Commissioner of Income Tax West
Bengal, Calcutta Vs. Associated Electrical Industries (India) Private Limited
[1985] INSC 231 (10 October 1985)
PATHAK, R.S. PATHAK, R.S.
TULZAPURKAR, V.D.
CITATION: 1986 AIR 383 1985 SCR Supl. (3) 627
1985 SCC (4) 660 1985 SCALE (2)868
ACT:
Indian Income Tax Act 1922 Sections 10(2)
(xv) and 10(4)(C).
Company - Pension and Life Assurance Plan for
employees Company contributing to premium - Plan rules amended to make direct
payment of policy amount to members - Company having no control over money -
Expenditure incurred on contribution by company to Plan - Whether an allowable
deduction.
HEADNOTE:
The assessee, is a firm carrying on the
business of Electrical Engineers and Contractors. It put into effect a pension
and Life Assurance Plan for its European employees about the year 1948 and took
out policies with a Life Assurance Society in the name of those employees.
Under the Plan, rules were framed and the assessee paid his part of the
contribution to the premium and the employees whose lives were insured their
portion of the premium. The assessee claimed a deduction every year of the sums
paid by it by way of its contribution to the premium and the Income- Tax
Department allowed the sum as a deductible expenses.
however, for the first time , the Income -
tax Officer disallowed the claim in respect of the assessment year 1956- 57.
The assessee's appeal to the Appellate
Assistant Commissioner, was dismissed on the ground that the provisions of
Clause (c) of sub-s. (4) of s. 10 of the Act barred the allowance claimed by
the assessee as no effective arrangements had been made by the assessee to
secure that tax would be deducted at source from the amounts paid finally to
the employees by the Society in terms of the policies.
In further appeal, the Income-Tax Appellate
Tribunal allowed the appeal in part, holding that all the contributions made in
the relevant year by the assessee to the premium on the life policies of the
Plan Members were not allowable as 628 deductions in the hands of the assessee,
and what was allowable were the contributions made by the assessee to the
policies of such employees who- had actually been paid pensionary and
retirement benefits by the Society.
After completing the assessment for the year
1956-57, the Income Tax Officer reopened the assessments of the assessee for
the assessment years 1948-49 to 1955-56 under s. 34 of the Act and disallowed
the deductions which had been allowed earlier. On appeal by the assessee, the
Appellate Assistant Commissioner allowed the deductions claimed in respect of
payments made by the Society to the employees in those years. The relevant
rules- under the Plan were amended on December 21, 1957 by the Board of
Directors to provide that the amount due under the policies would be paid to
the Plan Members entitled thereto, leaving the assessee with no control over
the moneys.
For the assessment year 1959-60, the assessee
claimed a deduction of all the contributions made by it towards the payments on
the policies. The Income Tax Officer, however, only allowed the contribution
made in the relevant previous year on the ground that the offending rules had
been amended but he did not allow the claim in respect of contributions made in
earlier years.
The assessee appealed against the
disallowance of the claim respecting contributions made in earlier years and
the Appellate Assistant Commissioner, allowed only the total contribution made
by the assessee to the Pension Fund and the payment made by the society in the
assessment years 1959-60 and 1960-61 and rejected the remaining claim.
The assessee filed a second appeal before the
Income Tax Appellate Tribunal which held that the deductions were permissible
under Clause (xv) of sub-Section (2) of section 10 of the Act, and that Clause
(c) of sub-Section (4) of s.
10 of the Act did not come in the way, and
allowed the appeal.
The Appellate Tribunal at the instance of the
Revenue, made a reference to the high Court which answered the question of law
in favour of the assessee and against the Revenue.
In the appeal, by the Revenue to this Court
it was contended on behalf of the Revenue (1) that the expenditure cannot be
said to have been incurred during the accounting year 629 relevant to the
assessment year 1959-60 as the assessee had made payments by way of
contribution to the premium in earlier years and no part of the amount in
question could be said to have been made in the relevant accounting year, and
(2) that the bar of Clause (c) of sub-section (4) of section 10 of the Act operated
as there was no scope for assuming that tax had been deducted at source by the
assessee.
Dismissing the Appeal, ^
HELD: 1.(a) Payments in the instant case were
made as contribution to the premium in the earlier years, at a time when the
rules permitted the assessee to receive back the amounts contributed by it
under the Plan. It cannot be said then that when those payments were made they
could be regarded as expenditure laid out or expended within the terms of
Clause (xv) of sub-section (2) of section 10 of the Act. [632 H - 633 A] 2.(b)
Pursuant to the resolution by the Board of Directors on December 21, 1957 the
rules were revised and amended. As a result, payments made earlier over which,
under the original rules, the assessee had maintained its control, now passed
from that control to the Plan Members.
