# Supp. THE INDIAN MOLASSES CO. (PRIVATE) LTD v. THE COMMISSIONER OF INCOME-TAX, WEST BENGAL

- **Citation:** [1959] Supp. 2 S.C.R. 964
- **Court:** Supreme Court of India
- **Decided:** 1956-11-09
- **Case number:** Civil Appeal No. 395 of 1957
- **Bench:** B. P. Sinha, J. L. Kapur, M. Hidayatullah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/supp-the-indian-molasses-co-private-ltd-v-the-commissioner-of-income-tax-west-1712
- **Pages:** 23

## Headnote

Income-tax-Deduction -
Business expendit11re-Payment of
sums for getting annuities to provide pension-Liability depending
on contingency-Expenditure, meaning of-Indian Income-tax Act,
z922 (XI of z922), s. Io(2)(xv).
With a view to provide a pension to H who was the managing director of the appellant company, after his retirement at
the age of 55 years on September 20, 1955, the company executed
a trust deed on September 16, 1948, in favour of three trustees
to w horn the company paid a sum of Rs. l,09,643 and further
undertook to pay annually Rs. 4,364 for six consecutive years.
The trustees undertook to hold the said sums upon trust to spend
the same in taking out a Deferred Annuity Policy with an Insurance Society in the name of the trustees but on the life of H
under which a certain sum of money was payable annually to H
for life from the date of his superannuation. It was also provided in the deed that notwithstanding the main clause the
trustees would, if so desired by the company, take out instead a
different kind of policy for the benefit of both H and his wife,
with a further provision for H's wife should H die before he
attained the age of 55. On January 12, f949, the trustees took
out a policy, wherein the amount of Deferred Annuity to be paid
per annum was fixed according as whether both H and his wife
were living on September 20, 1955, or one of them died earlier.
The policy also contained, inter alia, two clauses: "(1) Provided
the contract is in force and unreduced, the Grantees (i. e., the
trustees) shall be entitled to surrender the Annuity on the Option
Anniversary (i.e., Sept. 20, 1955) for the Capital sum of£ 10,169
subject to written notice of the intention to surrender being
received by the Directors of the Society within the thirty days
preceding the Option Anniversary. (2) If both the Nominees
shall die whilst the Contract remains in force and unreduced and
before the Option Anniversary the said funds and Property of
the Society shall be liable to make repayment to the Gran tees
of a sum equal to a returu of all the premiums which shall have
been paid under this Contract without interest after proof 'thereof and subject as hereinbefore provided."
The appellant company paid the initial sum and the yearly
premia for some years before H died.
For the assessment years
1949-50, 1950-51, 1951-52 and 1952-53, the appellant claimed a
deduction of these sums from its profits _or gains under s. l0(2)(xv)
(2) S.C.R. SUPREME COURT REPORTS
965
of the Indian Income-tax Act, 1922, but the Income-tax authoriz959
ties disallowed the claim on the ground that the sums claimed
did not amount to expenditure within the meaning of the section.
The Indian
The appellant's contention was that payment of pension was an
Mo~asses Co.
expenditure of a revenue character and so also the payment of a
(Prwate) Ltd.
lump sum to get rid of a recurring liability to pay such pension
v.
and that expenditure on insurance was not contingent, because The Commissioner
though the contingency related to life and depended on it, the
of Incorpe-tax,
probabilities were estimated on actuarial calculations and, that
West Bengal
the expenditure was, therefore, real.
Held, that expenditure which is deductible for the purposes
of income-tax under s. ro(2)(xv) of the Indian Income-tax Act,
1922, is one which must be 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, on the terms of the deed of trust, money
was placed in the hands of trustees for the purchase of annuities of different kinds, if required, but to be returned if the
annuities were not bought, and the clauses in the policy taken
out by the trustees showed that till September 20, 1955, the
appellant had dominion through the trustees over the premia
paid. The payment to the trustees was therefore towards a liability depending on a contingency. Consequently, the amount

## Text

_Characters 0–39,694 of 51,573. This is a partial read: ask again with offset=39694 for what follows._

'959
May 5.
964
SUPREME COURT REPORTS
[1959] Supp.
THE INDIAN MOLASSES CO. (PRIVATE) LTD.
v.
THE COMMISSIONER OF INCOME-TAX, WEST
BENGAL.
(B. P. SINHA, J. L. KAPUR and
M. HIDAYATULLAH, JJ.)
Income-tax-Deduction -
Business expendit11re-Payment of
sums for getting annuities to provide pension-Liability depending
on contingency-Expenditure, meaning of-Indian Income-tax Act,
z922 (XI of z922), s. Io(2)(xv).
With a view to provide a pension to H who was the managing director of the appellant company, after his retirement at
the age of 55 years on September 20, 1955, the company executed
a trust deed on September 16, 1948, in favour of three trustees
to w horn the company paid a sum of Rs. l,09,643 and further
undertook to pay annually Rs. 4,364 for six consecutive years.
