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PETITIONER: INDIAN ALUMINIUM CO.  LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, WEST BENGAL

DATE OF JUDGMENT12/01/1971

BENCH: GROVER, A.N. BENCH: GROVER, A.N. HEGDE, K.S.

CITATION:  1971 AIR 2284            1971 SCR  (3) 351

ACT: Income  Tax Act, 1922, s. 10(2) (xi) and 10(2)(xv)-Fee  paid to foreign collaborator for technical know-how-No  provision in  contract  for payment of tax on fee by  Indian  Company- Assessee  held  in  default and  tax  recovered  from  it-If allowable as business expenditure and deductible.

HEADNOTE: The  appellant Company which was engaged in the  manufacture of aluminium products, entered into a contract with  another company  in  Montreal, Canada, for the supply  of  technical know-how  etc. for the development of its production.   This agreement  provided  for payment of a retainer  fee  by  the appellant on an annual basis and there was no, condition or stipulation  that the fee would be payable by  the  assessee without  deduction  of income tax.  In 1951 the  Income  Tax Officer  treated  the  assessee as being  in  default  under section  18(7) of the Income Tax Act, 1922 in respect  of  a sum of Rs. 1,24,199 which the appellant was liable to deduct from  the  payments made to the Montreal Company  under  the provisions  of sections 18(3-A), 18(3-B) and  18(3-C).   The appellant was- required to pay this amount and the  Montreal Company refused to accept its claim for reimbursement.   The appellant  claimed  the  amount  as  a  deduction  from  its business income under S. 10(1) or 10(2)(xi) or 10(2)(xv)  of the  Act.  Although this claim was allowed by the  Appellate Assistant  Commissioner, the Tribunal, in appeal, held  that the amount in question was neither expenditure incidental to the business nor was it wholly and exclusively laid out  for that purpose; and nor was it claimable as a bad debt in view of the fact that it had not been incurred as a trade debt in the course of the business. The  High Court. upon a reference made to it,  held  against the assessee.  On appeal to this Court, HELD : Dismissing the appeal, (i)  It  is  well settled that a business  or  trading  debt should spring directly from the carrying on of a business or trade  and should be incidental to it and it cannot be  just any  loss  sustained  by the assessee even if  it  has  some connection with his business. [355 E] Although the retainer fees were paid by the assessee to  the Montreal  Company  for  technical  assistance  which  had  a connection  with  the business of the assessee  it  was  not

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possible to regard ’the amount which the assessee was  bound to  deduct  from the payment made to  the  Montreal  Company under  s. 18(3-B) of the Act and which it failed to  recover from  that company, as a debt which could be deducted  under s. 10(2) (xi).  The debt was not incidental to the  business because it arose out of noncompliance with the provisions of the Act.  The payment which the assessee made to the  income tax  authorities  and which it failed to  recover  from  the Montreal Company was more a matter of commercial  expediency and  proceeded  out  of motives  of  business  relationship, because the assessee was anxious not to annoy or offend  the Montreal  Company So as to avail of its continued  technical assistance and advice. [355 G] 352 A.   V. Thomas & Co. Ltd. v. Commissioner of Income Tax,  48 I.T.R. 67 at p. 75, referred to. (ii) The   assessee  was  presumed  to  know  the   relevant provisions  of the Act at the time when it entered  into  an agreement with the Montreal Company.  There was no provision in  the agreement with the Montreal Company which created  a contractual  obligation on the assessee to make  payment  of the taxes deductible under s. 18(3-B).  A payment made under a statutory obligation, because the assessee was in default, could ;lot constitute. expenditure laid out for the  purpose of the assessee’s business and was not therefore  deductible under s. 10(2) (xv). [356 E] Commissioner  of  Income  Tax,  Bombay  v.  M/s.    Pannalal Narotalindas & Co. Bombay, 1969 1 I.T.J. 32, distinguished.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 24 of 1967. Appeal  by special leave from the judgment and  order  dated April  27,  1966 of the Calcutta High  Court  in  Income-tax Reference No. 90 of 1962. M.   C.  Chagla,  S. R. Banerjee, N. N. Goswami  and  S.  N. Mukherjee, for the appellants. Jagadish Swarup, Solicitor-General,, Ram Panjavani and R. N. Sachthey, for the respondent. The Judgment of the Court was delivered by Grover,  J.  This  is  an appeal by  special  leave  from  a judgment of the Calcutta High Court answering the  following question referred to it under S. 66(1) of the Indian Income- tax Act, 1922, hereinafter called the "Act" in the  negative and against the assessee               "Whether,   on   the   facts   and   in    the               circumstances  of  the case, the  sum  of  Rs.               1,24,199/-  was deductible from  the  business               income of the assessee either under Section 10               (  1  ) or 10 (2) (xi) or 10 (2) (xv)  of  the               Incometax Act ?" The  assessee  is  a  public  limited  company  having   its registered  office  at  Calcutta.   Its  principal  business consists of manufacturing aluminium ingots, sheets and  such other  products  from aluminium.  There is  another  company known  by  the  name  of  Aluminium  Laboratories   Limited, Montreal,  in  Canada,  hereinafter  called  the   "Montreal Company", which provided the, assessee with technical  know- how,  engineering services etc. regarding development  of  a production  of the goods.  An agreement was entered into  on January  31,  1947  between the  Montreal  Company  and  the assessee.  The agreement provided for payment of a  retainer fee  on  an  annual  basis.   There  was  no  condition   or stipulation

