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TMI Blog1955 (12) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... n implementation, apparently, of that agreement, the assessee executed on the 16th of September, 1948, a deed of trust by which it appointed three chartered accountants as trustees and declared that it had already paid over to the trustees a certain sum of money and undertaken to pay to them certain annual sums for six consecutive years on condition that the trustees would execute a declaration of trust as thereafter specified. The deed went on to repeat that the company was undertaking and binding itself to pay to the trustees a certain sum on the 20th of September of every year for six consecutive years, the first of such payments to be made on the 20th of September, 1949. I may pause here to state that Mr. Harvey was due to retire on the 20th of September, 1955, on reaching the age of fifty-five years. To revert to the trust deed, it proceeded to set out the declaration of trust made by the trustees. Clause 2 of the deed states that the trustees hold a sum of £8,208-19-0 which, by the way, was the sum already paid to them and shall hold the rupee equivalent of £326-14-0 which, by the way, was the annual payment which the assessee was undertaking to make upon trust t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a deferred annuity policy in terms of clause 2 of the deed, as they were apparently expected to do if the assessee did not require them to take out a policy in terms of clause 3, the money would already be vested in such a policy. It is therefore not very easy to see how the trustees would stand possessed of the capital value of the deferred annuity policy referred to in clause 2, if after such a policy had been taken out Mr. Harvey died before attaining the age of fifty-five years. Be that as it may, it may be pointed out here that, in certain respects, the trust deed goes beyond the agreement, which the Tribunal has found the company was under, to provide a pension to Mr. Harvey when he retired. It exceeds the provisions of the agreement, because, under its provisions, even if Mr. Harvey died before reaching the age of fifty-five years and before retiring on superannuation and, therefore, without qualifying for a pension, his widow would still be entitled to an annuity if a policy was taken out in terms of clause 3 or if the trustees found themselves called upon to act in terms of clause 4. The trust deed was executed, as I have stated, on the 16th of September, 1948. It appear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring the next three years. It was these sums that the assessee claimed to be entitled to deduct in the computation of its business profits for the assessment years 1949-50, 1950-51, 1951-52 and 1952-53. The reference relates to all those four years and also to two chargeable accounting periods, one ended on the 31st of December, 1948, and the other on the 31st of March, 1949, but the latter are only consequential. The claim was made under section 10(2)(xv) of the Indian Income-tax Act, as it stood at the relevant time. The Income-tax Officer refused to allow the deduction on the grounds that the payment was in the nature of a gratuity, secondly, that the trust was vague and uncertain, thirdly, that the expenditure was a capital expenditure and lastly that, in any event, the deduction could not be allowed in view of the provisions of section 10(4)(c) of the Act, since no provision for payment of tax had been made. The Appellate Assistant Commissioner affirmed him, but chose to do so on two of the grounds. He held that the payments were ex gratia payments and also they were of a capital nature. Both the Income-tax Officer and the Appellate Assistant Commissioner held that the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any yet. "There has been only an allocation of a part of its funds for an expenditure which may (or may not) have to be incurred in future", or, as the Tribunal put it in other language, "what has been done amounts to a provision for a contingency which may never arise." In accordance with that view taken by the Tribunal, it held that the money in question had not been spent or expended at all and, therefore, no question of claiming or allowing any deduction under section 10(2)(xv) of the Act arose. After the decision of the Tribunal, the assessee applied for a reference to this Court and in compliance with that application, the Tribunal has referred the following question: "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 12th 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was, in any event, an expenditure made to meet a contingent liability. Mr. S. Iyengar, who appeared on behalf of the assessee, objected to the scope of the question being so enlarged and he referred to the appellate order of the Tribunal which had proceeded on a single ground. This Court has always construed questions referred to it with a certain degree of strictness and has not allowed any point to be canvassed before it which had not been raised before the Appellate Tribunal and which was not covered by the Tribunal's appellate order. I am, therefore, of opinion that the question should be taken as covering only the ground upon which the Tribunal held the payments to be not allowable as deductions and as not embracing any other ground. Accordingly, the question whether even if the amounts concerned were expended or parted with in fact, they constituted expenditure against a liability which, so far as the relevant accounting year was concerned, was only a contingent liability and therefore not allowable as deductions from the profits of that year, will be left open. So also will be the question as to whether section 10(4)(c) of the Act would bar the deduction claimed being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e obligation as an obligation "to provide for and pay to him a pension for life." I have already pointed out that the terms of the trust deed go beyond that obligation, but what payments in what eventualities they contemplate may be examined. It will appear that there is a provision for a payment of a pension to Mr. Harvey for the term of his life, if he should live up to the age of fifty-five and then retire. Such a provision is contained in clause 2 of the deed but it is not very relevant for our present purpose, since the policy actually taken out was not a policy contemplated by that clause. Clause 3 contemplates that should both Mr. Harvey and Mrs. Harvey be both alive on the date when Mr. Harvey's retirement would fall due, namely the 20th of September, 1955, an annuity would be payable to them for their joint lives and thereafter during the life of the survivor of the two. The clause further provides that if Mr. Harvey should die before reaching the age of fifty-five but Mrs. Harvey be alive, she will get an increased annuity. I