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PETITIONER: COMMISSIONER OF INCOME-TAX, KERALA

       Vs.

RESPONDENT: MALAYALAM PLANTATION LTD.

DATE OF JUDGMENT: 10/04/1964

BENCH: SUBBARAO, K. BENCH: SUBBARAO, K. SHAH, J.C. SIKRI, S.M.

CITATION:  1964 AIR 1722            1964 SCR  (7) 693  CITATOR INFO :  R          1965 SC 321  (15)  R          1966 SC1053  (17)  R          1966 SC1250  (6)  F          1967 SC 444  (12)  R          1979 SC1291  (8)  F          1982 SC 757  (8)

ACT: Income  Tax-Assessee treated as agent - Estate duty of  non- resident  paid  by assessee-If  an  allowable  deduction-Ex- pression "for the purpose of the business"-Meaning of Indian Income-tax Act, 1922 (11 of 1922), s. 10(2)(xv)-Estate  Duty Act, 1953 (34 of 1953), s. 34.

HEADNOTE: For  the  two accounting periods the  assessee,  a  resident company,  incorporated  outside  India  paid  -estate   duty payable  on  the  death of its  certain  share  holders  not domiciled  in India and debited the said amounts to  revenue in its accounts in ascertaining the profits and gains of its business  for  the  said  years.   The  Income-tax   Officer included the said amounts so paid towards estate duty in the profits and gains of the company for the said two accounting periods  and assessed the company to income-tax for  1955-56 and  1956-57 on that basis.  The appeals by the assessee  to the  Appellate Assistant Commissioner were dismissed but  on further  appeal, the Appellate Tribunal set aside  the  said orders and held that the assessee was entitled to deduct the said amount in computing its profits.  On an application  by the  Commissioner of Income-tax, the Tribunal stated a  case under s. 66(1) of the Act to the High Court and referred the following  question of law for its opinion: "Whether on  the facts and in the circumstances ,of the case, the estate duty paid  by  the company under s, 84 ,of the Estate  Duty  Act, 1953,  is a revenue expenditure deductible in computing  the assessee’s  business  income for the  ,assessment  years  in question."  The  High  Court agreed with  the  view  of  the Tribunal  and answered the question in the affirmative.   On appeal  by  special  leave it was urged  on  behalf  of  the appellants,  (1) that the sum paid by the assessee under  s. 84  of  the  Estate Duty Act were  not  expenditure  of  the

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assessee  company and therefore, they could not be  deducted from its profits in computing its assessable income under s. 10(2)(xv)  of the Act; and (2) that even if it  was  revenue expenditure,  it  was  not laid out or  expended  wholly  or exclusively  for  the  purpose of  the  assessee’s  business within the meaning of the said sub-clause. Held: (i) There was nothing on the record to show whether in England,  where  the  concerned  share  holders  died,   the resident  company could recover the amount representing  the estate   duty   paid  by  it  in  India   from   the   legal representative  of the deceased share  holders.   Therefore, the assessee who, as a statutory agent paid to the State the estate  duty,  could  not recover the same  from  the  legal representative  of the deceased non-resident share  holders. In that situation the company would be out of pocket to  the extent  it  paid  the  estate  duty  of  the  said  persons. Therefore,  it cannot be held that the amounts paid  by  the assessee  towards estate duty were not expenditure  incurred by  it, but only amounts paid by it on account with a  right to  recover  the same from the persons on  whose  behalf  it paid.  (ii)The  expression"  for the purpose  of  the  business"in s.10(2)  (xv)  of  the  Act  is  wider  in  scope  than  the expression "for the purpose of earning profits".  Its  range is wide: it may 694 take  in not only the day to day running of a  business  but also   the   rationalization  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  pre- condition  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 carrying on 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 amounts in question were  paid  by the  assessee as a statutory agent to discharge a  statutory duty unconnected with the business, though the occasion  for the  imposition  arose  because  of  the  territorial  nexus afforded  by  the accident of its doing business  in  India. Therefore, it must be held that the estate duty paid by  the respondent was not an allowable deduction under s. 10(2)(xv) of the Act. Case law reviewed.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 384 and 385 of  1963.   Appeals by special leave from the  judgment  and Decree  dated January 19, 1961, of the Kerala High Court  in Income-tax Referred case No. 20 of 1959. K.   N.  Rajagopal  Sastri  and  R.  N.  Sachthey,  for  the appellant. Bishan  Narain,  G.  B.  Pai,  T.  A.  Ramachandran,  J.  B.