The trustees undertook to hold the said sums upon trust to spend
the same in taking out a Deferred Annuity Policy with an Insurance Society in the name of the trustees but on the life of H
under which a certain sum of money was payable annually to H
for life from the date of his superannuation. It was also provided in the deed that notwithstanding the main clause the
trustees would, if so desired by the company, take out instead a
different kind of policy for the benefit of both H and his wife,
with a further provision for H's wife should H die before he
attained the age of 55. On January 12, f949, the trustees took
out a policy, wherein the amount of Deferred Annuity to be paid
per annum was fixed according as whether both H and his wife
were living on September 20, 1955, or one of them died earlier.
The policy also contained, inter alia, two clauses: "(1) Provided
the contract is in force and unreduced, the Grantees (i. e., the
trustees) shall be entitled to surrender the Annuity on the Option
Anniversary (i.e., Sept. 20, 1955) for the Capital sum of£ 10,169
subject to written notice of the intention to surrender being
received by the Directors of the Society within the thirty days
preceding the Option Anniversary. (2) If both the Nominees
shall die whilst the Contract remains in force and unreduced and
before the Option Anniversary the said funds and Property of
the Society shall be liable to make repayment to the Gran tees
of a sum equal to a returu of all the premiums which shall have
been paid under this Contract without interest after proof 'thereof and subject as hereinbefore provided."
The appellant company paid the initial sum and the yearly
premia for some years before H died.
For the assessment years
1949-50, 1950-51, 1951-52 and 1952-53, the appellant claimed a
deduction of these sums from its profits _or gains under s. l0(2)(xv)
(2) S.C.R. SUPREME COURT REPORTS
965
of the Indian Income-tax Act, 1922, but the Income-tax authoriz959
ties disallowed the claim on the ground that the sums claimed
did not amount to expenditure within the meaning of the section.
The Indian
The appellant's contention was that payment of pension was an
Mo~asses Co.
expenditure of a revenue character and so also the payment of a
(Prwate) Ltd.
lump sum to get rid of a recurring liability to pay such pension
v.
and that expenditure on insurance was not contingent, because The Commissioner
though the contingency related to life and depended on it, the
of Incorpe-tax,
probabilities were estimated on actuarial calculations and, that
West Bengal
the expenditure was, therefore, real.
Held, that expenditure which is deductible for the purposes
of income-tax under s. ro(2)(xv) of the Indian Income-tax Act,
1922, is one which must be 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, on the terms of the deed of trust, money
was placed in the hands of trustees for the purchase of annuities of different kinds, if required, but to be returned if the
annuities were not bought, and the clauses in the policy taken
out by the trustees showed that till September 20, 1955, the
appellant had dominion through the trustees over the premia
paid. The payment to the trustees was therefore towards a liability depending on a contingency. Consequently, the amount
claimed was not liable to be deducted as an expenditure under
s. ro(2)(xv) of the Act.
Cases on English Income-tax law reviewed.
CIVIL
APPELLATE
JURISDICTION:
Civil Appeal
No. 395 of 1957.
Appeal by special leave from the judgment and
order dated December 21, 1955, of the Calcutta High
Court in Income-tax Reference No. 15 of 1954.
A. C. Sampath Iyengar, Dipak Dutta Choudhury and
B. N. Ghosh, for the appellant.
M. C. Setalvad, Attorney-General for India, R. Ganapathy Iyer, R.H. Dhebar and D. Gupta, for the respondent.
1959. May 5. The Judgment of the Court was
delivered by
HIDAYATULLAH, J.-The Indian Molasses Co. (PriHidayat«llah J.
vate) Ltd., Calcutta (hereinafter called the assessee
Company), have brought this appeal, with the special
leave of this Court granted on November 9, 1956,
against the judgment of the High Court of Calcutta
dated December 21, 1955, in Income-tax Reference
966
SUPREME COURT REPORTS [1959] Supp.
1959
No. 15 of 1954.
The question of law referred to the
The Indian
High Court was :
Molasses Co.
" 'Whether on the facts and in the circumstances
(Pdvate) Ltd.
of the case, and on a true construction of the Trust
' v.
Deed, dated 16th September, 1948, and the Policy
The Commissioner dated the 13th January, 1949, the payments made by
01 Income-tax, the assessee Company and referred to in paragraph 4
West Bengal
b
t't t '
d't
'
'th' th
.
f'
a ove cons I u e expen I ure w1
m
e meanmg o
Hidayatnllah J. 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".
The question was answered in the negative.
The facts of the case are as follows : One John
Bruce Richard Harvey was the Managing Director of
the assessee Company in 1948. · He had by then
served the Company for 13 years, and was due to
retire at the age of 55 years on September 20, 1955.
