1. The argument addressed to us in this Reference has been lengthy and, if I may say without offence, of a somewhat wandering character, but the point referred is an extremely slender one. It covers but a fraction of the question which will have to be decided in favour of the assessee, if its claim for deduction of certain amounts of money in the computation of its taxable profits is to be allowed.
2. The assessee, the Indian Molasses Co. Ltd., is a public limited company. In 1948 its Managing Director was a gentleman of the name of Mr. John Bruce Richard Harvey who had already been in its service for about thirteen years. It has been, found; that there was an agreement that 'the Company should provide a pension to Mr. Harvey when he retires.'
In implementation, apparently, of that agreement, the assessee executed on 16-9-1948. a Deed of Trust by which it appointed three Chartered Accountants as trustees and declared that it had already paid over to the trustees a certain sum of money and undertaken to pay to them certain annual sums for six consecutive years on condition that the trustees would execute a declaration of trust as thereafter specified.
The deed went on to repeat that the company was undertaking and binding itself to pay to the trustees a certain sum on 20th September of every year for six consecutive years, the first of such payments to be made on 20-9-1949.
3. I may pause here to state that Mr. Harvey was due to retire on 20-9-1955, on reaching the age of fiftyfive years. To revert to the Trust Deed, it proceeded to set out the declaration of trust made by the trustees.
Clause 2 of the deed states that trustees hold a sum of 8,208-19-0 which, by the way, was the sum already paid to them and shall hold the rupee equivalent of 326-14-0 which, by the way, was the annual payment which the assessee was undertaking to make upon trust to expend thesame and the income thereof, if any, in taking out a Deferred Annuity Policy with the Norwich Union Life Insurance Society in the names of the trustees but on the life of Mr. Harvey. This policy was to cover an annuity of 720 per annum, payable to Mr. Harvey for life from the date when he would attain the age of fiftyfive years.
4. The next clause in the Trust Deed makes an alternative provision. It states that the trustees would, if so required by the company, take out 'a deferred longest life annuity policy' with the same company instead of the Deferred Annuity Policy mentioned in Clause 2, in their own names, but in favour of Mr. and Mrs. Harvey.
This policy was to cover an annuity of 558-1-0 per annum which would be payable during the joint, lifetime of Mr. and Mrs. Harvey from the date when Mr. Harvey would attain the age of fiftyfive years and thereafter during the life of the survivor of the two. It was further provided! that the policy would have to include a provision for the payment of an increased annuity of 611-12-0 to Mrs. Harvey in the event of Mr. Harvey's death before he attained the age of fiftyfive years.
5. It would thus appear that if the trustees took out a Deferred Annuity Policy in terms of Clause 2 of the Trust Deed the annuity covered thereby would be receivable by Mr. Harvey if he reached the age of retirement and earned the right to a pension irrespective of whether Mrs. Harvey was alive or dead.
The longest life annuity policy referred to in Clause 3 brings in Mrs. Harvey and makes an annuity payable to her during her own life even after the death of Mr. Harvey, should he live up to the age of fiftyfive and then predecease her and also if Mr. Harvey should die, leaving Mrs. Harvey him surviving, even before reaching the age of fifty-five years.
6. The next clause in the Trust Deed proceeded to make another provision. It stated that in the event of Mr. Harvey dying before attaining the age of fiftyfive years, the trustees would stand possessed of the capital value of the Deferred Annuity Policy referred to in Clause 2 of the deed, upon trust to purchase therewith an annuity for Mrs. Harvey from either the Norwich or any other Insurance Company as the trustees ought deem fit.
It is not easy to construe this clause and say in what circumstances it would apply. If the trustees took out a Deferred Annuity Policy in terms of Clause 2 of the deed, as they were apparently expected to do if the assessee did not require them to take out a policy in terms of Clause 3, the money would already be vested in such a policy.
It is therefore not very easy to see how the trustees would stand possessed of the capital value of the Deferred Annuity Policy referred to in Clause 2, if after such a policy had been taken out Mr. Harvey died before attaining the age of fifty-five years.
7. Be that as it may, it may be pointed out here that, in certain respects, the Trust Deed goes beyond the agreement, which the Tribunal has found the company was under, to provide a pension to Mr. Harvey when he retired. It exceeds the provisions of the agreement, because under its provisions, even if Mr. Harvey died before reaching the age of fiftyfive years and before retiring on superannuation and, therefore without qualifying for a pension, his widow would still be entitledto an annuity if a policy was taken out in terms of Clause 3 or if the trustees found themselves called upon to act in terms of Clause 4.
8. The Trust Deed was executed, as 1 have stated, on 16-9-1948. It appears that on 12-1-1949, the trustees took out a policy from the Norwich Union Life Insurance Society. The policy states that although it was being taken out on 12-1-1949, the data of proposal and declaration was 20-9-1948.
The terms of the policy, in so far as they provide for an annuity, are not reconcilable with, those of the Trust Deed. The nominees under the policy are both Mr. and Mrs. Harvey and one would, therefore, think that the trustees had been required by the company to take out a deferred longest life annuity policy In terms of Clause 3 of the Deed of Trust.
Actually, however, the terms of the policy are not wholly those of Clause 3 of the deed. It provides, in the first instance, that a sum of 563-5-8 per annum would be payable if both the nominees were living on 20-9-1955, then it provides for 720-0-0 per annum to Mr. Harvey, if Mrs. Harvey should the before 20-9-1955, leaving Mr. Harvey, her surviving, and lastly for 645-0-0 per annum to Mrs. Harvey, if Mr. Harvey should the before 20-9-1955, leaving Mrs. Harvey, him surviving.
