Allahabad Bank Ltd vs Commissioner of Income Tax, West Bengal
Rewritten Version Notice: This is a rewritten version of the original judgment.
Court: Supreme Court of India
Case Number: Civil Appeal No. 161 of 1952
Decision Date: 8 October 1953
Coram: Natwarlal H. Bhagwati, M. Patanjali Sastri, Vivian Bose, Ghulam Hasan
In the matter titled Allahabad Bank Ltd versus Commissioner of Income-Tax, West Bengal, the Supreme Court of India rendered its judgment on the eighth day of October, 1953. The opinion was authored by Justice Natwarlal H. Bhagwati, who sat on the bench together with Justices M. Patanjali Sastri, Vivian Bose and Ghulam Hasan. The case was recorded with the citation 1953 AIR 476 and 1954 SCR 195, concerning the provisions of the Income-Tax Act of 1922, specifically section 10 (2) (xv) which deals with contributions to a trust for the payment of pensions to employees and whether such contributions may be treated as business expenditure. The parties to the dispute were Allahabad Bank Limited, appearing as the petitioner, and the Commissioner of Income-Tax for West Bengal, appearing as the respondent.
The headnote of the decision summarizes the factual backdrop and the legal issue that the Court examined. The petitioner, a banking company, executed a deed on 15 March 1946 purporting to establish a trust for providing pensions to its retiring staff members. Under the terms of that deed a sum of two lakhs of rupees was transferred to three individuals designated as trustees, and the deed further allowed the bank to make additional contributions to the fund at its discretion, while expressly stating that the bank was under no obligation to pay any pension to any employee. Moreover, the deed granted the bank the power to withdraw or modify any pension and to alter the governing rules for granting pensions whenever it deemed fit. During the accounting year 1946-47 the bank contributed an additional two lakhs of rupees to the fund and claimed that this amount could be deducted under section 10 (2) (xv) of the Income-Tax Act as an expense incurred wholly and exclusively for the purposes of its business. The Court held that because the deed imposed no binding duty on the bank or the trustees to actually provide pensions, and because any pension that might be granted could be withdrawn or the rules could be altered at the bank’s will, no valid trust had been created despite the transfer of money to the trustees. Consequently, the amount in question could not be characterized as an expenditure incurred for the purposes of the business and therefore could not be allowed as a deduction under the cited provision. The Court distinguished the authorities of Brown v. Higgs (32 E.R. 473) and Burrough v. Philcox (41 E.R. 299) in reaching its conclusion.
The procedural history of the case shows that the appeal, numbered Civil Appeal No. 161 of 1952, was lodged against a judgment and order dated 18 May 1951 issued by the High Court of Judicature at Calcutta, which had exercised its special jurisdiction under the Income-Tax Act of 1922. Counsel for the appellant was N. C. Chatterjee, assisted by S. N. Mukherjee, while the respondent was represented by C. K. Daphtary, the Solicitor-General for India, assisted by O. N. Joshi. The Supreme Court heard the matter on 8 October 1953, and the judgment was delivered by Justice Bhagwati, who recorded the appeal’s origin from the Calcutta High Court’s decision on a reference made by the Income-Tax Appellate Tribunal under section 66(1) of the Income-Tax Act.
In this matter, the reference that reached the Supreme Court had been made by the Income-tax Appellate Tribunal pursuant to Section 66(1) of the Indian Income-tax Act (XI of 1922). The appellant in the case was a banking company that conducted business at several locations, including Calcutta and Allahabad. On 15 March 1946 the bank executed a deed that purported to establish a trust for the purpose of paying pensions to its staff members. The deed expressly declared that a pension fund had been constituted and that, at that time, a sum of two hundred thousand rupees had been transferred to three individuals identified in the deed as the “present trustees.” The deed further provided that the fund would initially consist of that amount of Rs 2,00,000 and that additional contributions might be made by the bank from time to time, although the bank was not bound to make any further contributions. During the accounting year 1946-47 the bank indeed transferred a further amount of two hundred thousand rupees to the same fund. In the assessment for the year 1947-48 the bank claimed a deduction of that additional Rs 2,00,000 under Section 10(2)(xv) of the Act, contending that the payment represented an expenditure laid out or expended wholly and exclusively for the purposes of its business. The claim was rejected by the Income-tax Officer, by the Appellate Assistant Commissioner and subsequently by the Income-tax Appellate Tribunal. At the instance of the appellant the Tribunal framed a specific question for the High Court to consider: whether, in the facts and circumstances of the case, the Tribunal was correct in disallowing the deduction of Rs 2,00,000 under Section 10(2)(xv) of the Indian Income-tax Act. The High Court answered the question in the affirmative, and that decision gave rise to the present appeal. Although both the appellant and the Revenue authorities raised several issues before the High Court, the only issue that was actually canvassed and treated as determinative was the validity of the deed of trust dated 15 March 1946. In construing the various provisions of that deed, the High Court held that, because the deed did not clearly specify the beneficiaries and because it imposed no obligation on the trustees to pay any pension, no legal and effective trust had been created; consequently, the purported trust was void. The Court further observed that even assuming that ownership of the transferred money had passed to the trustees, the clause directing the money to be used for pension payments was ineffective and void; therefore the money could not be said to have been expended for the purpose of the bank’s business, and consequently the amount did not constitute a deductible expenditure within the meaning of Section 10(2)(xv).
