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Commissioner of Income-tax (Central) Vs. Standard Vacuum Oil Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Ref. No. 37 of 1961
Judge
Reported inAIR1967Cal68
ActsIncome Tax Act, 1922 - Section 10(2)
AppellantCommissioner of Income-tax (Central)
RespondentStandard Vacuum Oil Co. Ltd.
Appellant AdvocateB.L. Pal, Adv.
Respondent AdvocateD. Pal, Adv.
Cases ReferredIn State of Madras v. G. J. Goelho
Excerpt:
- mitter, j. 1. the question in this case is whether wealth tax paid by a company on assets held by it for the purpose of its business is allowable as a deduction under section 10 (1) or section 10 (2) (xv) of the indian income-tax act, 1922.2. the contention of the assessee before the income-tax officer was that in order to carry on its business the company had to possess wealth in the form of various assets and therefore, the payment of tax levied on such wealth was incidental to the business and allowable as a deduction in computing its profits. the income-tax officer held that although wealth tax was a charge on the assets of the company including business as well as non-business assets, a person owing assets has to pay tax not because he carries on business but because of his ownership.....
Judgment:

Mitter, J.

1. The question in this case is whether wealth tax paid by a company on assets held by it for the purpose of its business is allowable as a deduction under Section 10 (1) or Section 10 (2) (xv) of the Indian Income-tax Act, 1922.

2. The contention of the assessee before the Income-tax Officer was that in order to carry on its business the company had to possess wealth in the form of various assets and therefore, the payment of tax levied on such wealth was incidental to the business and allowable as a deduction in computing its profits. The Income-tax Officer held that although wealth tax was a charge on the assets of the company including business as well as non-business assets, a person owing assets has to pay tax not because he carries on business but because of his ownership of the assets and hence wealth tax levied would not be said to be expended wholly and exclusively for business purposes. This was upheld in appeal by the Appellate Assistant Commissioner. The Tribunal however, came to a different conclusion. According to the Tribunal 'the assets were held by the assessee for the purpose of its business and no other' It was urged that if the assesses had not paid the tax the Revenue Authorities might have taken measures for bringing the assets to sale for recovery of the tax : from this point of view payment made to avert that contingency was expenditure incidental to the carrying on of the business. It was contended by the Revenue that the determination of the wealth tax was arrived at after the profits had been made and, therefore, the payment of the wealth tax was not an expense wholly and exclusively incurred for the purpose of the business. According to the Tribunal it did not matter that the computation had to be made as at the end of the year. Not being satisfied with this the Revenue Authorities required the Tribunal to refer to this Court the question of law which was couched in the following words :

'Whether on the facts and in the circumstances of the case, having regard, to the provision of Wealth Tax Act of 1957, the allowance of wealth tax liability was correct ?'

3. Under Section 8 of the Wealth Tax Act of 1957 'there shall be charged for every financial year commencing on and from the 1st day of April 1957 a tax in respect of the net wealth on the corresponding valuation date of every individual, company at the rate or rates specified in the schedule.' It will be noticed at once that the tax is charged for every financial year; the net wealth has to be determined in terms of Section 2(m) which broadly speaking means the aggregate value of all the assets of the assessee on the valuation dale less the debts owed by him. Under Section 2(q) 'valuation date' in relation to any year for which an assessment is to be made means the last day of previous year as defined in the Income-Tax Act if an assessment were to be made under that Act for that year. Under Section 7(1) the value of any asset, is to be estimated at the price which it would fetch if sold in the open market Under Section 7(2)(a) where an assessee is carrying on a business for which accounts are maintained by him regularly, the Wealth Tax Officer may, Instead of determining separately the value of each asset in such business, determine the net value of the assets of the business as a whole having regard to the balance of such business as on the valuation date. This is only a rough and ready method which can be adopted by the Wealth Tax Officer so as to avoid the valuation of each item of asset separately The schedule to the Act shows that a company which has incurred a net loss in any year computed in the manner provided is not to pay any wealth tax if it has not declared any dividend on its equity capital in respect of that year. Further, if the profits of the company in respect of any year before the deduction of certain allowances fall short of the amount of wealth tax payable by It In respect of the relevant assessment year the tax payable by the company is to be limited to the amount of such profits if the company has not declared any dividend on the equity capital in respect of that year.