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Dadachanji,  0. C. Mathur and Ravinder Narain, for the  res- pondents. April 10, 1964.  The judgment of the Court was delivered by SUBBA  RAO, J.-These two appeals by special leave raise  the question  whether  the  estate duty  paid  by  the  resident Company,  hereinafter  called  the  assesses,   incorporated outside  India, on behalf of members not domiciled in  India is  deductible from its profits in computing its  assessable income  under  s. 10(2)(xv) of the  Indian  Income-tax  Act, 1922, hereinafter called the Act. The  material  facts  are not in dispute  and  they  may  be briefly stated.  The assesses is a resident Company incorpo- rated  outside India.  Most of its shareholders are  in  the United  Kingdom.  During the accounting period ending  March 31,  1955, it paid pound 1,302-9-4 and pound  1,303  towards estate duty which was payable on the death of certain share- holders  who  were  not domiciled in  India.   The  assessee debited  the  said  amounts to revenue in  its  accounts  in ascertain- 695 ing the profits and gains of its business for the said year. Similarly, for the accounting year ending March 31, 1956, it paid a sum of pound 3,809-1-5 towards estate duty payable on the  death  of  certain shareholders and  debited  the  said amount  to  revenue  in its  accounts  in  ascertaining  the profits  and  gains  of its business  for  that  year.   The Income-tax Officer included the said amounts so paid towards estate duty in the profits and gains of the company for  the said  two  accounting periods and assessed  the  company  to income-tax  for  1955-56  and 1956-57 on  that  basis.   The appeals preferred by the assessee to the Appellate Assistant Commissioner  were  dismissed.   On further  appeal  to  the Appellate Tribunal it held that the assessee was entitled to deduct the said amount in computing its profits; and on that finding  it set aside the orders of the Appellate  Assistant Commissioner.  On an application made by the Commissioner of Income-tax,  the Appellate Tribunal stated a case  under  s. 66(1) of the Act to the Kerala High Court, and referred  the following question of law for its opinion:               "Whether on the facts and in the circumstances               of  the  case,  the estate duty  paid  by  the               Company  under Section 84 of the  Estate  Duty               Act, 1953, is a revenue expenditure deductible               in  computing the assessee’s  business  income               for the assessment years in question?" The  High  Court  agreed  with the  view  expressed  by  the Appellate Tribunal and answered the question referred to  it in  the affirmative.  The present appeals by  special  leave have been filed against the said order of the High Court. Mr. Rajagopala Sastri, learned counsel for the  Commissioner of  Income-tax, raised before us the following  two  points; (1) The sums paid by the assessee under s. 84 of the  Estate Duty  Act, 1953, are not expenditure of the  assesseeCompany and, therefore, they cannot be deducted from its profits  in computing  its assessable income under s. 10(2)(xv)  of  the Act;  and (2) even if it is revenue expenditure, it  is  not laid  out or expended wholly or exclusively for the  purpose of  the assessee’s business within the meaning of  the  said sub-clause. Mr.  Bishan  Narain,  learned counsel  for  the  respondent, supported the judgment of the High Court and contended  that the said estate duty was revenue expenditure incurred by the assessee as it was put out of pocket to that extent and that it  had  not  been proved that the  assessee  could  legally recover  the said amounts from the legal representatives  of

