1. This is a reference under Section 66(2) of the Indian Income-tax Act (XI of 1922) and the question submitted for our opinion is whether profession tax paid under Section 111 of the Madras City Municipal Act should be allowed as a proper deduction from the taxable income ' as an expenditure incurred solely for the purposes of the profession' of the assessees within the meaning of Section 11 of the Income-tax Act.
2. The assessees are a firm of attorneys practising in 'Madras and they claim that they are entitled to the deduction above mentioned. The Commissioner of Income-tax was of opinion that the deduction claimed was not an allowable item.
3. The answer to the question put to us depends in our opinion upon the nature of the profession tax levied by the Municipality. If the profession tax is a contribution from the income of the assessee to the Municipality it will stand on the same footing as income-tax itself which is such a payment to the Government. It is clear in assessing the income of a person the income-tax he pays could not be deducted for what is paid is a part of the income itself and not an expenditure for earning that income or profit. It was so ruled in Ashton Gas Co. v. Attorney-General (1906) AC 10 and the proposition is conceded before us. What then is the profession tax? Is it a payment made out of the income of the tax-payer or is it an expenditure which he has to incur to enable him to earn his income? We are of opinion that it is the former and not the latter.
4. Under the City Municipal Act (IV of 1919), Section 111, every person not liable for the Companies tax who within the City and for a period of 60 days in the half-year exercises 'a profession, art, trade or calling or holds any appointment, public or private, bringing him within the taxation rules of Schedule IV' is liable to pay the profession tax. Now Schedule IV makes it clear that the amount of tax payable is dependent on the income of the person taxed, the minimum being an income of Rs. 100 a month except in the cases of hotel-keepers, etc., dealt with under Class IX. Professional men are taxed not because they carry on their profession but because they do so and earn an income. The amount of tax varies with the income and if a person is over-taxed he has a right of appeal.
5. Now the nature of the tax cannot vary with the individual taxed. In the case of persons holding appointments under the Government it seems to us impossible to predicate that they pay profession tax to enable them to earn their salary. Section 111, Explanation 2 makes even pensioners liable for profession tax as if they were holders of appointments carrying a salary equal to the pension. In their cases it is still more difficult to treat the profession tax as a payment by them to earn their income. It is clear in these cases the Municipality is claiming a part of their income as a tax. A different rale, it seems to us, cannot be applied in the case of men who make their income by professional services. It is argued that because Section 111 uses the words 'by way of license fee' we must hold that the payment of the profession tax is for the purpose of obtaining a license to carry on one's profession in the City. We are unable to accept this argument. The Act deals with several matters in which the obtaining of a license is a prerequisite to the carrying on of a business or profession within the Municipal limits. We find examples of it in Chap. XII of the Act. There is no provision in the Act which makes the carrying on of one's profession without paying the profession tax illegal; and no formal license is issued on payment. The tax, if unpaid, can no doubt be collected by coercive processes of distraint, etc., but the carrying on of the profession is not interfered with. It is clear, therefore, that the Act does not treat the profession tax as a payment for a license. The words ' by way of a license fee ' seem to us to show that the payment is to be made in the manner of a license fee but do not imply that in itself the tax is a license fee. It is true that under Part II, Schedule IV, Rule 9, the tax is estimated on general considerations and not on the exact amount of asceitrained income of the person taxed. This merely provides a method of estimating one's income to avoid the trouble of having accounts produced and examined in every case. The fact that when an over-estimate is made liberty is given to the person taxed to produce his accounts and prove his income and get his tax reduced indicates that the proper basis of the tax is the income earned. In this view the payment of the profession tax cannot be held to be ' an expenditure for the purpose of such profession ' though it is incurred in connection with it. The words ' for the purpose of ' were construed by Lord Davey in the case of Strong and Co., Ltd. v. Woodifield (1906) AC 448 where the expression was ' for purposes of the trade.' His Lordship observed: ' These words appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade, etc. I think the disbursements permitted are such as are made for that purpose. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade, or is made out of the profits of the trade. It must be made for the purpose of earning the profits.' Following that view we consider that the payment of profession tax does not fall within Section 11.
6. The cases of Smith v. Lion Brewery Co., Ltd. (1911) AC 150 and of Usher's Wiltshire Brewery, Ltd. v. Bruce (1915) AC 433 were cited by the learned Counsel for the assessees. But, instead of helping him, they show what may properly be treated as money spent for purposes of trade. The expenses referred to in those cases were directly incurred for the purpose of increasing the income of the trade and were therefore allowed to be deducted. These cases do not apply here in the view we take of the nature of the profession tax. Along with these cases should be considered the case of money spent for an anti-prohibition campaign by a brewer which was disallowed as a deduction as it was held that it was not money directly spent for increasing the brewer's income though it may have indirectly that effect. Ward and Co. v. Commissioner of Taxes (1923) AC 145.
7. The case of Commissioner of Income-tax v. Nedungadi Bank : (1924)47MLJ160 referred to the Companies tax and not to the profession tax. The observation in it regarding profession tax that it stands on the same footing as income-tax supports the contention of the Government, but we do not look upon it as any authority on the point before us as the observations is only an obiter dictum. The case is not otherwise applicable.
8. Etherington's case (1919) 2 Ch 254 referred to excess profits duty which stands on a different footing altogether; as pointed out by the learned Judge there it was declared by statute to be an admissible deduction. Furthermore, the case was one of net profits of the company on which dividend was payable to the manager and not an income-tax case.
9. For the above-mentioned reasons we have come to the conclusion that the amount of profession tax paid is not a proper deduction for assessment of income-tax and we answer the question submitted in the negative. The assessees will pay the Commissioner's costs and Vakil's fee, Rs. 250.