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PETITIONER: ALLAHABAD BANK LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX,WEST BENGAL.

DATE OF JUDGMENT: 08/10/1953

BENCH: BHAGWATI, NATWARLAL H. BENCH: BHAGWATI, NATWARLAL H. SASTRI, M. PATANJALI (CJ) DAS, SUDHI RANJAN BOSE, VIVIAN HASAN, GHULAM

CITATION:  1953 AIR  476            1954 SCR  195

ACT:  Income-tax Act (XI of 1922). s. 10 (2) (xv)-Contribution  to  trust  for payment of pension to employees-Whether  business  expenditure-Payment  of pension and amount thereof  left  to  discretion  of  employer-No obligation on  trustees  to  pay  pension-Validity of trust.  (1)  [1950]18 I.T.R, 712; A.I.R 1950 Bom, 391.  196

HEADNOTE: A  banking company executed a deed whereby it  purported  to create  a trust for the payment of pensions to the  retiring members of its staff.  A certain sum of money was made  over to  three  persons  who were called trustees  and  the  deed provided  that  the company may make  further  contributions to  the  fund.  Under the terms of the  deed,  however,  the company  was  not  bound to pay any pension to  any  of  the members  of  the staff, the payment itself  and  the  amount payable being entirely at the discretion of the company, and the  company  had also the power to withdraw or  modify  any pension  and to alter the rules relating to the granting  of the pension at its will.  In the accounting year the company paid  a further contribution of Rs. 2 lacs to the  fund  and claimed deduction of this amount under s. 10 (2) (xv) of the Income-tax   Act   as  expenditure  laid  out   wholly   and exclusively for the purposes of the business: Held, that, as the deed did not impose any obligation on the bank  or the trustees to grant any pension to any  employee, and  the  pension, even if granted, could be  withdrawn  and even  the rules could be completely altered at will  by  the company,  no valid trust was created even though moneys  had been  transferred to the trustees, and the sum  in  question could not be said to have been spent for the purposes of the business and allowed as a deduction under s. 10 (2) (xv). Brown  v.  Higgs (32 E.R. 473) and Burrough v.  Philcox  (41 E.R. 299) distinguished.

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JUDGMENT:    CIVIL  APPELLATE  JURISDICTION: Civil Appeal No.  161  of 1952. Appeal  from  the Judgment and Order dated  the  18th  May, 1951,   of  the  High  Court  of  Judicature   at   Calcutta (Chakravartti and Das Gupta JJ.) in its Special Jurisdiction (Income-tax) in Income-tax Reference No. 63 of 1950. N.   C.  Chatterjee  (S.  N. Mukherjee, with  him)  for  the appellant. C.   K. Daphtary, Solicitor-General for India (O.  N. Joshi, with him) for the respondent. 1953.  October 8. The Judgment of the Court was delivered by BHAGWATI J.-This is an appeal from the judgment and order of the High Court of Judicature at Calcutta on a reference made by the Income-tax Appellate Tribunal under Section 66(1)  of the Indian Incometax Act (XI of 1922).                             197 The appellant is a banking company -carrying on business at, among  other  places, Calcutta and Allahabad.  On  the  15th March,  1946,  the  appellant executed a deed  by  which  it purported  to create a trust for the payment of pensions  to the members of its staff.  The deed declared that a  pension fund had been constituted and established.  It then  recited that  a  sum of Rs. 2,00,000 had already been made  over  to three persons who were referred to as the "present trustees" and  proceeded to state that the fund would consist  in  the first  instance  of the said sum of Rs. 2,00,000,  and  that there  would be added to it such further contributions  that the  bank might make from time to time, though it would  not be  bound to make such contributions.  In the course of  the accounting year 1946-47, the bank made a further payment  of Rs. 2,00,000 to this fund. In  its  assessment  for the  assessment  year  1947-48  the appellant  claimed  deduction of that sum  of  Rs.  2,00,000 under  section 10 (2) (xv) of the Act on the ground that  it was  an item of expenditure laid out or expended wholly  and exclusively  for the purposes of its business.  The  Income- tax  Officer, the Appellate Assistant commissioner  and  the Income-tax  Appellate  Tribunal rejected this claim  of  the appellant  and  the  Income-tax Appellate  Tribunal  at  the instance of the appellant stated a case and referred for the consideration of the High Court the following question :- "Whether  in the facts and circumstances of this  case,  the Income-tax  Appellate Tribunal was right in disallowing  Rs. 2,00,000  as  a deduction under section 10 (2) (xv)  of  the Indian Income-tax Act." The High Court answered the question in the affirmative  and hence this appeal. Though  several contentions were sought to be raised by  the appellant  as well as the Income-tax authorities before  the High Court as arising from the question, the only contention which was canvassed before the High Court and was held to be determinative of the enquiry before it was whether the  deed of trust dated 27 198 the 15th March, 1946, was valid.  On the construction of the several provisions of the deed of trust the High Court  held :- "I  am  of opinion that in view of these provisions  of  the trust  deed  coupled  with the uncertainty  as  regards  the beneficiaries and the absence of any obligation to grant any pension,  no legal and effective trust was created, and  the so-called trust must be held to be void,"