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the deceased shareholders.  He further argued that 696 he said expenditure was wholly and exclusively for the  pur- pose  of  the  assessee’s business  within  the  meaning  of s.10(2)(xv) of the Act inasmuch as it discharged its  statu- tory obligation in order to preserve the assets of the  com- pany. The  question raised turns upon the provisions of  s.  10(2) (xv) of the The act. It reads :               Section 10.  Business-The tax shall be payable               by  an  assessee under the head  "Profits  and               gains of business, profession or vocation"  in               respect  of  the  profits  and  gains  of  any               business, profession or vocation carried on by               him.               (2)   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  clauses               (1) to (xiv) inclusively, and not being in the               nature  of  capital  expenditure  or  personal               expenses of the assessee) laid out or expended               wholly or exclusively for the purpose of  such               business, profession or vocation." The  first  facet of the argument turns  upon  the  question whether the estate duty paid by the assessee is an  expendi- ture incurred by it within   the   meaning   of   the   said provision. Under s. 5 of the  Estate  Duty Act the  property of every person dying after   the  commencement of the  said Act  shall be liable to a duty called "estate duty"  at  the rates  fixed in accordance with s. 35 thereof.  Under s.  21 of the said Act there shall not be included in the  property passing  on the death of the deceased, inter  alia,  movable property situated outside the territories to which the  said Act  extends at the time of the death of the person.   Under s.  53  of the said Act, where any property  passes  on  the death  of the deceased, every legal representative  to  whom such  property  so  passes for any  beneficial  interest  in possession  or  in  whom any interest  in  the  property  so passing  is at any time vested and others mentioned  in  the section  shall  be accountable for the whole of  the  estate duty  on  the  property passing on the  death.   Section  84 thereof  is  aimed to reach the property of a  member  of  a company  dying outside India: the section  before  amendment read: Section  84.   Company to furnish  particulars  of  deceased inemberrs to the Controller-               Where  a  company incorporated  outside  India               carried  on  business in  the  territories  to               which  this Act extends and has been,  treated               for the               697               purposes  of the Indian income-tax  Act,  1922               (Xi of 1922),as resident for two out of  three               completed  assessments immediately  preceding,               such company shall, within three months of the               receipt of intimation of the death of a member               dying after the commencement of this Act, fur-               nish to the Controller such particulars as may               be prescribed in respect of the shares of  the               deceased  member in the company, and shall  be               liable  to  pay  estate  duty  at  the   rates               mentioned in Part III of the Second  Schedule,               on  the principal value of the shares held  by

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             the  deceased in the company except  in  cases               where   the  deceased  member  was  a   person               domiciled in India and the person  accountable               has obtained a certificate from the Controller               showing that either the estate duty in respect               thereof has been paid or will be paid or  that               none is due, as the case may be." Under this section in the circumstances mentioned therein  a company  is  liable  to pay estate duty in  respect  of  the shares of the deceased member of the company on the  princi- pal value of the share held by the deceased in the  company: under this section a statutory obligation is imposed on  the company  to pay the estate duty on the shares of a  deceased non-resident  member.  If such a member of the  company  had died  in India, subject to the conditions mentioned  in  the section,  the company would not be liable to pay the  estate duty  payable  on  the  shares held  by  the  deceased.   In substance  the company is made a statutory agent to pay  the said  duty  payable  in respect  of  property  belonging  to another.  Section 77 of the Estate Duty Act enables a person authorised or required to pay estate duty in respect of  any property  to transfer the said property for the  purpose  of paying the duty.  This section cannot have extra-territorial operation.   Prima  facie the company  cannot  transfer  the shares  or the property of a person domiciled in  a  country outside  India.  Nor sub-s. (2) of s. 77, which says that  a person  having  an interest in any property,  who  pays  the estate  duty in respect of that property, shall be  entitled to  the like charge, as the estate duty in respect  of  that property had been raised by means of a mortgage to him,  has application, for it cannot be said that the company has  any legal  interest in the shares owned by a third party.   That apart,  -the  said  sub-section  also  cannot  have   extra- territorial operation.  Nothing has been placed before us to enable  us to ,.come to the conclusion whether  in  England, where the concerned shareholders died, the resident  company could  recover the amount representing the estate duty  paid by it in      698 India from the legal representatives of the deceased  share- holders.  We, therefore, assume that the assessee who, as a statutory  agent pays to the State the estate  duty,  cannot recover  the  same  from the legal  representatives  of  the deceased  non-resident shareholders.  In that situation  the company   would  be out of pocket to the extent it paid  the estate  duty  of the said persons.   We  cannot,  therefore, accede  to  the contention of the learned  counsel  for  the appellant  that  the amounts paid by  the  assessee  towards estate  duty were not expenditure incurred by it,  but  only amounts  paid by it on account with a right to  recover  the same from the persons on whose behalf it paid. The  next  question  is whether  the  said  expenditure  was expended  wholly  and  exclusively for the  purpose  of  the business of the assessee within the meaning of s.  10(2)(xv) of  the Act.  The crucial words of the section  relevant  to the present enquiry are "for the purpose of such  business." Subsection (2) cl. (xv) is a residuary clause which provides for  allowing the items of business expenditure not  covered by  the  other clauses of sub-s. (2) of s. 10  of  the  Act. Beforethe  Amending  Act  of  1939,  the  language  of   the predecessor of this clause read thus:               "  not  being in the nature of  capital  gains               incurred  solely, for the purpose  of  earning               such profits or gains." The Amending Act of 1939 substituted the present clause  and