It will be noticed that the second provision for the payment of 720-0-0 per annum to Mr. Harvey in case Mrs. Harvey should the before 20-9-1955, is not to be found in Clause 3 of the Trust Deed.
In fact, the terms of the policy seem to combine those of clauses 2 and 3 of the Trust Deed with, this difference that the sums payable in two of the eventualities contemplated are slightly higher and that an annuity is made payable to Mr. Harvey, upon his retirement at the age of fiityfive years, but to that a condition that Mrs. Harvey should the before that date is superadded.
9. From what I have stated, it would be clear that not only does the Trust Deed go beyond the agreement which the Tribunal, has found proved, but the policy in its turn goes beyond the Deed of Trust.
10. I have already referred to the declaration in the Deed of Trust that the assessee had already made a payment of 8.208-19-0 to the trustees. The Statement of the Case recites that the company made that initial payment in terms of rupees, paying the trustees Rs. 109,643/- during the calendar year 1948 and had thereafter paid Rs. 4,364/- which was the rupee equivalent of 326-14-0 at current rates of exchange during the next three years.
It was these sums that the assessee claimed to be entitled to deduct in the computation of its business profits for the assessment years 1949-50, 1950-51, 1951-52 and 1952-53. The Reference relates' to all 'those four years and also to two chargeable accounting periods, one ended on 31-12-1948, and the other on 31-3-1949, but the latter are only consequential.
The claim was made under Section 10(2)(XV), Income-tax Act, as it stood at the relevant time. The Income-tax Officer refused to allow the deduction on the grounds that the payment was in the nature of a gratuity, secondly, that the trust was vague and uncertain, thirdly, that the expenditure was a capital expenditure and lastly that, in any event, the deduction could not be allowed in view of the provisions ofs. 10 (4) (c) of the Act, since no provision for payment of tax had been made.
The Appellate Assistant Commissioner affirmed him, but chose to do so on two of the grounds. He held that the payments were ex gratia payments and also they were of a capital nature. Both the Income-tax: Officer and the Appellate Assistant Commissioner held that the company had, not been able to prove that it was under any obligation to provide for a pension or annuity for Mr. Harvey.
11. On further appeal, the Appellate Tribunal upheld the decision of the authorities below, but on a new ground. The Tribunal held that there could be no doubt as to the bona fides of the arrangements made by the assessee company and that it was prepared to hold that there was an agreement that the company should provide a pension to Mr. Harvey when he retired.
Having held so much in favour of the assessee company, the Tribunal, nevertheless, refused to allow the deduction claimed on the ground that the moneys covered by the payments had 110 been expended within the meaning of Section 10(2) (XV): of the Act. In coming to that conclusion, the Tribunal relied on a provision contained in the policy which is Clause 3 of the second schedule. That Clause provides that 'if both the Nominees shall the 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.' The Tribunal held that if it so happened that both Mr. and Mrs. Harvey died before 20-9-1955, all the payments made till then to the Insurance Society through the trustees would, come back to the trustees and there would be a resulting trust in favour of the assessee company in respect of the moneys concerned.
In the Tribunal's view, it followed that since there was a chance of the money coming back to the company, it could not be said to have parted with the money effectively and that, therefore, no expenditure had, in fact, been incurred.
It was true that the money would stand invested in the policy and the annuities contracted for by the trustees would be payable to Mr. or Mrs. Harvey in certain contingencies, but there was at least one contingency contemplated by the policy in which no money would have to be paid or could be paid to the annuitants and on the happening of that contingency, all the premia paid would return to the trustees, which meant that they would return to them for the benefit of the assessee.
The Tribunal accordingly held that there had 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,' or, as the Tribunal put it in other language, 'what has been done amounts to a provision for a contingency which; may never arise'.
In accordance with that view taken by the Tribunal, it held that the money in question had not been spent or expended at all and, therefore, no question of claiming or allowing any deduction under Section 10 (2) (xv) of the Act arose.
12. After the decision of the Tribunal, the assessee applied for a Reference to this Court andin compliance with that application, the Tribunal has referred the following question:
'Whether, on the facts and in the circumstances of the case and on a true construction of the Trust Deed, dated 16-9-1948 and the Policy, dated 12-1-1949, the payments made by the assessee Company and referred to in para. 4 above constitute 'expenditure' within the meaning of that word in Section 10 (2) (xv) 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?'
13. It will be seen that the scope of the question is limited to asking whether any expenditure had at all been made. The Tribunal makes its meaning clear by an express reservation at the end of the Statement of the Case. It states as follows:
'In the event of the High Court holding that there was an expenditure in this case, it would still be necessary for the Tribunal to decide whether the money was laid out or expended wholly and exclusively for the purposes of the assessee's business and, if so, whether the expenditure was in the nature of capital or revenue expenditure.'
14. Before proceeding to deal with the question, it might be useful to make its scope a little clearer. Section 10 (2) (xv), Income-tax Act under which the deduction was claimed read as follows at the relevant time.
10 (2) 'Such profits or gains shall be computed after making the following allowances, namely:
(xv) any expenditure (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.'
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.
15. Of the above three matters, the question referred to us covers only the first, but it may perhaps be said that even the whole of the first is not really covered, although the language used by the Tribunal is of a general character. The question asks whether the payments concerned constitute expenditure within the meaning of that word in Section 10 (2) (xv) of the Act.
Mr. Meyer contended that 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 had 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. 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 Tribunal and which was not covered by the Tribunal's 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 and as not embracing any other ground.
