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PETITIONER: COMMISSIONER OF INCOME-TAX, WEST BENGAL

       Vs.

RESPONDENT: INDIAN MOLASSES (P) LTD.

DATE OF JUDGMENT: 12/08/1970

BENCH: SHAH, J.C. BENCH: SHAH, J.C. HEGDE, K.S. GROVER, A.N.

CITATION:  1970 AIR 2067            1971 SCR  (1) 773  1970 SCC  (2) 834  CITATOR INFO :  D          1986 SC 383  (7)

ACT: Income-tax  Act (11 of 1922), ss. 10(2)(xv),  10(4A),  66(1) and   66(5)-Ingredients  of  s.10(2)(xv)-Amounts   paid   to trustees  for  use on the happening of a  future  event-When deemed to be expenditure  under s. 10 (2) (xv) . Question of law arising out of its order’ in s.66(1),  scope of-Aspect  not  expressly raised  before  the  Tribunal-When could be urged before High Court on reference. High Court wrongfully refusing plea to be urged-Procedure to be followed by Supreme Court.

HEADNOTE: The respondent-company appointed a managing director who was to retire at the age of 55.  The company arranged to provide a pension to him on retirement, or a pension to his widow if he died before attaining the age of 55.  It executed a trust deed on September 16, 1948, and paid to the trustees certain amounts to enable the trustees to take out an annuity policy to  cover  the pension.  On October 29,  1954,  the  company arranged  to  give enhanced pension to the director  or  his wife and set apart an ,additional sum on the same terms. The  director died in 1955 before attaining the age  of  55, and the company claimed, in the return of its taxable income for the assessment year 1956-57, the total amount paid by it to  the  trustees  as  a  permissible  expenditure  in   the computation  of  the  company’s  business  profits  in   the previous year. The Appellate Tribunal, held; (i) that the setting apart  of the  funds  amounted to expenditure Within  the  meaning  of s.10(2)(xv),   and   (ii)  that  it  amounted   to   revenue expenditure  and not capital expenditure.  The Tribunal  did not however consider whether the outgoing represented expen- diture  laid out or expended wholly and exclusively for  the purpose of the business and whether it was authorised  under s.10(4A).  The  Tribunal  referred to  the  High  Court  two questions,  namely  : (1) whether  the  amounts  constituted expenditure during the relevant accounting year 1955  within the meaning of the section and (2) whether it represented  a

