My company paid a lump sum to trustees to buy a deferred annuity so a director would get a pension after he retires. Can I deduct what I paid in the year I paid it?
No. The Supreme Court held these payments were not 'expenditure' at all under section 10(2)(xv) of the 1922 Act (now section 37(1)). Money is expended only when it is paid out or away irretrievably. Here the trust deed and the policy let the trustees surrender the annuity for a capital sum, and returned all premia if both nominees died before the option date, so the company retained dominion over the money through the trustees and a resulting trust in its favour was possible. That is money set apart against a contingent liability, not expenditure.
Decided by the Supreme Court (Supreme Court of India — Hidayatullah J (author), Bhuvneshwar P. Sinha J and J.L. Kapur J) on 1959-05-05, reported as 1959 AIR 1049; 1959 SCR Supl (2) 964. It bears on section 37(1) of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the source of the rule that expenditure means an outgoing that is gone irretrievably. If there is any route by which the money can come back into the assessee's funds — a resulting trust, a surrender value the payer controls, a refund of premia — nothing has been spent, whatever the accounting entry says. The judgment also draws the distinction that decides many provision cases: a contingent liability, which is not deductible, as against an existing liability whose quantification merely depends on a contingency, which may be. Practitioners reach for it whenever a deduction is claimed for funding a future obligation — retirement benefits set aside outside an approved fund, escrow and sinking arrangements, warranty and similar provisions. It also warns Tribunals against referring one ingredient of section 37(1) piecemeal, leaving the rest for a later reference.
Binding on every court and authority in India.
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Harvey was managing director of the assessee company and was due to retire at 55 on 20 September 1955. The company was under an obligation to provide him a pension. On 16 September 1948 it executed a trust deed in favour of three trustees, paying them Rs 1,09,643 and undertaking to pay Rs 4,364 annually for six years. The trustees were to spend the money on a deferred annuity policy with the Norwich Union in their own names but on Harvey's life, with an alternative longest-life policy covering Harvey and his wife if the company so desired. The trustees took out a policy in January 1949. Its special provision let the trustees surrender the annuity on the option anniversary for a capital sum of £10,169; clause III returned all premia paid if both nominees died before that date; clause IV gave a surrender value. The company paid the initial sum and yearly premia and claimed deduction for assessment years 1949-50 to 1952-53 under section 10(2)(xv) of the Indian Income-tax Act 1922. The Department and the Tribunal refused on the ground that there was no expenditure at all. The Calcutta High Court answered the reference against the company.
The appeal was dismissed with costs. The payments to the trustees were not 'expenditure' within section 10(2)(xv). Expenditure is what is paid out or away and is gone irretrievably; if there is a possibility of the money forming part of the assessee's funds again, or of a resulting trust in its favour, nothing has been spent and the amount is merely set apart to meet a contingency. On the terms of this trust deed and policy the company retained dominion through the trustees until 20 September 1955, because the annuity could be surrendered for a capital sum and all premia were repayable if both nominees died first. The liability itself was contingent, not a liability merely depending on a contingency. Deductible expenditure must be towards a liability actually existing at the time.
The Court read 'expenditure' in its primary sense of paying out or away, money laid out by calculation and intention and gone irretrievably. Clause (xv) requires the outlay to be wholly and exclusively for the business and not capital or personal, but before any of that, there must be a paying out at all. It then tested the arrangement against the documents rather than the label. The special provision and clause III of the second schedule meant the fund could come back — by surrender for £10,169, or by repayment of all premia if both nominees died before the option anniversary — and the trustees had no beneficial interest, so a resulting trust in the company's favour was possible. Allahabad Bank was the closest authority: contributions on trust for employees' pensions were not expenditure where, the trust failing, a resulting trust arose for the maker. The English cases were treated with caution. Hancock allowed a lump sum paid to discharge an existing pension liability, because there the liability had accrued and the payment was a pension in another form; Rowntree refused a payment into an invalidity fund. The Court also insisted on the distinction taken in Southern Railway of Peru between a contingent liability and a payment depending on a contingency: Harvey might not live to 55, might resign or be dismissed, so no liability to pay him a pension yet existed. Actuarial certainty about mortality did not convert a contingent liability into an existing one.
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.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held these payments were not 'expenditure' at all under section 10(2)(xv) of the 1922 Act (now section 37(1)). Money is expended only when it is paid out or away irretrievably. Here the trust deed and the policy let the trustees surrender the annuity for a capital sum, and returned all premia if both nominees died before the option date, so the company retained dominion over the money through the trustees and a resulting trust in its favour was possible. That is money set apart against a contingent liability, not expenditure. This was decided by the Supreme Court (Supreme Court of India — Hidayatullah J (author), Bhuvneshwar P. Sinha J and J.L. Kapur J) and bears on section 37(1) of the Income Tax Act 1961. It is reported as 1959 AIR 1049; 1959 SCR Supl (2) 964. This is the source of the rule that expenditure means an outgoing that is gone irretrievably. If there is any route by which the money can come back into the assessee's funds — a resulting trust, a surrender value the payer controls, a refund of premia — nothing has been spent, whatever the accounting entry says. The judgment also draws the distinction that decides many provision cases: a contingent liability, which is not deductible, as against an existing liability whose quantification merely depends on a contingency, which may be. Practitioners reach for it whenever a deduction is claimed for funding a future obligation — retirement benefits set aside outside an approved fund, escrow and sinking arrangements, warranty and similar provisions. It also warns Tribunals against referring one ingredient of section 37(1) piecemeal, leaving the rest for a later reference. If it applies to you, the first step is this: Before claiming a deduction for money settled on trustees or an insurer, trace every route by which it could return to the company; a surrender option or a refund-of-premia clause will usually defeat the claim.
