K. L. ROY J. - By this reference under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act.) the Income-tax Appellate Tribunal has referred the following two question of law to this court :
'1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,05,679 being the wealth-tax paid by the assessee, was an admissible deduction in computing the assessees income under section 12 of the Indian Income-tax Act, 1922 ?
2. Whether, on the facts and in the circumstances of the case, the assessee is entitled to rebate in terms of section 15 B of the Indian Income-tax Act, 1922, in respect of the sum of Rs. 97,000 being the value of the shares donated by the assessee to Jaya Shree Charity Trust, a charitable institution to which section 15 B applies ?'
The assessment year concerned in this reference is 1960-61, for which the relevant accounting year is the financial year ending on the 31st March, 1960. The assessee is a Hindu undivided family. It derives income from dividends and interest on its investments, which is assessed under section 12 of the Act. The assessee claimed deduction of Rs. 1,05,679, being the wealth-tax paid by it during the accounting period on the value of its shares and other investments, as admissible expenditure in the computation of its income under section 12 of the Act. It also claimed a rebate under section 15 B of the Act on the donation, in the form of gift of certain shares valued at Rs. 92,000 to Jaya Shree Charity Trust. The shares so gifted were admittedly acquired by the assessee out of its savings of the earlier years. There was also no dispute that Jaya Shree Charity Trust was an institution, the donations to which attracted the provision of section 15B. The income-tax Officer rejected both the claims of the assessee. He was of the opinion that wealth-tax was not an admissible deduction in computing the assessees income under section 12. He also denied the rebate on the donation to Jaya Shree Charity Trust. The assessees appeal to the Appellate Assistant Commissioner against the aforesaid order of assessment was infructuous as the Appellate Assistant Commissioner upheld the order of assessment. On further appeal to the Tribunal, the assessee claimed that the payment of wealth-tax was incurred solely for the purpose of making or earning the income under section 12 and was, as such, an allowable deduction under section 12(2). The Tribunal rejected its contention on the ground that wealth-tax fell on the assessee as the owner of assets and not as an incidence to the earning of income. It was a liability to which all owners of properties were exposed whether they earned any income therefrom or not. The Tribunal also rejected the assessees claim for rebate under section. 15 B relying on the decision of this court in Commissioner of Income-tax v. Samnugger Jute Factory Co. Limited, where it had been held that a sum contributed to the Gandhi Memorial Fund, which was an institution to which donations were entitled to rebate under section 15 B, was not entitled to rebate under that section as it was not contributed by the assessee from its earnings in the relevant previous year but was paid out of its savings of a year prior to the previous year. Accordingly, the Tribunal dismissed the assessees appeal.
At the instance of the assessee the aforesaid questions of law have been referred to this court by the Tribunal.
Dr. Pal, the learned counsel for the assessee, attempted to distinguish the decision of the Supreme Court in Travancore Titanium Product Ltd. v. Commissioner of Income-tax on the ground that there it had been held that wealth-tax paid on the net wealth of an assessee was not a permissible deduction under section 10 (2) (xv) of the Act. Dr. Pal contended that in that case the Supreme Court made a distinction between a person who carried on business and a person who was the owner of assets. He relied on the following passage at page 282 of the report for his contention :
'The position may, therefore, be summarised thus : the nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and be laid out by the taxpayer in his character as trader. To be a permissible deduction there must be a direct and intimate connection between the expenditure and the business, that is, between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business.
In the light of the principle the amount of tax paid on the net wealth of an assessee under the Wealth-tax Act is not a permissible deduction under section 10(2) (xv) of the Indian Income-tax Act in his assessment to income-tax, for tax is imposed under the Wealth-tax Act on the owner of assets and not on any commercial activity. The charge of the tax is the same, whether the assets are part of or used in the trading organisation of the owner or are merely owned by him. The assets of the taxpayer, incorporated or not, become chargeable to tax because they are owned by him and not because they are used by him in the business.'
Dr. Pal submitted that income-tax is charged under section 12 on the income from dividends and interest from investments on the owner of the shares and of the investment. There is no question of carrying on any business with such shares or with such investments. There is no question of any expenditure incurred by the assessee in such a case, being an expenditure of the business and not an expenditure which the assessee is liable to meet in his character as the owner of such assets. Section 12 (2) of the Act is to the following effect.
'Such income, profit and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains and further in the case of any income by way of dividend, for any reasonable sum paid by way of commissioner or remuneration to a banker or any other person realising such dividend on behalf of the assessee...'
Dr. Pal submitted that under the aforesaid sub-section expenditure incurred solely for the purpose of making or earning the income is allowable. Under section 10 the concept is entirely different. Under the latter section only expenditure incurred solely for carrying on the business is allowable. In the case of income from dividends, for example the shares are the source of the dividend. If there was a statutory liability on the owner of the shares to pay tax on these shares, the tax paid would be an expenditure incurred for earning the dividends.