The only argument presented before the Court by counsel for the appellant was that the expenditure in question did not fall within the meaning of “business” as defined in section 10(2)(xv) of the Act.
Section 3 of the Indian Trusts Act, 1882, characterises a trust as an obligation that is attached to the ownership of property. This obligation arises from a confidence placed in, and accepted by, the owner, or is declared and accepted by the owner, for the benefit of another person, or for the benefit of both the other person and the owner. The individual for whose benefit the confidence is accepted is designated as the “beneficiary.”
Section 5, to the extent relevant for this appeal, provides that a trust involving movable property is not valid unless it is declared in accordance with the prescribed manner. Such a declaration must be made by a non-testamentary instrument in writing, signed either by the author of the trust or by the trustee, and the instrument must be registered, or it must be made by a will of the author or the trustee. Alternatively, a trust may be valid if the ownership of the property has been transferred to the trustee.
Section 6 of the Act states that, subject to the conditions laid down in section 5, a trust is deemed to be created when the author of the trust indicates, with reasonable certainty, by words or acts, the identity of the beneficiary and the terms of the trust.
The Court held that the question of whether the trust under dispute was valid must be examined by applying sections 3, 5 and 6 of the Indian Trusts Act. The provisions of the deed of trust must therefore be scrutinised in light of these statutory requirements.
Clause 5 of the deed of trust stipulated that if the income generated by the fund was sufficient, that income would be used to meet the pension obligations. If the income was insufficient, the capital of the fund was to be employed either to pay the pensions directly or, if that was also inadequate, to contribute towards the payment of the pensions. The manner of such payments was to be determined by the bank or by officers of the bank who were duly authorised by the bank to give such directions, and the amounts were to be paid out of the fund.
Clause 7 declared that the fund had been established for the benefit of retiring employees belonging to both the European and Indian staff of the bank, and that pensions would be granted by the bank to those employees.
Clause 8 set out the eligibility criteria for receiving a pension. It provided that any officer on the European staff who had served the bank for at least twenty-five years, and any officer or other employee on the Indian staff who had served for at least thirty years, could apply to the bank for a pension. The clause also allowed the bank, in special circumstances, to grant pensions to employees who had not completed the respective periods of service specified.
Clause 9 gave the bank the power to withdraw, modify, or determine any pension payable under the scheme whenever, in the bank’s opinion, the conduct of the pension recipient or the circumstances of the case justified such action. The trustees were bound to comply immediately with any directions issued by the bank or by any officers duly authorised by the bank to act on its behalf.
Clause 11 invested the …
In the deed, the bank was given a discretionary power to fix the amount of each pension and to make any modification to such amounts. This discretion was exercised without prejudice to the bank’s ability to determine which pensions it contemplated would be payable to persons who qualified under clause 8 of the deed. Clause 18 further authorised the bank, from time to time, to amend the regulations that related to the fund. The amendment could be effected by an instrument in writing under the bank’s common seal and required the written assent of the trustees. By virtue of clause 18, the bank could either alter any existing regulation or introduce new regulations, either to replace or to supplement the regulations that were then in force. For the purpose of that clause, every provision contained in the deed was treated as a regulation governing the fund.
