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PETITIONER: T. S. KRISHNA

       Vs.

RESPONDENT: C. I. T. MADRAS

DATE OF JUDGMENT03/10/1972

BENCH: REDDY, P. JAGANMOHAN BENCH: REDDY, P. JAGANMOHAN DUA, I.D. KHANNA, HANS RAJ

CITATION:  1972 AIR 2674            1973 SCR  (2) 533

ACT: Weather Tax Act read with S. 57(iii) of the Income Tax Act-- whether  Wealth Tax paid can be deducted as  an  expenditure allowable under S. 57(iii) of the Income Tax Act, 1961.

HEADNOTE: During  the  accounting period 1962-63,  the  assessee  paid Wealth Tax of Rs. 21,963/- in respect of the shares held  by him  and deducted this amount from his dividend  income  and interest as an expenditure allowable under S. 57(iii) of the Income Tax Act, 1961.  The I.T.O. rejected the claim on  the ground  that there was no connection between the payment  of Wealth  Tax and the earning of dividend income and both  the Appellate  Assistant  Commissioner as well as  the  Tribunal confirmed  the  order  of the I.T.O. The High  Court,  on  a reference,  also  rejected the contention of  the  assesses. The  appellant contended that the preservation of assets  is incidental for earning income and that the assets themselves produce  income.   Therefore,  payment  of  Wealth  Tax  was virtually  a  condition for earning income  and  default  in payment of such tax will endanger the ownership of the asset and will gradually destroy the very Source of income. Dismissing the appeal, HELD  :(i) The Income Tax (Amendment) Ordinance of July  15, 1972  and  the  Income-Tax  (Amendment)  Act  of  1972  have provided   for  disallowing  the  Wealth  Tax  paid  as   an expenditure  in  respect  of  incomes  derived  from   other sources. (ii) Even   apart   from  the  amendment   disallowing   the deduction, the very nature of the income from  dividends  in respect  of which deduction Wealth Tax is claimed does  not, bear any relationship direct or incidental to the earning of that  income and cannot be laid out or expended  exclusively for the purpose of making or earning such income within  the meaning  of Sub-clause (iii) of S. 57 of the Act,  or  under the  corresponding provisions of S. 10(2)(xv) of the  Indian Income Tax Act 1922. [540F] Travancore  Titanium  Products  Ltd. v.  C.I.T.  Kerala;  60 I.T.R. 277 and India Aluminum Co Ltd., v. C.I.T.; 84  I.T.R. 735 referred to. The  assessee therefore cannot treat the Wealth Tax Paid  as an expenditure allowable under S. 57(iii) of the Income  Tax

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Act 1961.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  1671  of 1969. Appeal  by  certificate from the judgment  and  order  dated September 27, 1967 of the Madras High Court in T. C. No. 219 of 1965. S. Swaminathan, D. P. Mohanthy and S. Gopalkrishna for the appellant. B. D. Sharma and R. N. Sachthey for the respondent. 534 The Judgment of the Court was delivered by Jaganmohan  Reddy, J. This appeal is by certificate  against the  judgment of the Madras High Court on a reference  under s.  256(1) of the Income-tax Act, 1961  (hereinafter  called the  "Act’)  answering the question referred to  it  by  the Tribunal against the assessee. During  the relevant accounting period 1962-63 the  assessee paid  wealth-tax  of Rs. 21,963/- in respect of  the  shares held  by him and claimed to have this amount  deducted  from the dividend income and interest as an expenditure allowable under  S.  57(iii)  ,of the  Act.   The  Income-tax  Officer rejected the claim on the ground that there was no direct or immediate  connection between the payment of the  wealth-tax and  the earning of the dividend income.  In the  subsequent appeals  against  this order, both the  Appellate  Assistant Commissioner as well as the Tribunal con-firmed the order of the  Income-tax Officer.  The High Court on a  reference  in that case as well as in others raising a similar  ,question, while  rejecting  the contention of the  assessee,  observed that the wealth-tax was paid by him as the owner and on  the ,value of the totality of his assets which has nothing to do with his making or earning income from such assets and  that the production of the income from the assets appeared to  it to  be wholly ,unconnected with the payment  of  wealth-tax. The  Court drew support from the Kumbakonam Electric  Supply Corporation Ltd. ,v.  Commissioner of Income-tax,  Madras(1) and  Travancore Titanium Products Ltd. v. C.I.T.  Kerala(2). The learned advocate ’who appeared for the assessee and  who has  also  addressed his argument before  us  had  contended before  the  High Court that the preservation of  assets  is incidental to the purpose of making or earning income,  that these   are   cases  in  which  the   assets   them   selves automatically produced income and that therefore payment  of wealth-tax  was virtually a condition for making or  earning income because default in payment of such tax will  endanger the  ownership of the asset which in its turn  will  destroy ,the  very  source of income.  Several cases were  cited  in support of  that  proposition but  the  High  Court  after distinguishing them ,observed :               "We find it difficult to hold that the wealth-               tax was paid by each of the assessees in these               cases  as  incidental  to  making  or  earning               income.  In a sense it may be that in order to               preserve  the total net assets,  the  assessee               has to pay wealth tax and that  without  such               assets  there can be no question of making  or               earning  the income.  But these facts  do  not               establish the nexus               (1)  50 1. T. R 809.                (2) 60  1.               T. R. 277.               535

