JAGADISAN J. - The question of law, which is common in all the cases, that arises for decision in this batch of applications under section 66 of the Indian Income-tax Act is :
'Whether wealth-tax paid by a company is an allowable expenditure in the computation of its business income under the Indian Income-tax Act ?'
We shall now state the facts in each case and set out the question referred :
T.C. No. 91/1961. - The assessee is a public limited company carrying on business of purchase and sale of electrical energy. It was assessed to wealth-tax under the Wealth-tax Act on March 31, 1959, and the tax of Rs. 9,594 was levied. This sum was claimed as a deduction by the assessee from its business income in respect of the assessment year 1959-60. The claim was negatived by the department as well as by the Tribunal. The question that is referred is :
'Whether the sum of Rs. 9,594 representing the wealth-tax paid by the assessee was an allowable expenditure under the Income-tax Act ?'
T.C. No. 92/1961. - The assessee is a public limited company owning a steel rolling and wire mill at Nagapattinam. For the assessment year 1959-60 corresponding to the previous year ending December 31, 1958, it returned an income of Rs. 1,43,262. In arriving at this figure of income it claimed as deduction a sum of Rs. 12,365 which was the tax levied under the Wealth-tax Act for the same year. The department and the Income-tax Appellate Tribunal have disallowed the claim and the following question stands referred :
'Whether on the facts and in the circumstances of the case, the sum of Rs. 12,365 representing the wealth-tax paid by the assessee was an allowable expenditure under the Income-tax Act ?'
T.C. No. 99/1961. - The assessee is a private limited company carrying on business in re-treading and repairing tyres of motor vehicles. In the assessment of the business income in respect of the assessment year 1958-59 it claimed a deduction of Rs. 6,566 being the amount of wealth-tax paid by it. The claim for allowance was negatived by the department and the Tribunal, and the following question stands referred :
'Whether the sum of Rs. 6,566 representing the wealth-tax paid by the assessee was an allowable expenditure under the Income-tax Act ?'
T.C. No. 102/1961. - The assessee is a public limited company carrying on business of manufacture and sale of cloth. It paid wealth-tax of Rs. 68,971 in the assessment year 1959-60 and claimed that amount was proper deduction in the assessment of income-tax of its business income for the same year. The claim was negatived by the department and the Tribunal and the question referred is as follows :
'Whether the sum of Rs. 68,971 representing the wealth-tax paid by the assessee was an expenditure allowable under the Income-tax Act ?'
T. C. No. 110/1961. - The assessee is a private limited company owning a fleet of buses and lorries and carrying on transport business. It was assessed to wealth-tax for the assessment years 1957-58, 1958-59 and 1959-60 and a tax of Rs. 89,761 was levied. The assessee claimed this amount as a deductible allowance in the computation of its business income in the assessment proceedings under the Indian Income-tax Act for the relevant years. The claim was not successful either before the department or before the Tribunal. The following question therefore stands referred :
'Whether the sum of Rs. 89,761, which represents the wealth-tax paid by the assessee company for the years 1957-58, 1958-59 and 1959-60 is to be excluded from the assessment ?'
T.C. No. 111/1961. - The assessee is a private limited company dealing in automobiles. The company paid tax of Rs. 19,867 under the Wealth-tax Act in respect of the assessment year 1959-60 and claimed this as proper deduction in the computation of its business profits for the same year. The claim was not allowed by the department or by the Tribunal. The assessee also claimed extra depreciation allowance of Rs. 1,08,988 for the assessment year 1959-60, and this was also disallowed. The two questions that stand referred are :
'(1) Whether the sum of Rs. 19,867 paid as wealth-tax for the assessment year 1959-60 is a proper deduction in the computation of income ?'
(2) Whether the claim of the assessee for extra depreciation allowance of Rs. 1,08,988 for the assessment year 1959-60 is justified ?'
We shall deal with question No. 2 in T.C. 111/1961 separately later.