Accordingly, the question whether even if the amounts concerned were expended or parted with in fact, they constituted expenditure against a liability which, so far as the relevant accounting year was concerned., was only a contingent liability and therefore not allowable as deductions from the profits of that year, will be left open. So also will be the question as to whether Section 10 (4) (c) of the Act would bar the deduction claimed being allowed.
16. On behalf of the assessee Mr. Iyengar urged two grounds, although he gave a variety of reasons in support of both. He contended that the possibility of a reverter to the assesses company could not make the payments to the trustees any the less expenditure for the purposes of Section 10 (2) (xv) and further that, under the terms of the Trust Deed, there was no chance of any reverter at all.
17. Logically the second question comes first although Mr. Iyengar took it up after he had exhausted his arguments on the first of the two questions I have mentioned. I may, therefore, begin with the second question.
18. I have already pointed out that the Tribunal found a possibility of reverter by referring to a particular provision contained in the policy. In my view, in relying upon the policy, the Tribunal was entirely mistaken.
Mr. Iyengar in his argument before us followed the Tribunal in its error and tried to prove that there was no possibility of reverter by referring to another provision of the policy, but the policy embodies a contract only between the trustees and the insurance Company to which the assessee company is not a party.
Whether or not the moneys paid' by the assessee company to the trustees would in certain eventualities come back to the assessee or be held by the trustees for its benefit must be determined by reference to the terms of the Deed of Trust and not by reference to the terms of a subsequent contract which the trustees may have entered into with a third party, the Insurance Company.
If the contingency contemplated by the policy came to happen and no annuity was required to be paid to either Mr. or Mrs. Harvey and if the amounts of premia were paid back to the trustees, such amounts could be held to be revertable to the assessee only if the provisions of the Trust Deed led to that consequence. It is conceivable that the Trust Deed might have been framed in terms under which even if the premia paid on the policy came back to the trustees, they would not hold it for the benefit of the truster.
In my view, therefore, reference to the terms of the policy is hardly relevant and I shall even say such reference was mistaken.
19. We do not know what the terms of the agreement between the company and Mr. Harvey were, except that the company was under an obligation to provide a pension to Mr. Harvey when he retired. The Trust Deed itself describes the obligation as an obligation 'to provide for and pay to him a pension for life'.
I have already pointed out that the terms of the Trust Deed go beyond that obligation, butwhat payments in what eventualities they contemplate may be examined, it will appear that there is a provision for a payment of a pension to Mr. Harvey for the term of his life, if he should live up to the age of fiftyfive and then retire. Such a provision is contained in Clause 2 of the deed, but it is not very relevant for our present purpose, since the policy actually taken out was not a policy contemplated by that clause.
Clause 3 contemplates that should, both Mr. Harvey and Mrs. Harvey be alive on the date when Mr. Harvey's retirement would fall due, namely 20-9-1955, an annuity would be payable to them for their joint lives and thereafter during the life of the survivor of the two. The clause further provides that if Mr. Harvey should the before reaching the age of fiftyfive but Mrs. Harvey be alive, she will get an increased annuity.
20. I may pause here for a moment to examine what the first provision in the third clause really means. The words are:
'to cover an annuity ...... ...... payable during the joint lifetime of Mr.and Mrs. Harvey from the date when Mr. Harvey will attain the age of fiftyfive years and during the life of the survivor of them'.
The first part of the clause undoubtedly contemplates that Mrs. Harvey should be alive when Mr. Harvey reaches the age of fiftyfive years and in the event of her being so alive, an annuity will be payable during the period of their joint lives. The second part describes the period during which the annuity will be payable as 'the life of the survivor of them.
Can it mean that the annuity will be payable, both when Mrs. Harvey is alive at the date Mr. Harvey reaches the age of fiftyfive years and thereafter at some future point of time one or other of them dies and also when Mr. Harvey died before reaching fiftyfive years and Mrs. Harvey survived him, though the payment would be made from the date when Mr. Harvey if alive, would reach the age of fiftyfive?
It does not seem to me that the latter contingency could possibly have been contemplated, because under the provisions of this clause, if Mr. Harvey died before reaching the age of fiftyfive, he would not qualify for an annuity or pension at all and, therefore, although Mrs. Harvey might be the survivor of the two, she could not be entitled to any payment.
The true meaning of the clause, therefore, seems to me to be that Mr. Harvey would naturally be alive when he reached the age of fiftyfive and Mrs. Harvey should also be alive at that date and an annuity would be payable to them so long as both continued to live.
Thereafter, when one or other of them died, the annuity would be continued to be paid to the survivor so long as he or she lived. The word 'survivor' therefore means the survivor of the two after both have been alive till the date of Mr. Harvey's retirement on superannuation. It cannot cover Mrs. Harvey as the survivor of the two in case M. Harvey died before reaching the age of fiftyfive.
It was, I think, precisely because Mrs. Harvey would not be covered by the first part of the clause in such circumstances that the last clause was added where it is said that in the event of Mr. Harvey dying before reaching the age of fifty-five, Mrs. Harvey will not only get an annuity but will also get an annuity of an increased amount.
21. Clause 3, however, seems to contain a very curious omission. It does not seem to provide for the case where Mr. Harvey will reach the age of fifty-five and will necessarily be alive but Mrs. Harvey will have predeceased him before that date. The clause nowhere states that should Mr. Harvey attain the age of fiftyfive years taut should Mrs. Harvey the before that date, Mr. Harvey will be entitled to an annuity.
I half suspect that precisely because this omission was detected that a specific provision was, made in the policy for the payment of an annuity of 720/- per annum to Mr. Harvey in the event of Mrs. Harvey dying before the 20th of September, 1955, although the provision goes beyond the terms of the Trust Deed in respect of a policy under Clause 3.