There was, it appears, an agreement by which the
Company was under an obligation to provide a pension to Harvey after his retirement. On September
16, 1948, the Company executed a Trust Deed in
favour of three trustees to whom the Company paid a
sum of£ 8,208-19-0 (Rs. 1,09,643) and further undertook to pay annually Rs. 4,364 (£ 326-14 sh.) for six
consecutive years, and the trustees agreed to execute
a declar.ation of trust. The trustees undertook to hold
the said sums upon trust 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 Harvey under which £ 720 per
annum were payable to Harvey for life from the date
of his superannuation. It was also provided in the
deed that notwithstanding the main clause the trustees would, if so desired by the assessee Company,
take ont instead a deferred longest life policy, with
the said Insurance Company, in their names, but in
favour of Harvey and Mrs. Harvey for an annuity of
£ 558-1-0 per annum payable during their joint lives
from the date of Harvey's superannuation and during
the lifetime of the survivor, provided further that if
Harvey died before he attained the age of 55 years the
(2) S.C.R.
SUPREME COURT REPORTS
967
I959
annuity payable to Mrs. Harvey would be £ 611-12-0
during her life. It was further provided that should
f
The Indian
Harvey die before attaining the age o 55 years, the
Molasses co.
trustees would stand possessed of the capital value of
(Private) Ltd.
the Deferred Annuity Policy, upon trust to purchase
v •
. therewith an annuity for Mrs. Harvey with the above The Commissioner
Insurance Company or another Insurance Company
0! Income-tax,
of repute. The other conditions of the deed of trust
West Bengal
need not be considered, because they do not bear upon Hidayatullah J.
the controversy.
In furtherance of these presents, the trustees took
out a policy on .January 12, 1949. In addition to
conditions usual in such policies, it provided for the
following benefits :
Amount per annum of
deferred Annuity.
£ 563-5-8 p. a. if both
Mr. and Mrs. Harvey be
living on
September 20,
1955.
£ 720-0-0 p. a. if Mrs.
Harvey should die before
September 20, 1955, leaving
Harvey surviving her.
£ 645-0-0 p. a. if Harvey
should die before September
20, 1955, leaving Mrs. Harvey surviving him.
There was a special provision which must be reproduced:
"Provided the contract is in force and unreduced,
the Grantees (i.e., the trustees) shall be entitled to
surrender the Annuity on the Option Anniversary (i.e.,
Sept. 20, 1955) for the Capital sum of £ 10,169 subject
to written notice of the intention "to surrender being
received by the Directors of the Society within the
thirty days preceding the Option Anniversary."
Two other clauses of the second schedule of the Policy
may also be quoted:
(III) "If both the Nominees shall die whilst the
Contract remains in force and unreduced and before
the Option Anniversary the said funds and Property
of the Society shall be liable to make repayment to
'
968
SUPREME COURT REPORTS [1959] Supp.
1959
the Grantees of a sum equal to a return of all the premiums which shall have been paid under this Contract
The Indian
Molasses co.
without interest after proof thereof and subject as
(Private) Ltd.
herein before provided.
v.
(IV) The Grantees shall before the Option Annin, Commissioner versary and after it has acquired a Surrender Value
01 Income-tax,
be entitled to surrender the Contract for a Cash PayWest Bengal
ment equal to a return of all the premiums (at the
Hidayatullah f. yearly rate) which have been paid less the first year's
premium or five per cent. of the Capital Sum specified
in the Special Provision of the First Schedule whichever shall be the lesser sum, provided that if the
Deferred Annuity has been reduced an equivalent
reduction in the guaranteed Surrender Value as calcu-
•
lated above will be made. "
The assessee Company paid the initial sum and the
yearly premia for some years before Harvey died. In
the assessment years 1949-50, 1950-51, 1951-52 and
1952-53, it claimed a deduction of.these sums from its
profits or gains under s. 10(2)(xv) of the Indian Income-tax Act (hereinafter called the Act), which
provides:
.
"Such profits or gains shall be computed after
making the following allowances, namely,
any expenditure (not being in the nature of capital
expenditure or personal expenses of the assessee) paid
out or expended wholly and exclusively for the purposes of such business, profession or vocation. "
This claim was disallowed by the Department and
the Appellate Tribunal. The Tribunal held that it
was not necessary to decide if the expenditure was
wholly or exclusively for the purposes of the Company's business, and if so, whether it was of a capital
nature, because in the Tribunal's opinion there was no
expenditure at all. The reason why the Tribunal held
this way may be stated in its own words :
"Clauses (I) and (II) do not contain any provision having a material bearing upon Clause (III).