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It further held that even if the ownership of the money  had passed  over  to the trustees, still the  further  provision regarding  the  application of the money to the  payment  of pensions  being  entirely ineffective and  void,  the  money cannot be said to have been expended for the purpose of  the business,  and that therefore was not an expenditure  or  an expenditure  for  the purposes of the  business  within  the meaning of section 10(2)(xv) of the Act.  This was also  the only  contention  urged before us by Shri N.  C.  Chatterjee appearing on behalf of the appellant. Section  3 of the Indian Trusts Act (II of 1882)  defines  a trust as an obligation annexed to the ownership of property, and  arising out of a confidence reposed in and accepted  by the owner, or declared and accepted by him, for the  benefit of  another,  or of another and the owner.  The  person  for whose  benefit  the  confidence is accepted  is  called  the "beneficiary".   Section 5 in so far as it is  material  for the purpose of this appeal says that no trust in relation to movable  property  is  valid unless  declared  as  aforesaid (i.e., by a non-testamentary instrument in writing signed by the author of the trust or the trustee and registered, or by the  will of the author of the trust or of the  trustee)  or unless  the ownership of the property is transferred to  the trustee.  Section 6 of the Act provides that subject to  the provisions of section 5, a trust is created when the  author of  the  trust indicates with reasonable  certainty  by  any words      or      acts..................      (c)       the beneficiary............  The  validity or otherwise  of  the trust in question has got to be determined with reference to the above sections of the Indian Trusts Act, 199 The  deed of trust provided in clause 5 that the  income  of the  fund if sufficient and if the income of the fund  shall not  be  sufficient then the capital of the  fund  shall  be applied in paying or if insufficient in contributing towards the payment of such pensions and in such manner as the  bank or such officers thereof as shall be duly authorised by  the bank in that behalf shall direct to be paid out of the fund. Clause  7  stated  that the fund  was  established  for  the benefit  of  retiring employees on the European  and  Indian staff  of the bank to whom pensions shall have been  granted by  the  bank.  Clause 8 provided that any  officer  on  the European  staff of the bank who had been in the  service  of the  bank for at least twenty-five years and any officer  or other employee on the Indian staff of the bank who had  been in  the service of the bank for at least thirty years  might apply  to  the  bank  for a pension,  and  that  in  special circumstances the bank might grant pensions to employees who had  not completed the respective periods of  service  above mentioned.    Clause   9  provided   for   the   withdrawal, modification  or  determination by the bank of  any  pension payable  thereunder when in its opinion the conduct  of  the recipient  or the circumstances of the case justified it  in so  doing and the trustees were bound forthwith to act  upon any  directions of the bank or of any officers thereof  duly authorised  by the bank in that behalf.  Clause 11  invested the  bank  with  discretion in fixing  the  amount  of  each pension  and in making any modification therein but  without prejudice to such discretion declared what were the pensions which  it was contemplating would be payable  to  recipients qualified  under  the provisions of clause 8  of  the  deed. Clause  18  authorised  the  bank  from  time  to  time   by instrument in writing under its common seal with the  assent in  writing  of  the trustees to alter all  or  any  of  the regulations  contained  in  the  deed  for  the  time  being

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relating  to  the  fund  and make  new  regulations  to  the exclusion of or in addition to all or any of the regulations for the time being relating to the fund and for the purposes of that clause all the provisions contained in the deed were deemed to be the regulations in relation to the fund.’ 200 On  a consideration of the provisions of the deed  of  trust above set out it is clear that the bank or its officers duly authorised   in  that  behalf  were  constituted  the   sole authorities  to determine what pensions and in  what  manner the same should be paid out of the income of the fund.   The fund  was declared to have been established for the  benefit of  the retiring employees to whom pensions shall have  been granted  by  the  bank.   Officers of  the  staff  who  were qualified under clause 8 were declared entitled to apply  to the bank for a pension.  But there was nothing in the  terms of the deed which imposed any obligation on the bank or  its officers duly authorised in that behalf to grant any pension to any such applicant.  The pension if granted could also be withdrawn,  modified or determined under the  directions  of the bank or any officer of the bank duly authorised in  that behalf  and  such directions were binding on  the  trustees. The  regulations  in  relation to the  fund  could  also  be altered  and new regulations could be made to the  exclusion of or in addition to all or any of the regulations contained in  the  deed  of  trust.   It  was  open  under  the  above provisions  for the bank or its officers duly authorised  in that behalf to grant no pension at all to any officer of the staff who made an application to them for a pension and also to withdraw, modify or determine any pension payable to such officer if in their opinion the conduct of the recipient  or the  circumstances  of the case should justify  them  in  so doing.   The whole scheme of the deed invested the  bank  or its  officers duly authorised in that behalf with  the  sole discretion  of  granting  or of  withdrawing,  modifying  or determining the pension and it was not at all obligatory  on them  at  any time to grant any pension or to  continue  the same  for any period whatever.  The beneficiaries  therefore could  not  be said to have been indicated  with  reasonable certainty.  What is more it could also be validly urged that there being no obligation imposed upon the trustees no trust in fact was created, even though the moneys had been  trans- ferred to the trustees. Shri N. C. Chatterjee however urged that the power conferred upon the bank or its officers duly authorised 201 in  that behalf was a power in the nature of a  trust,  that there  was  a general intention in favour of a class  and  a particular intention in favour of individuals of a class  to be selected by them and even though the particular intention failed  from  the selection not being made the  court  could carry  into  effect the general intention in favour  of  the class and that therefore the trust was valid.  He relied  in support of this contention on Brown v. Higgs(1) and Burrough v. Philcox(2).  The position in law as it emerges from these authorities is thus summarised by Lewin on Trusts, Fifteenth fxEdition, page 324 :-     "Powers,  in  the sense in which the  term  is  commonly used, may be distributed into mere powers, and powers in the nature  of  a trust.  The former are powers  in  the  proper sense  of  the  word-that  is  not  imperative,  but  purely discretionary; powers which the trustee cannot be  compelled to execute, and which, on failure of the trustee, cannot  be executed vicariously by the court.  The latter, on the other hand,  are not discretionary, but imperative, have  all  the