22. Proceeding now to the fourth clause of the Trust Deed, I have already pointed out the difficulty of construing it. in the present context it is only necessary to say that it contemplates a case where Mr. Harvey will the before attaining the age of fiftyfive and an alternative provision, is made for Mrs. Harvey against such a contingency.
23. Prom the terms of the Trust Deed which I have set out and tried to explain at some length, it would appear that nothing is made payable to either Mr. or Mrs. Harvey, should both of them the before the date on which Mr. Harvey would reach the age of fiftyfive. Nor, if one takes the provisions of Clause 3, is any provision made for Mr. Harvey, if Mrs. Harvey should the before he reaches the age of fifty-five, in which event also no annuity will be payable to anybody.
In those two contingencies the trust will fail if no policy is taken out in terms of Clause 2 or, to put it less accurately, the purpose of the trust will have been exhausted and that being so, a resulting trust will arise in favour of the assessee company which would be equivalent to its becoming re-entitled to the money paid by it to the trustees.
24. The trustees cannot be entitled to vary the terms of the trust and they cannot provide for an annuity to anybody in the two contingencies I have mentioned by taking out a policy which will contemplate payments even in such circumstances.
I can imagine a case where the trustees might exceed their authority and might take out a policy in terms which would not provide for any failure of payment in any circumstances and in such a case, the assessee could probably be said to have only a claim against the trustees, in case the two contingencies not provided for by the Trust Deed, occurred and. no annuity became payable to anyone under its terms.
In fact, however, the policy taken out by the trustees has left at least one of the contingencies unprovided for as much as the Trust Deed and it is only to that extent that some reference to the policy may be relevant.
25. It will be clear from what I have said above that if one refers to the Trust Deed, the same conclusion as was drawn by the Tribunal from the terms of the policy follows. The matter is governed by Section 83. Trusts Act, which clearly provides for a resulting trust in such circumstances.
The expression 'resulting trust' is not used, but it is said that where a trust is incapable of being executed, or is completely executed without exhausting the trust-property, the trustee, in the absence of a direction to the contrary, must holdthe trust-property, or so much thereof as is unexhausted, 'for the benefit of the author of the trust or his legal representative'.
In the present case, if at least Mr. Harvey and Mrs. Harvey should both the before 20-9-1955, when Mr. Harvey was due to reach the age of fifty-five, the trust would become incapable of being executed and the trust-property would remain unexhausted. There is no direction in the Trust Deed that in such circumstances the money paid to the trustees would follow any course other than the one indicated in the section.
The trustees would, therefore, hold the moneys for the benefit of the assessee and therefore it can by no means be said that by creating a trust in such terms and putting the trustees in funds in accordance with its provisions, the assessee had. wholly parted with its interest in the amounts' concerned.
26. As against the view taken by the Tribunal, Mr. Iyengar referred us to Section 56, Trusts Act, and Section 174, Succession Act. He relied particularly on Illustration (b) to Section 56, Trusts Act.
The first clause of Section 56 says that the beneficiary under a trust is entitled to have the intention of the author of the trust specifically executed to the extent of the beneficiary's interest and the second clause says that if he is competent to contract, he may require the trustee to transfer the trust-property to him or to such person as he may direct.
The illustration given states that if A bequeaths Rs. 10,000 to trustees upon trust to purchase any annuity for B, who has attained his majority and is therefore competent to contract, B may claim the Rs. 10,000. Mr. Iyengar contended that by virtue of the provisions of Section 56 as illustrated by Illustration (b), Mr. and Mrs. Harvey would be entitled to call upon the trustees to pay over to them the corpus of the trust fund immediately upon the execution of the Trust Deed and that, therefore, it could not be said that the assessee company retained any interest In the money.
The same principle, he argued would be found embodied in Section 174, Succession Act. I must confess that I was somewhat surprised to find Mr. Iyengar relying on those sections of the Trusts Act and the Indian Succession Act.
Neither of them contemplates a contingent interest and neither of them can be said to provide that even where money or property has not been transferred with instant effect, but the provision is such that the interest of the beneficiary will arise only on the happening of a contingency which lies in the future, the beneficiary can, nevertheless, claim to reduce the money or property to immediate possession and thus in a way acquire a larger right than was intended to be conferred on him.
Illustration (b) of Section 56, Trusts Act, obviously contemplates a case where a right to the annuity has arisen; and the same is obviously the position under Section 174 which deals with the bequest of an annuity by Will under which a present right to the annuity would arise upon the testator's death unless the Will itself directed its postponement. 'If a legacy be bequeathed to trustees upon trust to purchase an annuity, the intended annuitant, if 'sui Juris', or the legal personal representative of the annuitant, if deceased, may claim the legacy without going through the form of an investment.' (See Lewin on Trusts 15th Edition, page 626).
The proposition Is based on certain cases which obviously are the origin of Illustration (b), to Section 56, Trusts Act. But as will appear from those cases, as also from the discussion in Lewin the right referred to can be exercised by the annuitant only if it has already vested in him.
It is true that, in certain cases, if there is an immediate transfer of interest with, however, a condition that the enjoyment will be postponed till a future date; the Courts have sometimes struck out the condition, but this they have done only when it was clear that while the beneficiary was directed not to have the enjoyment till the time mentioned, no other persoa had been given the enjoyment and that vesting of the property had not been directed to wait till that time.
Where, however, the interest conferred is doubly, contingent, as in the present case, depending not only on the lapse of some time but also on the existence of a human life or lives on a future date, it is wholly unarguable that the beneficiary has a present interest and can reduce the property to his own possession to the exclusion of the truster before the happening of the contingency contemplated.