When the provisions of the deed of trust were examined, it became clear that the bank, or officers duly authorised by the bank, were the sole authorities empowered to decide which pensions would be paid and the manner in which such payments would be made from the income of the fund. The deed declared that the fund had been established for the benefit of retiring employees to whom the bank might grant pensions. Officers of the staff who satisfied the conditions prescribed in clause 8 were declared to be entitled to apply to the bank for a pension. However, the deed contained no clause imposing any obligation on the bank or its authorised officers to grant a pension to any applicant. Even when a pension was granted, the deed allowed the bank or its authorised officers to withdraw, modify or terminate that pension, and such directions were binding on the trustees. The regulations governing the fund could also be altered or new regulations could be introduced, either supplanting or adding to the existing rules. Consequently, the bank or its authorised officers could lawfully decide not to grant any pension at all to an applicant, and could also withdraw, modify or terminate any pension if, in their opinion, the conduct of the recipient or the circumstances of the case justified such action. The entire scheme of the deed vested the bank and its authorised officers with sole discretion to grant, withdraw, modify or determine pensions, and placed no mandatory duty on them to grant any pension or to continue a pension for any specific period. Because of this unfettered discretion, the beneficiaries could not be said to have been identified with reasonable certainty, and it could validly be argued that no enforceable trust arose from the arrangement.
In the present case the Court observed that because no duty was placed on the trustees, no actual trust could be said to have arisen, even though the funds had been transferred to those trustees. Counsel for the petitioner, Shri N C Chatterjee, contended that the authority given to the bank or to its duly authorised officers amounted to a power that was essentially a trust. He argued that there existed a general intention to benefit a class of persons and also a specific intention to benefit particular individuals from that class, who would be chosen by the bank. According to his submission, even if the specific intention failed because the required selection was not made, the court could still give effect to the general intention for the class, thereby rendering the trust valid. To support this position he cited the cases of Brown v Higgs and Burrough v Philcox. The Court then referred to the legal position articulated in Lewin on Trusts, fifteenth edition, page 324, which explains that powers may be divided into ordinary or mere powers and powers that are in the nature of a trust. Ordinary powers are discretionary, not mandatory, and a trustee cannot be forced to act; if an ordinary power is not exercised, the court has no authority to execute it. In contrast, powers that are in the nature of a trust are mandatory, possess all the qualities of a trust, and should be described as trusts, as Lord Hardwicke noted. Lord Eldon further explained that where there is only a mere power and it is not exercised, the court cannot enforce it, whereas if a trust is created and the trustee cannot perform it because of death or accident, the court will enforce the trust. The Court also pointed out a third category of power, one that the holder is required to execute; this type of power, though not a pure trust, bears enough characteristics of a trust that, should the holder fail to fulfil it, the court may intervene and discharge the duty in the holder’s place. Consequently, if a power exists to appoint beneficiaries among certain objects but there is no gift to those objects and no residuary gift in case of failure to appoint, the court will imply a trust or a gift to those objects equally when the power is unexercised, provided there is a clear indication that the settlor intended the power to operate as a trust. The Court concluded, however, that this doctrinal principle did not aid the appellant, as previously indicated.
It was observed that the deed of trust did not contain any explicit indication that the bank intended the power conferred to be treated as a trust. The deed imposed no obligation on the bank or on any officer duly authorised by the bank to grant a pension to any applicant. Consequently, there was no duty on the bank to award a pension at all; even if a pension were to be granted, the deed permitted the bank or its authorised officers to withdraw, modify or terminate that pension at their discretion. Because of this lack of obligation, the Court could not characterize the power as a trust-like authority that could be exercised by the Court in the event the holder of the power failed to act.
The Court then considered whether any person claiming to be a beneficiary under the deed could approach the Court for enforcement of a provision that purported to benefit him. Although a person might satisfy the conditions of clause 8 and therefore be eligible to apply for a pension, the Court held that such a person could not enforce the provision because the deed imposed no legal duty on the bank or its authorised officers to grant a pension. In the absence of any such duty, it would be futile to argue that a valid trust had been created in the manner alleged by the appellant.
Accordingly, the Court affirmed the High Court’s conclusion that there was uncertainty regarding the identity of any beneficiaries and that no obligation existed on the bank to provide a pension. As a result, no legal and effective trust could be said to have arisen. The Court further concluded that the payment of Rs 2,00,000 made in the accounting year 1946-47 could not be treated as an expenditure incurred for the purposes of the business within the meaning of section 10(2)(xv) of the Indian Income-Tax Act.
Given these findings, the Court found it unnecessary to address the questions raised by the appellant concerning the scope of the reference, nor the questions raised by the respondent about whether the expenditure was of a capital or revenue nature and, if of the latter, whether a deduction could be allowed under section 10(4)(c) of the Act. The final result was that the appeal was dismissed with costs. The appeal was dismissed, and the agents for the parties were noted as P K Mukherjee for the appellant and G H Rajadhyaksha for the respondent.