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PETITIONER: MITSUI STEAMSHIP CO.  LTD.

       Vs.

RESPONDENT: C.I.T. WEST BENGAL, II CALCUTTA

DATE OF JUDGMENT07/02/1975

BENCH: GUPTA, A.C. BENCH: GUPTA, A.C. KHANNA, HANS RAJ

CITATION:  1975 AIR  657            1975 SCR  (3) 467  1975 SCC  (1) 394

ACT: Indian Income-tax Act  (11 of 1922) s. 10(2)(xv) and  Indian Income-tax  Act (43 of 1961) s. 40, Cl. (ii) (a) as  amended by Amendment Act of 1972--Tax on property paid by owner-cum- trader--If deductible expenditure.

HEADNOTE: The  appellants,  non-resident  companies  with   registered office  s in Japan, had been assessed to Income-tax for  the assessment years 1956-1961 under the Indian Income-tax  Act, 1922 in respect of their Indian earnings.  In the assessment proceedings  they claimed as deductible allowance, under  s. 10(2)(xv),  the  tax paid by them on their  business  assets under the local tax law in force in Japan.  But the  Income- tax  Officer  rejected the claim.  The  Appellate  Assistant Commissioner,  however, allowed the claim and his order  was confirmed by the Tribunal.  On reference,.’ the High  Court, on a consideration of the various provisions of the Japanese statute,  held  that  under  the Japanese  law  it  was  the ownership  of  the assets that was material  and  not  their actual user in business, and relying on the decision of this Court  in Travancore Titanium Product Ltd. v. C.I.T.  Kerala (60 I.T.R. 277), decided in favour of the Revenue. Allowing the appeal to this Court, HELD:(1)  In  Indian Aluminum Co. Ltd. v.  C.I.T.  West Bengal (84 I.T.R. 735)   this  Court  held  that  the   test adopted  in  the  Travancore  Tuanium case,  that  to  be  a permissible  deduction there must be a direct  and  intimate connection  between the expenditure and the  business,  that is, between expenditure and the character of the assessee as a  trader, and not as owner of the assets, even if they  are assets  of the business, "’needs to be qualified by  stating that  if  the  expenditure is laid out by  the  assessee  as owner-cum-trader,  and the expenditure is really  incidental to  the carrying on of his business, it must be  treated  to have  been laid out by him as a trader and as incidental  to his business. [470H-471C] (2)The Income-tax Act, 1961, was amended by the Income-tax Amendment  Act,  1972.  The amendments  were  introduced  to restore the position established in Travancore Titanium case namely,  that Wealth Tax paid by an assessee in  respect  of his business assets was not deductible as a business expense

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in computing the assessee’s income from his business,  which was virtually overruled by the later decision in the  Indian Aluminium Company case.  But the amendments do not appear to touch the principle laid down in the later case, that  where a  person has a dual capacity of a trader-cum-owner, and  he pays  tax  in  respect of property which  is  used  for  the purpose of the trade, the payment must be taken to be in the capacity  of a trader.  The Amendment Act only adds the  sum paid  on  account of wealth tax to the list of  amounts  not deductible in computing the assessee’s income from business. Therefore,  any amount paid by the assessee on account of  a tax  other than the wealth-tax on his business assets  would be outside the scope of the Amending Act and would  continue to be governed by the law laid down in the Indian  Aluminium case.  The explanation in s. 40 of the Income-tax Act, 1961, which  s. 4 of the Amendment Act adopts for the  purpose  of that  section  defines wealth tax to  include,  inter  alia, besides  wealth tax chargeable under the Indian  Wealth  Tax Act, 1957, "any tax of a similar character chargeable  under any  law  in force in any country outside  India,.  [47ID-E; 472D-G] (3)But,  unlike  the  Wealth-tax in  India  the  municipal property  tax  in Japan is a local tax  imposed  on  certain specified  properties by the city, town or village in  which the  property  is  located.   The Indian  Wealth  Tax  is  a national tax chargeable on the net wealth of the person with certain specified exemptions.  The difference in the  manner of determination of the taxable basis of the proper- 468 ties   and  the  rates  of  taxation  emphasize  the   basic difference  between  the two taxes  notwithstanding  certain points of similarity. [473H-474B] (4)The  facts also disclosed that the assets belonging  to the  appellants were used by them in their  business  during the relevant previous years and also that the payment of tax under the Japanese law was incidental to the carrying on  of the business of the assessee. [473A-B]