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made it more comprehensive by using the expression "for  the purpose  of such business".  Some of the decisions cited  at the  Bar, both English and Indian, throw some light  on  the construction of the said expression and we would, therefore, briefly notice them. The House of Lords in Strong and Company of Romsey,  Limited v. Woodifield(1) construed a corresponding provision in  the Income-tax  Act  of the United Kingdom, the,  relevant  part whereof  read:  "money wholly and exclusively  laid  out  or expended  for  the  purposes of  such  concern."’  There,  a brewing  company, which also owned licensed houses in  which it  carried on the business of innkeepers, incurred  damages and  costs  to  the  amount of pound  1,490  on  account  of injuries caused to a visitor staying at one of its houses by falling  in of a chimney.  The House of Lords held that  the damages  and  costs  were not allowable as  a  deduction  in computing  the  company’s profits for  income-tax  purposes. The learned Lord Chancellor said:               "They  cannot be deducted if they  are  mainly               incidental to some other vocation, or fall  on               the-,               (1)   (1906) 5 T.C. 215, 219, 220.               699               trader in some character other than that of  a               trader." Lord  Davey,  whose  dictum was the basis for  some  of  the subsequent  decisions  in  that country,  referring  to  the expression "for the purpose of trade" observed as follows:               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." Lord  Davey’s  definition appears to be much  narrower  than that  of the Lord Chancellor, for the former  restricts  the expression  to  mean that the expenditure should  have  been made  only for the purpose of earning profits.  Finlay,  J., in  Allen v. Farquharson Brothers Limited(1),  noticed  that the qualifictaion "for the purpose of earning profits" was a slight expansion of the words of the statute, though he  ex- pressed the view that it brought out the real import of  the relevant  section.  In Rowntree and Company, Ltd. v.  Curtis (H.M.  Inspector of Taxes)(2), in disallowing the  deduction claimed  by a company of a sum set aside for the  relief  of ,the  invalid  employees,  Rowlatt,  J.,  applied  the  test whether the said expenditure incurred by the company was for the  purpose  of earning profits.  In Cooke  v.  Quick  Shoe Repair Service(3), the court allowed a deduction in  respect of  sums  paid  by the respondent-firm  in  discharging  the liabilities  of the business outstanding at the date of  the said respondent purchased the business from a third party on the  ground that the said expenditure, having been  incurred for the purpose of preserving the goodwill and for  ensuring the  continuity  of supply of raw-material and  labour,  was wholly  and  exclusively  laid out for the  purpose  of  its business.   After  referring to  earlier  decisions,  Croom- Johnson, J., made the following observation:               Here is a payment made in the circumstances of               this  case  in  order to ensure  a  supply  of               leather  for the business, a payment  made  in               order  to  ensure  a  continuance  of   labour               willing  to be employed in this business,  and               payment  for rent in order to ensure that  the               landlord’s   consent  to  assignment  of   the