may pause here for a moment to examine what the first provision in the third clause really means. The words are "to cover an ann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. It does not seem to provide for the case where Mr. Harvey will reach the age of fifty-five and will necessarily be alive but Mrs. Harvey will have predeceased him before that date. The clause nowhere states that should Mr. Harvey attain the age of fifty-five years but should Mrs. Harvey die before that date, Mr. Harvey will be entitled to an annuity. I half suspect that precisely because this omission was detected that a specific provision was made in the policy for the payment of an annuity of £720 per annum to Mr. Harvey in the event of Mrs. Harvey dying before the 20th of September, 1955, although the provision goes beyond the terms of the trust deed in respect of a policy under clause 3. Proceeding now to the fourth clause of the trust deed, I have already pointed out the difficulty of construing it. In the present context it is only necessary to say that it contemplates a case where Mr. Harvey will die before attaining the age of fifty-five and an alternative provision is made for Mrs. Harvey against such a contingency. From the terms of the trust deed which I have set out and tried to explain at some length, it would appear that nothing is made payable to either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y-five, the trust would become incapable of being executed and the trust-property would remain unexhausted. There is no direction in the trust deed that in such circumstances the money paid to the trustees would follow any course other than the one indicated in the section. The trustees would, therefore, hold the moneys for the benefit of the assessee and therefore it can by no means be said that by creating a trust in such terms and putting the trustees in funds in accordance with its provisions, the assessee had wholly parted with its interest in the amounts concerned. As against the view taken by the Tribunal, Mr. Iyengar referred us to section 56 of the Trusts Act and section 174 of the Indian Succession Act. He relied particularly on Illustration (b) to section 56 of the Trusts Act. The first clause of section 56 says that the beneficiary under a trust is entitled to have the intention of the author of the trust specifically executed to the extent of the beneficiary's interest and the second clause says that if he is competent to contract, he may require the trustee to transfer the trust-property to him or to such person as he may direct. The illustration given states tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d till a future date, the the Courts have sometimes struck out the condition, but this they have done only when it was clear that while the beneficiary was directed not to have the enjoyment till the time mentioned, no other person had been given the enjoyment and that vesting of the property had not been directed to wait till that time. Where, however, the interest conferred is doubly contingent, as in the present case, depending not only on the lapse of some time but also on the existence of a human life or lives on a future date, it is wholly unarguable that the beneficiary has a present interest and can reduce the property to his own possession to the exclusion of the trustor before the happening of the contingency contemplated. If Mr. Iyengar's contention be correct, Mr. and Mrs. Harvey became entitled immediately on the execution of the trust deed on the 16th of September, 1948, to call for an immediate payment to them of all sums paid by the assessee to the trustees and to keep such sums as their absolute property, irrespective of whether Mr. Harvey lived to attain the age of fifty-five years or whether any of the other contingencies contemplated by the trust deed happen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deficiency but profiting if there was an excess. I am entirely unable to see how a case which says that, on the true construction of the deed in question, there had been an absolute transfer of all interests, could help Mr. Iyengar in his contention that there could not be a resulting trust unless the trustor had specifically reserved his interest or provided for a reverter. Mr. Iyengar seemed to think that a resulting trust required a specific provision in the trust deed under which the trust-property or part of it, would be held by the trustees for the benefit of the trustor. A resulting trust, however, results from circumstances, not from specific reservations and if there be a specific provision in the deed of trust, there could not possibly be any question of any resulting trust at all. The other case cited by Mr. Iyengar was the decision in Cunnack v. Edwards [1896] 2 Ch. 679. The decision helps his contention even less. There, a society was established to raise a fund by subscriptions, fines and forfeitures of its members and the object was to provide annuities for the widows of the deceased members. Sometime after the establishment of the society, the rules were revised so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act recognised premia paid on deferred annuities as admissible expenditure or regarded the possibility of return of premia in certain circumstances as immaterial. He referred us to sections 15(1), 15(2A), 58K(2) and 58V of the Act. I am quite unable to see how anyone could extract any argument in aid of the admissibility of the allowance claimed in the present case from the analogy of other provisions in the Act containing specific directions. There is no room for any analogy or equity in a taxing statute. I do not, therefore, propose to deal with other sections which seem to me to be wholly irrelevant to the present purpose. Mr. Iyengar next referred to the decision of Rowlatt, J., and the Court of Appeal in Thomas v. Richard Evans & Co., Jones v. South-West Lancashire Coal Owners Association [1927] 1 K.B. 33 which, he said, wholly supported his contention that despite the possibility of a reverter, the money paid to the trustees in the present case could be claimed to be expenditure even in the Income-tax Act sense. The case relied on by Mr. Iyengar was heard along with another case which went up to the House of Lords, but the one on which Mr. Iyengar relied stopped at the Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in part, take the payment out of the category of a genuine insurance premium. If a person pays a premium for insurance with a right to a refund next year or in certain events, it might perhaps be said that he is paying a premium under discount and the full amount cannot be claimed as a deduction, but that does not arise here. Whether a member will get anything back is extremely remote; the occasion may never arise, and I do not think I need further consider the point." It will be noticed that the learned judge gave two reasons. One