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PETITIONER: THE INDIAN MOLASSES CO. (PRIVATE) LTD.

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX, WESTBENGAL.

DATE OF JUDGMENT: 05/05/1959

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. SINHA, BHUVNESHWAR P. KAPUR, J.L.

CITATION:  1959 AIR 1049            1959 SCR  Supl. (2) 964  CITATOR INFO :  R          1964 SC1722  (9)  R          1970 SC2067  (2,6)  D          1986 SC 383  (7)  R          1986 SC 484  (24)

ACT: Income-tax-Deduction  -Business expenditure-Payment of  sums for getting annuities to provide pension-Liability depending on  contingency-Expenditure,  meaning  of-Indian  Income-tax Act, 1922 (XI Of 1922), S. 10(2)(XV).

HEADNOTE: 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  whom  the company paid  a  sum  of  Rs. 1,09,643 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 His wife should  H  die before he attained the age Of 55.  On January 12, 1949,  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: " (i) Provided the contract is in  force and  unseduced, 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 pound  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

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and  unreduced  and before the Option Anniversary  the  said funds  and Property of the Society shall be liable  to  make repayment to the Grantees of a sum equal to a return 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. 10(2)(XV) 965 of  the  Indian  Income-tax Act, 1922,  but  the  Income-tax authorities disallowed the claim on the ground that the sums claimed did not amount to expenditure within the meaning  of the section.  The appellant’s contention was that payment of pension  was  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  and  that  expenditure  on insurance was not contingent, because though the contingency related  to life and depended on it, the probabilities  were estimated   on   actuarial  calculations   and,   that   the expenditure was, therefore, real. Held, that expenditure which is deductible for the  purposes of  income-tax under s. 10(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.  IO(2)(XV) Of the Act. Cases on English Income-tax law reviewed.

JUDGMENT: 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, B. 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.  (Private)  Ltd., Calcutta  (hereinafter  called the assesses  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 No.  15 of 1954.  The question of law referred to  the  High Court was: " Whether on the facts and in the circumstances of the case, and  on  a true construction of the Trust Deed,  dated  16th

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September,  1948,  and the Policy dated  the  13th  January, 1949, the payments made by the assessee Company and referred to in paragraph 4 above constitute ’expenditure’ within  the meaning  of  that  word in section  10(2)(xv)of  the  Indian Income-tax Act, 1922, in respect of which a claim for deduc- tion  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  pound  8,208-19-0  (Rs. 1,09,643)  and further undertook to pay annually  Rs.  4,364 (pound  326-14  sh.)  for six  consecutive  years,  and  the trustees  agreed  to execute a declaration  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 pound 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 out 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  pound 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 967 annuity  payable  to Mrs. Harvey would  be  pound,  611-12-0 during her life.  It was further provided that should Harvey die before attaining the age of 55 years, the trustees would stand possessed of the capital value of the Deferred Annuity Policy,.  upon  trust to purchase therewith an  annuity  for Mrs.  Harvey with the above 2 Insurance Company  or  another Insurance  Company of repute.  The other conditions  of  the deed  of trust need Dot be considered, because they  do  not bear upon 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 pound 563-5-8 p. a. if both   Mr. and Mrs. Harvey be  living on September 20,1955. pound,  720-0-0  p.  a.  if  Mrs.Harvey  should  die  before September 20, 1955, leaving Harvey surviving her. pound, 645-0-0 p. a. if Harvey should die before September 20, 1955, leaving Mrs. Harvey surviving him. There was a specialprovision 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 pound 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:

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(III)     "If  both  the  Nominees  shall  die  whilst   the Contract  remains  in force and unredressed and  before  the Option  Anniversary  the  said funds  and  Property  of  the Society shall be liable to make repayment to 968 the Grantees of a sum equal to a return of all the  premiums which  shall  have  been paid under  this  Contract  without interest  after  proof thereof and subject  as  hereinbefore provided. (IV) The  Grantees shall before the Option  Anniversary  and after  it  has  acquired a Surrender Value  be  entitled  to surrender the Contract for a Cash Payment equal to a  return of  all  the premiums (at the 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  calculated 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, 1651-52 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 (1) and (II) do not contain any provision having a material bearing upon Clause (111).  Therefore if it happens that  both  Mr. and Mrs. Harvey 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 969 slightest trace of any indication anywhere that the Trustees should have any beneficient interest in these moneys,  there would  be  a  resultant trust in favour of  the  Company  in respect  of the moneys thus far paid out.  In  other  words, what has been done amounts to a provision for a  contingency which  may  never  arise.  Such a  provision  can  hardly be treated as payment to an employee whether of remuneration or pension  or  gratuity,  and cannot  be  a  proper  deduction against the incoming 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

