TMI Blog1983 (11) TMI 93X X X X Extracts X X X X X X X X Extracts X X X X ..... d annuity policy from the LIC on the life of the managing director to provide for payment of annuity to him for life and upon his death to dependents. A resolution was passed on 5-12-1972 and incorporated in the minutes. The extract from the relevant minutes is as under : " The Board considered the purchase of deferred annuity policies on the life of the managing director for the amount equivalent to the commission payable to him for each financial year to provide for the payment of annuity to him for his life and upon his death to his dependents and the following resolution was passed : ' RESOLVED that commission payable to the managing director, Shri Rahul Kumar Bajaj, for the financial year ending 31st March, 1973 and thereafter be expended by the company every year towards the purchase of deferred annuity policies from the Life Insurance Corporation of India, on the life of the managing director, Shri Rahul Kumar Bajaj, to provide for the payment of an annuity to him for his life and upon his death to his dependents, such payment to commence from the date of his retirement from the company (or such other date as may be mutually agreed to between the board of directors of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of commission. The commission had accrued, become due and was payable to him. Paragraph 1 of the policy, according to the learned counsel, clearly indicated that the policy was taken for the benefit of the employee and on his behalf. The sum of Rs. 42,000 was clearly a debit in the company's book and the purpose of the debit is the payment on behalf of the managing director. The managing director, who is entitled to the payment, had, according to the learned counsel, shown agreement to the receipt of this amount in modification of the earlier intentions or understandings in this regard. The managing director had rendered services and was entitled to the remuneration. This clearly settled the fact that this was his income. On the contrary, the assessee had a present liability to make the payment of commission. That liability can be discharged by payment in cash or kind or in any other manner, if possible. According to the learned counsel, here was a case of payment in kind. The Tribunal's decisions referred to dealt with cases of employees. The present is a case of the employer. Those decisions, therefore, according to the learned counsel, will have no relevance to the present case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been received by the employee. 8. For the assessee, stress is laid on the Tribunal's orders which categorically held that the employees in each of these cases received no benefit. They were entitled to receive the payment only on the specific dates. The accrual of income, therefore, is clearly relatable to those dates. Referring to the resolution, it is pointed out that the true effect of the resolution passed by the company is to modify the agreement. Such a variation does not require even the permission of the company law authorities. In the present case under the deferred annuity policy, the employee has no interest and no right to receive any amount on the date the policy is taken up-in fact during the previous year he has no right to receive any amount. The first payment would be on 10-12-1977 and as far as the managing director is concerned, it is a limited right conferring no benefit in the accounting year at all. Reference is made to the fact that the ITO applied during the year the provisions of section 40A(5) or 40(c) of the Act. The limit is not to the expenditure but for the benefit received by the employee. Even if the premium paid on the deferred annuity policy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lies or section 40A(5) applies to the position. We have held, following the Special Bench decision of the Tribunal, that section 40(c) applies but the question as regards the manner in which the sum of Rs. 42,000 commission payable is to be dealt with is the same under both the sections. 11. The principal question which requires consideration is whether the employee's remuneration can be increased by an amount of Rs. 42,000 whether as salary or perquisite in the circumstances of the case. The ITO dealt with the question on the basis that the deferred annuity policy, taken admittedly enuring to the benefit of the employee, was an investment of income already accrued to him. The disallowance was made on that basis. The Commissioner (Appeals), however, followed the earlier Tribunal's decision in the case of certain employees and allowed the assessee's claim. Whether the inclusion is to be considered on this basis of investment after accrual may be relevant but, in our view, there are several other facets to this issue which outweigh giving an answer to this question. 12. In the first place the books of accounts of the assessee-company as well as the trend of the claim made before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same amount. There could be no dispute on the point that what the company did in the present case was to make the purchase of a policy. The policy in the present case is a one time premium payable policy which involves the disbursement of certain amounts over a period subject to certain formulae. The purchase of the policy, the entering into the legal transactions relevant to the purchase, the disbursement of the amounts, etc., are all an integrated package plan to which slight modifications could be made here and there but whose basic structure cannot be altered. Basically what the assessee has gone is to purchase a single premium policy which gives rise to periodic payments, in this particular case, after the lapse of an initial period. As is well-known, policies of insurance can be of various types immediate, deferred, whole life, endowment, single premium, multi-premium, single advantage, multi-purpose and so on. Each of these policies has got its own adjuncts. Both with regard to the payment of premium as well as the obligations incurred by the insurer, there could be variations. Even where a standard contract form is entered into or prescribed by the insurer, slight modif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e benefit of the policy enures to the company. Admittedly, the employees, his legal descendants, etc., are the beneficiaries. The position, therefore, is that while the company has parted with a sum of money, as a matter of fact, it has done so clearly to benefit the employee. Instead of giving the money to the employee in cash and asking him to purchase the annuity under the terms which he wanted to, the company has purchased the policy. There is no difference in principle between the employee after receiving the money from the employer, hands it over to his agent or assistant to purchase the said property for him on the one hand and instead of doing so straightway directs the employer himself, who owes him money, to purchase the same insurance policy on the other. In either case the employee has received the amounts due to him from the employer. If the receipt cannot be (we have no doubts on this also) regarded as a cash receipt, it would certainly become a receipt in kind. Instead of the company handing over the cash, it purchased the deferred annuity policy and handed it over to the employee. Instead of a deferred annuity policy, the company could have as well purchased any oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t