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  1072  to 1079 of 1970. From the judgment and order dated the 1st July, 1969 of  the Calcutta High Court in Income, Tax References Nos. 170, 174, 175, 186 and 184, 189, 177 & 176 of 1964. Schin  Chaudhuri (In C.As. Nos. 1076-1079/70), T.  A.  Rama- chandran  and  D. N. GuPta, for the appellants (In  all  the appeals). S.C. Manchanda, (In C.As. Nos. 1076-1079) S. P. Nayar and R. N. Sachthey, for the respondent (in all the appeals). The Judgment of the Court was delivered by GUPTA,   J.-These   two  groups  of  appeals,   brought   on certificates  granted by the High Court at  Calcutta,  arise out of two references under sec. 66(2) of the Indian Income- Tax Act, 1922 involving similar questions of law. Mitsui  Steamship Co. Ltd., appellant in Civil Appeals  Nos. 1072-1075  of  1970 and M/s.  Kawasaki  Kisen  Kaisha  Ltd., appellant in Civil Appeals Nos. 1076-1079 of 1970, are  both non-resident  shipping  companies  having  their  registered offices  in  Japan.  Civil Appeals Nos.  1072-1075  of  1970 relate  to  assessment years 195758,  1958-59,  1959-60  and 1960-61  for  which the previous years  were  the  financial years  ending on the 31st March, 1957, 1958, 1959  and  1960 respectively Civil Appeals Nos. 1076-1079 of 1970 relate  to

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assessment years 1956-57, 1957-58, 1958-59 and 1959-60,  the corresponding  previous  years  being  the  financial  years ending  on  the  31st  March  1956,  1957,  1958  and   1959 respectively.  The, appellant in each case had been assessed to income-tax for the years mentioned above under the Indian Income-Tax Act, 1922 (hereinafter referred to as the Act  of 1922)  in  respect  of  its net  Indian  earnings.   In  the assessment  proceedings the appellant companies had  claimed as  deductible allowance under sec. 10(2)(xv) of the Act  of 1922 the tax paid by them on their business assets under the Local  Tax  Law in force in Japan.  The  Income-tax  Officer rejected  the claim on the view ’that the incidence  of  tax under  the Japanese law falls on the assessee  companies  in their capacity as the owners of the business assets and  not as  traders.   On  appeal preferred  by  the  assessees  the Appellate Assistant Commissioner took the view that the  tax paid  under  the  Local Tax Law in Japan  was  an  allowable expenditure  under sec. 10(2)(xv) of the Act of  1922.   The Tribunal  also  affirmed  the view taken  by  the  Appellate Assistant  Commissioner overruling the contention raised  on behalf of the revenue that the nature of tax 469 imposed  by the Japanese, statute was similar to the  wealth tax  Payable  in India which was not  permissible  deduction under sec. 10(2) (xv). In Civil Appeals Nos. 1072-75 of 1970 the question  referred under sec. 66(2) was               "Whether on the facts and in circumstances  of               the  case,  the property tax and  vessels  tax               paid  by  the assesses in Japan on  its  land,               buildings and other tangible assets and  ships               were  allowable as deduction under sec.  10(2)               (xv) of the Income-Tax Act,1922 ?" In Civil Appeals Nos.1076-1079of 1970 the question referred      was:               "Whether on the facts and in the circumstances               of  the  case  the property tax  paid  by  the               assessee in Japan on its vessels was allowable               as  deduction under section 10(2)(xv)  of  the               Income-Tax Act, 1922?" The  two  questions,  though worded  a  little  differently, depend  for their answers on a correct appreciation  of  the character of the Japanese tax. The High Court on a consideration of the various  provisions of the Japanese statute held that under the Local Tax Law in Japan  it was the ownership of the assets that was  material and  not their actual user in business, and relying  on  the decision  of this Court in Travancore Titanium Product  Ltd. v.  Commissioner  of  Income-tax,  Kerala(1)  answered   the question referred to it in both cases in the negative and in favour  of the revenue.  In the case of Travancore  Titanium Product  Ltd.(2)  this Court was  considering  the  question whether  a  sum paid as wealth-tax was deductible  from  the profits  and  gains of the assessee’s  business  under  sec. 10(2)  (xv) of the Act of 1922.  In holding that the  amount of  tax  paid  on the net wealth of an  assessee  under  the Wealth-Tax  Act was not a permissible deduction, this  Court observed :               "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 tax-payer in his  character               as  a trader.  To be a permissible  deduction,               there must be a direct and intimate connection