The only question in this batch of tax cases, barring T.C. No. 111 of 1961 in which another question also has been raised, is whether payment of tax under the Wealth-tax Act in respect of the 'net wealth' of the assessee companies which are all trading concerns can be claimed as a proper allowance in computing their taxable income under the Income-tax Act. We have first to ascertain the nature and the incidence of tax under the Wealth-tax Act. This Act brings to charge the net wealth of every individual, Hindu undivided family, and a company. The charging section is section 3 which is as follows :
'Subject to the other provisions contained in this Act, there shall be charged for every financial year commencing on and from the first day of April, 1957, a tax (hereinafter referred to as wealth-tax) in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule.'
'Net wealth' is defined under section 2(m) :
'Net wealth means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his net wealth as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than, -
(i) debts which under section 6 are not to be taken into account; and
(ii) debts which are secured on, or which have been incurred in relation to any asset in respect of which wealth-tax is not payable under this Act.'
Section 5 and 6 of the Act provide for exemption of tax in respect of certain assets and exclusion of assets and debts outside India. It is unnecessary to refer to the other provisions of the Act which provide for the determination of the value of net wealth, machinery of assessment and the collection of the tax levied and imposition of penalty for contravention of the provisions of the Act. What is taxed therefore is the value of the true asset belonging to or owned by an individual, Hindu undivided family or company. It is plain that the charge is upon the ownership or the proprietary right of the assessee over the subject-matter of the taxation which is statutorily discribed as 'net wealth'. In the assessment to tax under this Act, it is immaterial to consider the use to which the wealth is put or the purpose for which the wealth is employed. The focus of the taxing authorities is only on the value of the net wealth in the hands of the assessee belonging to him as owner.
The claim for deduction under the Indian Income-tax Act in regard to the computation of the income, profits and gains of a business should fall within the provisions of section 10 of the Act. The claim for deduction of wealth-tax paid is rested on section 10(2)(xv) of the Act or alternatively on section 10(1). Section 10(1) is called in aid because it is now settled law that the categories of allowance prescribed under section 10(2) are not exhaustive in ascertaining the true commercial profits of a business. It would be open to the assessee to claim an item of expense or loss not covered by any one of the specific provisions of section 10(2) on the ground that the true profits of the business cannot be ascertained without deducting it. Now section 10(2)(xv) reads :
'Such profits or gains shall be computed after making the following allowances, namely :-
(xv) any expenditure (not being an allowance of the nature described in any of the clause (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.'
The proper interpretation of this provision has come up for consideration in numerous decisions particularly because the assessees generally claim a particular expense or loss as falling within this omnibus provision, other provisions under section 10 being inapt. There does not however appear to be any difficulty in ascertaining the principle to be applied as illustrated in the decided cases : nor do think there is much difficulty in applying these principles to these cases.
A sustainable claim for deduction under section 10(2)(xv) in the computation of business profits would depend very largely on the facts and circumstances of each case. The criterion laid down by the statute is that the expenditure should not be of a capital or personal kind and that it should be laid out or expended wholly and exclusively for the purpose of the business. Within this statutory framework, which is partly negative and partly positive, the assessee should bring the expenditure in respect of which he claims allowance. The true nature of the expenditure should be judged by applying the normal standard of trade and commerce. The primary question that should be posed is : 'Does it constitute part of the companys working expense and is it incurred as part of the implementation of the scheme of profit making ?' If the answer is in the affirmative the assessee succeeds : if not he fails. In order to be deductible the expenditure must spring directly from the carrying on of the business and must really be incidental to it : Commissioner of Income-tax v. Abdullabhai Abdulkadar. The implication of the words 'wholly and exclusively' and 'for the purpose of the business' is not obscure but plain. It must be devoted to the business; it must be incidental to it; it must be in harmony with commercial expediency; it must be sufficiently and closely connected with the business. A casual relation to the business which can be established by the exercise of dialectical skill or by an a priori reasoning would not be sufficient. Further, this is not the least important, the expenditure must fall on the assessee in his character as a trader. He is before the department only in a trading attire and the only consideration which it would be relevant for the department to have regard to, should be that which is appropriate to his trading garment. A general argument that because the assessee is the owner of the trade or business any expenditure incurred by him should somehow or in some manner be relatable or referable to the business would not avail the assessee invoking the aid of the provision successfully. If this were to be permitted and upheld, we have no doubt that the claim of the assessee would overflow the bounds of the statute.
