1970 (8) TMI 9 - SC - Income Tax

Annuity to trustees - amount wholly and exclusively expended for the purpose of its business - whether the payments constituted expenditure within the meaning of that word in section 10(2)(xv) - High Court was in error in refusing to allow the argument to be raised that the requirements of section 10(2)(xv) were not satisfied, and the expenditure on that account was inadmissible.

Issues Involved:
1. Whether the sum of Rs. 1,83,434 was an expenditure effectively laid out or expended during the accounting year 1955 within the meaning of section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Whether the said expenditure of Rs. 1,83,434 represented a revenue expenditure.

Detailed Analysis:

Issue 1: Effective Expenditure During the Accounting Year 1955
The respondent-company appointed Harvey as its managing director, with an agreement to provide a pension upon his retirement at age 55. The company executed a deed of trust in 1948, setting apart Rs. 1,09,643 initially and Rs. 4,364 annually for six years to secure an annuity for Harvey. The company claimed these amounts as deductible expenditures under section 10(2)(xv) of the Indian Income-tax Act, 1922, but the Income-tax Officer disallowed the claim. The High Court of Calcutta, and subsequently the Supreme Court in Indian Molasses Co. (P.) Ltd. v. Commissioner of Income-tax, held that the amounts set apart did not constitute "expenditure" as the liability was not existing at the time and the company retained control over the funds.

During the pendency of these proceedings, the company arranged for an "enhanced pension" for Harvey and executed a supplementary deed of trust in 1954, setting apart an additional Rs. 47,607. Harvey died in May 1955, and the company claimed Rs. 1,83,434 as permissible expenditure in the assessment year 1956-57. The Income-tax Officer disallowed the claim, and the Appellate Assistant Commissioner upheld this decision. However, the Income-tax Appellate Tribunal reversed the order, holding that the amount was "effectively disbursed during the accounting year."

The High Court of Calcutta affirmed this view, and the Supreme Court concurred, stating that the amounts set apart became subject to the obligation to pay the pension only upon Harvey's death, thereby constituting expenditure within the meaning of section 10(2)(xv) at that time.

Issue 2: Nature of the Expenditure (Revenue or Capital)
The Tribunal had to determine whether the expenditure was capital or revenue in nature. The High Court of Calcutta answered affirmatively that it was revenue expenditure. However, the Supreme Court found that the Tribunal did not provide sufficient facts to determine the admissibility of the allowance under section 10(2)(xv).

Sections 10(1) and 10(2)(xv) of the Act stipulate that for an expenditure to be deductible, it must not be capital expenditure or personal expenses and must be laid out wholly and exclusively for the business. The Supreme Court noted that the expenditure incurred by the company was neither capital expenditure nor personal expenses. The High Court rightly rejected the argument that the expenditure was capital in nature.

However, to qualify for exemption under section 10(2)(xv), it must be established that the amount was laid out wholly and exclusively for business purposes. The Tribunal did not discuss whether the expenditure met this criterion. The Supreme Court emphasized that all conditions of section 10(2)(xv) must be satisfied and authorized under section 10(4A). The High Court erred in refusing the argument that the requirements of section 10(2)(xv) were not met.

The Supreme Court concluded that the Tribunal failed to consider whether the expenditure was laid out wholly and exclusively for business purposes. Consequently, the Supreme Court declined to answer the second question due to insufficient findings by the Tribunal. The Tribunal is directed to re-examine the case under section 66(5) of the Indian Income-tax Act, 1922, considering the observations made by the Supreme Court.

Conclusion
The Supreme Court affirmed that the sum of Rs. 1,83,434 was effectively laid out as expenditure during the accounting year 1955 upon Harvey's death, but the Tribunal must re-evaluate whether the expenditure was laid out wholly and exclusively for the business of the company. The High Court's refusal to consider this aspect was incorrect, and the Tribunal must now address this issue comprehensively. There is no order as to costs in this appeal.

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