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             between  the  expenditure  and  the  business,               i.e.,   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." The  Judgment  of the High Court mainly  turned  on  Article 341(4) of the Japanese statute.  From an English translation of the statute filed before the tribunal it appears that the statute is divided into (1)  60 I.T.R. 277 470 four Books.  All the Articles to which we will refer for the purpose  of these appeals are in Chapter III, Section  2  of Book  Four which contains Article 341 to 746.   Chapter  111 bears the heading "Ordinary Taxes of City, Town or  Village" and Section 2 deals with "Municipal Property Tax.,"  Article 341 defines certain terms concerning municipal property tax, and in so far as it is relevant for the present purpose,  it reads as follows :               "With  respect to municipal property tax,  the               terms listed in the following items shall have               the   definition  given  to  them  under   the               respective items:               (1) PropertyLand,  houses and  depreciable               assets;               (2) Lands  x         x         x  (3) Houses          x         x    x               (4)   Depreciable  assets : Assets  (excluding               the mining rights, fishing right, patent right               and  other  depreciable  intangible  property)               other  than land and house which can  be  used               for   business  purpose  and  the  amount   of               depreciation of which is included in the  loss               or  necessary expenditures in the  computation               of  income as provided for in the  Corporation               Tax  Law or the Income-Tax Law (including  the               property similar to those properties which are               owned by the person upon whom the  corporation               tax  or the income tax has not been  imposed).               However,  automobiles and bicycles  which  are               the  objects  of  the  automobile  tax,,   and               bicycles  and carts which are the  objects  of               the cart tax respectively shall be excluded;" Referring to the definition of ’depreciable assets’ the High Court  pointed  out that under the Japanese law  the  assets which  could be used for business purpose were subjected  to tax and it was not required that these assets should in fact be used for business purpose.  The High Court took the  view that  the tax paid by the assessees under the  Japanese  law was  in their capacity as owners, of the assets and  not  as traders,  and  applying the test adopted in  the  Travancore Titanium case (supra) the High Court held that the tax  paid by  the assessees under the Local Tax Law in Japan was  riot deductible as a business expense under the Act of 1922. Travancore  Titanium  Product  case(1)  was  decided  by   a Division Bench of this Court in the year 1966.  The impugned orders of the High Court in the two references out of  which these  appeals  arise  were both made in 1969.   In  1972  a larger Bench of this Court expressed the view in the case of Indian  Aluminium  Co. Ltd. v. Commissioner  of  Income-Tax, West Bengal (2) that the test adopted in Travancore Titanium Product case(1) that to be permissible deduc- (1) 60 I.T.R. 277. (2) 84 I.T.R. 735. 471

