (i) capital expenditure, (ii)
-personal expense or (iii) an allowance of the character described in cls. (i)
to (xiv).
But whatever the character of the
expenditure, it must be a paying out or away, and we are not concerned with the
other qualifying aspects of such 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
policy an 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 bad in Alexander Howard & Co. 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 annuity
to Mrs. Harvey cannot rank higher than an annuity to Harvey, and the matter can
be considered on the limited aspect that a pension or annuity to Harvey was
also contemplated.
(1) (1948) 3o Tax Cas, 334.
983 In the years of account the assessee
Company did hand out to the trustees, the sums of money for which deduction is
claimed. But was the money spent in so far as the assessee Company was
concerned ? Harvey was then alive and it was not known if any pension to him
would be payable at all.'Harvey might not have the lived to be 55 years. He
might even have abandoned c his service or might have been dismissed. Till
September 20, 1955, the assessee Company had dominion 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
unseduced, the Grantees shall be entitled to surrender the Annuity on the
Option Anniversary for the Capital sum of pound 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., paid 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 984 upon a contingency. In our opinion, the
liability was contingent and not merely depending upon a contingency.
That such a distinction is real was laid down
in the speech of Lord Oaksey in Southern Railway of Peru Ltd. v. Owen (1), and
was recognised generally in the speeches of the other Law Lords. Now, the
question is what is the effect of the I payment of premia in the present case ?
Learned counsel for the assessee Company referred us to the provisions of
Chapter IX-B of the Act, particularly ss. 58R, 58S and 58V thereof. We regret
we are not able to see bow 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, and 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 upon Joseph v.
Law Integrity Insurance Company, Limited (2), Prudential Insurance Company v.
Inland Revenue Commissioners (3 ) and In re National Standard Life Assurance
Corporation (4) 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. I of the Assurance Companies Act, 1909.. In this
context, the definition that I a policy of life insurance' means I 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. 581.
(4) [1918] 1 Ch. 427, 430.
985 happening of any contingency depending on
the duration of human life, is assured or secured was referred to. The policies
issued by the company, though ostensibly called I investment policies' were
held to be really life insurance policies. The next case arose under s. 98 of
the Stamp Act, 1891. It was held that a contract by which in consideration of
the payment by a person of a weekly premium, a sum certain was payable to him
on his attaining the age of 65 or, in 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 124 986 the setting a part of the money was not a paying out or away
of these sums irretrievably.
In our opinion, the question was correctly
answered by the Calcutta High Court. We, therefore, dismiss the appeal with
costs.
Appeal dismissed.
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