Harvey was managing director of the assessee company and was due to retire at 55 on 20 September 1955. The company was under an obligation to provide him a pension. On 16 September 1948 it executed a trust deed in favour of three trustees, paying them Rs 1,09,643 and undertaking to pay Rs 4,364 annually for six years. The trustees were to spend the money on a deferred annuity policy with the Norwich Union in their own names but on Harvey's life, with an alternative longest-life policy covering Harvey and his wife if the company so desired. The trustees took out a policy in January 1949. Its special provision let the trustees surrender the annuity on the option anniversary for a capital sum of £10,169; clause III returned all premia paid if both nominees died before that date; clause IV gave a surrender value. The company paid the initial sum and yearly premia and claimed deduction for assessment years 1949-50 to 1952-53 under section 10(2)(xv) of the Indian Income-tax Act 1922. The Department and the Tribunal refused on the ground that there was no expenditure at all. The Calcutta High Court answered the reference against the company. The matter was decided on 1959-05-05 by the Supreme Court (Supreme Court of India — Hidayatullah J (author), Bhuvneshwar P. Sinha J and J.L. Kapur J). On those facts the Supreme Court held as follows. The appeal was dismissed with costs. The payments to the trustees were not 'expenditure' within section 10(2)(xv). Expenditure is what is paid out or away and is gone irretrievably; if there is a possibility of the money forming part of the assessee's funds again, or of a resulting trust in its favour, nothing has been spent and the amount is merely set apart to meet a contingency. On the terms of this trust deed and policy the company retained dominion through the trustees until 20 September 1955, because the annuity could be surrendered for a capital sum and all premia were repayable if both nominees died first. The liability itself was contingent, not a liability merely depending on a contingency. Deductible expenditure must be towards a liability actually existing at the time.
The Court read 'expenditure' in its primary sense of paying out or away, money laid out by calculation and intention and gone irretrievably. Clause (xv) requires the outlay to be wholly and exclusively for the business and not capital or personal, but before any of that, there must be a paying out at all. It then tested the arrangement against the documents rather than the label. The special provision and clause III of the second schedule meant the fund could come back — by surrender for £10,169, or by repayment of all premia if both nominees died before the option anniversary — and the trustees had no beneficial interest, so a resulting trust in the company's favour was possible. Allahabad Bank was the closest authority: contributions on trust for employees' pensions were not expenditure where, the trust failing, a resulting trust arose for the maker. The English cases were treated with caution. Hancock allowed a lump sum paid to discharge an existing pension liability, because there the liability had accrued and the payment was a pension in another form; Rowntree refused a payment into an invalidity fund. The Court also insisted on the distinction taken in Southern Railway of Peru between a contingent liability and a payment depending on a contingency: Harvey might not live to 55, might resign or be dismissed, so no liability to pay him a pension yet existed. Actuarial certainty about mortality did not convert a contingent liability into an existing one. In the words reproduced by the source cited on this page: "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."
It was decided by the Supreme Court on 1959-05-05 and is reported as 1959 AIR 1049; 1959 SCR Supl (2) 964. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 37(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed with costs. The payments to the trustees were not 'expenditure' within section 10(2)(xv). Expenditure is what is paid out or away and is gone irretrievably; if there is a possibility of the money forming part of the assessee's funds again, or of a resulting trust in its favour, nothing has been spent and the amount is merely set apart to meet a contingency. On the terms of this trust deed and policy the company retained dominion through the trustees until 20 September 1955, because the annuity could be surrendered for a capital sum and all premia were repayable if both nominees died first. The liability itself was contingent, not a liability merely depending on a contingency. Deductible expenditure must be towards a liability actually existing at the time. It arises in Deductions & Disallowances matters, on section 37(1) of the Income Tax Act 1961, and was decided by Supreme Court of India — Hidayatullah J (author), Bhuvneshwar P. Sinha J and J.L. Kapur J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Draft the trust or policy so the payment is irrevocable and no resulting trust in the payer's favour can arise, and say so expressly in the deed. Distinguish, in the reply, between a liability that already exists and is merely to be quantified later and one that arises only if an event happens; only the first supports a deduction. For retirement benefits, route the funding through an approved gratuity or superannuation fund and claim under the specific provisions rather than under section 37(1).
Still good law. The definition of expenditure and the contingent-liability distinction have been followed since; the report's own citator shows it relied on and referred to in Supreme Court decisions up to 1986, with one distinguishing entry. No decision overruling it was checked against. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The harvested page is clipped: about 2,133 characters from the middle are missing, covering the Calcutta High Court's analysis of the two contingencies in which the money could revert to the company, and part of the review of the English authorities. The opening facts and the operative reasoning and order were read in full. Decided under section 10(2)(xv) of the Indian Income-tax Act 1922; the sections field gives the 1961 equivalent, section 37(1). The Tribunal referred only the 'expenditure' ingredient, so whether the outlay was wholly and exclusively for the business, and whether it was capital, were never decided. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed with costs. The payments to the trustees were not 'expenditure' within section 10(2)(xv). Expenditure is what is paid out or away and is gone irretrievably; if there is a possibility of the money forming part of the assessee's funds again, or of a resulting trust in its favour, nothing has been spent and the amount is merely set apart to meet a contingency. On the terms of this trust deed and policy the company retained dominion through the trustees until 20 September 1955, because the annuity could be surrendered for a capital sum and all premia were repayable if both nominees died first. The liability itself was contingent, not a liability merely depending on a contingency. Deductible expenditure must be towards a liability actually existing at the time.
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