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the  Tribunal  whether the money was laid  out  or  expended wholly  and  exclusively for the purposes of  the  assesses’ 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  ques- tion.  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 Tribanal and which was not covered  by the Tribunal’s 122 970 appellate  order.   I  am, therefore, of  opinion  that  the question  should be taken as covering only the  ground  upon which the Tribunal held the payments to be not allowable  as deductions as not embracing any other ground.  "    We must express our regret that the case  took the course it  did.  The order of assessment was passed as far back  as 1952, and seven years have now passed 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 will 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.  Whether 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.  Com- missioner 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.  There, certain  contributions on trust for payment of pensions to employees were held  not to be I expenditure’, because on the original trust failing, the money was (1)  [1954] S.C.R. 195. 971 deemed  to be held by the trustees on a resulting trust  for the  benefit of the maker.  If the same can be said in  this case,  namely,  that the money continued to  belong  to  the assessee  Company in the account years, its payment  to  the trustees or the Insurance Company notwithstanding, there may be  a possibility of answering the question as was  done  in

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the  decision  of this Court cited earlier.  But if  such  a clear-cut proposition cannot be laid down, then,  obviously, there  is  considerable  difficulty in deciding  what  is  I expenditure  ’ within the clause, without reference  to  the rest  of its provisions.  Of course, to find the meaning  of the  word  I  expenditure ’, a dictionary  is  ill  that  is needed,  but to go further and to decide whether the  outlay in  this case was I 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 be was opposed to any extension of the  ambit of the question.  The following passage from the judgment of the  Chief  Justice shows the respective  attitudes  of  the Department and the assessee Company before the Bench: "  Mr. Meyer contended 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  bad  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 behalf  of  the  assessee, objected to the scope of the question being so enlarged  and he referred to the appellate order of the Tribunal which had proceeded on a single ground.  " 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 We  cannot  help saying that though the Tribunal may  be  at liberty  to  decide a case as appears best to it,  there  is considerable hardship to the tax-payers, if questions of law are  decided piecemeal and repeated references to  the  High Court are necessary.  The jurisdiction of-the High Court  is advisory  and consultative, and questions of  interpretation of  the  law in this attenuated form can  well  be  avoided. This will tend 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  I  expenditure’  was   not effective.   Following, therefore, the case in  Atherton  v. British   Insulated   and  Helsby  Cables,  Ltd.   (1)   and distinguishing   Hancock   v.   General   Reversionary   and Investment  Co.  Ltd.  (2),  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 Iona 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

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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 I 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. 973 trust, and pointed out that there were two contingencies  in which  money was likely to revert to the  assessee  Company. The  first  contingency was if both Harvey and  Mrs.  Harvey died before September 20, 1955.  The second contingency  was due to an omission in el. (III) to provide for a pension  to Harvey, if Mrs. Harvey died before the above date.  In  that event,  the  trust would have failed, unless  a  policy  was taken  out under 61. (II).  The High Court held that if  any 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: pound  720, if the annuity was payable to Harvey  alone;  or pound  558-1-0, during the joint lives of both or  survivor; or  pound  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  pound 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 ex- pended.   The conclusion of the High Court,  therefore,  was that the assessee Company must be held to have 974 set  apart  I tentatively’ a sum of money in order  that  it might  be  available for the payment of a I  gratuity  ’  to Harvey  and Mrs. Harvey, but there being I no provision  for the  application  of  the  money  in  the  event  of   those contingencies not occurring and no annuity being payable  to any  one’,  there  was no I expenditure’  in  any  real  and practical sense of the term’. The arguments in this appeal have ranged, as they 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