Therefore if it happens that both Mr. and Mrs. Harve:y
die before 20th September, 1955, all the payments till
made through the Trustees to the Insurance Society
will come back to the Trustees and as there is not the
(2) S.C.R. SUPREME COURT REPORTS
969
slightest trace of any indication anywhere that the
1959
Trustees should have any beneficient interest in these
moneys, there would be a resultant trust in favour of
The Indian
Molasses Co.
the Company in respect of the m_oneys thus far paid
(Private Ltd.)
out. In other words, what has been done amounts to
v.
a provision for a contingency which may never arise. The Commissioner
Such a provision can hardly be treated as payment to
of Income-tax,
an employee whether of remuneration or pension or
West Bengal
gratuity, and cannot be a proper deduction against Hidayatullah J.
the incomings of the business of the Company for the
purpose of computing its taxable profits. In short,
there has been no expenditure by the Company 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. "
The Tribunal, however, referred the above-stated
question for the opinion of the High Court. The High
Court noticed the limited scope of the question, and
pointed out that the Tribunal had stated at the end
of the Statement of the Case:
" In the event of the High Court holding that
there was an expenditure in this case, it would still be
necessary for the Tribunal whether the money was
laid out or expended wholly and exclusively for the
purposes of the assessee's business and, if so, whether
the expenditure was in the nature of capital or revenue expenditure. "
The learned Chief Justice of the Calcutta High Court
(Sarkar, J., concurring) felt the difficulty of the question.
He analysed the ingredients of cl. (xv), and
pointed out that the question referred to but one such
ingredient. The Divisional Bench, however, did not
call for an additional statement of fact, or ask that
the rest of the matter be referred, so that the whole of
the question involved might get disposed of.
It
observed:
"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
122
970
SUPREME COURT REPORTS [1959] Supp.
r959
appellate order. I am, therefore, of opinion that the
The Ind;an
question should be taken as covering only the ground
Molasses co.
upon which the Tribunal held the payments to be not
(Private) Lid.
allowable as deductions as not embracing any other
v.
ground. "
·
The Commissioner
We must express our regret that the case took the
of Income-tax, course it did. The order of assessment was passed as
rVest Bengal
.c
b k
9
d
lar ac as 1 52, an
seven years have now passed
Hidayatullah J. during which only one question out of three is before
the Courts for decision. Section 10(2)(xv) was analysed
by the learned Chief Justice in these words :
" It w'ill be noticed that three ingredients of the
clause lie on the surface of its language. 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-I am leaving ·aside the personal expenses-and, thirdly, that it was laid out or
expended wholly and exclusively for the purposes of
the assessee's business-I am leaving out profession or
vocation. "
We must not be understood as finding fault with
the Divisional Bench. It decided the question as
framed. It is the Tribunal which referred the question in this form, keeping to itself the right to decide
about the other ingredients of the clause later.
\Vhether the question can be answered in the bland
form it is posed, is a matter to which we will have to
address ourselves presently. But it appears to us
that this is a very unsatisfactory way to go about the
business.
Perhaps, the Tribunal decided this case in
this way and referred the question it did, because it
felt that if this Court in Allahabad Bank Ltd. v. Commissioner of Income-tax, West Bengal (1 ) was able to
decide whether a particular outlay was ' expenditure '
without reference to the other ingredients of cl. (xv),
the same could be done in this case also. That case,
however, was very different in its facts. Thero,
certain contributions on trust for payment of pensions
to employees were held not to be ' expenditure ',
because on the original trust failing, the money was
(t) (1954] S.C.R. 195.
(2) S.C.R.
SUPREME COURT REPORTS
971
deemed to be held by the trustees on a resulting trust
r959
for the benefit of the maker. If the same can be said
The Indian
in this case, namely, that the money con~inued to
Molasses co.
belong to the assessee Company 'in the account years,
(Private) Ltd.
its payment to the trustees or the Insurance Company
v.
notwithstanding, there may be a possibility of answer- The Commissioner
ing the question as was done in the decision of this of Income-tax,
C
t ·t·d
'l'
B t 'f
h
l
t
.
West Bengal
our 01 e ear ier.
u
I
sue
a c ear-cu proposition cannot be laid down, then, obviously, there is Hidayatullah J.
considerable difficulty in deciding what is 'expenditure ' within the clause, without reference to the rest
of its provisions. Of course, to find the meaning of
the word 'expenditure ', a dictionary is all that is
needed, but to go further and to decide whether the
outlay in this case was ' expenditure ', the context in
which the word is used in the clause cannot successfully be left out.
Mr. Sampath Iyengar for the assessee Company
complained before us of the narrowness of the question, though before the High Court he was opposed to
any extension of the ambit of the question. The
following passage from the judgment of the Chief
Justice shows the respective attitud~s of the Department and the assessee Company before the Bench:
"Mr. Meyer contended that that language entitled
him to argue not only that there had been no expenditure in fact at all, but also that even assuming that
there had been an expenditure in the sense of a physical spending, still the expenditure was not such as
could be claimed as an allowance under the clause
against the profits of the relevant accounting year in
view of the fact that it was, in any event, an
expenditure made to meet a contingent liability.
Mr. S. Iyengar, who appeared on be'half 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. "
The learned Attorney-General who appeared for the
Department at once conceded the difficulty of answering the question, but contended that the question in
its present form could be answered, though he agreed
that if it could not, the Court would be free to say so.