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             premises,   of  the  premises  in  which   the               business  was  carried on, should not  be  re-               fused.  I find it quite impossible to say that               there   is  no  evidence  to   justify   those               findings." (1) 17 T.C. 59. 65.                 (2) (1924) 8 T.C. 678. (3)  (1949) 30 T.C. 460. 466. 700 Here  it will be noticed that the learned Judge went  beyond the  limited scope given by Lord Davey to the expression  in the statute and did not confine it to the amounts spent only for earning profits, but to expenditure incurred in  connec- tion  with  the business.  Where a company incurred  an  ex- penditure in defending its title to property, it was held in Southern  (H.M. Inspector of Taxes) v.  Borax  Consolidated, Ltd.(1)  that the said amount was spent wholly  and  exclu-- sively  for  the  purpose of the company’s  trade  and  was, therefore,  an allowable deduction for the purpose  of  com- puting  the profits of the company for income-tax  purposes. This decision gives a more liberal meaning to the expression "for  the  purpose  of the trade" than that  given  by  Lord Davey.  "Purpose" of the trade includes the purpose to  pro- tect  the assets of the company carrying on the trade.   The House  of  Lords  resurveyed the legal  position  in  Morgan (Inspector of Taxes) v. Tate and Lyle Ltd.(2) in the context of the questions whether the expenditure incurred by a  com- pany  engaged in sugar refining in a propaganda campaign  to oppose  the threatened nationalization of the industry  was, an  admissible deduction.  Lord Morton, after  referring  to the relevant case-law and to Lord Davey’s formula, made  the following observations:               "..........this    seeems  to  me  to  be   an               assumption   wholly     unwarranted   by   the               evidence.    There  is  no  evidence  that   a               transfer  of the assets to a national body  or               authority  would  not  destroy  or   adversely               affect the company’s business.................               It  is  clear  on the  authorities  that  Lord               Davey’s  formula includes expenditure for  the               purpose  of’  preventing a person  from  being               disabled from carrying on and earning  profits               in the trade." Lord Reid laid down the relevant test thus:               "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." This  decision  also restated the two tests namely (i)  that the  expenditure should be for carrying on the  business  to earn  profits  in the trade, and (ii) that  the  expenditure shall’  be  incurred by the assessee in his  capacity  of  a person (1)  (1942) 10 T.T.R. (Suppl.) 1, S. (2 ) (1954) 26 I.T.R. 195, 205, 206, 219. 701 carrying  on  the business.  Lord Greene, M.R.,  in  Rushden Heel Co., Ltd. v. Keene(1) reaffirmed the second test in the following words:               "I  find,  however, in  Strong  and  Company’s               case(2)  what  appears  to me to  be  a  clear               answer to the present appeal.  It is, I think,

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             a matter not of dictum but of decision in that               case  that an expense is not deductible if  it               falls on a trader in some character other than               that of a trader.  This was the ground of  the               opinion  of  Lord Loreburn, L.C.,  with  which               Lords  Macnaghten and Atkinson agreed.   Their               Lordships  held  that  the  expense  there  in               question  fell  upon the appellants  in  their               character not of traders but of householders." In  Smith  v. Lion Brewery Co., Ltd.(3),  the  question  was whether  a brewery company, which was owner and lessee of  a number of licensed premises where business was carried on on the  tide-house  basis,  was  entitled  to  deduct  for  the purposes   of  income  tax  its  liability  in  respect   of compensation  fund charges under the, Licensing  Act,  1904. It  was contended by the Crown that the liability  to  which the  Company became subject was in its capacity as  landlord of  the property and not as trader carrying on the trade  of brewer.   When the case ultimately came up before the  House of Lords, the House was equally divided.  The view of two of the members who agreed with the view of the Court of  Appeal prevailed.  The basis of the judgment was that the liability was wholly and exclusively related to the carrying on of the company’s  business, because on the facts of that  case  the company had assumed the position of landlord for the purpose of its trade.  If the finding was that the company paid  the tax  in  its capacity as landlord as opined by  the  learned Lords  who dissented, the result would have been  the  other way.   In Harrods (Buenos Aires) Ltd. v.  TaylorGooby  (H.M. Inspector  of  Taxes)(4), Buckley, J.,  covered  the  entire ground  over again in the context of a question whether  the appellant-company   therein  which  was   incorporated   and resident in the United Kingdom and carrying on the  business of  a large general stores in Buenos Aires, having  paid  in Argentina  a tax known as the "substitute tax" to  which  it was liable, could claim deduction under the Income-tax  Act, 1952  (15 and 16 Geo.  VI and 1 Eliz. 1, c. 10, s.137  (a)). The learned judge held on the facts of that case (1) (1947) 30 T.C. 298, 316.    (2)  (1905) 5 T.C. 215. (3)  (1910) 5 T.C. 568. (4)   Appeal No. 2048 (Ch.  D.) decided on 25th March, 1963 (unreported). 702 that incurring liability for that tax was a pre-condition of the Company’s earning profits in the Argentina, for  without incurring liability for that tax the Company could not carry on  business in the Argentina at all.  On that  finding  the learned  Judge  came to conclusion that it was  a  liability which  the  Company had undertaken for the  purpose  of  its trade,  and  was, therefore, a payment made wholly  and  ex- clusively  for the purpose of the company’s trade.  It  will be seen that in that case the tax was paid by the Company in its  capacity as company doing business and unless that tax was  paid the company could not carry on its business.  The two  tests laid down are satisfied. Pausing here, we shall briefly recapitulate the legal  posi- tion in England. The relevant wordings of section with which the English Judges were concerned are, in effect, similar to the  terms  of s. 10(2)(xv) of the  Indian  Income-tax  Act, 1922.   The  test  laid down by Lord  Davey  in  Strong  and Company  of  Ramsey,  Ltd.  v.  Woodifield(1),  namely,  the disbursement  must  be  made  for  the  purpose  of  earning profits,  has been accepted and followed throughout,  though the  content of that test has been expanded to meet  diverse situations.   Broadly, the English courts applied two  tests