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Company  was concerned, it was, in point of fact, made,  and this was I expenditure’ within the dictionary meaning of the word.   The  argument  of  the  Department  is  that  by   I expenditures  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 arrangement  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. 975 It  has been ruled under the English statute that sums  paid to  an  employee as pension or gratuity  are  deductible  as money  laid  out  and expended for  the  purpose  of  trade, profession  or vocation.  See Smith v. Incorporated  Council of  Law  Reporting for England and Wales (1).  It  has  also been  ruled  that a single payment to  avoid  the  recurring liability  of  an  employee’s  pension  is  also  a   proper deduction.   The leading case on the subject is  Hancock  v. General  Reversionary and Investment Co. Ltd. (1).  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, & Co. Ltd.  v.  Curtis  (3). Pollock, M. R., drew pointed attention to the words of Lush, J., in the earlier case, where lie observed at p. 698:- "It  seems tome 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 first (1)  [1914] 3 K. B. 574 ; 6 Tax Cas. 477. (2)  (1918) 7 Tax Cas. 358. (3)  [1925] 1 K. B. 328; 8 Tax Cas. 678. 976 whether  there was an expenditure which he held  there  was,

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and  next  whether  it  could  be  said  to  be  wholly  and exclusively  for  the purposes of the trade  which,  in  his opinion, could not be said of the expenditure in that  case. The  words  of  the  learned  Lord  Justice  on  ’the  first proposition have a bearing upon the present case, and may be reproduced here(at p. 703) : I  am  inclined to agree with Mr. Latter in  his  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 provisions.  But it seems to me 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 down 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 was  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." (1)  (1925) 10 Tax Cas. 155. (2)  (1910) 5 Tax Cas. 529. 977 Again,  in Morgan Crucible Co. Ltd. v. The Commissioners  of Inland  Revenue (1), the payment to an insurance company  to take  out  a  policy  was  held  not  to  be  an  admissible deduction.  There, the company operated a scheme for payment of pensions to retired or incapacitated employees, reserving to  itself  the  uncontrolled discretion to  vary  or  cease payment  of  pensions.  When pensions were paid,  they  were deducted  -but when the company took out a policy,  without, 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 say ’ capital  money ’  without  prejudice-back  from the  insurance  company  on surrendering the policies." From these cases, there are deducible certain principles  of

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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 (1)  [1932] 2 K. B. 185 ; 17 Tax Cas. 311, 317. (2)  (1918) 7 Tax Cas. 358. 123 978 liability  to  make repeated and periodic  payments  in  the future,  it  may  generally be regarded as a  payment  of  a revenue character (Anglo-Persian Oil Co. Ltd. v. Dale)  (1), and  lastly, if the ownership of the money whether in  point of fact or by a resulting trust be still  in the  tax-payer, then  there  is acquisition of a capital asset  and  not  an expenditure of a revenue character. Side  by side with these principles, there are others  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 allow 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 (2).  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 & Co.  Ltd  v.  Bentley (3), 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] 1 K. B. 124; 16 Tax Cas. 253. (2)  (1948) 30 Tax Cas. 496. (3) (1948) 30 Tax Cas. 334. 979 and  under pressure from his brothers a company  was  formed and the directors were authorised to enter into an agreement to  purchase the business.  A. C. Howard was  the  governing director  of the company and his three  brothers,  permanent directors.    The  company  also  entered  into  a   service agreement with them, and Art.  107 thereof provided : "  After the death of the said Alexander Charles Howard  and during  such.  time as his  legal  personal  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

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her life." This service agreement was executed on January 3, 1934.   In 1943  by  a  deed of release A. C. Howard  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 pound 4,500. This amount was based upon the findings of an actuary.   The taxpayer  submitted that the sum paid 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 held 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 nothing whatever to do with the Company  ".  If, therefore, (1)  [1932] 1 K. B. 124; 16 Tax Cas. 253. (2)  (1946) 27 Tax CaS. 296. 980 the original annuity was not chargeable to revenue, the  sum of pound 4,500 paid to avoid it, could not also be. The other case is Southern Railway of Peru Ltd. v. Owen (1). In  that  case,  the English company was  bound  to  provide compensation  to  all its employees on  the  termination  of their services.  Legislation to this effect was deemed to be a  part  of the contract of service.  Such  right  arose  on dismissal  or  on  termination  of  the  employment  by  the employer  after  proper  notice.  The  compensation  was  an amount  equal  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 amount equal to the burden cast on it each year but  the  claim was refused.  It was held by  majority  that though  ’the  company  was entitled to  charge  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.  If the pension itself  be  not payable as an obligation, and if there 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 (2) was applied to the last corollary. So  far,  we have dealt with the principles  which  underlie leading cases decided in England, some of which were in  the forefront of the arguments.  We 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