972
SUPREME COURT REPORTS [1959] Supp.
r959
We cannot help saying that though the Tribunal may
Th, Indian
be at liberty to decide a case as appears best to it,
Molasses Co.
there is considerable hardship to the tax-payers, if
(Private) Ltd.
questions of law are ·decided piecemeal and repeated
The C v. . .
references to the High Court are necessary. The juris0'"'""·"0"" d' t'
f th H' h C
t .
d .
d
1
.
of Inconie-tax.
IC 10n o
e
Ig
our IS a visory an consu tative,
west Brngol
and questions of interpretation of the law in this
attenuated form can well be avoided.
This will tend
Hidayatullah J. to cut down the duration of litigation.
In deciding that the payment of the lump sum and
premia was not 'expenditure ', different views were
expressed as the case progressed. The Income-tax
Officer held that in the absence of a written agreement
covering the conditions of service, remuneration, etc.,
the arrangement could only be taken as a provision
for a gratuity, more so as there was a provision in the
deed of trust for payment of an annuity to Mrs. Harvey in the event of Harvey's demise.
According to
him, there were so many alternative arrangements for
the disbursement of the money laid out, that it was
impossible to say what shape the annuity would ultimately take and till certain events happened, the
' expenditure ' w!ts not effective. Following, therefore,
the case in Atherton v. British Insulated and H elsby
Cables, Ltd. (1 ) and distinguishing Hancock v. General
Reversionary and Investment Co. Ltd. ('), the claim for
deduction was rejected by the Income-tax Officer.
The Appellate Assistant Commissioner considered
that in the absence of an agreement the payment
must be regarded as an ex gratia payment of a capital
nature, so long as the trust intervened. The Appellate
Assistant Commissioner also commented upon the
existence of a provision for Mrs. Harvey's pension
which could not be a part of the agreement. He was
thus of the opinion that the case fell within the rule
laid down in Atherton's case (1).
This opinion of the
Tribunal which has already been reproduced earlier,
was shortly that there was no 'expenditure' yet and this
was only an allocation of funds for an 'expenditure',
which might or might not be incurred in the future.
The High Court analysed the terms of the deed of
(1) (1925) 10 Tax Cas. 155.
(2) (1918) 7 Tax Cas. 358.
(2) S.C.R. SUPREME COURT REPORTS
973
trust, and pointed out that there were two contingenr959
cies in which money was likely to revert to the assesThe Indian
see Company. The first contingency was if both HarMolasses co.
vey and Mrs. Harvey died before September 20, 1955.
(P,ivate) Ltd.
The second contingency was due to an omission in
v.
cl. (III) to provide for a pension to Harvey, if Mrs. The Commissioner
Harvey died before the above date. In that event,
01 Income-tax,
the trust would have failed, unless a policy was taken
West Bengal
out under cl. (II). The High Court held that if any Hidayatullah J.
- of these two circumstances happened, then there
would have been a resulting trust in favour of the
assessee Company, and it would have been entitled to
get back all the money laid out by it. We must say
here that the High Court was in error as to the second
of the two contingencies because the policy which was
taken out provided for all the three alternatives, and
pension was payable to both or either survivor, though
in different sums. Even in the trust deed, the three
alternative pensions were provided as follows : £ 720,
if the annuity was payable to Harvey ·alone; or
£ 558-1-0, during the joint lives of both or survivor;
or £ 611-12-0,. to Mrs. Harvey if Harvey died before
September 20, 1955. The special provision in the
policy, however, covered the first contingency of both
the prospective annuitants dying before September 20,
1955, and if that happened, the assessee Company
would have, if it chose to surrender the policy, got
back the sum of£ 10,169 subject to a written notice
of the intention to surrender being received by the
Insurance Company within thirty days preceding
September 20, 1955.
The High Court then observed in addition that
there was no ' instant necessity ' for the expenditure,
nor was the money ' laid out for a business purpose of
an instant character', nor did it bring in a 'present
asset which would always remain an asset in that
form, the money having gone for ever'. The High
Court pointed out that there was always a -possibility
of a resulting trust in favour of the Company and the
money could not, therefore, be held to have been expended. The conclusion of the High Court, therefore,
was that the assessee Company must be held to have
974
SUPREME COURT REPORTS [1959] Supp.
'959
set apart ' tentatively' a sum of money in order that
it might be available for the payment of a' gratuity'
The Indian
Molosoes co.
to Harvey and Mrs: Harvey, but there being' no pro-
(P•ivatc) Ltd.
vision for the application of tbe money in the event of
v.
those contingencies not occurring and no annuity being
n, Commfasiouer payable to any one', there was no 'expenditure ' in
of Income-tax. any real and practical sense of the term '.
