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TMI Blog1959 (5) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired 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, 1951-52 and 1952-53, it claimed a deduction of these sums from its profits or gains under section 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) laid 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " This court has always construed questions referred to it with a certain degree of strictness and has not allowed any point to be canvassed before it which had not been raised before the Appellate Tribunal and which was not covered by the Tribunal's 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 and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here 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. Sampath 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 be agreed that if it could not, the court would be free to say so. 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 taxpayers, 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 "p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, be taken from them, but the problems under our income-tax laws must be resolved in the ultimate analysis, with reference to our laws. It has been ruled under the English statute that 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. 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. 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 taxpayer 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 taxpayer'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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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." Again, in Morgan Crucible Co. Ltd. v. Commissioners of Inland Revenue, 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, observed that unlike that case the liability to pay pensions was not got ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x laws do not take every such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in praesenti and a liability de futuro which, for the time being, is only contingent. The former is deductible but not the latter. The case which illustrates this distinction is Peter Merchant Ltd. v. Stedeford. No doubt, that case was decided under the system of income tax laws prevalent in England, but the distinction is real. What a prudent trader sets apart to meet a liability, not actually present but only contingent, cannot bear the character of expense till the liability becomes real. We may here refer to two other cases. In Alexander Howard & Co. Ltd. v. Bentley, a business of blouse and gown manufacture was carried on by one A. C. Howard. His three brothers were employed by him as salaried managers. In 1933 A. C. Howard remarried 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 article 107 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 "spending" in the sense of "paying out or away" money is the primary meaning and it is with that meaning that we are concerned. "Expenditure" is thus what is "paid out or away" and is something which is gone irretrievably. To be an allowance within clause (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 clauses (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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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, and was recognised generally in the speeches of the other Law Lords. Now, the question is what is the effect of the "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 sections 58R, 58S and 58V thereof. We regret we are not able to see how these provisions help in the matter. We are not concerned with the provisions of this Chapter, because the allowance does not fall within any of the provisions, 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 Jo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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