1966 (3) TMI 13 - HC - Income Tax

Computation of the assessee s business profit - money which was paid to the trustees in the previous accounting years was not money paid. It was clearly set apart for the purpose of meeting the liability which had already ripened in the relevant accounting year - held that putting aside of the money in the previous years is not an expenditure within the meaning of section 10(2)(xv)

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.
2. Whether the said expenditure of Rs. 1,83,434 represented a revenue expenditure.

Issue-Wise Detailed Analysis:

Issue 1: Expenditure Effectively Laid Out or Expended During the Accounting Year 1955

The primary question is 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. The Tribunal found that the sum became an effective disbursement in the accounting year 1955 when Mr. Harvey died, as the possibility of the money coming back to the company was irretrievably gone. The Tribunal relied on the Supreme Court's decision in Indian Molasses Co. (Private) Ltd. v. Commissioner of Income-tax, which held that the setting aside of money does not constitute expenditure until the liability becomes absolute.

The Tribunal concluded that the payment of Rs. 1,83,434 was an effective expenditure in the accounting year 1955 when the liability became certain upon Mr. Harvey's death. The Tribunal's decision was based on the principle that expenditure deductible for income-tax purposes is one towards an existing liability, not merely setting aside money for a future contingent liability.

The High Court agreed with the Tribunal, stating that the money set aside in previous years was not considered expenditure until the liability became absolute in 1955. The Court noted that the Supreme Court's decision clarified that the setting aside of money does not constitute expenditure unless it is paid out irrevocably. Thus, the High Court answered the first question in the affirmative, affirming that the sum of Rs. 1,83,434 was effectively laid out or expended during the accounting year 1955.

Issue 2: Revenue Expenditure

The second issue was whether the expenditure of Rs. 1,83,434 represented a revenue expenditure. The Tribunal had concluded that the payment was a revenue expenditure, as it was made to secure pensionary benefits for the company's managing director, Mr. Harvey, and his widow, Mrs. Harvey. The Tribunal rejected the argument that the payment was a capital expenditure, stating that the pension itself would be a revenue expenditure, and the lump sum payment to get rid of the liability was also a revenue expenditure.

The High Court addressed the argument that the payment to Mrs. Harvey could not be considered a revenue expenditure. It noted that this specific argument was not raised before the tax authorities or the Tribunal. The Court referred to the Supreme Court's decision in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd., which allowed new contentions to be raised if they fell within the framework of the question referred. However, the High Court found that the question posed did not cover the specific issue of whether the payment to Mrs. Harvey was a revenue expenditure.

The High Court also considered previous decisions, including Alexander Howard and Co. Ltd. v. Bentley and Commissioner of Income-tax v. Anderson Wright Ltd., which dealt with similar issues. The Court concluded that the observation in Howard's case did not establish an abstract principle of law that payments to widows of employees are not allowable as revenue expenditure.

Ultimately, the High Court held that the payment of Rs. 1,83,434 was a revenue expenditure, as it was made to meet an existing liability that became absolute in the accounting year 1955. The Court answered the second question in the affirmative, affirming that the expenditure represented a revenue expenditure.

Conclusion:

The High Court concluded that the sum of Rs. 1,83,434 was effectively laid out or expended during the accounting year 1955 and represented a revenue expenditure. Both questions were answered in the affirmative, in favor of the assessee. The Commissioner of Income-tax was directed to pay costs to the respondents.

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