The entire amount must be regarded as having
been expended by the assessee during the accounting period relevant to the
assessment year 1960-61. [633 - C] Indian Molasses Co. (P) Ltd. v. Commissioner
of Income Tax West Bengal, [1959] 37 I.T.R. 66, Commissioner of Income Tax,
Calcutta v. Anderson Wright Ltd., [1962] 46 I.T.R. 715, Commissioner of
Income-Tax, West Bengal - I v. Indian Molasses Co. P. Ltd., [1970] 78 I.T.R.
474 and Commissioner of Income-Tax, Kanpur v. Lakshmi Ratan Cotton Mills Co.
Ltd., [1976] 104 I.T.R. 319 distinguished.
2. A finding of fact has been recorded in the
instant case by the Appellate Assistant Commissioner, and thereafter confirmed
in appeal by the Appellate Tribunal, that tax had been deducted at source by
the assessee when making payment of its contributions to the premium due on the
life policies. That finding of fact was never challenged and this Court cannot
permit it to be assailed now. [633 D]
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 1404 of 1973.
From the Judgment and Order dated 17.2.1971
of the Calcutta High Court in Income Tax Reference No. 148 of 1965.
630 S.T. Desai, and Miss A. Subhashini for
the Appellant.
A.K. Sen, T.A. Ramachandran and D.N. Gupta
for the Respondent.
The Judgment of the Court was delivered by
PATHAK, J. This appeal by special leave is directed against the judgment of the
Calcutta High Court answering the following question of law against the Revenue
on a reference made by the Income-tax Appellate Tribunal :
"Whether on the facts and in the
circumstances of the case the Tribunal was right in holding that the difference
between Rs. 2,09,920.88 np. and the amount that had been allowed by the
Appellate Assistant Commissioner was a business expenditure incurred by the
assessee in the relevant previous year and in allowing the same as a deductible
expenditure"? The assessee, who is the respondent before us, carries on
business as Electrical Engineers and Contractors with its Head Office in
Calcutta and branches in different parts of the country. The assessee put into
effect a Pension and Life Assurance Plan for its European employees in about
the year 1948. Pursuant to the Plan it took out policies with the Scottish
Widows' Fund and Life Assurance Society in the name of those employees. Under
the Plan rules were framed, and the assessee paid his part of the contribution
to the premium in respect of the policies taken with the Society.
The employees whose lives were insured also
paid their portion of the premium and thereupon became Plan Members.
The original rules under the Plan enabled the
assessee to obtain receipt of the moneys assured in certain circumstances and
the assessee had also a right to direct a particular mode of disposal of the
funds of the Plan. The assessee claimed a deduction every year of the sums paid
by it by way of its contribution to the premium in respect of the said
policies. Originally, the amount so contributed by the assessee towards payment
of the premium was allowed by the Income-tax Department as a deductible
expense. For the first time, however, the Income-tax Officer disallowed the
claim in respect of the assessment year 1956-57. On appeal by the assessee
against the assessment, the Appellate Assistant Commissioner found that the
assessee had treated its contribution to the premium as part of the salary of
the respective employees on whose lives the 631 policies had been taken and had
also deducted tax at source from the salary, and the contributions made by the
assessee constituted a revenue expenditure falling within the terms of cl. (xv)
of sub-s. (2) of s.10 of the Indian Income Tax Act 1922. The Appellate
Assistant Commissioner, however, dismissed the appeal on the ground that the
provisions of cl.(c) of sub-s. (4) of s.10 of the Act barred the allowance
claimed by the assessee in as much as no effective arrangements had been made
by the assessee to secure that tax would be deducted at source from the amounts
paid finally to the employees by the Society in terms of the policies. The
Income-tax Appellate Tribunal allowed in part the second appeal preferred by
the assessee, holding that all the contributions made in the relevant year by
the assessee see to the premium on the life policies of the Plan Members were
not allowable a- deductions in the hands of the assessee and what was allowable
were the contributions made by the assessee to the policies of such employees
who had actually been paid pensionary and retirement benefits by the Society.
After completing the assessment for the year
1956-57, the Income-tax Officer reopened the assessments of the assessee for
the assessment years 1948-49 to 1955-56 under s. 34 of the Act and disallowed
the deductions which had been allowed earlier. On appeal by the assessee
against the several assessment, the Appellate Assistant Commissioner followed
the approach adopted by the Appellate Tribunal in the appeal for the assessment
year 1956-57, and allowed the deductions claimed in respect of payments made by
the assessee on policies respecting which payments had been made by the Society
to the employees in those years.