If Mr. Iyengar's contention be correct, Mr. and Mrs. Harvey became entitled immediately on the execution of the Trust Deed on 16-9-1948, to call for an immediate payment to them of all sums paid by the assessee to the trustees and to keep such sums as their absolute property, irrespective of whether Mr. Harvey lived to attain the age of fiftyfive years or whether any of the other contingencies contemplated by the Trust Deed happened and even before 20-9-1955, only after which payment in all the contingencies contemplated was to commence under the provisions of the Trust Deed. In my view, nothing could be less tenable than such a contention.
27. Mr. Iyengar followed up his basic proposition by stretching it in different directions. He contended that under the provisions of the Trust Deed, the Harveys had an actionable claim which they could enforce in a Court of law; and, again, that they had a present interest which was transmissible to their heirs and representatives and, therefore, an absolute Interest; and, again, that it was an interest capable of actuarial valuation and, therefore, a real and present interest.
I confess that I find myself wholly unable to follow what Mr. Iyengar sought to make out. It is true that an equitable interest, of beneficiary under a trust is capable in certain circumstances of assignment, even though It be a possibility, but that certainly does not mean that the interest can be reduced to possession or that it has any existence in a real sense capable of being converted into property with immediate effect.
The whole of the argument of Mr. Iyengar on this branch of the case appears to me to be based on total misconception as to vested and contingent interests and I may be pardoned if I do not refer to it any further.
28. Two cases cited by him on this part of the case should, however be noticed. I was equally surprised at those citations, but Mr. Iyengar insisted that they supported his case.
The first case cited was -- 'Smith v. Cooke' (1891) A.C. 297 (A). There, the partners of a business assigned the whole business and the property of the firm to certain trustees upon certain trusts for the benefit of the creditors of the firm, inasmuch as they were unable to pay their debts.
The House of Lords held that there was no resulting trust for the benefit of the assignors, in-asmuch as, upon the natural and true construction of the deed there was an absolute disposal of all the proceeds to be realised for the benefit of the creditors. That was clearly a case where it was held on a construction of the Trust Deed that the trusters had reserved nothing for themselves and the deed was of the usual kind whereby debtors entered into a composition with creditors and under which the latter took the risk of the bargain, losing if there was a deficiency but profiting it' there was an excess.
I am entirely unable to see how a case which says that, on the true construction of the deed in question, there had been an absolute transfer of all interests, could help Mr. Iyengar in his contention that there could not be a resulting trust, unless the truster had specifically reserved his: interest or provided for a reverter.
Mr. Iyengar seemed to think that a resulting trust required a specific provision in the trust deed under which the trust-property or part of it would be held by the trustees for the benefit of the truster. A resulting trust, however, results from circumstances, not from specific reservations and if there be a specific provision in the Deed of Trust, there could not possibly be any question of any resulting trust at all.
The other case cited by Mr. Iyengar was the decision in -- 'Cunnack v. Edwards' (1896) 2 Ch 679 (B). The decision helps his contention even less. There a society was established to raise a fund, by subscriptions, fines and forfeitures of its members and the object was to provide annuities, for the widows of the deceased members.
Sometime after the establishment of the society, the rules were revised so as to adjust them, to the provisions of the Friendly Societies Act. 1829, but the object of ths society remained the same. Subsequently, all the members died and when it was found upon the death of the last widow annuitant that there was a surplus of a certain amount, one of the legal representatives of one of the members claimed a resulting trust, first in his own favour and then in favour of the legal representatives of all the past members.
The claim was negatived and again the reason for the decision was that when a member had paid his money to the society, he had divested himself of all interest in that money for ever with only one reservation that if the member left a widow, she was to be provided for during her. widowhood.
'In my opinion,' observed A.L. Smith L.J., 'this case cannot be likened to that of a man providing a fund by way of trust for the payment of an annuity to his widow during her life, and making no provision for the fund when the widow died and her interest therein ceased, in which case there would be a resulting trust'.
The passage I have Just quoted, instead of supporting Mr. Iyengar's contention, contains at clear refutation of it. The other Lord Justice, who participated in the appeal, pointed out several reasons for holding that there could be no resulting trust in the circumstances of the case.
One of them was that the fund was composed of not only contributions by the members but also . of fines and forfeitures and it might well be that contributions made by the members had long ago been entirely expended and what remained as surplus in the hands of the society was only a sum made up of fines and forfeitures in respect of which nobody could claim a resulting trust. I do not think that it is necessary to say anything more about the decisions cited by Mr. Iyengar.
29. For the reasons I have given, I must hold that Mr. Iyengar has failed to establish that there was no possibility of resulting trust in the present case and, therefore, no chance of reverter.
30. The second and the mere important question is whether the chance of reverter prevents the payments made to the trustees being expenditure in the sense of the assessee having parted with its interest therein wholly and effectively.
On this point again Mr. Iyengar referred us to various provisions of the Income-tax Act where he said it would be found that the Act recognised premia paid on deferred annuities as admissible expenditure or regarded the possibility of return of premia in certain circumstances as immaterial. He referred us to Sections 15(1), 15(2A), 58K(2) and 58V of the Act.
I am quite unable to see how anyone could extract any argument in aid of the admissibility of the allowance claimed in the present case from the analogy of other provisions in the Act containing specific directions. There is no room for any analogy or equity in a taxing statute, I do not, therefore, propose to deal with other sections which seem to me to be wholly irrelevant to the present purpose.
31. Mr. Iyengar next referred to the decision of Rowlatt J. and the Court of Appeal in -- 'Thomas v. Evans and Co.; Jones v. South-West Lancashire Coal Owners' Association (1927) 1 KB-33 (C), which he said, wholly supported his contention that despite the possibility of a reverter, the money paid to the trustees in the present case could be claimed to be expenditure even in the Income-tax Act sense.
