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TMI Blog1966 (3) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... r 20, 1955, on attaining the age of 55. He was a married man. When Mr. Harvey entered the service of the company, it was arranged that he would get a pension when he retired, but this arrangement was not reduced to writing. Pursuant to this arrangement, the company executed a trust deed dated September 16, 1948, appointing three trustees for the purpose of providing the pension and the deed recited that the assessee-company was under an obligation to provide Mr. Harvey with a pension. In order to discharge the obligation the assessee-company paid to the trustees in 1948, a sum of Rs. 1,09,643 and undertook to pay to the trustees annually thereafter a sum of Rs. 4,364 for each of the six consecutive years. The payments were made up to 1954, and the total amount came up to Rs. 1,35,827. Under the trust deed the trustees agreed to hold the aforesaid sum on trust and to spend the same in taking out a deferred annuity policy with the Norwich Union Life Insurance Society in the name of the trustees but on the life of Mr. Harvey to cover an annuity of pound 720 per annum payable to him for life from the date of his attaining the age of 55 years, provided that, if Mr. Harvey was to die bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the accounting year 1955 relating to the assessment year 1955-56. He simply stated that the amount could not be treated as an expenditure under section 10(2)(xv) for the accounting period. The Appellate Assistant Commissioner in appeal supported the decision of the Income-tax Officer. He, however, held that the payment of this amount having been made long before the relevant accounting year it should not be treated to be an amount paid out or expended in the accounting year 1955, so that the assessee might be eligible to obtain deduction of the said amount as an admissible expenditure. The matter was taken in appeal before the Tribunal. It was contended on behalf of the assessee before the Tribunal that the Supreme Court in the decision referred to before, having held that the payment made in the earlier years to the trustees not being actual expenditure for those years but merely representing "the putting aside of money which may become expenditure on the attaining of an event", the amount became an effective expenditure during the accounting year 1955 when Mr. Harvey died. It was also contended before the Tribunal that on the death of Mr. Harvey and Mrs. Harvey being alive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In order that a deduction may be claimed under its provisions, it must be proved first that there was an expenditure, secondly, that the expenditure was not in the nature of a capital expenditure .... and thirdly, that it was laid out or expended wholly and exclusively for the purposes of the assessee's business ......" Thus it appears that in this clause there are three ingredients as pointed out by their Lordships of this court and the frame of the question itself would go to show that an answer is sought as to whether the amount, viz., the sum of Rs. 1,83,434 was really an expenditure in the accounting year. As regards the second and third elements stated before, no answer to these elements is contemplated by the question as posed. Therefore, it is for our decision to consider whether the said amount was an expenditure in the accounting year within the meaning of section 10(2)(xv) of the Income-tax Act. Mr. Pal, appearing for the applicant Commissioner, argued before us in the first instance that the sum of Rs. 1,83,434, was not an expenditure effectively laid out or expended during the accounting year for the reasons, that (1) it is admitted that in the accounts of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows : " 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 trust in favour of the company, then the money has not been spent, i. e., paid out or away, but the amount must be treated as set apart to meet a contingency. There is a distinction between a contingent liability and a payment depending upon a contingency. . . . . In our opinion, the liability was contingent and not merely depending upon a contingency. " This decision was arrived at in an appeal preferred by the assessee-company when their claim for deduction of the amounts in the previous accounting years was disallowed by this court. Their Lordships further remarked as follows : " In our opinion, the payment was not merely 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 an expenditure on the happening of an event is not expenditure. In the present case, nothing more was done in the acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eemed to have been paid or expended during the previous accounting years. Further, we are of the view that, as there is an observation by the Supreme Court that expenditure which is deductible for income-tax purposes is one which is towards the liability actually existing at the time, it may be said that the liability actually accrued in the accounting year ending with December 31, 1955, when it is found that there was no possibility of the money coming back to the assessee. We have already shown clearly that the Supreme Court decision does not contemplate that the money which was set apart should be treated as paid out or expended and it is reasonable to hold that when the liability actually came into existence, it should be dealt with under the provisions of section 10(2)(xv) of the Act as an expenditure and we should think that it comes under the first element of section 10(2)(xv) of the Act as stated before. In this connection, Mr. Pal has referred to us a decision in Commissioner of Income-tax v. A. Gajapathy Naidu. The decision of the Supreme Court as stated in the head-note is given below: " The provisions of the Income-tax Act, 1922, have to be construed on their own term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in previous years, that is no reason to hold why the setting apart of the money which ripens into actual liability on the happening of an event in the accounting year should not be debited to that particular year for the purpose of assessment of income-tax. As such, it appears to us that the amounts which, according to the Supreme Court decision, cannot be said to have been paid or expended during the previous accounting years can, by virtue of the observation made in Indian Molasses Co. (Private) Ltd. v. Commissioner of Income-tax be also treated as an expenditure in the accounting year when the liability really accrued. Accordingly, our conclusion in this regard is that the 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. Therefore, the position in law is that the putting aside of the money in the previous years is not an expenditure within the meaning of section 10(2)(xv) of the Act, but it was really so when the liability became fait accompli in the accounting year in question. Undoubtedly, the money was not show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity to pay the pension to Mrs. Harvey. Accordingly, the Tribunal went wrong in law in treating the amount in question generally as a pensionary liability. The legal position, according to him, is different when the pension is paid to an employee or to the widow of the employee and in this respect he submits that the settled law is that payment by an assessee towards pension of a widow cannot be treated to be a revenue expenditure. First of all, on this question we are called upon to decide whether the submission made by Mr. Pal can be entertained. It is to be found that before the tax authorities, as also before the Tribunal, it was not specifically argued that the pensionary benefit which accrued to Mrs. Harvey on account of payment by the assessee was not an expenditure within the meaning of section 10(2)(xv). In