PETITIONER: THE INDIAN MOLASSES CO. (PRIVATE) LTD. Vs. RESPONDENT: THE COMMISSIONER OF INCOME-TAX, WESTBENGAL. DATE OF JUDGMENT: 05/05/1959 BENCH: HIDAYATULLAH, M. BENCH: 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 unseduced, 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. JUDGMENT:
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 Income-
tax 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 deduc-
tion 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 specialprovision 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 beneficient interest in these moneys, there
would be a resultant trust in favour of the Company in
respect of the moneys thus far paid out. In other words,
what has been done amounts to a provision for a contingency
which may never arise. Such a provision can hardly be
treated 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 ques-
tion. 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
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. 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. Com-
missioner 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 bad 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 ex-
pended. 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 tome 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 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 (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 some-
thing 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 apart 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.