The case relied on by Mr. Iyengar was heard along with another case which went up to the House of Lords, but the one on which Mr. Iyengar relied stopped at the Court of Appeal. The facts were that a colliery company was a member of an Association formed with the object of indemnifying its members against compensation in respect of fatal accidents to their workmen.
The Association itself was a mutual concern. Calls were made by the Association and were paid by the members for insurance and nothing more. Out of those calls a general fund was built up to meet claims for indemnity. In addition to the general fund, there was also a reserve fund created by the Association, the interest on which might be applied in diminution of the calls upon members.
The rules provided that if a member retired from the Association, he would be entitled to receive in cash a certain proportion of what might be found to be his share of the reserve fund as it stood at the time and if the Association ever came to be dissolved, its fund, if any, would naturally be distributed among its members.
There were elaborate and complicated provisions which would have to be applied in the computation of the share of a member, if he intimated his intention to retire, but it is noticeable that he would get nothing, unless after meeting the claims due to the Association from him, there was a surplus and of that surplus too he would receive only a certain fraction.
The question in the first case was whether the colliery company was entitled to deduct the amount of the calls made by the Association in computing the amount of its profits for Income-tax purposes. One of the contentions was that it was not entitled to make the deduction, because some, part of the money paid might at someday be returned. That contention was repelled both by Rowlatt, J., and the Court of Appeal.
I think the reasons given by the learned Judges can best be given in their own words. In the trial Court Rowlatt J. observes as follows:
'It is not denied that an insurance premium paid to an insurance company to obtain the like protection would be a deductible expense, and certainly, if the payments made by the colliery company are to be regarded simply as payments of that kind, they are deductible. Why is it suggested that the payment made to the Association is not deductible?
One suggestion is that it is not deductible, because some of it may be returned. But it can only be returned if a member retires from membership of the Association. I do not think this circumstance can, even in part, take the payment out of the category of a genuine insurance premium.
If a person pays a premium for insurance with a right to a refund next year or in certain events, it might perhaps be said that he is paying a premium under discount and the full amount cannot be claimed as a deduction, but that does not arise here. Whether a member will get anything back is extremely remote; the occasion may never arise, and I do not think I need further consider the point'.
It will be noticed that the learned Judge gave two reasons. One was that if any part of the money came back to a member at all, It would come back not in pursuance of any terms attached to the payment itself, but only when the member withdrew from the membership of the Association. The second reason given was that the possibility of any part of the money returning was extremely remote and indeed so remote that it might be left out of account for all practical purposes.
The learned Judge next proceeded to deal with the contention that the member retained its) ownership of the money in the sense that he wast interested 'pro rata' in it as a reserve. The argument was considered by the learned Judge to be irrelevant, because, as he pointed out, the member when it paid the money, bought with it a protection not only of itself but of the combination of all other members and the position wag not as if it had carried the amount of the payment to a contingency fund or some domestic insurance fund.
The contention of the Crown, the learned Judge pointed out, meant that the colliery company had not 'really spent the money' but in the learned Judge's view that was not so, because the money had been laid out and the colliery company had bought with it a protection for itself and others upon a true insurance principle, a principle which pooled or distributed losses.
The reason given by the learned Judge, as I understand it, is that the colliery company had applied the money to a present business necessity and had procured with it a present asset, namely, protection for the current year which was an investment properly required for 'bona fide' purposes of the business and which was a present) expenditure in a material sense, inasmuch as it brought in an asset.
The possibility that the company might get back a parti of the money in a remote contingency and that in another capacity could not take away from the present laying out the character of expenditure. When the matter went up to the Courtof Appeal, the argument on behalf oi the Crown was repeated.
Lord Hanworth M.R. again repelled: it and pointed out that the return of the money upon which, the Crown was relying was not something like a distribution of the assets not called upon to meet liabilities at the end of a year or quinquennial or decennial periods.
It was a return which became available to a member only if he withdrew from the Association which he was entitled to do in certain circumstances and if he did so, a part of the fund deemed to belong to him might be returned, if it was found that his liabilities to the Association were not equal or larger.
'Now all that indicates,' observed the learned Master of the Rolls, 'that in some possible, though remote, event, thers may arise a right to an insured member to receive back some portion of the sum which he has helped to accumulate, but while the insurance system is in operation, he makes his contribution to a fund, and his colleagues in the Association, equally with himself, have a, right to snare or to receive a portion of the sum which they have put together, if either of them respectively should meet with accident which are within the indemnity clause.'
Then the learned Master of the Rolls observed in a later Dart of the judgment as follows;
'It appears to me, from what the Commissioners have found, and after consideration of the' cases, that the character of these payments is not altered, and that they remain premiums, although there may be this possibility, more or less remote, of an ultimate return of some of the money.
x x x x So long as the member is conducting his colliery, he wants to have the protection as and when any serious accident may occur, and the sum that has been accumulated is not more than sufficient to meet that possible liability.'
It was next observed by the learned Master of the Rolls that if it ever occurred that the business men, carrying on the Association, thought that the accumulated reserve was too large and then distributed a portion of it or allowed a set-off against future premia, the Crown might say that the members had not paid the whole of the premia, but really a portion of them. That would be a question of quantum.
But on the facts, it was clear that the sums had been paid for the purpose of obtaining insurance and for nothing more and that there was no reason to cut down the cost of the insurance below the sum which had actually been paid by the members.
