GROVER J. - This is a reference made by the Appellate Tribunal under section 66(1) of the Indian Income-tax Act, 1922.
The assessee is a registered firm with its headquarters at Chawri Bazar, Delhi. The firm had a workshop known as Grand Iron Works for the manufacture of kohlus (cane-crushers) and karhais (iron pans). These were let out on hire to the village cultivators who utilised them for the manufacture of gur. The business was seasonal and the kohlus were utilised by the villagers for a period of about six months. For the assessment year 1951-52 and 1952-53, the Income-tax Officer declined to allow depreciation for the whole year. He has disallowed certain taxes which had been imposed by U.P. District Board. The Appellate Assistant Commissioner allowed depreciation for the whole year subject to certain minor modifications and he also held that the taxes were allowable under section 10(2). The Tribunal upheld the order of the Appellate Assistant Commissioner. Thereupon, the Commissioner of Income-tax sought reference of the following questions of law which was allowed :
'(1) Whether the assessee was entitled to depreciation for the full year on the kohlus that were let out on hire for the season consisting of a period of six months under section 10(2)(vi) of the Indian Income-tax Act read with rule 8 of the Indian Income-tax Rules ?
(2) Whether the tax on circumstance and properties paid by the assessee under the U.P. District Boards Act was properly allowed as a deduction under section 10(2) of the Indian Income-tax Act, 1922 ?'
Mr. Hardayal Hardy, who appears for the Commissioner, has rightly and properly not addressed us on the first question as it is covered by the decision of this court in Commissioner of Income-tax v. Sarveshwar Nath Nigam. In that case it was held that the second proviso to rule 8 of the Indian Income-tax Rules governed the case and not the first proviso and the assessee was entitled to depreciation for the full year under section 10(2)(vi) of the Income-tax Act even though the kohlus were let out only for the season consisting of four months. It must, therefore, be held that in the present case the assessee was entitled to the depreciation as allowed by the Appellate Assistant Commissioner and the Appellate Tribunal.
On the second question Mr. Hardy has invited our attention to the provision under which the deduction should be allowed. According to section 10(2)(xv), any expenditure, with certain exceptions which need not be mentioned, laid out or expended wholly and exclusively of the purpose of business, profession or vocation must be deducted while computing the profits or gains therefrom. Section 10(4), however, provides that the allowance of any sum paid on account of any cess, rate or tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or gains cannot be deducted. Now, the tax amounting to Rs. 2,000 for which deduction was claimed by the assessee had been imposed under section 114 of the U.P. District Boards Act. That section is in the following terms :
'114. Imposition of tax on circumstances and property. -The power of a board to impose a tax on circumstances and property shall be subject to the following conditions and restrictions, namely :
(a) The tax may be imposed on any person residing or carrying on business in the rural area provided that such person has so resided or carried on business for a total period of at least six months in the year under assessment;
(b) no tax shall be imposed on any person whose total taxable income is less than two hundred rupees per annum;
(c) the rate of tax shall not exceed four pies in the rupees on the total taxable income; and
(d) the total amount of tax imposed on any person shall not exceed such maximum (if any) as may be prescribed by rule.'
The first contention of Mr. Hardy is that the aforesaid tax is, in substance and fact, a cess which is covered by section 10(4) which constitutes an exception to section 10(2)(xv). This contention is sustainable neither on the relevant provisions contained in the U.P. District Boards Act nor under the Rules framed under that Act. Moreover, the Privy Council had occasion to consider a similar matter in Commissioner of Income-tax v. Gurupada Dutta. There, it was held that the rate imposed under the provisions of the Bengal Village Self-Government Act, 1919, on a person occupying a building within the Union, and using the same for the purpose of business was an allowable deduction in computing the profits of the business under section 10 of the Income-tax Act. It was further held that the estimate of the annual income from business under the aforesaid Bengal Act could only proceed on a rough guess which was in no way comparable with the ascertainment of profits and gains under the Income-tax Act and the inclusion of this element of business income as part of the 'circumstances' of the assessee with a view to the imposition of the union rate did not fall within section 10(4) of the Income-tax Act. Their Lordships proceeded to say that where the union rate was not wholly referable to premises occupied for the purpose of a business, the assessee, on establishing the portion of the rate which was so referable, would be entitled to deduct such portion under section 10(2)(ix) (new section 10(2)(xv)). Mr. Hardy has not been able to show how the principles laid down by the Privy Council in this case are not applicable to the facts of the present case. In Simbholi Sugar Mills Ltd. v. Commissioner of Income-tax, the Allahabad High Court had to consider identically the same point as is involved in the present case and the view which has been expressed is that tax payable under the U.P. District Boards Act could be legitimately claimed by way of an allowance under section 10(2)(xv) as an amount expended for the purpose of enabling the assessee to carry on business within the jurisdiction of the District Board. It was an expenditure laid out or expended wholly and exclusively for the purpose of the business.
Mr. Hardy has urged that in the present case it has not been established that the allowance which was being claimed on account of the payment of the tax to the District Board was an amount which constituted an expenditure laid out or expended wholly and exclusively for the purpose of the business. According to him, even their Lordships of the Privy Council envisaged a situation where the tax rate levied by a local authority was not wholly referable to premises for purposes of business and only that portion of the rate could be deducted which was so referable. Mr. Hardy says that the imposition of the tax in the present case was on 'circumstances and property' and that would included not only the business but also other property unconnected with business which was owned by the assessee. No such case, however, was ever put forward at any stage before and it is too late in the day for Mr. Hardy to agitated this matter. On the other hand, as in the Allahabad case, the argument has throughout proceeded on the assumption that the assessee was carrying on business in proceeded on the assumption that the assessee was carrying on business in the area falling within the jurisdiction of the District Board and in order to carry on this business it became necessary for the assessee-firm to submit to the tax liabilities imposed by the District Board. The amount, therefore, which was expended by payment of the tax in question, was for the purpose of enabling the assessee to carry on its business within the jurisdiction of the District Board and such an expenditure must necessarily be held to be of the nature covered by section 10(2)(xv).
For the reasons given above, the answer to both the questions must be returned in the positive. In view of all the circumstances of the case the parties are left to bear their own costs.
S. K. KAPUR J. - I agree.