We;I Bengal
Th
·
h'
1
d
e arguments mt 1s appea have range , as they
Hidayatullah ;. did before the High Court, over a very wide field. No
useful purpose will be served in following them
through all their convolutions. The main points
urged on behalf of the assessee Company are that
payment of pension is an expenditure of a revenue
character and so also the payment of a lump sum to get
rid of a recurring liability to pay such pension. This
is illustrated from some English cases, and reference is
made also to Ch. IX-B of the Act. It is also submitted
that in so far as payment by the assessee Company
was concerned, it was, i_n point of fact, made, and this
was ' expenditure ' within the dictionary meaning of
the word. The argument of the Department is that
by 'expenditure 'is meant a laying out of money for
an accrued liability and not for a contingent liability,
which contingency may or may not take place; that
the present 1trrangement was only a setting apart of
money for a contingent liability and till the liability
became real, there was no expenditure. The assessee
Company, however, contends that expenditure on
insurance is not contingent, because though the contingency relates to life and depends on it, the probabilities are great being estimated on actuarial calculations and the expenditure is real.
Both sides rely on
a large number of English decisions.
We shall now
consider the arguments in detail and refer to those
authorities, which are relevant.
In dealing with cases expounding the English In.
come-tax law, it must always be borne in mind that
the scheme of legislation there is not the same as in
our country. No doubt, a certain amount of assistance can, with caution, be taken from them, but the
problems under our Income-tax laws must be resolved,
in the ultimate analysis, with reference to our laws.
(2) S.C.R. 'SUPREME COURT REPORTS
975
It has been ruled under the English statute that
I959
sums paid to an employee as pension or gratuity are
The Indian
deductible as money laid out and expended for the
Molasses co.
purpose of trade, profession or vocation. See Smith v.
(Private) Ltd.
Incorporated Council of Law Reporting for England
v.
and Wales (1). It has also been ruled that a single The Commissioner
payment to avoid the recurring liability of an emploof Income-tax,
1
d d
Th l d
West Bengal
yee's pension is a so a proper e notion.
e ea ing
case on the subject is Hancock v. General Reversionary Hidayatullah J.
and Investment Go. Ltd. (2). In that case, the taxpayer was under a liability to pay a pension to a
retired actuary, and pension had, in fact, been paid
for some years. Subsequently, the tax-payer purchased an annuity for the employee, which he accepted in
place of his pension. The sum paid in purchasing the
annuity was allowed as a deduction in computing the
tax-payer's profits, it being held that it was money
wholly and exclusively laid out or expended for the
purposes of the trade, profession or vocation.
On the other hand, a sum which a company put
into a fund for the relief of invalidity, etc., was held
not to be an admissible deduction, and the case last
cited was distinguished. See Rowntree & Go. Ltd. v.
Curtis (3).
Pollock, M. R., drew pointed attention to
the words of Lush, J., in the earlier case, where' he
observed at p. 698 :-
"It seems to me as impossible to hold that the
fact that a lump sum was paid instead of a recurring
series of annual payments alters the character of the
expenditure, as it would be to hold that, if an employer
made a voluntary arrangement with his servant to
pay the servant a year's salary in advance instead of
paying each year's salary as it fell due, he would be
making a capital outlay.'',
and added that Lush, J., had described the actuarial
payment made in Hancock's case- (2) as a pension in
another form, which could not be said of the invalidity, claims for which were wholly uncertain. ·warrington, L. J., pointed out that the test to apply was fir:;t
(r) [r9r4] 3 K. B. 574; 6 Tax Cas. 477.
(2) (r9r8) 7 Tax Cas. 358.
(3) [1925] r K. B. 328; 8 Tax Cas. 678.
976
SUPREME COURT REPORTS [1959] Supp.
'959
whether there was an expenditure which he held there
was, and next whether it could be said to be wholly
The Indian
Molasses co.
and exclusively for the purposes of the trade which, in
(Private) Ltd.
his opinion, could not be said of the expenditure in
v.
that case. The words of the learned Lord Justice on
The Commissioner the first proposition have a bearing upon tho present
01 Income-tax. case, and may be reproduced here (at p. 703) :
West Bengal
" I
• 1 · d
• h M
L tt
·
h ·
am me me to agree wit
r.
a er m
1s
Hidayatullah J. contention that the money has actually been expended.
There is nothing like a resulting trust in favour
of the company although there is that provision
which I have already called attention to in the trust
deed, that one of the things which might be done
would be to abrogate altogether the trust or the provisions of the deed and to substitute other rules and
prov1s10ns.
But it seems to me that that cannot be
said to be a resulting trust in favour of the company
having regard to the other objects which are pointed
out as those to which the scheme was directed."
Similarly, a sum of money paid to the trustees to form
a nucleus of a pension fund for the benefit of some of
its employees by a company was also not held to be an
admissible deduction in Atherton's case (1).
Viscount
Cave, L. C., recalled the test laid d_own in a rough
way by Lord Dunedin in Vallambrosa Rubber Co. v.