Subsequently, the relevant rules under the
Plan which were construed as enabling the assessee to receive the moneys
assured or to enjoy the power of control over disposal of the Fund were amended
on December 21, 1957 by the Board of Directors of the assessee. In the result,
the rules now provided that the amounts due under the policies would be paid to
the Plan Members entitled thereto. The assessee was left with no control over
the moneys.
For the assessment year 1959-60, with which
we are concerned, and for which the relevant previous year is the year November
1, 1957 to October 31, 1958, the assessee claimed a deduction of all the
contributions made by it towards the payment on the policies. The Income-tax
Officer allowed Rs. 27,069, being the contribution made in the relevant
previous year, on the footing that the offending rules had been amended, but he
did not 632 allow the claim in respect of contributions made in earlier years.
The assessee appealed against the disallowance of the claim respecting
contributions made in earlier years. Before the Appellate Assistant
Commissioner, a statement was filed by the assessee showing the total
contribution made by the assessee to the Pension Fund, and the payment made by
the Society in the assessment years 1959-60 and 1960-61 amounting to L8932-7-9
and L3315-8-3d. The Appellate Assistant Commissioner allowed these amounts only
and rejected the remaining claim. The assessee filed a second appeal before the
Income Tax Appellate Tribunal and restricted the claim to the amount that stood
disallowed out of Rs. 2,09,920.88 after deducting therefrom the equivalent of
the two sterling payments. The assessee contended that on amendment of the
rules the amount representing the balance out of Rs. 2.09,920.88 was liable to
be considered as an outgoing from the assessee during this year and should,
therefore, be considered as an allowable business expenditure. The appeal was
allowed by the Appellate Tribunal, which held that the deductions were
permissible under cl. (xv) of sub-s.(2) of s.10 of the Act and cl.(c) of sub-s.
(4) of s. 10 of the Act did not come in the way.
At the instance of the Commissioner of
Income-tax, the Appellate Tribunal made a reference to the Calcutta High Court
for its opinion on the question of law set forth earlier the High Court has
answered the question of law in favour of the assessee and against the
Commissioner of Income-tax.
In this appeal, learned counsel for the
Commissioner of Income-tax contends that the expenditure cannot be said to have
been incurred during the accounting year relevant to the assessment year
1959-60 in as much as the assessee had made payments by way of contribution to the
premium in earlier years and no part of the amount in question could be said to
have been paid in the relevant accounting year.
Learned counsel has cited Indian Molesses Co.
(P) Ltd. v.
Commissioner of Income-Tax, West Bengal,
[1959] 37 I.T.R.
66, Commissioner of Income-Tax, Calcutta v.
Anderson Wright Ltd., [1962] 46 I.T.R. 715, Commissioner of Income-Tax, West
Bengal-I v- Indian Molasses Co. P. Ltd., [1970] 78 I.T.R.
474 and Commissioner of Income Tax, Kanpur v.
Lakshmi Ratan Cotton Mills Co. Ltd., [1976] 104 I.T.R. 319. The contention
appears to us to be without substance. It is true that the payments were made
as contributions to the premium in the earlier years. But they were made at a
time when the rules permitted the assessee to receive back the amounts
contributed by it under the 633 Plan. According to the construction put on the
rules lt was deemed that the assessee continued to retain its hold on those
amounts. It cannot be said then that when those payments were made they could
be regarded as expenditure laid out or expended within the terms of cl. (xv) of
subs.(2) of s.10 of the Act. The control over the moneys passed on December 21,
1957 when pursuant to a resolution by the Board of Directors the rules were
revised and amended.
On that day, payments made earlier over
which, under the original rules, the assessee had maintained its control, now
passed from that control to the Plan Members. The entire amount must be
regarded as having been expended by the assessee during the accounting period
relevant to the assessment year 1959-60. In the circumstances, the cases relied
on by learned counsel for the Commissioner of Income- tax can be of no
assistance to the Revenue.
It was further contended by learned counsel
for the Commissioner of Income-tax that the bar of cl.(c) of sub- s.(4) of S.10
of the Act operated in the instant case as there was no scope for assuming that
tax had been deducted at source by the assessee. It appears to be too late in
the day for such a contention, because a finding of fact has been recorded by
the Appellate Assistant Commissioner, and thereafter confirmed in appeal by the
Appellate Tribunal, that tax had been deducted at source by the assessee when
making payment of its contributions to the premium due on the life policies.
That finding of fact was never challenged, and we cannot permit lt to be
availed now.
In the result, we hold that the High Court is
right in answering the question referred to it in the affirmative, in favour of
the assessee and against the Commissioner of Income-tax.
The appeal is dismissed with costs.
N.V.K. Appeal dismissed.
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