4. Section 10 (1) of the Income-Tax Act, 1922 provides that tax is to be payable by an assessee carrying on business in respect of the profits or gains of the said business. Section 10 (2) of the Act enumerates various allowances which have to be taken into account for the computation of the profits or gains. The specification is however, not exhaustive and Clause (xv) of Section 10 (2) provides for the deduction of any expenditure not being an allowance of the nature described in Clauses (1) to (xiv) and not being in the nature of capital expenditure or personal expense of the assessee laid out or expended wholly and exclusively for the purpose of such business. There is no question here as to whether the expenditure is of a capital nature or whether it is personal to the assessee. The only question is whether the amount was expended wholly and exclusively for the purpose of the 95-sessee's business. The expression 'for the purpose of such business' has a very wide ambit. It must include anything which will further the cause of the business as also anything which is so linked with the business as to go hand in hand with it or be an unavoidable outgoing by its very nature. Thus an expenditure incurred by a business man with the idea of increasing his profits, a disbursement made with the object of meeting a threat to it, a payment which is unavoidable by anybody carrying on a particular business must all be included within the category of an expenditure for the purpose of the business. To illustrate advertisement expenses, expenses of litigation to meet a threat by another trader attempting to pass off his goods as and for that of the assessed, a license fee which a business man must pay in order to enable him to carry on his business must be deductible for the purpose of computation of the profits of his business. It is difficult to conceive of any business which can be carried on without assets of some kind or other if the assets are held exclusively for the purpose of the business an Imposition on the ownership of the assets must in my opinion be a necessary concomitant of the business. The assessee in this case is well known carries on business as dealers and traders in petrol and petroleum products, Such a business cannot be carried on unless stocks of these commodities are held by the trader. He must also have depots where these commodities are stored, shops where they are sold, motor trucks and lorries for their transport from the depots to the shops etc. The trader must also hold some business premises. This may be on freehold land of his own or held by him on rental. If he buys a plot of land and raises structures on it for the purpose of using as a depot for storing his stock-in-trade I can see no reason why such land and structures cannot be held to be assets necessary for the purpose of his business. But if he owns a multi-storied house, in one portion of which he carries on his business letting out the rest It would be impossible to say that the entire property is an asset held by him for the purpose of his business. In this case the finding of the Tribunal is that the assets are held for the purpose of the assessee's business and no other. An imposition like the Wealth Tax Act which the assessee has to bear if it wants to carry on business must in my opinion be considered to be an expenditure incurred wholly and exclusively for his business. If he does not hold the assets for any other purpose the imposition must be held to be a necessary expenditure which he must incur for the purpose of his business and be covered by the wording of Section 10 (2) (xv) of the Income-Tax Act.

5. It was, however, contended on behalf of the Revenue that the imposition had to be met not because the assessee's carrying on a business but by reason of its mere ownership of the assets. It was argued that the capacity in which the assessee paid the tax was that of an owner and not a trader The argument was sought to be fortified by reference to some decisions of the Supreme Court on the applicability of Clause (xv) of Section 10 (21 to diverse circumstances Reliance was further placed on two decisions, one of the Madras High Court and the other of the Kerala High Court where the contention of the Revenue as to the inadmissibilty of payment of wealth tax by a company on its business assets has been upheld.

5-a. The first decision to which reference must be made is that of the Supreme Court in Badridas Daga v. Commissioner of Income-tax, : [1958]34ITR10(SC) corresponding to : [1958]34ITR10(SC) . There the question was whether a sum of money embezzled by an employee of the assessee was allowable as a deduction either under Section 10 (1) or under Section 10 (2) (xv) It was laid down that profits and gains liable to be taxed under Section 10 (1) were such as would be understood to be profits according to ordinary commercial principles and the admissibility of an outgoing under Section 10 (2) (xv) would depend on whether having regard to accepted commercial practice and trading principles the same could be said to arise out of the carrying on of the business and to he incidental to it It was observed