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353 that  the  fee  would be payable  by  the  assessee  without deduction  of  tax  under the provisions of  the  Act.   The assessee credited a total fee of Rs. 2,50,808/- in favour of the Montreal Company for a period of seven years between the accounting year ending, September 30, 1944 and September 30, 1950.  In  1951  the Income-tax Officer treated  the  assessee  as being  in default under s. 18 (7) of the Act in  respect  of the  amount of tax which the assessee was liable  to  deduct from  the  payments made to the Montreal Company  under  the provisions  of ss. 18(3-A), 18(3-B) and 18(3-C) of the  Act. The  amount  of  tax which was found to be  payable  by  the assessee  came  to  a  total sum  of  Rs.  1,24,199/-.   The assessee   wrote   to  the  Montreal  Company   asking   for reimbursement  of  the said amount.  The  Montreal  Company, however,  refused  to accept the assessee’s  claim  for  re- imbursement by means of a letter dated August 3, 1954.   The assessee  wrote off the amount of Rs. 1,24,199/- during  the relevant  previous  year ending on December 31,  1954.   The assessee,  appealed to the Appellate Assistant  Commissioner who  allowed its claim.  The department preferred an  appeal to  the Tribunal which held that the amount in question  was neither  expenditure, incidental to the business nor was  it wholly and exclusively laid out for that purpose nor was  it claimable as a bad debt in view of the fact that it had  not been incurred as a trade debt in the course of the business. The departmental appeal was therefore allowed and the  order of the Income-tax Officer was restored.  The High Court  was of  the view that there was a nexus between payment and  the business  of  the assessee inasmuch as it  had  an  indirect bearing  upon  the  technical aid  which  the  assessee  had obtained  from the Montreal Company but was of  the  opinion that  even  if  the payment had  some  connection  with  the business it could not be said to be incidental to it as  the liability could have been avoided by the assessee if it  had deducted  at  the source the required amount  of  income-tax from  the  retainer fee which was payable  to  the  Montreal Company.   The  High  Court  also  considered  the  question whether  the  amount paid to the Montreal Company  could  be treated  as a bad debt within the meaning of s.  10(2)  (xi) but came to the conclusion that as it had not been  advanced as  a  trading  debt in the course of business  it  was  not deductible  as a bad debt.  According to the High Court  the provisions-  of s. 18 (3-B) had not been complied  with  and since  the statutory provisions had been disobeyed and as  a result  thereof  the assessee had incurred  a  liability  it could not be construed as a part of business expense  within the meaning of s. 10 (2) (xv) nor could it be said that such an  expense  was  wholly and exclusively laid  out  for  the purpose of the business. 807Sup.CI/71 354 In  order to decide the contentions raised before us  it  is necessary to refer only to ss. 18(3-B) and 18 (7) of the Act a they stood at the material time :-               S.    18(3-B)-"Any   person  responsible   for               paying  to  a  person  not  resident  in   the               territories  any interest not being  "interest               on  securities"  or any other  sum  chargeable               under the provisions of this Act shall, at the               time  of payment, unless he is himself               liable  to  pay any income-tax  and  super-tax               thereon as an agent, deduct income-tax at  the               maximum   rate  and  super-tax  at  the   rate               applicable to a company or in accordance  with