but in a subsequent year. From the very nature of things, this is the prime purpose of a deferred annuity policy or for that matter any policy of insurance. If a person unconnected with an employee-employer relationship or other contractual or other attachments takes out a sum of Rs. 42,000 from his own till, purchases the same deferred annuity policy as in this case, the liability of the insurance company to pay him annuities would be spread over a period with an initial postponement of payment of first annuity itself. Having paid out the money to the insurance company, this person cannot recover any amount except in accordance with the terms of the policy. The first payment, therefore, he would get after a period or if the conditions are so stipulated only his heirs will get it. It would be preposterous to hold that when such a person has purchased a policy for Rs. 42,000, the policy ceases to be his asset and the sum of Rs. 42,000 goes out of his net wealth. Extending the analogy further, there are several situations where persons enter into financial transactions, purchases, sales, etc. where a deferred benefit alone is obtained. It would be equally preposterous to hold that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y would be, but actually as a payment in kind which would be of the same nature for tax purposes as a payment in cash. 15. In the alternative, as pointed out above, the payment for the purchase of the annuity cannot be said to have been incurred for the purpose of the assessee's business at all if it does not enure instantly on the purchase to the benefit of the employee. The assessee-company is entitled to the deduction only if the expenditure is relatable and spent for the purposes of the business. We are aware that such expenditure need not be limited to the immediate purpose of earning income but must be given a broader connotation---vide the Supreme Court's observations in the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140---but even so if it was only to purchase a deferred annuity policy not to benefit an employee immediately during the previous year or to benefit the company at any time in future, it cannot be allowed as an expenditure incurred for the business at all. The two alternatives, therefore, are to disallow the entire payment of Rs. 42,000 as not pertaining to the business at all or if the stand of the assessee is accepted to treat it as an addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tantial sales in the foreign market, thus becoming entitled to receive certain duty drawback and cash assistance. On account of the sales made in the export market during the financial year relevant to the year under appeal, the assessee was entitled to receive such drawback and assistance to the extent of Rs. 8,43,989. The assessee maintains its accounts on the mercantile basis and till the year of appeal, had been showing such assistance and drawback receipts on the above basis. During the year of account, the assessee claimed that in respect of this item it has bonafide changed its method of accounting to the cash basis in view of certain difficulties. The ITO did not accept the claim but added the sum of Rs. 8,43,989 in the total income of the assessee. 32. On appeal, the Commissioner deleted the addition. He came to the conclusion that the assessee had changed the method of accounting in respect of this item for all times to come and it was not a temporary or casual change for the year. The assessee, according to the Commissioner, had the right to decide the proper method of accounting and so long as the correct income was represented by the accounts, the department could ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel, difficult if not almost impossible to ascertain in advance the rates of duty or the amount of assistance the assessee was entitled to. The outstanding cash assistance and duty drawbacks were not settled promptly partly on account of the difficulty in quantifying them and partly for other reasons and often years lapsed before the assessee could receive the amounts. On the contrary, the accounts had to be finalised within a short period after the end of the year and the assessee was in fact taking a risk in taking these receipts into account while computing the profit at the time of Annual General Meetings and fixing dividends on the basis. It is also pointed out that the entire amount receivable being brought into account as and when received, there was no loss to revenue. Decisions in Indo-Commercial Bank Ltd. v. CIT [1962] 44 ITR 22 (Mad.) and 74 ITR 420 (sic) are cited in support of the claim. 35. On a consideration of the facts, we find no reason to interfere with the order of the Commissioner. It is settled law that the assessee is entitled to adopt a method of accounting and even change it. It has also been held that where the assessee followed the same meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it he does not get the relief, to claim the refund after a long time. On the contrary, it would be more equitable for him to pay the tax after the assistance or due drawback has been quantified and he becomes sure of receiving it. It has been claimed that such quantification and payment takes substantial time by not taking the 'accrued' duty drawback and cash assistance for the year, for the point of view of method of accounting, it cannot be stated that any taxable amount will go untaxed. Afterall even the Government has yet to decide whether to pay this amount to the assessee and how much. We cannot, therefore, hold that the change made by the assessee is not bona fide in the first place. We cannot also hold that he has not acted as a prudent businessman or taxpayer. The extreme inequity, if we accept the stand of the department, would be clear if we think of a case (God forbid) where a businessman having made an export and becoming entitled to a duty drawback or cash assistance pays the tax on this on the 'accrual' basis, but unfortunately is forced to close down the business later---in which case the tax having been paid on an amount he did not actually receive, he cannot even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the public are substantially interested or not depends to some extent on its listing in the stock exchange. The business of the company also carries better prestige and a better status when listed in the stock exchange. It will not be even incorrect to say that such listing adds several advantages to the business carried on by the assessee, particularly in the matter of confidence of the customers, loyalty of the employees, a large advertisement value, etc. 42 to 48. [These paras are not reproduced here as they involve minor issues.] 49. (15) Interest under section 216 --- The ITO charged interest under section 216 of the Act amounting to Rs. 1,99,025. It was claimed before him that there was no default since section 216 applies only where there was a deliberate and wilful underestimate of the advance tax payable. In fact in the draft assessment order issued under section 144B of the Act, there was no direction for charging interest under section 216 at all. This item was not mentioned even in the proceedings under section 144B before the IAC or in his directions to the ITO. The ITO levied the interest only at the time of finalising the assessment order. This technical obje ..... X X X X Extracts X X X X X X X X Extracts X X X X
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