'if employment of agents is incidental to the carrying on of business, it must logically follow that losses which are incidental to such employment are also incidental to the carrying on of the business. Human nature being what it is, it is impossible to rule out the possibility of an employee taking advantage of his position as such employee and misappropriating the funds of his employer, and the loss arrising from such misappropriation must be held to arise out of the carrying on of business and to be incidental to it. The Court further said that,

the loss for which a deduction could be made under Section 10 (1) must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee, if it has some connection with his business'

This was illustrated by the case of a loss occurring to a money lender by theft of his funds overnight. Such a loss was described as one which may fall to any owner of funds whether carrying on a money lending business or notand as such not incidental to the business According to the Supreme Court loss by embezzlement was incidental to the assessee's carrying on his business and as such allowable under Section 10 (1) of the Income-tax Act.

6. The question of relevancy of the capacity of the assessee in the matter of payment came up for consideration before the Supreme Court in Commissioner of Income-tax, Bombay v. Abdullabhai Abdulkadar AIR 1961 SC 701 corresponding to : [1961]41ITR545(SC) . In this case the assessee carried on business as commission agents and was treated as an agent of certain non-resident principals of Port Sudan. Goods were supplied from India by the assessee to the non-resident principals who on their part consigned cotton to the assessee and other merchants for sale in India. The assessee was treated as the agent of the non-resident principals under Section 43 of the Income-Tax Act for the purpose of income-tax and excess profits-tax. It had to pay a large sum of money under the provisions of Section 42 (1) of the Income-Tax Act as such agent. Under this provision all income, profits or gains accruing or arising from any business connection in the taxable territory was to be deemed to be income accruing or arising within the taxable territories and where the person entitled to the income, profits or gains was not resident in the taxable territories, he was to be chargeable to income-tax either in his own name or in the name of his agent and in the latter case such agent was to be deemed to be, for all the purposes of the Act, the assessee in respect of such tax. The assessee paid the amount which was payable by the non-resident principal and claimed to have it deducted as a loss to be set off against his profits Reiving on the provision of Section 42 (2) it was argued that the assessee's business was foreign trade which was inter-connected with the business of the non-resident principal and therefore, the nature of the business was such as to attract the imposition of liability on the respondent under Section 42 (2) and the loss incurred must be taken to be incidental to and arising out of the business of the assessee. The Court held that the liability was imposed on the assessee because it was treated as an agent within the meaning of Section 42 (1) of the Act and because of the deeming provisions of Sub-section (2) of Section 42. According to the Court it did not spring directly from the carrying on of the assessee's business and was not incidental to it but the liability arose because of the business of another person.

7. In my opinion, this decision does not help the Revenue. Clearly the business which excited liability to income-tax was the business of the non-resident principal as it was he who made the profit and it was only under the deeming provision of Section 42 (2) that the liability of the principal had to be met by the agent who though connected with the business of the principal did not make the profits : the profits belonged to some one else and it was the misfortune of the assessee that it did not deduct necessary funds wherewith to meet the demands of income-tax.

8. Before dealing with the latest case of the Supreme Court cited it is necessary to refer to certain English decisions noted in the judgment of the Supreme Court. In Strong and Co. Ltd. v. Woodifield, 1906 AC 448 corresponding to 5 Tax Cas 216, a brewery company which owned an inn claimed to deduct from its profits the damages which it had to pay to a customer sleeping in the inn by the falling of a chimney upon him: the House of Lords held that, the damages were not deductible as the assessee had to pay tax on the balance of the profits or gains of a trade and a deduction could not be allowed on account of loss not connected with or arising out of such trade and no sum could be deducted unless it was money wholly and exclusively laid out and expended for the purpose of the trade. Loreburn L. C. observed

'the nature of the trade is to be considered.***** No degree of ingenuity canframe a formula so precise and comprehensive as to solve at sight all the cases that may arise. In the present case I think that loss sustained by the appellant was not really incidental to their trade as inn-keepers, and fell upon them in their character not of traders, but of house holders.'