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revenue  expenditure.  The High Court held in favour of  the company.   When the Department sought to urge the plea  that before the section could be called in aid, it had also to be established that the expenditure was wholly and  exclusively for  the purpose of the business and that it was  authorised by  s.10(4A), the High Court did not permit the plea  to  be raised as it was not expressly raised before the Tribunal. In appeal to this Court, HELD  :  (1)  The amounts set apart became  subject  to  the obligation  to  pay the pension arranged to be  given,  only when the director died, and since he died in May 1955,  they must  be  deemed to have been expended only  then,  that  is during the accounting year 1955. [776 H; 777 A-B] 774 Indian Molasses Co. (P) Ltd. v. Commissioner of  Income-tax, West Bengal, 37 I.T.R. 66, referred to.  I I (2) An amount proved to be expended by a tax-payer  carrying on business is a permissible allowance under s.10(2) (iv) in the computation of the taxable income of the business if  it is   established;   (i)  that  the  allowance   claimed   is expenditure  which, is not of the nature described  in  cls. (i) to (xiv) of s. 10(2); (ii) that it is not of the  nature of capital expenditure or personal expenses of the assessee; (iii)  that the expenditure was laid out or expended  wholly and exclusively for the purposes of such business; and  (iv) that it was authorised under s. 10 (4A). [778 C-F] (3)  The  expression ’question of law arising  out  of  such order’  in s.66(1), is not restricted to take in only  those questions  which  have  been  expressly  argued  before  and decided  by  the Tribunal.  If a question of law  is  raised before  the Tribunal, even if an aspect of the question  was not raised, that aspect may be urged before the High  Court. In  the  present  case, the second question  as  framed  and referred,   does   not  exclude  an  enquirY   whether   the expenditure was wholly and exclusively laid out or  expended for  the purpose of the business of the company.  It  cannot be  held that, because before the Tribunal, stress  was  not pointedly   laid  upon  the  ingredients  which  enable   an expenditure to be claimed and allowed, the question did  not arise out of the order of the Tribunal.  Therefore the  High Court  was in error in refusing to allow the argument to  be raised  that  the  requirements of s. 10(2)  (xv)  were  not satisfied. [779 H; 780 A; 781 B-F] Commissioner   of  Income-tax,  Bombay  v.   Scindia   Steam Navigation Co.  Ltd. 42 I.T.R. 589, explained and followed. (4)  Since the Tribunal gave no finding on that part of  the case, a supplementary statement could be called from it, but such  a supplementary statement would be restricted  to  the evidence  on  record  and may result  in  injustice  to  the parties. [781 F] New Jahangir Vakil Mills Ltd. v. Commissioner of Income-tax, ’Bombay  North,  Kutch  & Saurashtra, 37  I.T.R.  11  Petlad Turkey Red Dye Works Co. Ltd. v. Commissioner of  Income-tax 48 T.T.R. 92(S.C.) and Keshav Mills Co. Ltd. v. Commissioner of  Income-tax,  Bombay  North. Ahmedabad,  56  I.T.R.  365, referred to. (5)  Therefore. it is appropriate to decline to  answer  the second  question on the ground that the Tribunal bad  failed to consider and decide the question whether the  expenditure was  laid  out or expended wholly and  exclusively  for  the purpose  of the business of the company and that it had  not considered  all  appropriate statutory  provisions.  and  to leave  it to the Tribunal to dispose-of the appeal under  s. 66(5) of the Act [782 A-C]

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JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2555 of 1966. Appeal from the judgment ’and order dated March 16, 1966  of the  Calcutta High Court in Income Tax Reference No.  76  of 1962. S.  C.  Manchanda.  G. C. Sharma, R. N. Sachthey and  B.  D. Sharma, for the appellant. A.  K.  Sen,  T. A. Ramachandran and D. N.  Gupta,  for  the respondent. 775 The Judgment of the Court was delivered by Shah,  J.  The respondent Company appointed one  Harvey  its Managing Director.  Under the terms of agreement, Harvey was to  retire  on attaining the age of 55 years.   The  Company arranged  to provide a pension to Harvey on retirement,  and executed  a deed of trust on September 16,  1948  appointing three  trustees  to carry out that object.   The  respondent Company set apart in 1948 Rs. 1,09,643/- and in each of  the six subsequent years Rs. 4,364/-, and delivered the  various amounts  to the trustees who were authorised to take  out  a deferred  annuity policy to secure an annuity of  pound  720 per  annum  payable  to Harvey for life. from  the  date  he attained the age of 55 years, and in the event of his  death before that date an annuity of pound 611.12 annually to  his widow. In  its return for the -assessment year 1949-50 the  Company claimed  that in the computation of its taxable  income  Rs. 1,09,643/-  paid in 1948 to the trustees under the  deed  of trust    were   allowable   as   an   amount   wholly    and exclusively,expended  for the purpose of its  business.   In the  subsequent  years  of assessment  the  Company  claimed allowance of the annual payment of Rs. 4,364/-.  The Income- tax Officer disallowed the claim.  The Company disputed  the decision   and  carried  it  to  the  Income-tax   Appellate Tribunal.  The Tribunal submitted a statement of case to the High   Court  of  Calcutta  on  the  question  whether   the payments  .’constituted ’expenditure’ within the meaning  of that  word  in S. 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 High Court answered the question  in the  negative.   The  view  taken  by  the  High  Court  was confirmed  by this Court in appeal: Indian Molasses Co.  (P) Ltd.  v. Commissioner of Income-tax, West  Bengal(1).   This Court  held that the expenditure deductible  for  income-tax purposes is one towards a liability actually existing at the time,  but  a  sum of money set apart which  may  be  deemed appropriated  to a purpose for which it was intended on  the happening  of  a future event was not  expended  within  the meaning of s. 10(2)(xv) of the Act, until the event  occurs, and since the Company had dominion through the trustees over the  funds and there was a possibility of a trust  resulting in its favour, by setting apart. the funds no  "expenditure" within the meaning of s. 10(2)(xv) of the Indian  Income-tax Act, 1922, may be deemed incurred. During  the  pendency of those proceedings the  Company  ar- ranged to give an "enhanced pension" to Harvey and  executed a  supplementary deed of trust on October 29, 1954 -and  set apart  an  additional  sum of Rs.  47,607/-  to  enable  the trustees  to take out an annuity policy in the names of  the trustees in favour of Harvey (1)  37 I. T. R. 66, 776