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             the  provisions  of  sub-clause  (b)  of   sub               section (1) of section 17, as the case may  be               :               Provided that where the person not resident is               not a company, the proviso to sub-section (2B)               shall apply to the deduction of income-tax and               super-tax under this sub-section as it applies               to  the deduction of income-tax and  super-tax               under sub-section (2B) :               Provided further that nothing in this  section               shall apply to any payment made in the  course               of  transactions in respect of which a  person               responsible  for the payment is  deemed  under               the first proviso to section 43 to be an agent               of the payee."               S.    18(7)--’If  any  such  person  does  not               deduct or after deducting fails to pay the tax               as required by or under this section, he,  and               in the cases specified in subsection (3D)  the               company  of which he is the principal  officer               shall,   without   prejudice  to   any   other               consequences  which  he or it  may  incur,  be               deemed to be an assessee in default in respect               of the tax."               Provided that................" Now the Act contains provisions for collecting taxes in  two modes;  ,one  is by direct levy and the other  by  means  of deduction at the source.  Section 18 provides for  deduction in cases inter alia of "Salaries" ",Interest on securities", "Dividends",  interest and other sums chargeable  under  the Act and paid to non-residents.  There is no dispute that  in the  present case the assessee was bound  under  sub-section (3-B)  to deduct the sum chargeable under the provisions  of the  Act at the time of payment of the retainer fees to  the Montreal Company.  Under sub-section (7) if the assessee did not  deduct the amount of tax as required under the  section it was to be deemed to be in default in respect of the  tax. The  argument raised on behalf of the appellant is that  the Montreal Company refused to reimburse it for the payment  of the 355 amount  in  question for the reasons stated  in  the  letter dated   August 3, 1954.  It was stated in this  letter  that the Montreal Company was not contractually bound to meet the obligation of Indian tax liability.  The concluding  portion of the letter ",as as follows :-               "Again, this involves a question of  principle               for  us.  If every State to which we have  to               render  technical  assistance,  based  on  the               researches carried on by us in our plant and               laboratories,  starts demanding incometax  and               super-tax on our charges, no such State  could               ever  receive any technical assistance at  all               and we ourselves could hardly afford to render               such  technical assistance and  the  expensive               taxes involved.  We have given this matter our               serious   consideration   and   cannot   bring               ourselves  on  any  score,  equitable,   legal               contractual, or moral to reimburse to you  any               monies  you  may have to pay  to  the  Indian-               taxing Authorities." The  claim of the assessee principally is two fold.   It  is maintained  firstly that after the refusal of  the  Montreal Company  in  the matter of reimbursement the amount  of  Rs. 1,24,199/- was written off as a bad and irrecoverable debt.

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It was, therefore deductible under s. 10(2) (xi) of the Act. In the section the debt certainly means something more  than a  mere  advance.   It  is something  which  is  related  to business  or results from it.  To be claimable as a bad  and irrecoverable debt it must first be shown as a proper  debt. (vide  A.  V. Thomas & Co. Ltd. v. Commissioner  of  Income- tax(1).  It is well settled that a business or trading  debt should spring directly from the carrying on of a business or trade  and should be incidental to it and it cannot be  just any  loss  sustained  by the assessee even if  it  has  some connection with his ’business. Although it is true that the retainer fees were paid by  the assessee  to the Montreal Company for  technical  assistance which had a connection with the business of the assessee but it  is not possible to regard the amount which the  assessee was  bound  to  deduct from the total payment  made  to  the Montreal  Company under s. 18(3-B) of the Act and  which  it failed to recover from that company as a debt which could be deducted under s. 10 (2) (xi).  The debt was not  incidental to the business because it arose out of non-compliance  with the  provisions of the Act.  The payment which the  assessee made  to the income-tax authorities and which it  failed  to recover  from  the  Montreal Company was more  a  matter  of commercial  expediency  and  proceeded  out  of  motives  of business relationship because the assessee was anxious (1)  48 I.T. R. 67 at p. 75. 356 not  to annoy or offend the Montreal Company so as to  avail of  its continued technical assistance and  advice.   Indeed the  argument on behalf of the appellant has rested a  great deal  on  this aspect of the matter and it  has  been  urged strenuously that the assessee could not afford to  displease the  Montreal  Company as it stood greatly in need  of the latter’s technical assistance. Secondly  the question is whether the assessee  could  claim deduction under s. 10(2) (xv) of the Act.  For that  purpose the  assessee had to establish that the amount  in  question had been wholly and exclusively laid out for the purpose  of its business.  Our attention has been invited to a  decision of  the  Bombay High Court in  Commissioner  of  Income-tax, Bombay v. M/s.  Pannalal Narotamdas & Co. Bombay(") in which it  was held that the amount of penalty imposed not for  the fault of the assessee but because he had to pay the same for the, purpose ’of getting the goods released from the Customs Authorities  could  be regarded as  wholly  and  exclusively incurred  for the purpose of his business.  We  consider  it unnecessary  to pronounce  on  the  correctness  of   this decision.   The point which came up for consideration  there was altogether different and it can afford no assistance  to us in determining whether an amount which an assessee had to pay by virtue of the provisions of the Act could be regarded as  an  expense  incurred wholly and  exclusively  for  the purpose of the business.  The assessee was presumed to  know the  relevant  provisions  of the Act at the  time  when  it entered into an agreement with the Montreal Company.   There was no provision in the agreement with the Montreal  Company which  created a contractual obligation on the  assessce  to make  payment of the taxes deductible under s. 18(3-B).   At any  rate it is difficult to understand how a  payment  made under  a  statutory obligation because the assessee  was  in default, could constitute expenditure laid out for the  pur- pose of the assessee’s business. We  find  no reason or justification to interfere  with  the answer  returned by the High Court with the result that  the appeal fails and it is dismissed with costs.

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R.K.P.S. (1) [1969] 1 L.T.J. 32. Appeal dismissed. 357