Lord Devey said :

'It has been argued that the deduction claimed was a loss connected with or arising out of the appellants' trade within Rule 3 applying to case 1 only Case 1 relates to trades, manufacturers, adventures or concerns in the nature of trade, and I think that the word 'loss in Rule 3 means what is usually known as a loss in trading or in speculation *** *** *** 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 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 he made for the purpose of earning the profits. '

9. In Smith v. Lion Brewery Co. Ltd. 1909 (2) K B 912 the Court of appeal by a majority upset the judgment of Channell, J. holding that the sum which the assessee were compelled to pay for the compensation charges was a payment necessary to enable them to earn profits as a brewery company and might properly be deducted from the profits with a view to ascertaining the balance on which income-tax had to be paid The business of the assessee was that of brewers and sellers of beer. The assessee acquired a number of tied houses in order to enable it to sell its beer in larger quantities and to greater advantage. The Licensing Act of 1904 compelled a licence holder to pay the levy That levy formed a fund out of which compensation was to be made to those whose licences were discontinued by no fault of their own but in order to carry out the statutory policy of reducing the number of licensed houses and also to those who owned the houses themselves. They were entitled to share in the compensation and were also hound to contribute to the fund. The licence-holder could deduct a part of it from the rent he paid and his landlord might in turn deduct from the rent he had to pay, and so on, in order that each person interested in the house might contribute to the fund in proportion to the extent of his interest in accordance with the tables set forth in Schedules I, II to the Act. The question before the Court was whether the assessee could deduct the amount which it was obliged to pay as owner of tied houses in respect of the compensation levy authorised by the Act of 1904. According to the judgment of Parwell L. J., who took the same view as Cozens Hardy M. R.

'the compensation levy under the Licensing Act, a portion of which it is sought to deduct, is imposition and made payable as part of the excise. It is paid in the first instance by the tenant, but the landlord is bound to allow the deduction of a proportionate part, according to the length of the term, from the rent. It is, therefore, in effect a statutory imposition on landlord and tenant in proportions varying according to their respective interests and necessarily payable as a term of the use of licensed premises. *** *** It is a payment necessary for the purpose of enabling him to carry on, and to earn, profits in his trade. His trade is the sale of beer by retail, and the brewer's business is the sale of beer wholesale.'

According to his Lordship the profit of the whole-sale trade which was the matter in question 'could not have been made without the tied houses, on the owner of which this statutory payment was imposed. *** *** *** The payment is made because the legislature has compelled it as a term of the ownership of a licensed house, and it is worth the while of the company to acquire houses and pay it in order to increase their own sales of beer in which they have a direct interest and out of the profits of which the Crown claims a share. The tenant makes his own profit by his retail trade, the brewer makes his by his wholesale trade; the levy must be paid by each in his due proportion to enable those profits to be made, and out of each set of profits the Crown claims a share and must allow proper deductions accordingly.' The argument put forward on behalf of the Revenue was that inasmuch as a private owner of a public house could not deduct the compensation levy from his rent the fact that the owner happened to be a brewer should make no difference. This was rejected by Farwell L. J. who said that it was because the brewer put the house to a profitable use that the question arose at all. Kennedy L. J. took a different view. The House of Lords (1911 AC 150) were equally divided in their opinion at the hearing of the appeal with the result that the majority view of the Court of Appeal prevailed.

10. In Morgan v. Tate and Lyle Ltd., 1955 AC 21, the question was whether a company engaged in sugar refining could deduct expenses incurred in a propaganda compaign to oppose the threatened nationalisation of the industry. In other words whether the sum in question was money wholly and exclusively laid out for the purpose of the Company's trade. By a majority the House of Lords held that the object of the expenditure being to preserve the assets of the company from seizure and so to enable it to carry on and earn profits there was no reason in law to prevent the commissioners from finding that the amount was deductible. The cases were elaborately discussed and reference was made to some where it had been held that the expenditure was not deductible because it was not incurred by the tax-payer in his capacity of his trader. Thus for instance payment of a fine was held not to be an ordinary commercial loss: (See Inland Revenue Commissioners v. Warnes and Co. Ltd., 1912 2 KB 444) and insurance against loss of profits owing to strike had been held not to be deductible: Rhymney Iron Co. Ltd. v. Fowler, 1896 2 QB 79. Lord Reid referred to the general test which had been laid down in some cases as to:

'whether 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. It is said that the appellant can succeed in this case on an application of that test because a distinction must be recognised between a person as trader and the same person as owner of his trade. I find that distinction difficult to understand .... I do not see how a person can be owner of the trade unless he is also the trader or how he can be the trader unless he is also the owner of the trade. It therefore, appears to me that there is no real distinction between a person in his capacity of trader and that person in his capacity of the owner of the trade, and that if the appellant is to succeed it must be because the terms of the rule required, in the special circumstances of this case, some modification of the test generally applicable 'Lord Morton who delivered the first judgment put the matter rather tersely when he said,

'apart from authority I should have no hesitation in answering the question just posed in the affirmative. Looking simply at the words of the rule I would ask if money so spent is not spent for the purposes of the Company's trade, for what purpose is it spent If the assets are seized, the Company can no longer carry on the trade which has been carried on by the use of these assets. Thus the money is spent to preserve the very existence of the company's trade

11. The case of Meffatt v. Webb, 16 CoM WLR 120 is instructive. There Section 9 ofthe Income-tax Act (1895) of Victoria (Australia)provided (1) All losses and outgoings actuallyincurred in Victoria by any taxpayer in production of income . .... shall bededucted from the gross amount of eachtaxpayer's income and (2) that in estimatingthe balance of income liable to tax anydisbursements or expenses whatever not beingmoney wholly and exclusively laid out or expended for the purposes of the trade were not to be deductible. The tax payer was a grazier, and during the year in question carried on business as such in Victoria upon lands of the fee simple of which he was during the said year the owner. The lands comprised 18,000 acres and their unimproved value for the purposes of the Land Tax Assessment Act, 1910 was 44,924, on which tax for the financial year ending on June 30, 1911 amounted to 387. This was paid by the taxpayer and sought to be deducted from the gross income derived from his business as a grazier. On behalf of the assessee it was argued:

'The possession of land is necessarily incidental to carrying on the business of a grazier; the payment of land tax is a necessary consequence of the possession of land of taxable value, whether the land is freehold or leasehold: the payment of land tax is therefore, a necessary incident of carrying on the business of grazing. As against this it was contended that 'even if that is so, the payment of land tax is not a payment made wholly and exclusively for the purpose of the trade, it is said: True, the grazier could not carry on his trade without paving it, but he would have to pay it whether he carried on his trade or not, and therefore, it is not an expenditure for the purpose of the trade.'

All the Judges of the High Court of Australia held against the Revenue. After referring to the case of Lion Brewery Co. Ltd. 1902-2 KB 912 Griffith C. J. said:

'The dissenting Lords in that case did not think that there was no close a connection between the business of brewing and the ownership of the houses in respect of which the compensation levy was made, that it could be said that the expenditure was wholly for the purpose of the brewing business. Here no question of nexus arises. 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.'

Barton J. said:

It is only by reason of the necessity of land for his business that he holds this land, and it is only because of his holding it for his business that he necessarily pays the tax, for without the business it cannot be said that he would hold the land at all. In view, then, of the particular facts, I think the payment is incidental to the conduct of the business, and that it is money wholly and exclusively expended for the purposes of his trade.' '

Isaacs J thus posed the question:

'Suppose the Federal Parliament were to lay a tax on the owners of motor cars, and carts, and guns, and dogs and sheep, so that the tax was payable whether these things were employed in trade or not; could it be doubted that the tax would be a real outgoing necessary for the production of the income of a business in which they were all used? The land is as necessary to the business as the personal property. The grass, water, and shelter of that particular landwere indispensable to the production ofthe particular income for the year; with otherland the amount would probably be different;and as the actual gross return could not bereceived without the use of that land, and theuse of land means the use of an instrument towhich is attached by law a compulsive payment, it seems to me to follow naturally thatthe payment made under compulsion of lawin respect of that necessary element of thebusiness income is an outgoing made in theproduction of the income, and in the circumstances here it was made wholly and exclusivelyfor the taxpayer's business.'

Gavan Duffy J. said

It is admitted that the land in question is used by the taxpayer wholly and exclusively for the purposes of his trade as a grazier. In these circumstances the Commonwealth land tax paid in respect of that land on which he carries on that trade is, in my opinion an outgoing actually incurred in Victoria in the production of income.