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and his wife to cover the "enhanced pension".  The terms  of the  original  trust  deed  were  made  applicable  to   the supplementary deed. Harvey died in May 1955 (before he was due to retire) and in the  return  of its taxable income for the  assessment  year 1956-57  the Company claimed that Rs. 1,83,434/-  being  the total amount paid by the Company to the trustees in terms of the original trust deed dated September ’I 6, 1 94 8 and the supplementary  deed dated October 29, 1954, be allowed as  a permissible expenditure in the computation of the  Company’s business  profits in the previous year ending  December  31, 1955.   The Income-tax Officer disallowed the claim  without assigning  any reasons.  In appeal the  Appellate  Assistant Commissioner  confirmed the order observing that the  amount paid long before the commencement of the previous year  were not  admissible  under s. 10(2)(xv) of the  Income-tax  Act, 1922.  The Income-tax Appellate Tribunal in appeal  reversed the order and allowed the claim of the Company holding  that the  amount  of Rs. 1,83,434/-  was  "effectively  disbursed during  the  accounting  year" and was on  that  account  an admissible  allowance  in the computation of  the  Company’s business profits. At the instance of the Commissioner of Income-tax, the  Tri- bunal submitted a statement of the case to the High Court of Calcutta on the following two questions :-               "(1)   Whether  on  the  facts  and   in   the               circumstances  of  the case, the  sum  of  Rs.               1,83,434/- was an expenditure effectively laid               out  or  expended during the  accounting  year               1955 within the meaning of s. 10(2)(xv) of the               Income-tax Act ?               (2)  If the answer to Question No. (1)  is  in               the   affirmative,  then  whether   the   said               expenditure  of Rs. 1,83,434/-  represented  a               revenue expenditure ?" The   High  Court  of  Calcutta  recorded  answers  in   the affirmative on both the questions.  With certificate granted by  the High Court under s. 66A(2) of the Indian  Income-tax Act,  1922, this appeal is preferred by the Commissioner  of Income-tax. Answer  recorded  by the, High Court on the  first  question was,  in  our  judgment, correct.  This  Court  had  in  the earlier  decision Indian Molasses Co. (Private) Ltd. v.  The Commissioner of Income-tax(’) held that the Company had  not parted  with control over the amounts set apart between  the years  1948  and 1954 for securing the ’pension  benefit  to Harvey,  and on that account no amount was  appropriated  to make  it expenditure within the meaning of s.  10(2)(xv)  of the Act.  At the date when different sums of money were  set apart there was no existing liability and the sums (1) 37 I.T.R. 66. 777 of  money set apart to meet an obligation which may  or  may not  arise on the happening of a future event,  the  Company did not lay out or expend the sums within the meaning of  S. 10(2)(xv).   The  amounts set apart became  subject  to  the obligation to pay the pension arranged to be given only when Harvey  died,  and must be deemed expended then  within  the meaning of s. 10(2)(xv) of the Indian Income-tax Act, 1922. But  on the materials before us we are unable to answer  the second  question,  for the Tribunal has found  no  facts  on which the admissibility of the allowance may be  determined, and the High Court has declined to allow the argument to  be raised by the Commissioner that in the circumstances of  the case  the  amounts  expended were not  admissible  under  s.