32. I do not think that the Court of Appeal proceeded on any principle different from that formulated by Rowlatt J. What the decision, in my view, means is that if persons, carrying on a business, make a payment which is required for 'bona fide' purposes in order to meet a present business necessity or secure a present business advantage and such necessity is met or such advantage is secured, then the mere possibility and a remote, one, that some part of the money may, in certain changed ' circumstance's or an extraneous character, return to the persons who paid them, will not prevent the payments, when made, being or being treated as expenditure.
In the case before the Court, the colliery company was, during the relevant accounting year, under the necessity of securing protection against the risk of claims by workmen or at least it was prudent business to provide for such protection.
It was with a view to securing such protection during the accounting year that the money was laid out and the protection was, in fact purchased and. obtained.
In those circumstances, it was clear that the honey had been actually applied and spent in a material sense for securing a present advantage which was one of the 'bona tide' necessities of the business and which would not be available if the payment had not been made. The money having gone out during the year of account and the protection for that year having been purchased with the money paid as consideration to the party who provided the advantage, there was a complete transaction which involved expenditure in a real sense.
If that was so, nothing could prevent the payments from becoming expenditure and the fact that the contributor might become entitled to some money in his capacity as a member or rather ex-member of the Association to which the contribution was made, in case he retired or the Association was dissolved, could not suffice to take away from the payment as made by the contributor the character of an expenditure.
33. I am unable to see that the principle of the case in (1927) 1 K.B. 33 (C), would apply to the facts of the present case. Under the agreement which the Tribunal has found, the company was under an obligation to provide for a pension for Mr. Harvey when he retired. There was, therefore no instant necessity of laying out money in a trust.
I am not saying that there was no necessity for laying out money in a trust if it was intended to grant Mr. Harvey a pension in the form of an annuity, -but there was no instant necessity. In the second place, the object for which the trust was created was one which might never require to be fulfilled, because there were possibilities implicit in the nature of a pension in which no pension might ever be required to be paid,
I am not forgetting that we are not in this Reference dealing with the wisdom of the expenditure made by the assessee company, nor with the question as to whether it was right in incorporating in the Trust Deed provisions which seemed to exceed the terms of the agreement as found by the Tribunal.
But what I am pointing out is that by the laying out of the money in trust, the assessee company was not acquiring any immediate advantage which was required for its business purposes of the accounting year, nor was it laying out the money for a purpose to which it would have to be applied at all events nor was it applying the money to the meeting of a present necessity so that the application being real and complete the possibility that in a certain contingency it might get back a part of the money in another right was immaterial. .
In the case in (1027) 1 KB 33(C), the money was not liable to be returned to the member under the terms in accordance with which it was paid. It would come back on the happening of a different and an extraneous contingency and would be returned in another character.
In the present case, the money was nol; 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 forever: nor was the chance of the money coming1 back to the assessee company under the very terms of the investment it was making; wholly closed.
What the company was, in fact, doing was that it was making an advanced provision of a tentative character to meet a liability which might or might not accrue and was doing so in a form which itself carried within, it twot contingencies or at least one contingency in which the money would come back to itself. In those circumstances, I am unable to hold that the case cited can conclude the argument advanced on behalf of the Revenue.
34. On behalf of the Commissioner of Income-tax Mr. Meyer relied on the decision of the Privy Council in the case of -- 'Raghunandan Prasad v. Income-tax Commissioner, B & O', . In that case, a mortgagee who had obtained a decree upon his mortgage brought the property to sale and purchased it himself. It appeared that a minor was claiming a share in the property and had brought a suit for a declaration that his share was not affected by the decree.
Pending the disposal of that suit, the mortgagee deposited in Court a certain sum of money which would be the proportionate price of the minor's share, if he succeeded in establishing his case. At the time the deposit was made, the minor's suit, as L have said, was still pending and the decision therein was not given till about two years later.
The mortgagee who had purchased the property was liable to pay income-tax on the difference between the principal sum advanced by him and the purchase price of the property which would represent interest, but he claimed a deduction of the amount which he had deposited in Court. The Judicial Committee held that the deduction claimed was not allowable in the year of account, because until the suit was decided in the minor's favour though in fact it had been, the mortgagee could not say whether or not he would have to pay over the amount of the deposit to the minor,
'In these circumstances,' observed Lord Macmillan, 'their Lordships are unable to see how in computing the profits or gains of the assessees' business for the year 1925-26, this deposit can legitimately be claimed as a deduction from the purchase price of the Srinagar estate or from such part of that purchase price as may be held to be an income receipt.
It was not in its nature a deduction from the purchase price, for the purchase price was paid in the knowledge of the claim; nor was It a sum actually expended in the year 1925-26, so as to be a debit in that year in the books of the assessees which are kept on a cash basis, for it was then at most a contingent liability; and in no respect does it answer the description of expenditure incurred in the year 1925-26 by the assessees solely for the purpose of earning the profits or gains of that year within the meaning of Section 10, Sub-section 2 (ix)'.
The last part of the quotation refers to a point which is not covered by the present Reference, but the earlier part does make it clear that, in the view of their Lordships the mortgage made no expenditure when he merely set apart a sum for application to payment to the minor, should such payment be required to be made. In spite of the deposit, the money remained the mortgagee's property.
As I have pointed out, their Lordships of the Judicial Committee were considering the whole question under Section 10 (2) (ix) of the Act which corresponded to what is now Section 10 (2)(xv) and their observations cover other points involved in the clause which are not within theambit of the present Reference, but the case does lend support to the contention that if what has been done has been merely to set apart a particular sum of money for application to the meeting of a contingent liability, should the contingency on which the liability would accrue occur, there has been no real parting with the interest in the money and, therefore, there has been no expenditure.