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nature  and substance of a trust, and ought rather, as  Lord Hardwicke observed, to be designated by the name of  trusts. ’It is perfectly clear,’ said Lord Eldon, ’that where  there is  a mere power, and that power is not executed, the  court cannot  execute  it.  It is equally clear, that  wherever  a trust  is created, and the execution of the trust  fails  by the  death  of the trustee or by accident, this  court  will execute the trust.  But there are not only a mere trust  and a mere power, but there is also known to this court a  power which  the party to whom it is given is intrusted  with  and required  to  execute; and with regard to  that  species  of power,  the court considers it as partaking so much  of  the nature and qualities of a trust, that if the person who  has the  duty imposed upon him does not discharge it, the  court will,  to a certain extent, discharge the duty in  his  room and  place’.   Thus, if there is a power  to  appoint  among certain  objects  but no gift to those objects and  no  gift over  in default of appointment, the court implies  a  trust for or gift to (1) 8 ves. Junior 561 ; 32 E.R. 473. (2) 5 Mylne & Graig 72; 41 E.R. 299. 202 those  objects equally if the power be not  exercised.   But for  the  principle  to  operate  there  must  be  a   clear indication  that  the  settlor  intended  the  power  to  be regarded in the nature of a trust."     This position however does not avail the appellant.   As already  stated there is no clear indication in the deed  of trust that the bank intended the power to be regarded in the nature  of  a  trust, inasmuch as there  was  no  obligation imposed on the bank or its officers duly authorised in  that behalf to grant any pension to any applicant.  There was  no duty  to  grant  any  pension at all  and  the  pension,  if granted,  could be withdrawn, modified or determined by  the bank  or  its  officers duly authorised in  that  behalf  as therein mentioned.  Under the circumstances it could not  be said  that there was a power in the nature of a trust  which could  be exercised by the court if the donee of  the  power for some reason or other did not exercise the same.  It will be  appropriate  at  this  stage  to  consider  whether  any beneficiary  claiming to be entitled to a pension under  the terms  of  the  deed  could  approach  the  court  for   the enforcement  of any provision purporting to have  been  made for his benefit Even though he may be qualified under clause 8 to apply for the grant of a pension he could not certainly enforce  that  provision  because there  was  no  obligation imposed  at all on the bank or its officers duly  authorised in  that  behalf  to grant any pension to  him  and  in  the absence of any such obligation imposed upon anybody it would be  futile  to urge that a valid trust was  created  in  the manner contended on behalf of the appellant.     In our opinion therefore the High Court was right in the conclusion  to which it came that there was  uncertainty  as regards  the beneficiaries and there was an absence  of  any obligation  to  grant any pension with the  result  that  no legal and effective trust could be said to have been created and  further  that  the provision of  Rs.  2,00,000  in  the accounting  year  1946-47  was  not  an  expenditure  or  an expenditure  for  the purposes of the  business  within  the meaning of section 10 (2) (xv) of the Indian Income-tax Act. 203 In  view of the above we do not think it necessary  to  into the interesting questions which were sought to toe raised by the  appellant, viz., what was the scope of  the  reference, and  by the respondent, viz., whether the expenditure was  a

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capital expenditure or revenue expenditure and if the latter whether the deduction could still not be allowed in view  of the provisions of section 10 (4) (c) of the Act.    The result therefore is that the appeal fails and must be dismissed with costs.                             Appeal dismissed. Agent for the appellant: P. K. Mukherjee. Agent for the respondent: G. H. Rajadhyaksha.