TMI Blog1982 (12) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... ng year concerned, the assessee had made a provision of Rs. 1,89,787. However, during this year, the actual amount of expenditure incurred was only Rs. 1,33,562. There was thus an excess provision of Rs. 56,225. This excess provision had been written back to the accounts in the accounting year ended 30-6-1976 which is assessable for the assessment year 1977-78. 6. The ITO brought this amount to tax on the ground that this amount did not represent an expenditure and it was only an estimate. He also noted that the provision written back in the next year would be excluded from the assessment of that year. 7. The assessee appealed. The Commissioner (Appeals) accepted the assessee's explanation and deleted the addition. 8. Shri Sathe, for the department, contended that the entire provision is a mere contingent liability and in view of the authority in the case of Addl. CIT v. U.P. State Agro Industrial Corporation [1982] 133 ITR 597 (All.) a contingent liability cannot be allowed as a deduction. 9. We are unable to accept this submission. No doubt, the amount is contingent and at the time when the provision is made in the accounts it is merely on the basis of an estimate. But, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the staff in the branch offices and the third trust for those working in the factories. The trust deeds are worded in identical fashion. The settlor in all these trusts is the assessee company itself. The trustees are two directors and one employee. In respect of the trust for the central office, Shri Patel, one of the employees, had been made a trustee, while the two other trustees are the two directors, Sathena and Aga. In respect of the trust for the branches, along with the two directors aforementioned, Shri B.K.G. Rao, an employee of the trust, was the trustee. In respect of the trust for the factory workers, the trustees were Sathena and Kabraji, directors, and Mr. N.S. Mirza, an employee. 16. The trust properties initially consisted of Rs. 1,000 paid in cash. There had been further contributions from the company from time to time. The objectives of the trusts as given in the preamble of the deeds are the welfare and benefit of the staff. The objects have to be worked out through the rules and regulations framed thereunder. Rule 6 says that the trust fund would be more or less for making loans or grants of money to the employees for housing facilities, relief in any dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that the trustees are only representatives of the management of the companies and nominated by the companies. The employees have no voice at all. Neither they have any representation. The trust is, therefore, an alter ego of the company only. He then pointed out that the initial corpus was a meagre sum of Rs. 1,000. This is, prima facie, insufficient for any welfare work for a company of the standing like the assessee. This invariably means that the trustees will have to depend on contributions from outsiders. Such contribution necessarily has to come only from the company since the beneficiaries are the company's employees. But, there is no obligation in the trust deed under which the company is obliged to make any such contribution. Taking all these facts, he submitted that the benefit for the employees is totally illusory. He then submitted that whatever welfare requirements of the staff are not brought on the records, there is really no nexus between the welfare of the staff and the expenses. The only effective result is that the trust has become the means for reducing the taxable income of the company. He also submitted that there was no obligation on the trustees to spen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ITO had rejected the claim only on the ground that it was a capital expenditure. No other reason had been given. Nobody had so far disputed that the trust was not genuine. He further submitted that in the prior assessment years these contributions had been allowed as a deduction. The funds had been utilised for the welfare of the employees as the accounts for the subsequent accounting years would show. He then pointed out that it is not correct to say that the employees had no voice in the management of the trust. He further submitted that in each of the trusts, there is one representative of the employees. All the funds of the trusts are at the control of the trustees only. The company cannot be accused of trying to control the management through the trusts because such a subterfuge is unnecessary since the company itself is a private limited company, with regard to the investments of the trust funds, he submitted that a proper reading of clause 2 would show that only such funds which, in the discretion of the trustees required investment, could be considered for investing in the shares and debentures of the company. He submitted further that it is open for the trustees to inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he settlor is a company. The company has got perpetual life till it is wound up. So, the issue would be whether the expression ' beyond lifetime of persons living ' would have to exclude the lifetime of the settlor which is a company. He pointed out that section 5 of the Transfer of Property Act refers to companies specifically. If that, is so, the assessee has to be treated as a living person and so long as the company is in existence, section 14 of the Transfer of Property Act cannot apply. 25. He then submitted that assuming that the rule of perpetuity generally is applicable, even then, the authorities have held that where the trustees have power of disposing of both the income and the corpus of the trust, the rule of perpetuity will not apply. 26. With regard to the submission that the beneficiaries are not certain, he pointed but that at any given time the class of beneficiaries is certain being the employees of the company in the particular branch. The actual benefit may be given to an employee who needs it but the potential of the employees are the beneficiaries and there is no uncertainty. 