1959 (5) TMI 5 - SC - Income Tax

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 can be made, subject to the other conditions mentioned in that clause being satisfied ? Held that - 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 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.

Summary

Issues Involved:
1. Whether the payments made by the assessee company constituted "expenditure" within the meaning of section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Whether the payments were laid out or expended wholly and exclusively for the purposes of the assessee's business.
3. Whether the payments were in the nature of capital expenditure or revenue expenditure.

Issue-wise Detailed Analysis:

1. Whether the payments made by the assessee company constituted "expenditure" within the meaning of section 10(2)(xv) of the Indian Income-tax Act, 1922:

The court examined the definition of "expenditure" as it pertains to section 10(2)(xv) of the Indian Income-tax Act, 1922. The key point was whether the payments made by the assessee company to the trustees for the purchase of an annuity policy for its managing director, Harvey, constituted "expenditure." The court noted that "expenditure" implies money paid out or away, which is irretrievable. The court emphasized that for a payment to be considered "expenditure," it must be a disbursement or an outgoing, not merely an allocation of funds for a future contingent liability. The court concluded that the payments made by the assessee company were not "expenditure" because they were contingent and could revert to the company under certain conditions.

2. Whether the payments were laid out or expended wholly and exclusively for the purposes of the assessee's business:

The court acknowledged that this aspect was not directly addressed due to the limited scope of the question referred to the High Court. However, it was noted that if the payments were considered "expenditure," it would still be necessary to determine whether they were laid out or expended wholly and exclusively for the purposes of the assessee's business. The court observed that the payments were made to secure an annuity for Harvey, which could be seen as a business expense. However, the court also noted that the payments provided benefits to Mrs. Harvey, who had no claim to the annuity or pension, raising questions about whether the payments were wholly and exclusively for the business.

3. Whether the payments were in the nature of capital expenditure or revenue expenditure:

The court discussed the principles distinguishing capital expenditure from revenue expenditure. It noted that capital expenditure is typically a one-time payment made to acquire an asset or advantage of enduring benefit, while revenue expenditure is recurring and related to the day-to-day operations of the business. The court referred to English case law, emphasizing that a lump sum payment does not necessarily constitute capital expenditure if it is made to avoid recurring liabilities. However, the court concluded that in this case, the payments were contingent and could revert to the company, indicating that they were not irretrievable and thus not "expenditure" under section 10(2)(xv).

Conclusion:

The court upheld the decision of the Calcutta High Court, concluding that the payments made by the assessee company did not constitute "expenditure" within the meaning of section 10(2)(xv) of the Indian Income-tax Act, 1922. The appeal was dismissed with costs. The court emphasized that for a payment to be considered "expenditure," it must be an outgoing or disbursement that is irretrievable, and in this case, the payments were contingent and could revert to the company.