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tion there must be a direct and intimate connection  between the   expenditure  and  the  business,  i.e.,  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  "needs  to  be qualified by stating  that  if  the expenditure  is  laid  out by  the  assessee  as  owner-cum- trader, and the expenditure   is  really incidental  to  the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to  his business".   It  was  held  in  Indian  Aluminium  Company’s case(1)   that  the  wealth-tax paid on assets held  by  the assessee for the purpose of his business, was deductible  as a  business expense in computing the assessee’s income  from business. Within a few months of the decision in Indian Aluminium Com- pany’s case(2) which was rendered on March 29, 1972,  Income Tax  (Amendment) Ordinance 1972 (7 of 1972) was  promulgated on  July  15,  1972  with the  object  of  barring,  in  the computation of total income in respect of certain assessment years  prior  to the assessment year 1962-63,  deduction  of amounts  paid on account of wealth-tax.  The  Ordinance  was later  repealed and replaced by the  Income-Tax  (Amendment) Act,  1972 (41 of 1972) containing similar provisions.   The Amendment Act which received the assent of the president  on August  28,  1972  sought to restore, as  the  Statement  of Objects  and Reasons says, the position established  in  the case of Travancore Titanium Products Ltd. v. Commissioner of Income-tax,  (supra)  which was virtually overruled  by  the later decision in Indian Aluminium Co. Ltd. v.  Commissioner of  Income  tax,(1) that wealthtax paid by  an  assessee  in respect  of  his  business assets was not  deductible  as  a business  expense  in computing the assessee’s  income  from business.   Section  2 of the Amendment  Act  inserted  with retrospective effect a new sub-clause (iia) in clause (a) of section  40 of the Income-Tax Act, 1961 which specifies  the amounts  not deductible in computing the  income  chargeable under the head "Profits and gains of business or profession" Sub-clause  (iia)  adds  to the list of amounts  not  to  be deducted  "Any sum paid on account of wealthtax".   To  this sub-clause an explanation was added extending the meaning of the expression Wealth-tax for the purpose of the  subclause. The Explanation reads:               "Explanation.-For  the purposes of  this  sub-               clause, wealth-tax means wealth-tax chargeable               under the Wealthtax Act, 1957 (27 of 1957), or               any  tax  of a  similar  character  chargeable               under any law in force in any country  outside               India  or  any tax chargeable under  such  law               with reference to the value of the assets, of,               or  the  capital employed in,  a  business  or               profession carried on by the assessee, whether               or  not the debts of the business  or  profes-               sion  are allowed as a deduction in  computing               the amount with reference to Which such tax is               charged,   but  does  not  include   any   tax               chargeable with reference, to the value of any               particular   asset   of   the   business    or               profession;"                (1) 84  I.T.R.735.                472 Section  4 of the Amendment Act which bears directly on  the ,appeals before us provides:               "4.   Wealth-tax not deductible  in  computing               the   total  income  for  certain   assessment               years.-Nothing contained in the Indian Income-