The decision of the House of Lords in Strong & Co. v. Woodifield, dealing with the corresponding provision under the English Act, is really the locus classicus on the subject. A deduction was claimed by the assessee in that case of an amount which he paid as damages and costs incurred by him in defending an action for injuries sustained by a guest in his business premises. The claim was disallowed. The following passage from the judgment of Lord Davey, which has been repeatedly quoted, has really shaped the course of subsequent judicial precedents :
'I think that the payment of these damages was not money expended for the purpose of the trade. These words are used in other rules, and appear to me to mean for the purpose of enabling a person to carry on and earn profit 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 its made out of the profits of the trade It must be made for the purpose of earning the profits.'
The observation of Lord Chancellor (Lord Loreburn) in the same judgment emphasises that the expenditure or loss should fall upon the assessee in his character as a trader. The following is the passage at page 219 :
'In my opinion, however, it does not follow that if a loss is in any sense connected with the trade, it must always be allowed as a deduction; for it may be only remotely connected with the trade or it may be connected with something else quite as much as or even more than with the trade. I think only such losses can be deducted as are connected with it in the sense that they are really incidental to the trade itself. They cannot be deducted if they are mainly incidental to some other vocation or fall on the trader in some character other than that of trader. The nature of the trade is to be considered.'
Two principles can be formulated from this decision and they are : the expenditure should be incurred as an incident of the trade or business and that it should have been incurred by the assessee in his character as a trader. In our opinion this is really the key-note of the provisions of section 10(2)(xv) of the Indian enactment as well.
Mr. Swaminathan, learned counsel who appeared for some of the assessee, strenuously contends that both the tests or principles set out above are satisfied in these cases. His submission is that the foundation of the business of the company is its wealth, that it cannot carry on the business without it, that its ownership of the wealth cannot be dissociated from its business engagement or activity and that a charge on the wealth under the Wealth-tax Act when properly made and collected would be a permissible deduction in the ascertainment of the true commercial profits of the business. Learned counsel has referred to some decisions in support of this contention and we shall now deal with them.
The decision in Smith v. Lion Brewery Co. Ltd. has been relied upon. The assessee there was a brewery company who were owners or lessees of a number of licensed premises. The licensed premises were let to tenants who were 'tied' to purchase their beers from the respondents. Under the Licensing Act of 1904, the Compensation Fund Charges were levied in respect of the excise on licences held by the tenants who paid the charges and recouped themselves by deduction from the rents which they paid to the assessee. The assessees claimed that in computing their profits for assessment to income-tax they should be allowed to deduct the sum of amounts ultimately borne by them in respect of these charges. The Court of Kings Bench held that the deduction claimed was inadmissible. This decision was reversed in the Court of Appeal by a majority of two Lord Justices, Kennedy Lord Justice dissenting. In the House of Lords the opinion was equally divide with the result that the judgment of the Court of Appeal was sustained. In the midst of this diversity of judicial opinion, it would not be safe to cull out any guiding principle as constituting an acceptable precedent. Even on the facts of the case it is fairly clear that the expenses of charges borne by the assessees were really incidental to the carrying on of the brewery business. We do not think that this case lends any assistance to the learned counsel for advancing his contention.
The decision of the Australian High Court in Moffatt v. Webb is cited. The relevant provision of the Income-tax Act in that case was as follows :
'All losses and outgoings actually incurred in Victoria by any taxpayer in production of income.... shall be deducted from the gross amount of such taxpayers income.
2. In estimating the balance of the income liable to tax no sum shall be deducted therefrom for... (g) Any disbursements or expenses whatever not being money wholly and exclusively laid out or expended for the purpose of such trade.'