12. All these cases excepting the last one were noted by the Supreme Court in the case of Commissioner of Income Tax v. Malayulam Plantation Ltd. : [1964]53ITR140(SC) corresponding to : [1964]53ITR140(SC) . The Court there had to consider whether estate duty paid by a foreign Company in respect of the shareholding of a non-domiciled shareholder on his death was deductible as business expenditure. The Company though incorporated outside India carried on business here; most of its shareholders were in the United Kingdom. The Company had to pay various amounts towards estate duty payable on the death of certain shareholders not domiciled in India. The question was whether the sums so paid were deductible out of the business profits of the assessee in computing its assessable income under the Income Tax Act. Under Section 84 of the Estate Duty Act a Company incorporated outside India but carrying on business within India and treated for the purposes of Indian Income Tax Act as a resident was obliged within three months from the receipt of the intimation of the death of a member to furnish to the Controller of Estate Duty particulars in respect of the shares of the deceased member and was to be liable to pay estate duty at the rates mentioned in the schedule to the Act on the principal value of the shares held by the deceased in the Company excepting where the latter was a person domiciled in India and the person accountable had obtained a certificate from the Controller showing that estate duty has been paid or would be paid or that none was due as the case might be. According to the Supreme Court 'in substance the Company is made a statutory agent to pay the estate duty payable in respect of property belonging to another.' For reasons given the Court 'could not accept the contention of the Revenue that the amounts paid by the assessee towards estate duty were not expenditure incurred by it but only amount paid by it on account with a right to recover the same from the person for whose behalf they were paid. The Court however found itself unable to hold that the expenditure was wholly and exclusively for the purpose of the business of the assessee within the meaning of Section 10 (2) (xv) of the Act. It was pointed out that the crucial words of the section were 'for the purposes of such business.' According to the Court this expression was wider in scope than the expression for the purposes of earning profits.' Referring to the test formulated by Lord Davey in Strong and Co., case, 1906 AC 448 that the expenditure must be for the purpose of earning the profits the Supreme Court said that the expression 'for the purpose of the business' was wider in scope than the expression 'for the purpose of earning profits'. According to the Court the former expression

'may take in not only the day to day running of a business but also the rationalisation of its administration and modernization of its machinery; it may Include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However, wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business. In the present case the Company, as a statutory agent or the deceased owners of the shares, paid the sums payable by the legal representatives of the deceased shareholders. The payments have nothing to do with the conduct of the business. The fact that on his default, if any, in the payment of the dues the revenue may realise the amounts from the business assets is a consequence of the default of the assessee in not discharging his statutory obligation, but it does not make the expenditure any the more expenditure incurred in the conduct of business.'

13. Kumbakonam Electric Supply Corporation Ltd. v. Commissioner of Income-tax Madras : [1963]50ITR809(Mad) was a case very similar to the case before us. There a Division Bench of the Madras High Court held that the payment of wealth tax by a Company carrying on a business of purchase and sale of electric energy was not an allowable expenditure under the Income Tax Act. It was observed that the primary question was:

'Does it constitute part of the Company's 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.'

The learned Judges referred to the decision in : [1961]41ITR545(SC) According to their Lordships

'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 owner-ship of the assets and however necessary or compelling it may be that a trader should own and possess 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.'

14. With great respect I find myself unable to concur in the above opinion. It may be that wealth tax is payable merely because of ownership of wealth and has to be paid whether or not that wealth is used for a business purpose A businessman who owns and holds the assets has to own and hold the same for his business and even if the mere holding of it makes him liable to pay a tax the outgoing must be considered to be necessary for his business when he pursues the same and be considered to be a payment wholly and exclusively incidental to the carrying on of the business