In support of his contention that tax charged on the assets was an admissible deduction under section 12(2), Dr. Pal referred us to the decision of the Madras High Court in Commissioner of Income-tax v. Jagannatha Govindas. In that case the assessee leased out a picture theatre together with the cinema equipment, machinery and furniture. He was assessed to income-tax under section 12 in respect of the rent realised under the lease and claimed deduction of the municipal tax paid for the property. The Madras High Court held that the municipal tax paid was allowable as deduction under section 12 (2) with the following observation.
'The point we have to consider accordingly is whether the municipal taxes paid by the assessee can come within the description of any expenditure (not being in the nature of capitals expenditure) incurred solely for the purpose of making or earning such income, profits or gains. We are of the view that in a lease of this kind, the income from which the department seeks to tax as income from other sources, it is not the category of income labeled as municipal tax that is determinative of the question. If the assessment is under section 12.... the assessee should be entitled to an allowance of all those item of expenditure which have been incurred for the purpose of earning that income. We are unable to see how the payment of municipal tax which is a statutory levy and which the assessee is in law bound to lazy can be taken out of the expression expenditure incurred for the purpose of earning the income. We are conscious that in a manner of speaking this expenditure is not an outlay which the assessee voluntarily makes in order to enable him to earn that income. But that it is an involuntary item of expenditure which the relevant statute enjoins upon him to pay does not to our minds render it any the less an allowable expenditure.'
Mr. S. Mukherjee, appearing for the Commissioner of Income-tax, referred us to the decision of the Supreme Court in Travancore Tribunal Product, where at page 282 the court referred to its earlier decision in Commissioner of Income-tax v. Malayalam Plantations, where it had been observed :
'The expression for the purpose of the business is wider in scope than the expression for the purpose of earning profits. Its range is wide : It may take in not only the day to day running of a business but also the rationalisation of its administration and modernisation of its machinery;.... 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.'
Mr. Mukherjee submitted that even under the wider expression 'for the purpose of the business', the Supreme Court has held in that case that wealth-tax paid by the assessee was not allowable as deduction in computing his income from business. Mr. Mukherjee further submitted that the tax paid on the value of the asset could not be said to be an expenditure incurred for earning income from those assets. The point is not free from difficulty. We agree with Dr. Pal that the ratio laid down by the Supreme Court in Travancore Titanium case is not applicable to the case of an assessee assessed under section 12 but we are unable to accept Dr. Pals further contention that the wealth-tax paid by an assessee in respect if his shares and investments is an expenditure incurred solely for the purpose of earning dividends from the shares or interest from the investments. The said dividends and interest would be earned whether the assessee paid the tax or not. One of the consequences of the failure to pay the tax might be that the assets would be attached and sold for realization of the tax. But that is one of the consequences of the assessees failure to meet its statutory liability for paying the tax. It could not be said that the payment of wealth-tax was an expenditure and even if it was an expenditure that it was an expenditure incurred solely for the purpose of earning income from dividend and interest. With respect we are unable to agree with the observations of the Madras High Court in the case of Jagannatha Govindas, that the payment of municipal tax, which is a statutory levy and which the assessee is in law bound to pay, is covered by the expression 'expenditure incurred for the purpose of earning such income.'
As pointed out by the Supreme Court, the allowance under section 12(2) is much more restricted than the allowance under section 10(2) (xv) and is confined only to the expenses incurred for earning the income. Any expenditure or outlay for preserving the assets would not qualify for allowance under that section. In our opinion, the Tribunal was correct in disallowing the assessees claim for deduction of wealth-tax.
So far as the second question is concerned, our attention was drawn to the decision of this court in Commissioner of Income-tax v. Samnugger Jute Factory Company Ltd., on which reliance was placed by the Tribunal. In that case this court held that the sums claimed for allowance of rebate as donations to recognised charitable institutions must be sums assessable in their nature, being part of the assessable income of the relative accounting year and sums brought into the assessment and about to be brought to charge. As, in this case, admittedly the shares donated by the assessee were acquired out of its past savings, the value of these shares would not be entitled to rebate under section 15B. The aforesaid decision of this court was given in 1953 and still stands unchallenged. Dr. Pal stated that some High Courts have distinguished the aforesaid decision but he could not resist out answering the question against his client as we are bound to follow the decision of this court which has stood for such a long time.
In the result, the questions referred to this court are answered as follows :
Question No. 1 in the negative and against the assessee.
Question No. 2 also in the negative and against the assessee.
The assessee to pay the costs of this reference.
BANERJEE J. - I agree.