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PETITIONER: COMMISSIONER OF INCOME TAX WEST BENGAL - I, CALCUTTA.

       Vs.

RESPONDENT: ASSOCIATED ELECTRICAL INDUSTRIES (INDIA) PRIVATE LIMITED.

DATE OF JUDGMENT10/10/1985

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. TULZAPURKAR, V.D.

CITATION:  1986 AIR  383            1985 SCR  Supl. (3) 627  1985 SCC  (4) 660        1985 SCALE  (2)868

ACT:      Indian Income  Tax Act  1922 Sections  10(2)  (xv)  and 10(4)(C).      Company - Pension and Life Assurance Plan for employees Company contributing to premium - Plan rules amended to make direct payment  of policy amount to members - Company having no  control   over  money     -   Expenditure  incurred   on contribution by  company to  Plan  -  Whether  an  allowable deduction.

HEADNOTE:      The assessee,  is a  firm carrying  on the  business of Electrical Engineers  and Contractors.  It put into effect a pension and  Life Assurance  Plan for its European employees about the  year 1948  and took  out  policies  with  a  Life Assurance Society  in the name of those employees. Under the Plan, rules  were framed  and the  assessee paid his part of the contribution  to the  premium and  the  employees  whose lives  were  insured  their  portion  of  the  premium.  The assessee claimed  a deduction every year of the sums paid by it by way of its contribution to the premium and the Income- Tax Department  allowed the  sum as  a deductible  expenses. however, for  the first  time ,  the   Income - tax  Officer disallowed the claim in respect of the assessment year 1956- 57.      The  assessee’s   appeal  to  the  Appellate  Assistant Commissioner,  was   dismissed  on   the  ground   that  the provisions of  Clause (c)  of sub-s. (4) of s. 10 of the Act barred the allowance claimed by the assessee as no effective arrangements had  been made  by the  assessee to secure that tax would  be deducted  at  source  from  the  amounts  paid finally to  the employees  by the  Society in  terms of  the policies.      In further  appeal, the  Income-Tax Appellate  Tribunal allowed  the   appeal  in   part,  holding   that  all   the contributions made  in the  relevant year by the assessee to the premium  on the  life policies  of the Plan Members were not allowable as 628 deductions in  the hands  of  the  assessee,  and  what  was allowable were the contributions made by the assessee to the policies of  such employees  who-  had  actually  been  paid

