Judgment sc-s-1985-3-627-633

627

A WOO:SSIONER OF INCOME TAX WEST BENGAL - I, CALCUTl'A. Vo ASSOCIATED ELECTRICAL INDUSTRIES (INDIA) PRIVATE LIMITED. B OCTOBER 10, 1985

' Indian Income Tax Act 1922 Sections 10(2) (xv) and 10(4)(c). c Company - Pension and Life Assurance Plan for employees - Company contributing to premium - Plan rules amended to make direct payment of policy amount to members - Company having no control over money - Expenditure incurred on contribution by D company to Plan - Whether an allowable deduction•

The asses see, is s' .firm carrying on the busine&s of Electrical Engineers and Contractors. It put into effect a pension and Life Assurance Plan for its Europe&n employees about the year 1948 and took out policies with a Life Assurance Society E in the name of those employees. Under the Plan, rules were framed and the assessee paid his part of the contribution to the premium and the employees whose lives were insured their portion of the premium. The assessee claimed a deduction every year of the sums paid by it by way of its contribution to the premium and the Income-Tax Department allowed the sum as a deductible expenses. However, for the first time, the Income-tax Officer disallowed the claim in respect of the assessment year 1956-57.

The assessee 1s appeal to the Appellate Assistant Commis- sioner, was dismissed on the · ground that the provisions of Clause (c) of sub-a. (4) of s. 10 of the Act barred the allowance claimed by the assessee as ·no· effective arrangements had been made by the assessee to secure that tax would be deducted at source from the amounts paid fiDally to the employees by the Society in terms of the policies.

In further appeal, the Income-Tax Appellate Tribunal allowed the appeal in part, holding that all the contributions made in the relevant year by the assessee to the premium on the life policies of the Plan Members were not allowable as

p. 628

deductions in the hands of the assessee, and what was allowable were the contributions made by the assessee to the policies of such employees who had actually been paid pensionary and retirement benefits by the Society.

After compl,eting the assessment for the year 1956-57, the Income Tax Officer reopened the assessments of the assessee for B the assessment years 1948-49 to 1955-56 under s. 34 of the Act and disallowed the deductions which had been allowed earlier. On appeal by the assessee, the Appellate Assistant Comllissioner allowed the deductions claimed in respect of payments made by the Society to the employees in those years. The relevant rules under the Plan were amended on December 21, 1957 by the Board of Directors to provide that the amount due under the policies would c be paid to the Plan Members entitled thereto, leaving the assessee with no control over the moneys.

For the assessment year 1959-60, the asseasee claimed a deduction of all the contributiona made by it towards the payments on the policies. The Income Tax Officer, however, only allowed the contribution made in the relevant previous year on j) the ground that the offending rules had been amended but he did not allow the claim in respect of contributiona made in earlier years.

The assessee appealed against the disallowance of the ciai.m respecting contr-ibutions made in earlier years and the Appellate E Assi~tant Collllliasioner, allowed only the total contribution made by the assessee to the Pension Fund and the payment made by the Society in the assessment years 1959-60 and 1960-i'il and rejected the remaining claim.

The aasessee filed a second appeal before the Income Tax F Appellate Tribunal which held that the deductions were permissible under Clause (xv) of sub-Section (2) of section 10 of the Act, and that Clause (c) of sub-Section (4) of s. 10 of the Act did not come in the way, and allowed the appeal.

The Appellate Tribunal at the instance of the Revenue, made G a reference to the High Court which answered the question of law in favour of the assessee and against the Revenue.

In the appeal, by the Revenue to this Court it was contended on behalf of the Revenue (l) that the expenditure cannot be said to have been incurred during the accounting year H

I

C.I.T. v.II ASSOCIATED ELECTRICAL 629

relevant to the assessment year 1959-60 as the assessee had made A payments by way.of contribution to the premium in earlier yesrs and no part of the amount in question could be said to have been made in the relevant accounting year, and (2) that the bar of Clause (c) of sub-section (4) of section 10 of the Act operated as there was no scope for assuming that tax had been deducted at ·s~ce_ by the assessee. B

Dismissing the Appeal,

2.(b) Pursuant to the resolution by the Board of Directors D on December 21,' 1957 the rules were revised and amended. As a result, payment;. made earlier over which, ·under the ·original rules, the assessee had maintained its control, now passed from that control to · the Plan Members. The entire amount Jlll.lSt be regarded as having been ·expended by · the assessee during the accounting period relevant to the assessment. year 196~1. E [633 B - CJ .