35. I may make a passing reference to another decision cited by Mr. Meyer on the question of there being no expenditure when there is a possibility of a resulting trust. The case cited was -- Rowntree and Company, Limited v. Curtis' (1925) 1 KB 328 (E). In giving his reasons for holding that the fund then in question could not be said to have been established by an expenditure wholly for the purpose of the trade, Warrington L.J. observed as follows:
'It seems to me that it is impossible to say that a fund constituted under such trusts as those can be said to have been established by an expenditure which is wholly and exclusively for the purpose of the trade. 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 to which I have already called attention 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'.
Why the learned Lord Justice thought that the fund could not be said to have been established by expenditure which was wholly and exclusively for the purposes of the trade, is not material. What is material is that in holding that the money had actually been expended, he pointed out that there was nothing like a resulting trust in favour of the truster under the provisions of the trust deed.
The implication undoubtedly is that if there had been a possibility of a resulting trust, as in the present case, the learned Lord Justice would not have held that the money had been expended.
36. Towards the end of his argument Mr. Iyengar referred to the well-known decision in --'Athertou v. British Insulated and Helsby Cables, Ltd.' (1925), 10 Tax Cas 155 (F), and particularly to the observations of Rowlatt, J., at page 177 of the report and those of Viscount Cave, L.C., at page 191. That was a case where a company was the assesses and it was claiming deduction of contributions it had made to the nucleus of a Pension Fund established by a trust deed for the benefit of its clerical and technical salaried staff.
Rowlatt, J. posed for himself the question whether, if a person invested an actuarial sum to free his undertaking from the liability to pay pensions which was a liability for a term of years uncertain, that could be treated as a payment in one year on the same footing as the annual payments would have stood if they had been made annually. He answered the question by saying that had the matter been res Integra, he would probably have held that they could not be so treated, but he was pressed by the decision In --'J.P. Hancock v. General Reversionary and Investment Co. Ltd.' (1919) 7 Tax Cas 358 (G).
The fact that in 'Hancock's case (G)', the pension was already de facto being paid and theinvestment was made for redeeming that liability, whereas in the case then before him in the pension scheme was still in future and the payment was made to prevent the annual payments having to be made in the future, did not in the learned Judge's view make any difference.
Mr. Iyengar contended that similarly, the fact that the company was providing for a future liability could not make any difference and could not make the payments any the less expenditure. The real decision in 'Atherton's case (P)', turned on other points, viz., whether the expenditure had been made solely and exclusively for the purposes of the assessee's business and whether it was a capital or a revenue expenditure, and the observations, of Rowlatt J. bear only on a side issue.
The view taken by Bowlatt, J. however, was not accepted by the Court of Appeal. Pollock, M.R., pointed out that in 'Hancock's case (G)', there was an existing liability which made all the difference and similar observations were made by both Warrington L.J., and Scrutton L.J. Mr. Iyengar contended that in the House of Lords, Viscount Cave had taken a different view, but I do not see that he did.
All that the learned Lord Chancellor said with respect to 'Hancock's case (G)', was that in that case the expenditure had been made for the purchase of an annuity for the benefit of an actuary who had retired and that therefore the expenditure had been rightly allowed.
On the other hand, irrespective of whether the decision in 'Hancock's case (G)', would apply to the case of a payment for provision against a future liability, the case itself was dissented from by Lord Atkinson and both Lord Buckmaster and Lord Blanesburgh pointed out that the liability in that case was an existing liability.
Apart from the difference pointed out in the Court of Appeal and some of the learned Lords, it appears to me that in 'Atherton's case (P)', the contribution was made to a general fund out of which some pension was bound to be paid to some employee or another & therefore it could be said that the money had been parted with effectively in favour of certain trustees upon trust to hold it for application to the meeting of a continuous business demand.
The position in the present case is entirely different, since the provision is made in favour of a single employee who may or may not qualify for a pension and to whom or to whose wife a payment may or may not have to be made even under the terms of the Trust Deed.
If no payment requires to be made, the money put into the hands of the trustees would in effect continue to remain the money of the assessee company and therefore it cannot be said that the money was expended in the Income-tax Act sense.
37. I do not consider it necessary to refer to the decision in -- 'Peter Merchant, Ltd. V. Stede. ford' (1948), 30 Tax Cas 496 (H), and -- 'James Spencer and Co. v. Commissioners of Inland Revenue' (1950) 32 Tax Cas 111 (I), referred to by Mr. Msyer. They seem to me to bear on the point as to whether a payment or allocation made in a particular year to meet a contingent liability, then laying in futurity could be claimed as a deduction against the taxable profits of that year, or, in other words, to which year an expenditure to meet a contingent liability should be assigned, even assuming that an expenditure was made or where no expenditure was made, an allocation was made in the books. Those cases do not seemto me to bear upon the extremely narrow point with which we are concerned in the present Reference.
38. Looking at the matter in the sum and from a business point of view, it seems to me that what the assessee company was doing was to set apart tentatively a sufficient sum of money in the form of a trust fund in order that it might be available for the payment of a gratuity to Mr. and Mrs. Harvey or one or the other of them in certain specified contingencies, should those contingencies occur, but making no provision for the application of the money in the event of those contingencies not occurring and no annuity being payable to anyone.
It appears to me that payments made to the trustees in those circumstances and under those conditions cannot be said to constitute moneys expended in any real and practical sense of the I term and that in holding that there was no expenditure in the present case, the Tribunal was right.
39. The answer to the question referred must, therefore, be in the negative.
40. The Commissioner of Income-tax will have his costs of this Reference. Certified for two Counsel.
41. I agree.