27. He also submitted that the expenditure is only for the purpose of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be appointed by the company. This, no doubt, gives the company an upper hand in nominating the trustees. But, once the trustees take their office, they have to conduct themselves within the powers granted to them in advancing the objects of the trust and they cannot act as mere mouth-piece of the company. It has also been submitted that the corpus of the trust being only Rs. 1,000, it is totally inadequate for welfare work and that the trustees have to depend upon contributions from the company. No doubt, the company has to support the finances by contributions but it is in the company's interest to make the regular contributions to the trust. It is now more or less accepted that in these days where priority is given for welfare of employees it is a duty cast on the company to look after the welfare of their employees. For this purpose, the company has created this trust since the members would take over much of this work. The trust would be in a better position because they would be untrammelled by the administrative control of the company. It is also made sure that the employees have also a voice insofar as some of the trustees are bound to be employees. It is true further that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 102 that the law of perpetuity would be applicable to trusts. The same is the position in Indian law as pointed out by O.P. Agarwala in his book on Trusts, 6th edition, at page 167. Commentaries on Transfer of Property Act by Mulla as well as by V.B. Mitra also lay down that this rule would be applicable to trusts. 31. The general rule of perpetuity makes void any limitation on the free dealing in property. Now, a free dealing in property is subject to limitation when it is not open to the person holding the property to dispose it of in any way he likes. There are two further aspects to this. The first is a bar on the transfer of the property and the second is directions regarding the income of the property as distinguished from the corpus of the property. Almost all the cases regarding perpetuity have this in common that by a will or a trust the ownership of the property is tied down to certain limitations over a period. The question is whether such limitations are applicable in the case of a trust, the object of which is the welfare of a group of individuals. If the group of individuals were to represent the cross-section of a society, then there, is no difficulty because the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is bad.' In Drummond Ashworth v. Drummond [1914] 2 Chancery 90, a legacy was given to trustees on trust to pay the income to trustee of a company to contribute to the holiday expenses of the workmen employed in the spinning department of the company, in such manner as the directors in their absolute discretion think fit and the directors were empowered to divide the income equally or unequally between workmen and the residue of the estate should be held on trust for the old Bradfordians' club. It was held that the trust for the workmen was not a charitable trust but the residuary gift which imposes a trust that the money should be expended at the discretion of the trustees in the best interest of the school and the club was valid because it did not tend to perpetuity. In Re. Taylor v. Midland Bank Executor and Trustee Co. Ltd. v. Smith and Others [1940] 2 All England Report 637 a testator after making certain bequests to his wife and daughters directed his trustees to hold the residuary interest in the trust for the Midland Bank Staff Association, Liverpool and the District Centres formed the trust to be administered in accordance with the instructions and rules of the fund. Obje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hts of the beneficiaries but, nonetheless, the trustees are the full owners. They have only a legal obligation attached to the ownership of the properties to utilise the property and income for the purpose for which the trust was created. The trust deed makes no difference between the income and the corpus. Both of them are part of the trust fund and this is made clear by the rules. The trust gives full authority to dispose of the trust fund for the objectives of the trust. Rule 6 makes clear that the trust fund, whether representing accumulated income or corpus, can be utilized in making loans or granting facilities to the employees of the company according to their requirements. Thus, there is no limitation that only the income should be utilised and consequently there is no tying of the property in violation of perpetuity. The three questions posed by Megarry and Wade have to be answered in favour of the assessee. We, therefore, hold that the trust deed does not violate the rule of perpetuity in its primary and general sense. 35. We are equally clear in our mind that section 14 of the Transfer of Property Act does not apply to the facts of the case. In order to bring it in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the trust deed had full liberty to dispose of the corpus itself is ab initio void. There are no words or expression in the trust deed or the rules by which one could say that an attempt is made to create an interest which will take effect for the beneficiaries living at the time of winding up of the company. 37. Even if we assume all these points against the company, still, insofar as the settlor is the company and it has perpetual existence till it is wound up, it cannot be said that it violates perpetuity. So long as the company is not wound up, it is in existence and, therefore, one of the persons living at the time of creation of the trust is in existence. Shri Sathe submitted that the life of the settlor should not be considered for the purpose of section 14 of the Transfer of Property Act. We are unable to see how this can be excluded when the expression used therein is ' one or more persons living at the date of such transfer '. 38. We are, therefore, satisfied that the rule of perpetuity is not violated and the trust is not invalid on that account. 39. The second objection is that the beneficiaries of the trust are uncertain. For this purpose, the Supreme Court's dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibutions cannot be considered as business expenditure. In our opinion, the requirement regarding welfare is continuous and amounts would be required from time to time in order to meet the same. It may not be possible for the company to precisely judge the same and then set apart the amount so required. It is precisely to avoid such difficulties that the assessee had to set up welfare trusts. After its setting up, it would be the problem for the welfare trusts to locate the areas requiring expenditure or the employees who require assistance and do the necessary to meet the requirements. We are satisfied that the expenditure is only for the purpose of business. 41. The last contention of Shri Sathe is that even then the expenditure is of capital nature. He had relied on the decision of the House of Lords in the case of Atherton. In that case, the assessee had a contractual liability to pay pension to the employees. The company created a trust and transferred certain funds with the object that the trust would hereinafter meet the requirements of payment of pension to the retired, employees. The sum transferred was arrived at upon the actuarial calculations and it was the sum which w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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