The following is the head note in that case :
'Held, that land tax paid under the Land Tax Acts of the Common wealth by a person who carries on the business of a grazier in respect of land in Victoria on which he carries on the business, is an outgoing actually incurred by him in the production of income, and is also a disbursement of money wholly and exclusively laid out or expended for the purposes of such trade within the meaning of section 93 and therefore that, for the purpose of assessing the income-tax payable by him, he is entitled to deduct the sum paid for such land tax from his gross income. In assessing such income-tax, no distinction can be drawn between land acquired for the purpose of carrying on the business of grazing thereon, and land already in possession which is applied to that purpose.'
It must be noted that the business was that of a grazier, and that tax was paid upon the grazing land. It is obvious that without the grazing land the business could not have been carried on and as long as the assessee had that land, he was necessarily compelled to pay land tax. It is not surprising that the Australian High Court held, on a proper construction of the analogous income-tax law, that the land tax paid would constitute a proper deduction in the computation of the business income. At page 130 Griffiths C.J. observes :
'The land taxed is the very land on which the business is carried on, and, as I have already pointed out, it is impossible to carry on the business of grazing on that land without paying the tax. It seems to me, therefore, that the tax falls within the words a payment made wholly and exclusively for the purpose of the trade, as construed in that case.'
Barten J. observes thus at page 132 :
'It cannot be predicated that he would own the land at all if he carried on any other business. It is scarcely an inference from the case to say that he holds the land simply as an instrument essential to the proper conduct of his business.'
At page 137 Isaacs J. stated as follows :
'Indeed, the trader here is owner of everything; he devotes the land to business purposes in the character of owner; he uses it as owner; he is entitled to the income of the business as owner; he is entitled to deduct the annual value of his own land as owner of the land in precisely the same sense as he pays the federal land tax in respect of the same land as owner.'
The principle laid down by the Australian High Court in Moffat v. Webb is only this : if a trader pays a tax in respect of a business asset owned by him and if such an asset is indispensable for the carrying on of the business, any tax paid by him on that asset would be a proper debit in the computation of the income under the Income-tax Act.
Mr. Swaminanthan referred us to various passages in the decision of the House of Lords in Morgan (Inspector of Taxes) v. Tate & Lyle Ltd. There, a company was engaged in sugar refining and had incurred expenses in a propaganda campaign to oppose the threatened nationalisation of the industry. The Commissioners for the General Purposes of the Income Tax found that the sum in question was money wholly and exclusively laid out for the purposes of the companys trade and was an admissible deduction from its profits for income-tax purposes. It was held by the majority of the learned Law Lords, two Law Lords expressing dissent, that the object of the expenditure being to preserve the assets of the company from seizure and so as to enable it to carry on and earn profits, there was no reason in law to prevent the Commissioners from so finding. In our opinion there can be no similarity at all between that case and the present batch of cases. In Morgans case, the assessee was obliged to incur expenses in connection with an activity designed to save the business itself from extinction. Expenses incurred for sustaining the continuance of the life of the business cannot but be absolutely essential and unavoidably incidental to the carrying on of the business. We must observe that the observations of the Law Lords in general rather tend to negative the contention of the learned counsel than to support him. The decision in Strong & Co. v. Woodifield has been referred to and Lord Daveys observation already extracted above has been approved. Lord Reid refers to the following observation of Lord Simonds in Smiths Potato Estates Ltd. v. Bolland :
'It is, I think, important to emphasise that the words for the purposes of the trade in their context, i.e., where a computation of profits for the ascertainment of taxable income is being made, must mean for the purpose of enabling a person to carry on and earn profits in the trade.'
That the expenditure claimed should fall on the assessee in his capacity as a trader is emphasised by Lord Reid thus at page 219 :
'A general test is whether the money was spent by the person assessed in his capacity of trader or in some other capacity - whether on the one hand the expenditure was really incidental to the trade itself or on the other hand it was mainly incidental to some other vocation or was made by the trader in some other capacity than that of trader.'
We are unable to say that this case supports the contention raised on behalf of the assessees.