the forum below they pin-pointed their argument to this effect that the payment being a lump sum payment for securing pensionary benefits was a capital expenditure. It was also argued before the tax authorities that such payment could not be said to be an expenditure within the accounting year. Undoubtedly, the trust deeds are before us and it is also true that we can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(xv) of the Act did not apply to the assessment as the contention was within the scope of the question as framed by the Appellate Tribunal and was really implicit therein. Mr. Pal, on the basis of this observation of the Supreme Court, has argued before us that, although no specific question in the instant case was mooted, the question as raised by him can be gone into as one of the aspects of question No. 2. On a perusal of this judgment it appears to us that their Lordships affirmed the decision of the Bombay High Court taking the view that such a point of law which was raised by the assessee for the first time before the High Court could be taken into consideration, as the question was wide enough to include the point. The question which came up before the Bombay High Court runs as follows : " Whether in view of the fact that the fourth proviso to section 10(2)(vii) of the Indian Income-tax Act did not apply to the assessment for the assessment year 1945-46 and under the law in force as applicable to that assessment year the sum of Rs. 9,26,532 which accrued in the previous year relevant to that assessment year was not taxable at all, and the fact that having regard to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion of law was raised before the Tribunal, nor was there any finding by the Tribunal to the effect that on proper construction of the trust deeds, the pensionary benefits given to Mrs. Harvey would come within the ambit of section 10(2)(xv). Furthermore, it appears in terms of the Supreme Court decision that such a question was not in issue before the Tribunal and as such we may say at once that the question which is now sought to be argued by Mr. Pal cannot be availed of by him in view of the limited nature of the question. It is apparent that the Supreme Court considered in the Scindia Steam Navigation Co.'s case that the question was wide enough because a pure question of law was raised for the first time by the assessee which, according to the Supreme Court, could cover the question which was raised before the High Court by the Tribunal. Such is not the case here. Further, we may say in this connection that the question whether a pension granted to the widow of an employee would be an allowable expenditure raises a mixed question of law and fact. There is no finding on this mixed question of law and fact by the Tribunal, and following the observation of the Supreme Court, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Taxes). The headnote of the case runs as follows : " The appellant company was formed in 1933 to take over a business carried on by H, who became governing director. In the discussions leading up to the formation of the company, the questions of the sale, the remuneration to be paid to H and an annuity to be paid to his widow, were all discussed and decided at the same time. H originally demanded a salary of pound 3,000 per annum, but later agreed to accept pound 2,000 per annum provided that an annuity was secured to his widow. The articles of association of the company, and the service agreement entered into by H provided for the payment to his widow (if any) of an annuity of pound 1,000 per annum so long as his legal personal representatives held at least 10,000 shares. The directors later considered that the obligation to pay this annuity would be detrimental to the company, if it wanted to dispose of its business, and in 1943 H surrendered all right to the annuity in consideration of the payment to him by the company of pound 4,500. On appeal against an assessment to income-tax under Case 1 of Schedule D for the year 1944-45, the company contended that the slim of pound 4, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to consider whether or not the annuity itself would have been properly chargeable to revenue account. " The learned judge observed : " That is quite right : they set out that question, but, so far as I can find, they do not answer it directly. " Accordingly, we cannot accept the contention of Mr. Pal that the Commissioners also decided on the point whether an annuity was not an admissible deduction. Singleton J. observed further at page 342 as follows : " Again, I am not sure that it is wholly right to say that provision of the annuity had no connection with the services to be rendered by Mr. Howard, but I have referred to the findings generally and they may be summarised in this way on this part of the case. They, the Commissioners, did not find that the annuity was part of the consideration for the sale of the business. " From this observation it is also clear that Singleton J. did not make any clear finding whether an annuity as made out on the facts of the case was admissible as deduction or not. This decision was made on the ground that the assessee's claim for deduction was to be negative on the ground that the company obtained an additional advantage of an enduring cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nuity to Harvey, and the matter can be considered on the limited aspect that a pension or annuity to Harvey was also contemplated. " We do not think that this observation can also be considered as a proposition of law as their Lordships were not called upon to decide, in view of the limited question posed, whether the annuity paid to Mrs. Harvey was an expense made wholly and exclusively for the purpose of business. We may observe here that, in spite of this observation by the Supreme Court, no steps were taken on behalf of the revenue to agitate this point before the Tribunal and as their Lordships have not decided as to whether the annuity is deductible or not on the analogy of Alexander Howard's case, we consider that such an observation is of no assistance to the revenue. Nor do we think that simply by making this observation their Lordships have enunciated any abstract proposition of law as to whether an annuity available to the widow of an employee comes within the ambit of section 10(2)(xv). Mr. Pal has in this connection referred to us the case of Commissioner of Income-tax v. Anderson Wright Ltd. In this decision it appears that it was decided, relying on the Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e treated as a deductible expenditure under section 10(2)(xv) of the Act. Their Lordships negatived the contention of the assessee. It has been observed by G. K. Mitter J. as follows: " Mr. Meyer relied on the above (Howard's case) in support of his contention that the payment to the widow of an employee can never be deductible as an expense under section 10(2)(xv). I doubt whether the proposition in such wide terms is justified. Speaking for myself I cannot hold that payment of compensation to the widow of Mr. Cameron on the facts of this case is an expense laid out wholly for the purposes of the assessee's business. The company certainly behaved very generously towards the widow of a person who has served it faithfully and efficiently for many years. His death in the circumstances attending it was a great tragedy. The loss of this valuable life certainly affected both the assessee and Mr. Cameron's dependants very seriously. It cannot be denied that the payment of the compensation was likely to engender a feeling in the minds of other servants of the assessee that the company would look after their dependants if anything untoward happened to them. However this may be, I fail to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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