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negative (I) [1957] A.C. 334. (2) [1912] A.C. 443. 981 form.   Section 137 of 15 & 16, Geo. 6 & I Eliz. 2,  c.  10, which  prescribes the general rules regarding deductions  is expressed  in the negative, and r. (a) which was  applicable to the cited cases reads as follows: "  Subject to the provisions of this Act, in  computing  the profits  or gains to be charged under Case I The Case 11  of schedule D, no sum shall be deducted in respect of- (a)  any  disbursements or expenses, not being 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 sometimes 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.  " Business-(1) The tax shall be payable by an  assessee under  the head I Profits and gains of business,  profession or  vocation’  in  respect of the profits or  gains  of  any business, profession or vocation carried on by him. (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." This section, though it enacts affirmatively what is  stated in   the   negative  form  in  the   English   statute,   is substantially in pari materia with the English enactment and would have justified our considering the English authorities as aids to the interpretation thereof But  there is no case directly on what is I expenditure  and if the authorities under the English statute 982 were  to  be  of real assistance, the whole  of  the  matter should  have been before us.  The question, however,  limits the  approach  to  whether the  payments  made  towards  the policy  were expenditure within cl.(xv). I  Expenditure’  is equal  to  I  expense’ and ’expense’ is money  laid  out  by calculation  and intention though in many uses of  the  word this element may not be present, as when we speak of a  joke at  another’s expense.  But the idea of I spending’  in  the sense of I paying out or away’ money is the primary  meaning and  it  is  with that meaning that  we  are  concerned.   I Expenditure’ is thus what is ’paid out or away’ and is some- thing which is gone irretrievably. To  be an allowance within cl. (xv), the money paid  out  or away  must  be (a) paid out wholly and exclusively  for  the purpose  of  the business and further (b) must  not  be  (i) capital  expenditure,  (ii) -personal expense  or  (iii)  an allowance  of the character described in cls. (i) to  (xiv). But whatever the character of the expenditure, it must be  a paying  out  or away, - and we are not  concerned  with  the other  qualifying aspects of such expenditure stated in  the clause either affirmatively or negatively. So,  the question is whether in a business sense the  amount was  spent, that. is to say, paid out or away.   To  discuss

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this, we must go to the terms of the policy. No  doubt, under the general terms of the policy an  annuity was  to be provided for the Harveys.  We are  not  concerned with Mrs. Harvey, because she had no claim to the annuity or pension any more than Mrs. Howard bad in Alexander Howard  & Co.  Ltd. v. Bentley (1) already discussed by us  elsewhere. That consideration involves a finding on whether an  annuity to  Mrs. Harvey was an expense made wholly  and  exclusively for  the purpose of the business, and that is not  a  matter open to us by the limited question posed.  In any event, the -provision  for a pension or annuity to Mrs.  Harvey  cannot rank higher than an annuity to Harvey, and the matter can be considered  on the limited aspect that a pension or  annuity to Harvey was also contemplated. (1)  (1948) 3o Tax Cas, 334. 983 In the years of account the assessee Company did hand out to the  trustees,  the  sums of money for  which  deduction  is claimed.  But was the money spent in so far as the  assessee Company was concerned ? Harvey was then alive and it was not known if any pension to him would be payable at  all.’Harvey might not have the lived to be 55 years.  He might even have abandoned c his service or might have been dismissed.   Till September  20,  1955,  the  assessee  Company  had  dominion through  the grantees over the premia paid, at least in  two circumstances.   They  are  to  be  found  in  the   special provision,  and the third clause of the second  schedule  of the policy.  These provisions have been quoted already,  but may again be reproduced: " Special provision: Provided  the  contract  is  in  force  and  unseduced,  the Grantees  shall be entitled to surrender the Annuity on  the Option  Anniversary  for  the Capital sum  of  pound  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." - Cl.  (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 the Grantees of a sum equal to a return of all the premiums which shall have been  paid under this Contract without interest after  proof thereof and subject as hereinbefore provided." To be a payment which is made irrevocably there should be no possibility of the money forming, once again, a part of  the funds  of  the assessee Company.  If this condition  be  not fulfilled  and  there  is a possibility  of  there  being  a resulting trust in favour of the Company, then the money has not been spent, i. e., paid out or away, but the amount must be  treated as set apart to meet a contingency.  There is  a distinction  between  a contingent liability and  a  payment depending  upon a contingency.  The question is  whether  in the  years  of  account,  one  can  describe  the   assessee Company’s liability as contingent or merely depending 984 upon  a  contingency.   In our opinion,  the  liability  was contingent and not merely depending upon a contingency. That such a distinction is real was laid down in the  speech of  Lord Oaksey in Southern Railway of Peru     Ltd. v. Owen (1),  and  was recognised generally in the speeches  of  the other Law Lords.  Now, the question is what is the effect of the I payment of premia in the   present case ? Learned counsel for the assessee Company referred us to  the provisions of Chapter IX-B of the Act, particularly ss. 58R, 58S  and 58V thereof.  We regret we are not able to see  bow