15. Nor, in my opinion, is there anything in the observations of the Supreme Court in the case of Malayalam Plantation Ltd., : [1964]53ITR140(SC) quoted above which justifies arriving at a different conclusion. It was argued on the strength of the said observations that the payment of statutory dues (i.e. wealth tax) was not a pre-condition of the carrying on of the business and the fact that in default of payment of wealth tax the assets might be put up to sale and cause loss to the businessman was not a circumstance to be taken into consideration The observations of the Court cannot be dissociated from the facts in which they were made. According to the Supreme Court acts other than those mentioned might be incidental to the carrying on of a business If the assets had to be held for the purpose of the business and statutory dues had to be paid because of the holding of the assets I fail to see how the payment can be said to be other than for the purpose of the business. It was also argued that according to the dictum of the Supreme Court the expenditure must be incurred by the assessee in his capacity as a person carrying on the business which according to the Revenue was different from the capacity of a person owning the assets. Again I find myself unable to accept this contention. What the Court was at pains to point out in Malayalam Plantation case, : [1964]53ITR140(SC) was that the tax which the assessee had to pay in that case was not in the conduct of his own business but as a statutory agent of another The same remark applies to Abdullabhai Abdul Kadar's case : [1961]41ITR545(SC) Here the tax has to be paid because of the ownership of the assets of the business, in other words the ownership of the business itself. In this connection the observations of Lord Reid in 1955 AC 21 quoted above are apposite. If the owning of assets is absolutely essential for the purpose of conducting a business or trade the capacity of the ownership of the assets and the capacity of the trader who carries on his trade with the assets must be held to be the same.

16. A very recent judgment of the Supreme Court supports the reasoning adopted by us in this case. In State of Madras v. G. J. Goelho : [1964]53ITR186(SC) a question arose as to whether the entire interest paid by the assessee on moneys borrowed for the purpose of purchasing some coffee, tea and rubber plantations should be deducted from his gross income in computing his agricultural income under the Madras Plantations Agricultural Income Tax Act. In applying Section 5 (e) of that Act which was worded very similarly to Section 10 (2) (xv) of the Income Tax Act the Court held that the interest paid did not savour of the nature of a capital expenditure, nor was it personal to the assessee Recapitulating the test formulated in Malayalam Plantation case, : [1964]53ITR140(SC) it was observed that it was 'impossible to dissociate the character of the assessee or the owner of the plantation and as a person working the plantation. The assessee had bought the plantation for working it as a plantation, i.e for growing tea, coffee and rubber. The payment of interest on the amount borrowed for the purchase of the plantation when the whole transaction of purchase and working of the plantation is viewed as an integrated whole, is so clearly related to the plantation that the expenditure can be said to be laid out or expended wholly and exclusively for the purpose of the plantation. From the agricultural receipts must be deducted all expenses which in ordinary commercial accounting must be debited against the receipts.' In the result the admissibility of the expenditure under Section 5 (e) was upheld.

17. The judgment of the Kerala High Court in : [1964]51ITR47(Ker) which follows the judgment of the Madras High Court in : [1963]50ITR809(Mad) need not be separately discussed.

18. It is necessary to note in brief some minor considerations urged by the parties. On behalf of the Revenue reference was made to Section 12 of the Excess Profits Tax Act and Section 10 of the Business Profits Tax Act under which special provision was made for deduction of certain impositions in computing the business income under the Indian Income Tax Act and it was argued that the absence of a similar provision in the Wealth Tax Act showed that the Legislature did not intend that the imposition under the last mentioned Act was to be deductible. In my view this argument cannot be accepted. The yardstick for allowing expenditure under Section 10 (2) (xv) is the test whether it was incurred 'for the purpose of the business' the meaning whereof has been expounded in the various decisions referred to. If the expenditure passes that test it must be allowed.

19. Again the reference by the learned advocate for the assessee to the schedule to the Act that in certain contingencies the tax was not to be payable because of deficiency of profits cannot be a solid ground for urging that the expenditure was incurred for the purpose of earning profits. The schedule merely provides for cases where the Legislature thought it fit to grant the assessee relief from the operation of Wealth Tax Act because of the paucity of profits. The provisions in the schedule to which our attention was drawn do not lead to hold that the imposition was to be an outgoing out of profits alone.

20. In my view, the Appellate Tribunal came to the right conclusion in this case and the answer to the question framed should be in the affirmative and in favour of the assessee who will have the costs of this reference.

Masud, J.

21. I agree.


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