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10(2)(xv) of the Act. Sections 10(1) and 10(2)(xv) of the Act, insofar as they are relevant, provide :               S.  10(1)-"The  tax  shall be  payable  by  an               assessee under the head "profits -and gains of               business,  profession or vocation, in  respect               of  the  profit  or  gains  of  any  business,               profession or vocation carried on by him."               S.  10(2)-"Such  profits  or  gains  shall  be               computed    after   making    the    following               allowances, namely               (xv)  any expenditure (not being an  allowance               of the nature described in any of the  clauses               (i)  to (xiv) inclusive, and not being in  the               nature  of  capital  expenditure  or  personal               expenses of the assessee) laid out or expended               wholly and exclusively for the purpose of such               business, profession or vocation." Sub-section (4A) of S. IO which was added by the Finance Act of 1956 with effect from April 1, 1956, may also be read :               "Nothing  in  sub-section (2)  shall,  in  the               computation  of  the profits and  gains  of  a               Company be deemed to authorise the making of-               (a)   any   allowance  in   respect   of   any               expenditure   which   results   directly    or               indirectly    in   the   provision   of    any               remuneration  or-benefit  or  amenity  to   a-               director  or  a person who has  a  substantial               interest in the company within the meaning  of               sub-clause (iii) of clause (6C) of section, 2,               or               (b) any allowance in respect of any assets  of               the company used by any person referred to in 778               clause (a) either wholly or partly for his own               purposes or benefit.               if  in the opinion of the  Income-tax  Officer               any    such   allowance   is   excessive    or               unreasonable  having regard to the  legitimate               business needs of, the company and the benefit               derived by or accruing to it therefrom.               Explanation.The provisions of this sub-section               shall  apply notwithstanding that  any  amount               disallowed under this sub-section is  included               in the total income of any person referred  to               in clause (-a)." An  amount proved to be expended by a tax-payer carrying  on business is (subject to sub-s. (4A) of s. 10), a permissible allowance  in  the  computation of  taxable  income  of  the business, if it be established that the allowance claimed is (a) expenditure which is not of the nature described in cls. (i)  to (xiv) of s. 10(2); (b) that it is not of the  nature of capital expenditure or personal expenses of the assessee; and (c) that the expenditure was laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.  The expenditure incurred by the Company is not allowance of the nature described in any of the clauses  (i) to  (xiv) inclusive of S. 10(2), nor is it of the nature  of capital expenditure or personal expenses of I the  assessee. In our judgment, the argument advanced before the High Court that the expenditure resulting from the setting apart of the money for securing an annuity to provide pensionary  benefit to  Harvey  and his wife was of a  capital  expenditure  was rightly negatived by the High Court. To attract the exemption under s. 10(2) (xv)it had still  to