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to  ascertain  whether a deduction was permissible  or  not, namely.  (i)  whether the expenditure was incurred  for  the purpose  of  carrying on of the business  and  for  removing obstacles  and impediments in the conduct of  the  business, and  (ii)  whether  the  assessee paid  the  amount  in  his capacity as businessman or in his personal capacity. Now  coming to the Indian decisions, a Devision  Bench    of the  Bombay High Court in Tata Sons Ltd. v. Commissioner  of Income-tax,  Bombay  (2  )  held that  the  share  of  bonus voluntarily  paid  by  a company, which  held  the  managing agency  of another company, to some of the officers  of  the managed   company   was  a   permissible   deduction   under s.10(2)(xv)  of the Act.  The reason for the  conclusion  is stated thus:               "But having considered the whole case and  the               question  submitted to us I am satisfied  that               looking purely at it from the point of view of               commercial   principles  what   the   assessee               company has done is something which had as its               object increasing the profits of the Tata Iron               and  Steel Co.  nd thereby increasing its  own               share of the commission." (1)  (1906) 5 T.C. 215. (2) (1950) 18 I.T.R. 460, 472. 703 In Badridas Daga v. Commissioner of Income-tax(1), where the agent  of  the assessee misappropriated his  money  and  the assessee claimed the part of the amount misappropriated  and not  recovered  from  the  agent as  a  deduction  under  s. 10(2)(xv)  of  the Act for the purpose of  income-tax,  this Court  held that it was not allowable under s. 10(2)(xi)  or s.10(2)(xv) of the Act. Venkatarama Ayyar ,j., observed :               "The result is that when a claim is made for a               deduction  for  which  there  is  no  specific               provision  in  section 10(2),  whether  it  is               admissible  or  not will  depend,  on  whether               having regard to accepted commercial  practice               and  trading  principles, it can  be  said  to               arise  out of the carrying on of the  business               and to be incidental to it." This  decision,  though not direct in point, lays  down  the principle  that  an expenditure can be deducted only  if  it arises  out  of  the  carrying on of  the  business  and  is incidental  to  it.  In Indian Molasses Co. (Pvt.)  Ltd.  v. Commissioner  of Income-tax, W.B. (2), this Court held  that s.  10(2)  (xv) of the Act enacted  affirmatively  what  was stated  in the negative form in the English statute and  was substantially in pari materia with the English enactment and the courts might consider the English authorities as aids to the  interpretation thereof.  The decision of this Court  in Commissioner   of   Income-tax,   Bombay   v.    Abdullabhai Abdulkadar(3), though, turns upon the provisions of s. 10(1) of  the Act, gives some assistance in deciding the  question raised.   One  of the questions raised was whether  the  tax paid  by the assessee-firm as an agent of  the  non-resident principle could be claimed as a bad debt or a trading  loss. In the words of Kapur, J., "the loss which the appellant has incurred is not in its own business but the liability  arose because  of the business of another person and that  is  not permissible  deduction within s. 10(1) of the Act".   It  is true that this decision did not arise under s. 10(2)(xv)  of the Act, but the principle that the expenditure incurred  by the  assessee in his capacity as agent of another is  not  a deductible  item equally applies to the present case.   This Court  in  The  Commissioner of Income tax,  W.B.  v.  Royal