We would like to refer to a Scottish case reported in Inland Revenue Commissioner v. Scottish General Electric Power Co. (No. 2). The House of Lords therein held that the rates paid by the company in respect of lands and buildings in Scotland which it owned and occupied for the purpose of its trade were not allowable in arriving at the taxable profits. Under the rating law of Scotland rates are treated as a charge on the ownership of property. The following observation of Lord Macmillan pertaining to the point now in issue may be quoted :
'The owners rates in the present case would be payable by the company whether it carried on any trade in the premises or not or if it chose to let them.... The obligation to pay owners rates is similarly incidental to the ownership of the property, irrespective of how he may use it.'
It is true that a capital asset of a trading company is an essential requisite for the carrying on of the business. It is also true that such capital asset would fall within the ambit of the Wealth-tax Act. But this circumstance by itself would not be sufficient to claim the wealth-tax paid as an allowance under section 10(2)(xv) or even under section 10(1). It cannot be said that payment of wealth-tax is incidental to the carrying on of the business nor can it be said that the tax falls upon the assessee, who owns the wealth and who carries on the business, in his character as a trader or businessman. Payment of wealth-tax is as a result of a charge on the ownership of the assets and however necessary or compelling it may be that a trader should own and posses wealth it would be difficult to contend that payment of tax on such ownership would constitute a business expense, that is, an expense incurred in the regular course of business as a necessary step in the conduct of such business. We are therefore unable to uphold the contention of the assessees that the amount of wealth-tax paid would be a proper allowance under section 10(2)(xv) or under section 10(1). It is unnecessary to refer to analogous cases where it has been held that payment of estate duty or succession duty would not constitute a proper debit in the computation of the business income.
All the questions in T.C. Nos. 91, 92, 99, 102, 110 and question No. 1 in T.C. No. 111 of 1961 are answered against the assessees.
Question No. 2 in T.C. No. 111 of 1961 raises the proper interpretation of section 10(2)(via) of the Indian Income-tax Act. The assessee claimed extra depreciation allowance under that provision of a sum of Rs. 1,08,988. That provision reads :
'In respect of depreciation of buildings newly erected, or of machinery or plant being new which has been installed, after the 31st day of March, 1948, a further sum (which shall be deductible in determining the written down value) equal to the amount admissible under clause (vi) (exclusive of the extra allowance for double or multiple shift working of the machinery or plant and the initial depreciation allowance admissible under that clause for the first year of erection of the building or the installation of the machinery or plant) in not more than five successive assessments for the financial years next following the previous year in which such buildings are erected and such machinery and plant installed and falling within the period commencing on the 1st day of April, 1949, and ending on the 31st day of March, 1959.'
It is not disputed that the erection was after the 31st day of March, 1948. The department and the Tribunal negatived the claim of the assessee as the five year limit prescribed by this provision extended only up to March 31, 1959. The assessee claimed it in the financial year April 1, 1959, to March 31, 1960. Learned counsel for the assessee contends that the words 'financial years' occurring in section 10(2)(via) mean not the assessment years, but only financial years, and that therefore the extra depreciation allowance in respect of the financial year April 1, 1958, to March 31, 1959, can be claimed in the assessment year April 1, 1959, to March 31, 1960. In our opinion this contention is wholly unsustainable. We have no doubt that in the context of this provision the words 'financial years' mean and can only mean 'the assessment years'. The words used are 'financial years next following the previous year in which such buildings are erected'. The scheme of the Indian Income-tax Act is only to tax income of the previous year in the relevant assessment year. If the contention of the learned counsel were to be accepted, it would mean that for the special purpose of allowing extra depreciation allowance, it is not the previous year that would be relevant but the financial year. This is opposed to the whole scheme and tenor of the provisions of the Indian Income-tax Act. The decision of the Tribunal holding that the assessee is not entitled to relief under section 10(2)(via) is well founded. This question is answered against the assessee.
The assessee in each of these cases will pay costs to the department. Counsels fee Rs. 250 in each case.