Farmer (2) (at p. 192) that,
"capital expenditure is a thing that is going to be
spent once and for all and income expenditure is a
thing which is going to recur every year",
but added that it was not and wa.s not meant to be a
decisive test. The Lord Chancellor observed, however,
that,
"when an expenditure is made, not only once and
for all, but with a view to bringing into existence an
asset or an advantage for the enduring benefit of a
trade, I think that there is very good reason (in the
absence of special circumstances leading to an opposite
conclusion) for treating such an expenditure as properly attributable not to revenue but to capital."
(r) (1925) 10 Tax Cas, 155.
(2) (1910) 5 Tax Cas. 529.
(2) S.C.R.
SUPREME COURT REPORTS
977
Again, in Morgan Crucible Co. Ltd. v. The Commis-
'959
sioners of Inland Revenue (1), the payment to an insurThe Indian
ance company to take out a policy was held not to be
Molasses co.
an admissible deduction. There, the company operat-
(Private) Ltrl.
ed a scheme for payment of pensions to retired or
v.
incapacitated employees, reserving to itself the uncon- The Commissioner
trolled discretion to vary or cease payment of penofw 1"1cBomc-ta1x,
.
Wh
.
'd h
d d
d
es
enga
s10ns.
en pens10ns were pa1 , t ey were
e ucte
but when the company took out a policy, without Hidayatullah J.
informing their employees, for payment to itself of
annuities equal to the pensions, it was held that by
this the company had acquired an asset .and this was
in the nature of a capital asset.
Rowlatt, J., in
distinguishing Hancock's case (2), observed that unlike
that case the liability to pay pensions was not got rid
of and that the company had acquired an asset.
The
learned Judge continued (at p. 317):
" It is true they have got an asset which would
give them, in all probability, nothing on balance,
because they use it to pay these pensions ; but they
have got an asset; they had not any pension fund to
pay these pensions with, and now they have got an
insurance company which will in the future not
extinguish the liability but countervail it and they
have got the command of this policy to the extent that
they are entitled to get their capital money-I say
' capital money ' without prejudice-back from the
insurance company on surrendering the policies."
From these cases, there are deducible certain principles of a fundamental character. The first is that
capital expenditure cannot be attributed to revenue
and vice versa. Secondly, it is equally clear that a payment in a lump sum does not necessarily make the
payment a capital one. It may still possess revenue
character in the same way as a series of payments.
Thirdly, if there is a lump sum payment but there is
no possibility of a recurrence, it is probably of a capital nature, though this is by no means a decisive test.
Fourthly, if the payment of a lump sum closes the
(r) [1932] 2 K. B. 185; r7 Tax Cas. 311, 317.
(2) (1918) 7 Tax Cas. 358.
123
978 SUPREME COURT REPORTS [1959] Supp.
z959
liability to make repeated and periodic payments in
the future, it may generally be regarded as a payment
The Indian
Molasses co.
of a revenue character (Anglo-Persian Oil Go. Ltd. v.
(Private) Ltd.
Dale) (1), and lastly, if the ownership of the money
v.
whether fn point of fact or by a resulting trust be still
The Commissioner in the tax-payer, then there is acquisition of a capital
of Income-tax,
asset and not an expenditure of a revenue character.
West Bengal
S'd
b
'd
' h
h
'
' 1
th
th
1 e
y SI e wit
t ese prmmp es,
ere are o ers
Hidayatullah J. which are also fundamental. The Income-tax law.does
not allow as expenses all the deductions a prudent
trader would make in computing his profits. The
.money may be expended on grounds of commercial
expediency but not of necessity. The test of necessity
is whether the intention was to earn trading receipts
or to avoid future recurring payments of a revenue
character.
Expenditure in this sense is equal to
disbursement which, to use a homely phrase, means
something which comes out of the trader's pocket.
Thus, in finding out what profits there be, the normal
accountancy practice may be to a.How as expense any
sum in respect of liabilities which have accrued over
the accounting period and to deduct such sums from
profits. But the Income-tax laws do not take every
such allowance as legitimate for purposes of tax.
A
distinction is made between an actual liability in
praesenti and a liability de futuro which, for the time
being, is only contingent. The former is deductible
but not the latter. The case which illustrates this
distinction is Peter Merchant Ltd. v. Stedeford (').
No
doubt, that case was decided under the system of
Income-tax laws prevalent in England, but the distinction is real. What a prudent trader sets apart to meet
a liability, not actually present but only contingent,
cannot bear the character of expense till the liability
becomes real.
We may here refer to two other cases. In Alexander
Howard & Go. Ltd v. Bentley ('), a business of blouse
and gown manufacture was carried on by one A. C.
Howard. His three brothers were employed by him.as
salaried managers. In 1933 A. C. Howard remarried
(1) [1932] I J(. B. 124; 16 Tax Cas. 253.
(2) (1948) 30 Tax Cas, 496.
(3) (1948) 30 Tax Cas 334.