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pensionary and retirement benefits by the Society.      After completing  the assessment  for the year 1956-57, the Income  Tax Officer  reopened  the  assessments  of  the assessee for  the assessment  years 1948-49 to 1955-56 under s. 34  of the  Act and  disallowed the  deductions which had been  allowed  earlier.  On  appeal  by  the  assessee,  the Appellate  Assistant  Commissioner  allowed  the  deductions claimed in  respect of  payments made  by the Society to the employees in those years. The relevant rules- under the Plan were amended  on December 21, 1957 by the Board of Directors to provide  that the  amount due under the policies would be paid to  the Plan  Members  entitled  thereto,  leaving  the assessee with no control over the moneys.      For the assessment year 1959-60, the assessee claimed a deduction of  all the  contributions made  by it towards the payments on  the policies.  The Income Tax Officer, however, only allowed  the contribution made in the relevant previous year on the ground that the offending rules had been amended but he  did not  allow the claim in respect of contributions made in earlier years.      The assessee  appealed against  the disallowance of the claim respecting contributions made in earlier years and the Appellate Assistant  Commissioner, allowed  only  the  total contribution made  by the  assessee to  the Pension Fund and the payment  made by  the society  in the  assessment  years 1959-60 and 1960-61 and rejected the remaining claim.      The assessee  filed a  second appeal  before the Income Tax Appellate  Tribunal which  held that the deductions were permissible under  Clause (xv) of sub-Section (2) of section 10 of  the Act, and that Clause (c) of sub-Section (4) of s. 10 of  the Act  did not  come in  the way,  and allowed  the appeal.      The Appellate  Tribunal at the instance of the Revenue, made a  reference to  the  high  Court  which  answered  the question of  law in  favour of  the assessee and against the Revenue.      In the  appeal, by  the Revenue  to this   Court it was contended on  behalf of the Revenue (1) that the expenditure cannot be  said to  have been incurred during the accounting year 629 relevant to  the assessment year 1959-60 as the assessee had made   payments by  way of  contribution to  the premium  in earlier years and no part of the amount in question could be said to  have been made in the relevant accounting year, and (2) that the bar of Clause (c) of sub-section (4) of section 10 of  the Act  operated as  there was no scope for assuming that tax had been deducted at source by the assessee.      Dismissing the Appeal, ^      HELD: 1.(a)  Payments in  the instant case were made as contribution to  the premium in the earlier years, at a time when the  rules permitted  the assessee  to receive back the amounts contributed  by it under the Plan. It cannot be said then that  when those  payments  were  made  they  could  be regarded as  expenditure laid  out or  expended  within  the terms of Clause (xv) of sub-section (2) of section 10 of the Act. [632 H - 633 A]      2.(b) Pursuant  to  the  resolution  by  the  Board  of Directors on  December 21,  1957 the  rules were revised and amended. As  a result,  payments made  earlier  over  which, under the  original rules,  the assessee  had maintained its control, now  passed from  that control to the Plan Members. The entire  amount must  be regarded as having been expended by the assessee during the accounting period relevant to the

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assessment year 1960-61. [633 - C]      Indian Molasses  Co. (P) Ltd. v. Commissioner of Income Tax West Bengal, [1959] 37 I.T.R. 66, Commissioner of Income Tax, Calcutta v. Anderson Wright Ltd., [1962] 46 I.T.R. 715, Commissioner of  Income-Tax,  West  Bengal  -  I  v.  Indian Molasses Co.  P. Ltd., [1970] 78 I.T.R. 474 and Commissioner of Income-Tax,  Kanpur v.  Lakshmi Ratan  Cotton  Mills  Co. Ltd., [1976] 104 I.T.R. 319 distinguished.      2. A  finding of  fact has been recorded in the instant case by the Appellate Assistant Commissioner, and thereafter confirmed in  appeal by the Appellate Tribunal, that tax had been deducted  at source by the assessee when making payment of  its  contributions  to  the  premium  due  on  the  life policies. That finding of fact was never challenged and this Court cannot permit it to be assailed now. [633 D]

JUDGMENT:      CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1404 of 1973.      From the  Judgment and  Order dated  17.2.1971  of  the Calcutta High Court in Income Tax Reference No. 148 of 1965. 630      S.T. Desai, and Miss A. Subhashini for the Appellant.      A.K. Sen,  T.A. Ramachandran  and D.N.  Gupta  for  the Respondent.      The Judgment of the Court was delivered by      PATHAK, J.  This appeal  by special  leave is  directed against the  judgment of  the Calcutta  High Court answering the following  question of  law against  the  Revenue  on  a reference made by the Income-tax Appellate Tribunal :           "Whether on  the facts and in the circumstances of           the case  the Tribunal  was right  in holding that           the difference between Rs. 2,09,920.88 np. and the           amount that  had been  allowed  by  the  Appellate           Assistant Commissioner  was a business expenditure           incurred by  the assessee in the relevant previous           year and  in allowing  the same  as  a  deductible           expenditure"?      The assessee,  who is the respondent before us, carries on business as Electrical Engineers and Contractors with its Head Office  in Calcutta  and branches in different parts of the country. The assessee put into effect a Pension and Life Assurance Plan  for its European employees in about the year 1948. Pursuant  to the  Plan it  took out  policies with the Scottish Widows’ Fund and Life Assurance Society in the name of those  employees. Under  the Plan  rules were framed, and the assessee  paid his  part  of  the  contribution  to  the premium in  respect of  the policies taken with the Society. The employees  whose lives  were  insured  also  paid  their portion of  the premium  and thereupon  became Plan Members. The original  rules under  the Plan  enabled the assessee to obtain  receipt   of   the   moneys   assured   in   certain circumstances and  the assessee had also a right to direct a particular mode  of disposal  of the  funds of the Plan. The assessee claimed  a deduction every year of the sums paid by it by  way of  its contribution to the premium in respect of the said  policies. Originally, the amount so contributed by the assessee  towards payment  of the premium was allowed by the Income-tax  Department as  a deductible expense. For the first time,  however, the  Income-tax Officer disallowed the claim in  respect of  the assessment year 1956-57. On appeal by  the  assessee  against  the  assessment,  the  Appellate Assistant Commissioner  found that  the assessee had treated

