TMI Blog1959 (5) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... ired, but to be returned if the annuities were not bought and the setting apart of the money was not a paying out or away of these sums irretrievably. High Court correctly answered the question in negative. Appeal dismissed. - Civil Appeal No 395 of 1957. - - - Dated:- 5-5-1959 - Judge(s) : B. P. SINHA., J. L. KAPUR., M. HIDAYATULLAH JUDGMENT The judgment of the court was delivered by HIDAYATULLAH, J.--The Indian Molasses Co. (Private) Ltd., Calcutta, (hereinafter called the assessee 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 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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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., September 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 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. (IV) The grantees shall before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 to decide whether the money was laid out or expended wholly and exclusively for the purpose of the assessee's 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 clause (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 qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 "expenditure" within the clause, without reference to the rest of its provisions. Of course, to find the meaning of the word "expenditure", a dictionary is all that is needed, but to go further and to decide whether the outlay in this case was 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 he 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 contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement the payment must be regarded as an ex gratia payment of a capital nature, so long 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. 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 "expenditure", which might or might not be incurred in the future. The High Court analysed the terms of the deed of 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 clause (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 clause (II). The High Court held that if any of these two circumstances happened, then there would have been a resultin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This is illustrated from some English cases, and reference is made also to Chapter 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 "expenditure" within the dictionary meaning of the word. The argument of the Department is that by "expenditure" is 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 income-tax law, it must always be borne in mind that the scheme of legislation there is not the same as in ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. The words of the learned Lord Justice on the first proposition have a bearing upon the present case, and may be reproduced here : " 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 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 Atherion's case. Viscount Cave, L.C., recalled the test laid down in a rough way by Lord Dunedin in Vallambrosa Rubber Co. v. Farmer that, "capital expenditure is a thing that is going to be spent once and for all and income expenditure is a thing which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, though this is by no means a decisive test. Fourthly, if the payment of a lump sum closes the 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), and lastly, if the ownership of the money whether in point of fact or by a resulting trust be still in the taxpayer, 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 sence 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Simon at pages 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, 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. 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 bur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0. Business.--(1) The tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profit, 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 "expenditure", and if the authorities under the English statute 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" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 unreduced, 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." " Clause (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d" was referred to. The policies issued by the company, though ostensibly called "investment policies" were held to be really life insurance policies. The next case arose under section 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 section 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 ..... 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