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beestablished  that the amount set apart was laid out  or expended  wholly  and  exclusively for the  purpose  of  the business  of the Company. On this part of the case there  is no  discussion in the orders of the taxing  authorities  and the Tribunal.  To recall, the Income-tax Officer recorded no reasons  for,  disallowing the expenditure.   The  Appellate Assistant Commissioner disallowed it on the, ground that  it was  not  debited  in the profit and  loss  account  of  the Company in the previous year.  The Tribunal assumed, and  in our judgment erroneously, that this Court had in the earlier judgment  pronounced  upon  the  applicability  of  all  the conditions  of  S. 10(2)(xv) of the Act to  the  amount  set apart  when  it  became expenditure.   This  Court  did  not express any opinion on that question., The language in which the  question  was  framed  in  the  earlier  case   clearly indicated that the enquiry contemplated was only whether the amounts set apart were expended and no other. 779 The  judgment of this Court also does not imply that in  the view  of  the Court if the setting apart of the  amount  was expenditure, the other conditions for the expenditure to  be a permissible allowance under s. 10(2) (xv) were  satisfied. It  cannot be, assumed that because on the death  of  Harvey the  amounts previously set apart were deemed expended,  the outgoing  was admissible as expenditure under  s.  10(2)(xv) read with S. 10(4A).  The Tribunal considered two  questions only : (1) whether the setting apart of the amounts amounted to expenditure within the meaning of S. 10(2) (xv); and  (2) if  it  was  expenditure, whether it could  be  regarded  as capital  expenditure and not revenue expenditure.   On  both the  contentions  the  Tribunal decided  in  favour  of  the Company.  But before s. 10(2)(xv) could be called in aid  to support  the claim of the company it had to  be  established that it represented expenditure laid out or expended  wholly and exclusively for the purpose of the business, and that it was authorised under s. 10(4A). The High Court was of the view that because before the  Tri- bunal the question was not expressly raised that "the  other conditions inviting the application of S. 10(2)(xv) were not satisfied,   the   allowance  was   not   admissible",   the Commissioner  was incompetent to urge that plea  before  the High  Court.  In support of that view they relied  upon  the judgment of this Court in Commissioner of Income-tax, Bombay v.  Scindia  Steam Navigation Co. Ltd(1).   The  High  Court observed  that  before  the  Tribunal  the  plea  that   the expenditure  was not laid out or expended wholly and  exclu- sively  for the purpose of the business of the  Company  was not argued, and since the question raised and referred  "was not   wide   enough  to  include   that   submission",   the Commissioner could not urge it before them.  ’We are  unable to  hold  that  the decision  in  Scindia  Steam  Navigation Company’s  case(’) supports the opinion of the  High  Court. The  plea that the amount claimed to have been expended  was not admissible as an allowance was raised by the Department. The  Appellate Assistant Commissioner had decided in  favour of  the Department and the order was sought to be  supported before  the  Tribunal by  the  Departmental  representative. Granting  that  an  aspect of the question  was  not  argued before  the Tribunal, the question was on that  account  not one  which did not ,arise out of the order of the  Tribunal. In our judgment, the expression "question of law arising out of such order" in s. 66(1) is not restricted to take in only those questions which have been expressly argued and decided by the Tribunal.  If a question of law is raised before  the Tribunal, even if an ’aspect of that question is not raised,

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in  our judgment, that aspect may be urged before  the  High Court.  The judgment of this Court in Scindia Steam  Naviga- tion  Co.  Ltd.’s  case(’)  does  not  only  not  lend   any assistance to the (1) 42 I.T.R. 589 780 view  taken by the High Court, but negatives that view.   In that  case  certain  steamships belonging  to  the  assessee Company  were lost during the World War 11 by enemy  action. The  Government  of India paid to the  Company  compensation which  exceeded  the written down value of  the  steamships. The  Department  sought to charge the excess amount  to  tax under the fourth proviso of S. 10(2)(vii) of the  Income-tax Act, 1922 inserted by the Income-tax (Amendment) Act,  1946, which came into force in the yea of assessment.  The Income- tax  Officer held that the material date for the purpose  of the  fourth proviso to s. 10(2)(vii) was the date  when  the compensation was in fact received and therefore the’  amount was  assessable  in  the assessment year  1946-47.   At  the instance  of the Company the Tribunal referred the  question whether  the difference between the written down  value  and compensation  was properly included in the total income  for the  assessment  year  194647. Before  the  High  Court  the Company  for the first time raised the contention  that  the fourth  proviso  to  s.  10(2)(vii)  did  not  apply  to-the assessment  as it was not in force on April 1, 1946 and  the liability of the Company had to be determined as on April 1, 1946,  when  the Finance Act, 1946 was brought  into  force. The  Commissioner of Income-tax contended that the  question did  not arise out of the order of the Tribunal within’  the meaning of s. 66 as it was not raised before nor dealt  with by the Tribunal, and it was not referred to the Court.   The High  Court overruled the objection.  This Court  held  that the  High Court had jurisdiction to entertain the  Company’s contention  raised  for the first time before it,  that  the fourth  proviso  to s. 10(2)(vii) did not apply to  the  as- sessment  as  the  contention was within the  scone  of  the question as framed by the Appellate Tribunal and was  really implicit  therein.  The  Court in that case  held  that  the question  as  framed was comprehensive enough to  cover  the question  of the applicability. of the fourth proviso to  s. 10(2)(vii)  of the Income-tax Act.  Venkatarama  Aiyar,  J., observed at p. 612               " Section 66 (I ) speaks of a question of  law               that arises out of the order of the  Tribunal.               Now  a question of law might be a simple  one,               having its impact at one point, or it may be a               complex  one.  trenching  over  an  area  with               approaches   leading   to   different   points               therein.   Such a question might involve  more               than one aspect, requiring to be tackled  from               different standpoints.  All that section 66(1)               requires is that the question of law which  is               referred  to the Court for decision and  which               the  Court is to decide must be  the  question               which was in issue before the Tribunal.  Where               the question itself was under issue, there  is               no  further limitation imposed by the  section               that the reference should be limited to  those               aspects (1) 42 I. T.  R. 589. 781               of  the question which had been argued  before               the Tribunal. it will be an over-refinement of               the  position  to hold that each aspect  of  a