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its contribution to the premium as part of the salary of the respective employees on whose lives the 631 policies had  been taken and had also deducted tax at source from the  salary, and the contributions made by the assessee constituted a  revenue expenditure  falling within the terms of cl.  (xv) of  sub-s. (2) of s.10 of the Indian Income Tax Act 1922.  The Appellate  Assistant  Commissioner,  however, dismissed the  appeal on  the ground  that the provisions of cl.(c) of sub-s. (4) of s.10 of the Act barred the allowance claimed  by   the  assessee  in  as  much  as  no  effective arrangements had  been made  by the  assessee to secure that tax would  be deducted  at  source  from  the  amounts  paid finally to  the employees  by the  Society in  terms of  the policies. The  Income-tax Appellate Tribunal allowed in part the second  appeal preferred  by the  assessee, holding that all the  contributions made  in the  relevant  year  by  the assessee see to the premium on the life policies of the Plan Members were not allowable a- deductions in the hands of the assessee and  what was allowable were the contributions made by the  assessee to  the policies  of such employees who had actually been paid pensionary and retirement benefits by the Society.      After completing  the assessment  for the year 1956-57, the Income-tax  Officer  reopened  the  assessments  of  the assessee for  the assessment  years 1948-49 to 1955-56 under s. 34  of the  Act and  disallowed the  deductions which had been allowed  earlier. On appeal by the assessee against the several assessment,  the  Appellate  Assistant  Commissioner followed the  approach adopted  by the Appellate Tribunal in the appeal  for the assessment year 1956-57, and allowed the deductions claimed  in  respect  of  payments  made  by  the assessee on policies respecting which payments had been made by the Society to the employees in those years.      Subsequently, the  relevant rules  under the Plan which were construed  as enabling  the  assessee  to  receive  the moneys assured  or  to  enjoy  the  power  of  control  over disposal of  the Fund  were amended  on December 21, 1957 by the Board  of Directors  of the assessee. In the result, the rules now  provided that  the amounts due under the policies would be  paid to  the Plan  Members entitled  thereto.  The assessee was left with no control over the moneys.      For the  assessment year  1959-60, with  which  we  are concerned, and  for which  the relevant previous year is the year November  1, 1957  to October  31, 1958,  the  assessee claimed a  deduction of  all the  contributions made  by  it towards the  payment on the policies. The Income-tax Officer allowed Rs.  27,069, being  the  contribution  made  in  the relevant previous  year, on  the footing  that the offending rules had been amended, but he did not 632 allow the  claim in respect of contributions made in earlier years. The assessee appealed against the disallowance of the claim respecting contributions made in earlier years. Before the Appellate  Assistant Commissioner, a statement was filed by the  assessee showing  the total contribution made by the assessee to  the Pension  Fund, and  the payment made by the Society  in   the  assessment   years  1959-60  and  1960-61 amounting  to   L8932-7-9  and   L3315-8-3d.  The  Appellate Assistant  Commissioner   allowed  these  amounts  only  and rejected the  remaining claim.  The assessee  filed a second appeal  before   the  Income   Tax  Appellate  Tribunal  and restricted the claim to the amount that stood disallowed out of Rs.  2,09,920.88 after deducting therefrom the equivalent of the two sterling payments. The assessee contended that on