was that if any part of the money came back to a member at all, it would come back not in pursuance of any terms attached to the payment itself but only when the member withdrew from the membership of the association. The second reason given was that the possibility of any part of the money returning was extremely remote and indeed so remote that it might be left out of account for all practical purposes. The learned Judge next proceeded to deal with the contention that the member retained its ownership of the money in the sense that it was interested Pro rata in it as a reserve. The argument was considered by the learned judge to be irrelevant, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e put together, if either of them respectively should meet with accidents which are within the indemnity clause." Then the learned Master of the Rolls observed in a later part of the judgment as follows: "It appears to me, from what the Commissioners have found, and after consideration of the cases, that the character of these payments is not altered, and that they remain premiums, although there may be this possibility, more or less, remote, of an ultimate return of some of the money. So long as the member is conducting his colliery, he wants to have the protection as and when any serious accident may occur, and the sum that has been accumulated is not more than sufficient to meet that possible liability." It was next observed by the learned Master of the Rolls that if it ever occurred that the businessmen, carrying on the association, thought that the accumulated reserve was too large and they distributed a portion of it or allowed a set-off against future premia, the Crown might say that the members had not paid the whole of the premia, but really a portion of them. That would be a question of quantum. But, on the facts, it was clear that the sums had been paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the Tribunal has found, the company was under an obligation to provide for a pension for Mr. Harvey when he retired. There was, therefore, no instant necessity of laying out money in a trust. I am not saying that there was no necessity for laying out money in a trust if it was intended to grant Mr. Harvey a pension in the form of an annuity, but there was no instant necessity. In the second place, the object for which the trust was created was one which might never require to be fulfilled, because there were possibilities implicit in the nature of a pension in which no pension might ever be required to be paid. I am not forgetting that we are not in this reference dealing with the wisdom of the expenditure made by the assessee company, nor with the question as to whether it was right in incorporating in the trust deed provisions which seemed to exceed the terms of the agreement as found by the Tribunal. But what I am pointing out is that by the laying out of the money in trust, the assessee company was not acquiring any immediate advantage which was required for its business purposes of the accounting year, nor was it laying out the money for a purpose to which it would have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would represent interest, but he claimed a deduction of the amount which he had deposited in Court. The judicial Committee held that the deduction claimed was not allowable in the year of account, because until the suit was decided in the minor's favour, though in fact it had been, the mortgagee could not say whether or not he would have to pay over the amount of the deposit to the minor. "In these circumstances", observed Lord Macmillan, "their Lordships are unable to see how in computing the profits or gains of the assessees' business for the year 1925-26 this deposit can legitimately be claimed as a deduction from the purchase price of the Srinagar estate or from such part of that purchase price as may be held to be an income receipt. It was not in its nature a deduction from the purchase price, for the purchase price was paid in the knowledge of the claim; nor was it a sum actually expended in the year 1925-26, so as to be a debit in that year in the books of the assessees, which are kept on a cash basis, for it was then at most a contingent liability; and in no respect does it answer the description of expenditure incurred in the year 1925-26 by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich was wholly and exclusively for the purposes of the trade, is not material. What is material is that in holding that the money had actually been expended, he pointed out that there was nothing like a resulting trust in favour of the trustor under the provisions of the trust deed. The implication undoubtedly is that if there had been a possibility of a resulting trust, as in the present case, the learned Lord justice would not have held that the money had been expended. Towards the end of his argument Mr. Iyengar referred to the well- known decision in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 Tax Cas. 155 and particularly to the observations of Rowlatt, J., at page 177 of the report and those of Viscount Cave, L.C., at page 191. That was a case where a company was the assessee and it was claiming deduction of contributions it had made to the nucleus of a pension fund established by a trust deed for the benefit of its clerical and technical salaried staff. Rowlatt, J., posed for himself the question whether, if a person invested an actuarial sum to free his undertaking from the liability to pay pensions which was a liability for a term of years uncertain, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se [1925] 10 Tax Cas. 155 the contribution was made to a general fund out of which some pension was bound to be paid to some employee or another and therefore it could be said that the money had been parted with effectively in favour of certain trustees upon trust to hold it for application to the meeting of a continued business demand. The position in the present case is entirely different, since the provision is made in favour of a single employee who may or may not qualify for a pension and to whom or to whose wife a payment may or may not have to be made even under the terms of the trust deed. If no payment requires to be made, the money put into the hands of the trustees would in effect continue to remain the money of the assessee company and therefore it cannot be said that the money was expended in the Income-tax Act sense. I do not consider it necessary to refer to the decision in Peter Merchant Ltd. v. Stedeford (H.M. Inspector of Taxes) [1948] 30 Tax Cas. 496, and James Spencer & Co. v. Commissioners of Inland Revenue [1950] 32 Tax Cas. 111, both referred to by Mr. Meyer. They seem to me to bear on the point as to whether a payment or allocation made in a particular year ..... X X X X Extracts X X X X X X X X Extracts X X X X
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