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             tax Act, 1922 (11 of 1922), shall be deemed to               authorize,  or  shall be deemed ever  to  have               authorized,  any deduction in the  computation               of the income of any assessee chargeable under               the  head  "Profits  and  gains  of  business,               profession or vocation" or "Income from  other               sources" for the assessment year commencing on               the 1st day of April, 1957, or any  subsequent               assessment   year,  of  section  40   of   the               principal Act."               To this section also an explanation was  added               saying               "Explanation,-For   the   purposes   of   thiS               section,  "  wealth-tax" shall have  the  same               meaning   as  is,  assigned  to  it   in               the Explanation to sub-clause (iia) of  clause               (a) of section 40 of the principal Act." Section  5 of the Amendment Act contains a saving clause  to which it is not necessary to refer for the purpose of  these appeals. We have mentioned earlier the assessment years concerned  in the instant appeals.  The question is, what is the effect of the Income-Tax (Amendment) Act, 1972 on these appeals.   The amendments  introduced do not appear to touch the  Principle laid  down in Indian Aluminium Company’s case  (supra)  that when a person has a dual capacity of a trader-cum-owner, and he  pays  tax in respect of property which is used  for  the purpose  of  trade, the payment must be taken to be  in  the capacity  of a trader.  The Amendment Act only adds the  sum paid  on  account of wealth tax to the list of  amounts  not deductible in computing the assessee’s income from business. ,Therefore, any amount paid by the assessee on account of  a tax ,other than the wealth-tax on his business assets  would be outside the scope of the Amendment Act and would continue to  be  governed by the law laid down  in  Indian  Aluminium Company’s  case  (supra).  The explanation to the  new  sub- clause (iia) inserted in section 40 ,of the Income-Tax  Act, 1961  which  section 4 of the Amendment Act adopts  for  the purposes  of that section, defines "wealth-tax" to  include, infer alia, besides wealth-tax chargeable under the  Wealth- Tax  Act, 1957, "any tax of a.similar  character  chargeable under any law in, force in any country outside India".   The only  contention raised before us on behalf of  the  revenue was  that  the nature of the tax paid by  the  assessees  in Japan  an their business assets is similar to the  wealthtax payable  under  the Wealth-Tax Act, 1957.  This leads  to  a comparison of the two statutes, Wealth-Tax Act, 1957 and the Local  Tax Law of Japan, to find out whether they are  of  a similar  character.   The supplementary  statement  of  case drawn up by the Tribunal pursuant to an order of this  Court dated April 11, 1973 discloses that the assets belonging  to the- appellants with which we 473 are  concerned  in these, appeals were all used by  them  in their  business during the relevant previous years and  also that  the  payment  of  tax  under  the  Japanese  law   was incidental  to  the  carrying  on of  the  business  of  the assessees. From an examination of the provisions contained in Book Four of  the Japanese statute, it appears to us that there  is  a basic  difference between the Wealth-Tax Act, 1957  and  the Local Tax Law of Japan.  Wealth tax in, India is charged  on the  net wealth of the assessee.  Net wealth as  defined  in sec.  2(m) of the Wealth-Tax Act, 1957 means,  broadly,  the aggregate  value  of all the assets, wherever  located,  be-

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longing to the assessee minus the total amount of the debts, with certain exceptions, owned by him.  Generally  speaking, by  the  value of an asset, other than cash,  is  meant  its ’market  value.  ’Assets, has been defined in clause (e)  of sec.   2  of  the  Act  as  including  property   of   every description, moveable or immoveable, with certain  specified exemptions.   Wealth-tax in India is a national tax  charged by  the Central Government.  The municipal property  tax  in Japan  is imposed on property as defined in Article  341(1). In this definition, property includes only land, houses  and depreciable  assets and not property of  every  description. Depreciable assets has been defined in Article 341(4), inter alia, as assets other than losid and house which can be used for  business  purpose, but these assets again  exclude  all depreciable  intangible property and property which are  the objects of other taxes like automobiles, bicycles and carts. Article 342 lays down that the municipal property tax  shall be imposed on property by the city, town or village in which the  property  concerned is located and provides  that  with respect  to vessels, vehicles and other objects  similar  in nature  which are included in depreciable assets, the  city, town and village in which the principal port of anchorage or regular keeping place is located shall be the city, town  or village  authorized  to impose the municipal  property  tax. Further,  it  appears that under the Japanese  law,  tax  is charged at the standard rate of 1.4 per cent on the value of the property computed in the manner laid down in the statute providing the taxable basis, and in certain special cases it may  go UP to 2.5 per cent, which is the maximum; in  India, the rates of wealth tax vary, increasing progressively  with the amount of net wealth of the assessee. The  broad features of the two statutes we have noted  above reveal their basic dissimilarity.  Unlike the wealth tax  in India,  ,the municipal property tax of Japan is a local  tax imposed on certain specified properties by the city, town or village in which the properties are located.  The wealth tax is a national tax chargeable on the 474 net  wealth of a person with certain  specified  exemptions. The difference in the manner of determination of the taxable basis of the properties and the rates of taxation  emphasize the  basic  difference between the two taxes.   of  course,- there are certain points of similarity between the two laws, as  there  must be, both being taxing  statutes,  but  these similarities  do  not remove the fundamental  difference  in ’the aim, object and the basic structure of the two Acts. Accordingly  we  allow the appeals,  discharge  the  answers given  by the High Court to the questions referred to it  in these two cases, and answer the questions in the affirmative and in favour of the assessees.  In the circumstances of the case we direct the parties to bear their own costs both here and in the High Court. V.P.S.                          Appeals allowed.                             475