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amendment of  the rules  the amount representing the balance out of  Rs. 2.09,920.88  was liable  to be  considered as an outgoing from  the assessee  during this  year  and  should, therefore,  be   considered   as   an   allowable   business expenditure.  The   appeal  was  allowed  by  the  Appellate Tribunal, which  held that  the deductions  were permissible under cl. (xv) of sub-s.(2) of s.10 of the Act and cl.(c) of sub-s. (4) of s. 10 of the Act did not come in the way.      At the  instance of the Commissioner of Income-tax, the Appellate Tribunal  made a  reference to  the Calcutta  High Court for  its opinion  on the  question of  law  set  forth earlier the   High Court has answered the question of law in favour of  the assessee  and  against  the  Commissioner  of Income-tax.      In this appeal, learned counsel for the Commissioner of Income-tax contends  that the  expenditure cannot be said to have been  incurred during  the accounting  year relevant to the assessment  year 1959-60  in as much as the assessee had made payments  by way  of contribution  to  the  premium  in earlier years and no part of the amount in question could be said to  have been  paid in  the relevant  accounting  year. Learned counsel  has cited  Indian Molesses  Co. (P) Ltd. v. Commissioner of  Income-Tax, West  Bengal, [1959]  37 I.T.R. 66, Commissioner  of Income-Tax, Calcutta v. Anderson Wright Ltd., [1962] 46 I.T.R. 715, Commissioner of Income-Tax, West Bengal-I v-  Indian Molasses  Co. P.  Ltd., [1970] 78 I.T.R. 474 and  Commissioner of Income Tax, Kanpur v. Lakshmi Ratan Cotton Mills Co. Ltd., [1976] 104 I.T.R. 319. The contention appears to  us to  be without substance. It is true that the payments were  made as  contributions to  the premium in the earlier years.  But they  were made at a time when the rules permitted  the   assessee  to   receive  back   the  amounts contributed by it under the 633 Plan. According  to the construction put on the rules lt was deemed that  the assessee  continued to  retain its  hold on those amounts.  It cannot  be  said  then  that  when  those payments were  made they  could be  regarded as  expenditure laid out  or expended  within  the  terms  of  cl.  (xv)  of subs.(2) of  s.10 of  the Act.  The control  over the moneys passed on December 21, 1957 when pursuant to a resolution by the Board  of Directors  the rules were revised and amended. On that  day, payments  made earlier  over which,  under the original rules, the assessee had maintained its control, now passed from  that control  to the  Plan Members.  The entire amount must  be regarded  as having  been  expended  by  the assessee  during  the  accounting  period  relevant  to  the assessment year  1959-60. In  the circumstances,  the  cases relied on by learned counsel for the Commissioner of Income- tax can be of no assistance to the Revenue.      It was  further contended  by learned  counsel for  the Commissioner of  Income-tax that  the bar  of cl.(c) of sub- s.(4) of  S.10 of  the Act  operated in  the instant case as there was  no scope  for assuming that tax had been deducted at source  by the assessee. It appears to be too late in the day for  such a  contention, because  a finding  of fact has been recorded  by the  Appellate Assistant Commissioner, and thereafter confirmed  in appeal  by the  Appellate Tribunal, that tax  had been  deducted at  source by the assessee when making payment  of its  contributions to  the premium due on the  life   policies.  That   finding  of   fact  was  never challenged, and we cannot permit lt to be availed now.      In the  result, we hold that the High Court is right in answering the question referred to it in the affirmative, in favour of  the assessee  and  against  the  Commissioner  of

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Income-tax.      The appeal is dismissed with costs. N.V.K.                                     Appeal dismissed. 634