Indian !!glasses Co. (P) Ltd· v. C,,,,,.,fsstooer of lDccme Tm<, West lleDgal, [1959J .37 l.T.R •. 66, Conmfssioner of Inc.- Tm<, Citln1tta v. Anderson Wright Ltd., [1962] 46 l.T.R. 715, Qimis- aioner of lDcQme-Tax, West Bengal. - l v. Ind1an llolaaaes Co. P. Ltd., [1970] 78 1.T.R. 474 and Cmrnfssiooer of Income-Tm<, Kanpur F V• Lakabmf. Ratan Cotton HUla Co •. Ltd.. [ 1976 J 104 l. T.R. 319 distinguished.

2. A f1nding ·of fact has been recorded in the instant case by the Appellate Assistant Comnissioner; 'and thereafter confirmed in appeal .by the ·Appellate Tribunal, that Jax had been deducted G at source - by the · assessee when making payment of its contributions to the premium due on the life policies. Tbat finding of fact was never challenged·and this Court cannot permit it -to be assailed now. [633 DJ · ·

1973. ClVlL' APPELLATE JURISDICTION : . Civil Appeal No. • 1404 of H • From the Judgment and Order.dated 17.2.1971 of the Calcutta l!igb Court in Income Tax Reference No.• 148 of 1965.

p. 630

A S.T, Desai, and Miss A. Subhashlni for the Appellant.

A,K, Sen, T.A, Rsmachandran and D,N, Gupta for the Respon- dent.

B The Judgment of the Court was delivered by

PATHAK, J, This appeal by special leave is directed against the judgment of the Calcutta High Court answering the following question of law against the Revenue on a reference made by the Income-tax Appellate Tribunal :-

c "Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the difference between Rs. 2,09,920.88 np. and the amount that had been allowed by the Appellate Assistant Commissioner was a business expenditure incurred by the assessee in the relevant previous year and in allowing the same as a deductible expenditure"? D The assessee, who is the respondent before us, carries on business as Electrical Engineers and Contractors with its Head Office in Calcutta and branches in different parts of the country. The aasessee put into effect a Pension and Life Assurance Plan for its European employees in about the year 1948, E Pursuant to the Plan it took out policies with the Scottish Widows' Fund and Life Assurance Society in the nsme of those employees. Under the Plan rules were framed, and the assessee paid his part of the contribution to the premium in respect of the policies taken with the Society. The employees whose lives were insured also paid their portion of the premium and thereupon became Plan Members. 'The original rules under the Plan enabled the assessee to obtain receipt of the moneys assured in certain circumstances and .the assessee had also a right to direct a particular mode of disposal of the funds of the Plan. The assessee claimed a deduction every year of the sums paid by it by way of its contribution to the premium in respect of the said policies. Originally, the aDDunt so contributed by the assessee towards payment of the premium was allowed by the Income-tax Department as a deductible expense. For the first time, however, the Income-tax Officer disallowed the claim in respect of the assessment year 1956-57. On appeal by the assessee against the assessment, the Appellate Assistant Commissioner found that the assessee had treated its contribution to the premium as part of the salary of the respettive employees on whose lives the

C,I.T. v. ASSOCIATED ELECTRICAL [PATHAK, J, J 631

A policies had been taken and had also deducted tax at sour.:e from the salary, and the contributions made by the asseseee constitu- ted a revenue expenditure falling 111.thin the terms of cl. (xv) of sub-s. (2) of s. 10 of the Indian Income Tax Act 1922. The Appellate Assistant Commissioner, however, dismissed the appeal on the ground that the provisions of cl.(c) of sub-s. (4) of •· B 10 of the Act barred the allowance claimed by the assessee inas- 1111Ch as no effective arrangements had been made by the assesaee to secure that tax .would be deducted at source from the amounts paid finally to the eq>loyees by the Society in terms of the policies. '!lie Income-tax Appellate Tribunal allowed in part the second appeal preferred by the assessee, holding that all the c contributions made in the relevant year by the aseessee to the premium on the life policies of the Plan Membera were not allow- able as deductions in the hands of the assessee, and what was allowable were the contributions made by the asseasee co the policies of such eqiloyees who had actually been paid pensionsry and retirement benefits by the Society. D

After coq>leting the assessment for the year 1956-57, tbe Income-tax Officer reopened the assessments of the aa••- for the assessment years 1948-49 to 1955-56 under a. 34 of tbol Act and disallowed the deductions which had been allowed earlier. On appeal by the assesaee againat the several aasessmente, the Appellate Assistant Commissioner followed the approach adopted 111 the Appellate Tribunal in the appeal for the asses1111m1t year 1956-57, and allowed the deductions claimed in respect of pay- ments made by the assessee on policies respecting which payments had been made by the Society to the eqiloyees in those years. Subsequently, the relevant rules under the Plan which were F construed as enabling the assessee to receive the moneys assured or to enjoy the power of control over tlisposal of the Fund were amended on December 21, 1957 by the Board of Directors of the assessee. ln the result, the rules now provided that the amounts due under the policies would be paid to the Plan Members entitled thereto. The assessee was left with no control over the moneys. G