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Calcutta  Turf Club(1) had to consider the question  whether an  expenditure incurred by a race club for the  purpose  of training  jockeys  of the club was  an  allowable  deduction within the meaning of s. 10(2)(xv) of the Act. (1)  [1959] S.C.R. 690. (2) (1959) 37 I.T.R. 66. (3) [1961]  2 S.C.R. 949. (4) [1961] 2 S.C.R. 729, 735-736. 704 Kapur,j.,  speaking  for the Court , after  considering  the relevant decisions, concluded thus:               "Applying  the  law,  as laid  down  in  those               cases,  to the present case the conclusion  is               that  the amountn dispute was laid out  wholly               and   exclusively  for  the  purpose  of   the               respondent’s business because if the supply of               jockeys  of  efficiency and skill  failed  the               business of the respondent would no longer  be               possible.   Thus the money was spent  for  the               preservation of the respondent’s business." This decision gives a liberal interpretation to the relevant expression.  -In M/s.  Haji Aziz and Abdul Shakoor Bros.  v. The  Commissioner  of Income-tax, Bombay  City  II(1),  this Court  disallowed deduction of the amount paid by a firm  as penalty  to  release  the  consignment  confiscated  by  the Customs  authorities.  In coming to the  conclusion,  Kapur, J., speaking for the Court, observed:               "The words "for the purpose of such  business"               have been construed in Inland Revenue v. Anglo               Brewing Co., Ltd.(2) to mean "for the  purpose               of  keeping the trade" going and of making  it               pay.,, After considering the relevant decisions, the learned  Judge proceeded to state thus:               "They  cannot be deducted it they fall on  the               assessee in some character other than that  of               a  trader.   Therefore,  where  a  penalty  is               incurred for the contravention of any specific               statutory provision, it cannot be said to be a               commercial  loss falling on the assessee as  a               trader the test being that the expenses  which               are  for the purpose of enabling a  person  to               carry  on  trade  for making  profits  in  the               business  are  permitted but not if  they  are               merely connected with the business." No doubt this judgment is really based upon the fact that an expense  which is paid by way of penalty for breach  of  law cannot  be said to be an amount wholly and exclusively  laid out for the purpose of the business; but the observations in the  decision go further and indicate that the  expenditure, if incurred by the trader in some character other than  that of a ,trader, is not an allowable deduction. (1) [1961] 2 S.C.R. 651, 657, 663. (2)  [(1925] 12 T.C. 803. 813. 705 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 rationalization  of its administration and modernization  of its  machinery; it may include measure for the  preservation of  the  business and for the protection of its  assets  and property  from expropriation, coercive process or  assertion of  hostile  titles;  it  may  also  comprehend  payment  of statutory  dues  and  taxes imposed as  a  pre-condition  to

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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 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 of 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  conse- quence 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  the business.  It is manifest that the amounts in question  were paid  by  the assessee as a statutory agent to  discharge  a statutory  duty  unconnected with the business,  though  the occasion for the imposition arose because of the territorial nexus  afforded  by the accident of its  doing  business  in India.  We, therefore, hold that the estate duty paid by the respondent was not an allowable deduction under s. 10(2)(xv) of  the Act.  We answer the question in the  negative.   The order of the High Court is wrong and is set aside. In the result, the appeals are allowed with costs.  One  set of hearing fees.                                        Appeal allowed 706