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             question is itself a distinct question for the               purpose of section 66                (1) of the Act." The second question raised in the present case, in our judg- ment,  permits an enquiry whether the amount claimed  is  an admissible  allowance under S. 10(2)(xv).  We are unable  to hold  that  it  is  restricted to  an  enquiry  whether  the expenditure  is of a capital nature.  The Tribunal  did  not consider whether the amount was laid out or expended  wholly and  exclusively  for  the purpose of the  business  of  the Company.  Expenditure is admissible as an allowance under s. 10(2)(xv).  if  all the conditions  prescribed  thereby  are satisfied and is authorised by s. 10(4A).  We are unable  to hold  that  the  question framed and  referred  excluded  an enquiry  Whether the expenditure was wholly and  exclusively laid out or expended for the purpose of the business of  the Company.   Nor are we able to hold that because  before  the Tribunal stress was not pointedly laid upon the  ingredients which  enable an expenditure to be claimed and allowed,  the question  does not arise out of the order of  the  Tribunal. The  matter in dispute before the Tribunal was  whether  the Company  was  entitled to the allowance under  s.  10(2)(xv) -,of   the  Indian  Income-tax  Act  1922.    The   Tribunal considered whether the amount claimed to have been laid  out or  expended  became expenditure within the  meaning  of  s. 10(2)(xv) on the death of Harvey, and whether it was capital expenditure.  They did not consider whether the  expenditure was  laid  out or expended wholly and  exclusively  for  the purpose of the business of the Company.  Since the  Tribunal gave  no finding on this part of the case, we are unable  to answer the question on the materials placed before US. The High Court was, in our judgment, in error in refusing to allow the argument to be raised that the requirements of  s. 10(2)(xv)  were not satisfied, and the expenditure  on  that account was inadmissible. Two courses are now open to us : to call for a supplementary statement  of the case from the Tribunal; or to  decline  to answer the question raised by the Tribunal and to leave  the Tribunal  to take appropriate steps to adjust  its  decision under s. 66(5) in the light of the answer of this Court.  If we  direct the Tribunal to submit a supplementary  statement of  the case, the Tribunal will, according to the  decisions of   this   Court,  (New  Jehangir  Vakil  Mills   Ltd.   v. Commissioner   of  Income-tax,  Bombay  North,   Kutch   and Saurashtra(’); Petlad Turkey Red Dye Works Co, Ltd. v.  Com- missioner  of  Income-tax(’); and Keshav Mills Co.  Ltd.  v. Commissioner  of Income-tax, Bombay North, Ahmedabad(’),  be res- (1) 37 I. T. R. 11 (48 I. T. R. 92(S.  C.) (3) 46 I. T. R. 365. 782 tricted  to  the  evidence  on the record  and  may  not  be entitled  to take additional evidence.  That may  result  in injustice.  In the circumstances we think it appropriate  to decline  to  answer  the question on the  ground  that  the- Tribunal  has  failed to consider and  decide  the  question whether the expenditure was laid out or expended wholly  and exclusively  for the purpose of the business of the  Company and  has  not considered all appropriate provisions  of  the statute applicable thereto.  It will be open to the Tribunal to  dispose of the appeal under s. 66(5) of  the  Income-tax Act,  1922, in light of the observations made by this  Court after  determining  the questions which ought to  have  been decided.

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There will be no order as to costs in this appeal. V.P.S. 783