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these  provisions help in the matter.  We are not  concerned with  the provisions of this Chapter, because the  allowance does not fall within any of the provisions, and we have only to decide the question whether the amounts -paid to purchase the policy involved an expenditure in the accounting years. Next  learned  counsel relied upon Joseph v.  Law  Integrity Insurance Company, Limited (2), Prudential Insurance Company v.  Inland  Revenue Commissioners (3 ) and  In  re  National Standard  Life Assurance Corporation (4) to show that  there was  no contingent liability but a liability depending on  a contingency, namely, the duration of life, the probabilities of  which  were  estimated on  actuarial  calculations.   No doubt, these cases deal with insurance of human life but the observations therein are not material here.  In the first of these  cases,  it was held that the kind of  policies  which were  issued were policies of insurance on human lives,  and that  the  company  was carrying on  the  business  of  life insurance contrary to its memorandum of association and  the policies  were ultra vires the company.  The  policies  were also  illegal  within s. I of the Assurance  Companies  Act, 1909..  In this context, the definition that I a  policy  of life insurance’ means I any instrument by which the  payment of  monies, by or out of the funds of an assurance  company, on the (1)  [1957] A.C. 334. (3)  [1904] 2 K.B. 658. (2)  [1912] 2 Ch. 581. (4)  [1918] 1 Ch. 427, 430. 985 happening  of any contingency depending on the  duration  of human  life,  is  assured or secured was  referred  to.  The policies  issued by the company, though ostensibly called  I investment  policies’ were held to be really life  insurance policies.  The next case arose under s. 98 of the Stamp Act, 1891.    It   was  held  that    a  contract   by   which in consideration  of  the  payment  by a  person  of  a  weekly premium,  a sum certain was payable to him on his  attaining the  age  of  65 or, in the event of his  dying  earlier,  A smaller sum was to be paid to his executors, was a policy of insurance  upon a contingency depending upon a  life  within the meaning of the section.  In the last case, the  question arose under s. 30 of the Assurance Companies Act, 1909,  and it  was decided that a certificate-holder held a  policy  on human  life  because  money  was payable  not  only  at  the expiration  of  a certain number of years but  all  premiums were   repayable  in  the  event  of  death  to  the   legal representative. These cases may help to determine the nature of the contract with the insurance company but cannot help in the solving of the  question whether the payments to the insurance  company were expenditure.  That insurance of human lives involves  a contingency relating to the duration of human life is a very different proposition from the question whether the  payment in the present case to the trustees was towards a contingent liability or towards a liability depending on a contingency. In  our opinion, the payment was not merely  contingent  but the liability itself was also contingent.  Expenditure which is  deductible  for  income-tax purposes  is  one  which  is 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, nothing more was done in the account years.  The money was  placed  in the hands of trustees and/or  the  insurance company  to  purchase  annuities  of  different  kinds,   if required,  but  to  be returned if the  annuities  were  not

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bought and 124 986 the setting apart of the money was not a paying out or  away of these sums irretrievably. In  our opinion, the question was correctly answered by  the Calcutta High Court.  We, therefore, dismiss the appeal with costs. Appeal dismissed.