1959 (5) TMI 5 - SC - Income Tax

Insurance premium payments held non-deductible as contingent liabilities under section 10(2)(xv) Income-tax Act 1922

Indian Molasses Company Private Limited Versus Commissioner Of Income-Tax, West Bengal

The SC dismissed an appeal regarding whether payments to an insurance company for policy premiums constituted deductible expenditure under section ... Payments to the insurance company to take out a policy constitute 'expenditure' within the meaning of that word in section 10(2)(xv) of the Indian Income-tax Act, 1922 - Interpretation of the trust deed and the Insurance policy - definition of 'expenditure'. Held that:- 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 bought and 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. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered was whether the payments made by the assessee company under a trust deed and policy to provide pension or annuity benefits to a retiring employee constituted 'expenditure' within the meaning of section 10(2)(xv) of the Indian Income-tax Act, 1922, so as to qualify for deduction against business profits. Specifically, the issue was:'Whether on the facts and in the circumstances of the case, and on a true construction of the trust deed dated 16th September, 1948, and the policy dated 13th January, 1949, the payments made by the assessee company 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 deduction can be made, subject to other conditionsRs.'This question arose because the payments were made to trustees to purchase deferred annuity policies for the benefit of the employee and his wife, with contingencies under which the money might revert to the company. The question was whether such payments were actual expenditure or merely an allocation of funds for a contingent liability which might never materialize.2. ISSUE-WISE DETAILED ANALYSISIssue: Whether the payments made under the trust deed and insurance policy constituted 'expenditure' under section 10(2)(xv)Relevant legal framework and precedents: Section 10(2)(xv) allows deduction of 'any expenditure (not being capital expenditure or personal expenses) laid out or expended wholly and exclusively for the purposes of such business.' The English cases cited (Hancock v. General Reversionary and Investment Co. Ltd., Atherton v. British Insulated and Helsby Cables Ltd., Rowntree & Co. Ltd. v. Curtis, Morgan Crucible Co. Ltd. v. Commissioners of Inland Revenue, Alexander Howard & Co. Ltd. v. Bentley, Southern Railway of Peru Ltd. v. Owen) elucidate principles distinguishing revenue expenditure from capital expenditure, and actual expenditure from contingent or allocated funds.Court's interpretation and reasoning: The Court emphasized that 'expenditure' means money 'paid out or away' irretrievably. Merely setting aside money or placing it in trustees' hands to meet a contingent liability is not 'expenditure.' The liability must be actual and not contingent for the payment to qualify as expenditure. The Court distinguished between a contingent liability and a payment depending on a contingency. Here, the liability itself was contingent, as the employee might not survive to retirement or might leave service, and the money could revert to the company under certain contingencies.Key evidence and findings: The trust deed and policy provided for deferred annuities payable on retirement, with provisions that if both the employee and his wife died before the pension commencement date, the premiums paid would be returned to the trustees (and effectively to the company). The company had dominion over the funds through the trustees until the option anniversary. The payments were made during accounting years before the employee's retirement or death, and the liability to pay pension had not crystallized.Application of law to facts: Since the payments could be returned to the company if the contingencies did not arise, the funds were not irretrievably paid out. Therefore, the payments were not 'expenditure' within the meaning of section 10(2)(xv). The Court held that the payments were an allocation of funds to meet a contingent liability, not an actual expenditure.Treatment of competing arguments: The assessee argued that payment of pension or lump sum to extinguish recurring pension liability is revenue expenditure, citing English cases where lump sum payments to avoid recurring liability qualified as deductible expenditure. They also contended that insurance payments are towards liabilities depending on actuarially calculable contingencies and thus are real expenditure. The Department contended that the payments were only a provision for a contingent liability and not actual expenditure.The Court acknowledged the relevance of English precedents but stressed differences in legislative schemes and the necessity of interpreting the Indian statute in context. The Court rejected the assessee's argument that the payments were expenditure because the liability was contingent and the money might revert to the company. It also rejected the applicability of Chapter IX-B provisions, as they were irrelevant to the question posed.Issue: Interpretation of 'expenditure' in section 10(2)(xv)Relevant legal framework and precedents: The Court analyzed the meaning of 'expenditure' as 'money paid out or away' irretrievably, and the requirement that it must be 'wholly and exclusively' for business purposes. English cases such as Hancock, Atherton, and Morgan Crucible were examined to extract principles distinguishing capital and revenue expenditure, and actual expenditure from mere allocation.Court's interpretation and reasoning: The Court held that 'expenditure' must be actual payment of money which is irretrievably gone from the taxpayer's control. If there is a possibility of a resulting trust or reversion of money to the company, the money has not been spent in the real sense but only set apart. The Court noted that the presence of contingencies allowing the money to revert to the company meant the payments were not 'expenditure' but provision for a contingent liability.Key evidence and findings: The policy's special provisions allowed surrender of the annuity for a capital sum, and if both nominees died before the option anniversary, the premiums paid would be returned. The company retained dominion over the funds until the contingencies matured or failed.Application of law to facts: The payments were not irretrievably paid away; thus, they could not be treated as expenditure under the statute.Treatment of competing arguments: The assessee's reliance on dictionary meanings and English cases was considered but found insufficient to overcome the statutory context and facts showing the contingent nature of liability and possibility of reversion.Issue: Whether the question referred to the High Court was too narrow and whether the other ingredients of section 10(2)(xv) should have been consideredCourt's reasoning: The Court expressed regret that only one of the three ingredients of section 10(2)(xv) - whether there was 'expenditure' - was referred for opinion, leaving other issues such as whether the expenditure was wholly and exclusively for business and whether it was capital or revenue expenditure undecided. The Court criticized piecemeal litigation and narrow framing of questions, which prolongs litigation and causes hardship to taxpayers.However, the Court held itself bound to answer the question as framed by the Tribunal and High Court, without expanding the scope.3. SIGNIFICANT HOLDINGS'Expenditure' within section 10(2)(xv) means money 'paid out or away' irretrievably, and not money set apart to meet a contingent liability which may or may not materialize.'If there is a possibility of 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.''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.''The liability in the present case was contingent and not merely depending upon a contingency.''A lump sum payment does not necessarily make the payment capital expenditure; it may be revenue expenditure if it extinguishes a recurring liability. Conversely, if the payment creates or acquires an asset or advantage for enduring benefit, it may be capital expenditure.''The English cases must be read with caution and in the context of the Indian Income-tax Act, which is in pari materia but not identical.'Final determination: The payments made by the assessee company under the trust deed and policy were not 'expenditure' within the meaning of section 10(2)(xv) of the Indian Income-tax Act, 1922, and therefore, the claim for deduction was rightly disallowed. The appeal was dismissed with costs.