(2) S.C.R. SUPREME COURT REPORTS
979
and under pressure from his brothers ·a company was
r959
formed and the directors were authorised to enter into
The Indian
an agreement to purchase the business. A. C. Howard
h
."''vlolass11s Co.
was the governing director oft e company and his
(Private) Ltd.
three brothers, permanent directors. The company also
v.
entered into a service agreement with them, and Art. The Commissioner
107 thereof provided:
01 Incoine-tax,
" After the death of the said Alexander Charles
West Bengal
Howard and during such time as his legal personal Hidayatullah J.
representatives shall hold at least Ten Thousand
Shares in the Company, any widow surviving him
shall receive out of the profits of the Company an
annuity of One Thousand Pounds per annum during
her life."
This service agreement was executed on January 3,
1934. In 1943 by a deed of release A. C. Hmvard
released to the company all right to a claim in respect
of the annuity in consideration of the payment to him
of a sum of£ 4,500.
This amount was based upon
the findings of an actuary. The taxpayer submitted
that the sum pa.id in redemption of the annuity was a
proper charge against revenue, and was deductible.
The Commissioners held against the company on two
main grounds. They held that in order to decide
whether the sum paid to obtain release of the annuity
was properly allowable as a deduction, they had to
decide first whether the annuity itself would have been
properly chargeable to revenue, (Anglo-Persian Oil
Co. Ltd. v. Dale (1) and Bean v. Doncaster Amalgamated Collieries Ltd. (2) per Lord Simon at pp. 311-312);
and they helu next that the redemption of the annuity
freed the company from a contingent liability and the
company had thus secured only an enduring advantage.
Singleton, J., before whom the case came in appeal,
affirmed the decision.
He pointed out that this was
not a case of a company providing an annuity or
pension for an employee, "for" (to quote him) " the
wife of Mr. Alexander Charles Howard had notliing
whatever to do with the Company".
If, therefore,
(r) [1932/ r K. B: Il{; r6 Tax Cas. 253.
(2) (r9i6) '27 Tax Cas, 296.
980
SUPREME COURT REPORTS [1959] Supp.
1959
the original annuity was not chargeable to revenue,
The Indian
the sum of£ 4,500 paid to avoid it, could not also be.
Molasses co.
The other case is Southern Railway of Peru Ltd. v.
(P,ivate) Ltd.
Owen('). In that case, the English compa.ny was
v.
bound to provide compensation to all its employees on
The Commission" the termination of their services. Legislation to this
of Income-tax, effect was deemed to be a part of the contract of
West Bengal
•
S h . h
d.
.
]
.
serv10e.
uc ng t arose on rnmrnsa or on termmaHidayatullah J. tion of the employment by the employer after proper
notice.
The compensation was an amount egufLl to
one month's salary for every year of service. There
were, however, certain exceptions under which the
compensation was not payable. The company sought
to deduct an amonnt equal to the burden cast on it
each yefLr but the claim was refused. It WfLS held by
majority that though 'the company was entitled to
chfLrge against one year's receipts the cost of making
provision for the retirement payments which would
ultimately be payable as it had the benefit of the employees' services during that year, provided the present
value of the future payments could be fairly estimated', since the factor of discount was ignored in making
the deduction, the claim could not be entertained.
These two cases illustrate the propositions that the
recurring liability of a pension which is compressed
into a lump payment should itself be a legal obligation,
and that, if contingent, the present value of the future
payments should be fairly estimable. IC the pension
itself be not payable as an obligation, and if t.here be
a possibility that no such payment may be necessary
in the future, the whole of the amount cannot be
deducted but only the present value of the future
liability, if it can be estimated. It is significant that
the case in Sun Insurance Office v. Clark(') was applied to the last corollary.
So far, we have dealt with the principles which
underlie leading cases decided in England, some of
w hicb were in the forefront of the arguments. 'Ve
have already stated that the English decisions should
be read with considerable caution. Under the English Income-tax Act, the law is stated in a negative
(I) [1957] A.G. 334-
(2) [1912] A.G. 443.
(2) S.C.R. SUPREME COURT REPORTS
981,
fo~m. Section 137 of 15 & 16, Geo. 6 & 1 Eliz. 2, c. 10,
r959
which prescribes the general rules rrgarding deducThe Indian
tions is expressed in the negative, and r. (a) which was
Molasses co.
applicable to the cited cases reads as follows:
(Private) Ltd.
"Subject to the provisions of this Act, in computv.
ing the profits or gains to be charged under Case I or The Commissioner
Case II of schedule D, no sum shall be deducted in
ofwlnco3me-ta1x,
est
enga
respect of-
. (a)
any disbursements or expenses, not being Hidayatullah J.
money wholly and exclusively laid out or expended
for the purposes of the trade, profession or vocation."
In these several cases, emphasis was sometimes laid on
the words "wholly and exclusively", sometimes on
" laid out or expended " and som.etimes on " for the
purposes of the trade ... ". It was the nature of the
liability or the time of payment or the value of the
payment or all of them which determined whether the
amount should be deducted or not.
Clause (xv) of s. 10(2) of the Act, with which we are
concerned, reads as follows :
10.