For the assessment year 1959-60, with which we are concerned, .and for which the relevant previous year is the year November 1, 1957 to October 31, 1958, the assessee cl.simed a deduction of all the contributions made by it towards the payment on the policies. The Income-tax Officer allowed Rs. 27 ,069, being the contribution made in the relevant previous year, on the H footing that the offending rules had been amended, but he did not

p. 632

A allow' the claim in respect of contributions made in earlier years. The assessee appealed against the disallowaoce of the claim respecting contributions made in earlier years. Before the Appellate Assistant Colllllissioner, a statement was filed by the assessee showing the total contribution made by the assesses to the Pension Fund, and the payment made by the Society in the assessment years 1959-60 and 1960-61 amounting to L8932-7-9 and L3315-8-3d. The Appellate Assistant Colllllissioner allowed these amounts only and rejected the remaining claim. The assessee filed a second appeal before the Income Tax Appellate Tribunal and restricted the claim to the amount that stood disallowed out of Rs. 2,09,920.88 after deduoting therefrom the equivalent of the two sterling payments. The assessee contended that on amendment of the rules the amount representing the balant6 out of Rs. 2. 09, 920. 88 was liable to be considered as ao outgoing from the assessee during this year and shou1d, therefore, be considered as an allowable business expenditure. The appeal was allowed by the Appellate Tribunal, which held that the deductions were permissible under cl. (xv) of sub-s.(2) of s.10 of the Act and cl.(c) of sub-s. (4) of s. 10 of the Act did not come in the way.

At the instance of the Commissioner of Income-tax,. the Appellate Tribunal made a reference to the Calcutta High Court for its opinion on the question of law set forth earlier. The Higi:> Court has answered the question of law in favour of the assessee and against the Colllllissioner of Income-tax.

In this appeal, learned counsel for the Commissioner of Income-tax contends that the expenditure cannot be said to have been incurred during the accounting year relevant to the assess- ment year 1959-60 inasmuch as the assessee had made payments by way of contribution to the premium in earlier years and no part of the amount in question could be said to have been paid in the relevant accounting year. Learned counsel has cited I:adian &lasses Co, (P) Ltd. v. Cqqmfssiouer of Iucome-Tas, West Beogal, [1959] 37 I.T.R. 66, C<mnteei.ooer of Incaae-tax, Calcutta v. Aoderson Wright Ltd., (1962] 46 I.T.R. 715, c.:-issiooer of G l.ncoole-'Ialr., West Bengal-I v. I:adian Molasses eo. p. Ltd •• [1970] 78 I.T.R. 474 aod Cqqmfsslooer of Iucome-Tai<, l.an{lUr v. Laksbmi Katan Cotton Milla eo. Ltd., (1976] 104 I.T.R. 319. The conten- tion appears to us to be without substance. It is true that the payments were made.as contributions to the premium in the earlier years. But they were made at a time when the rules permitted the H assessee to receive back the amounts contributed by it under the

C.I.T. v. ASSOCIATED ELECTRICAL (PATHAK, J.] 633

A Plan. According to the construction put on the rules it was deemed that the asseseee continued to retain its hold on those amounts. It cannot be said then that when those payments were made they could be regarded as expenditure laid out or expended within the terms of cl. (xv) of sub-s.(2) of s.10 of the Act. The control over the moneys passed on December 21, 1957 when pursuant to a resolution by the Board of Directors the rules were revised B and amended. On that .day, payments made earlier over which, under the original rules, the assessee had maintained its control, now passed from that eontrol to the· Plan Members. The entire 8lllQUllt ID.1st be regarded as having been expended by the assessee during the accounting period relevant to the assessment year 1959-60. In the circumstances, the cases relied on by learned counsel for the Commissioner of Income-tax- can be of no assistance to the Revenue. c It was further cont.!nded by learned counsel for the Commissioner of Income-tax that the,bar of cl.(c) of sub-s.(4) of s .10 of the Act operated in the instant case es there was uo scope for assuming that tax had been deducted et source by the assessee. It appears to be too late in the day for such a D contention, because a finding of fact has been recorded by the Appellate Assistant Conmf.ssioner, and thereafter confirmed in appeal by the Appellate Tribunal, that tax had been deducted et source by the assessee when making payment of its contributions to the premium due on the life policies. That finding of feet was never challenged, and we cannot permit it to be assailed now. E In the result, we hold that the High Court is right in answering the question referred to it in the affirmative, in favour of the assessee and against the Commissioner of Income-tax. F The appeal is dismissed with costs.

N.V.K. Appeal dismissed.