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             required for the expenditure by way of  wealth               tax  to  be  a  permissible  deduction.    The               connection, if any, of the expenditure by  way               of  wealth tax with the assessee’s  making  or               earning  the income appears to be too  remote.               The expenditure in order to be a  permissible               ’deduction, should be directly connected  with               the  purpose  of making or earning  of  income               for,  otherwise  it cannot be  said  that  the               expenditure  is for the purpose of  making  or               earning income."               The  case  of  Travancore  Titanium   Products               decided  by  this Court was dealing  with  the               deduction  of excess profits tax on the  asset               which a trader owned and which was employed in               the  business.  The assessee had in that  case               sought  to  claim under s. 10(2) (xv)  of  the               Income-tax Act, 1922, deduction of the  excess               profits  tax It paid on the asset so  utilised               in  earning the business income. was  observed               by this Court:               " In determining whether an amount expended by               the assessee is deductible under s.  10(2)(xv)               of  the Indian Income-tax Act, 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               must  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  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  dichotomy between the trader  owning an               asset  and his utilisation of it in earning  a               business  income therefrom, according to  this               Court,  lacked the nexus for holding that  the               asset  was directly and  intimately  connected               with  the  business and was laid  out  by  the               assessee  in  his character as  a  trader.   A               larger Bench of this Court recently in  Indian               Aluminium Co. Ltd. v. C.I.T.(1) has not               accepted   the  test  adopted  in   Travancore               Titanium case that:               " to he a permissible deduction, 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." (1)  84 1. T. R. 735. 536 That  view was 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  further held that in the case of individuals who have both  business assets  and  debts  and non-business assets  and  debts,  it

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should  not  be  difficult to evolve a  principle  or  frame statutory rules to find out the proportion of the wealth-tax which is really incidental to the carrying on of the  trade. Immediately  after the judgment was rendered  the  President issued the Income-tax (Amendment) Ordinance on July 15, 1972 by  the  addition of sub-cl. (iia) to cl. (a) of S.  40  and sub-s.  (1A)  to s.58. This was followed by  the  Income-tax (Amendment)  Act 41 of 1972, the preamble of  which  enacted that it was "further to ,amend the, Income-tax Act, 1961 and to provide for 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".   It may be observed that both  the  Travancore Titanium Products case as well as the Indian Alliminium case dealt   with  deductions  of  Excess  Profits  tax   as   an Expenditure  in respect of business income.  They  were  not dealing ’with deduction of wealth-tax paid by individuals on the  assets owned by them from income derived  from  other sources under the Income-tax Act, but even so the  ordinance and  the Act have made provision for disallowing the  wealth tax  paid  as an expenditure in respect of  both  the  above categories of income. It  is  contended be-fore us by the  learned  advocate  that -notwithstanding   these  amendments,  wealth-tax  paid   on particular  assets of the business or profession  have  been excluded from the disallowance under the amended sub-s.(1A) of s. 58 which by   reference incorporates sub-cl. (iia)  of cl. (a) to S. 40 added by     the  Amending Act., S.  40  of the Act inhibits the deduction of  any expenditure specified therein  notwithstanding anything to the contrary in ss.  30 to   39  which  permit  deductions  of  certain   items   of expenditure  incurred  by  the assessee in  respect  of  his business  or profession.  Similarly, under s. 58 of the  Act the ,expenses categorised therein are not to be deducted  in computing the income chargeable under the head "’income from other  sources"  notwithstanding that under  s.  57  certain deductions  are permissible in respect of that  category  of income.   It  may be specified that in so  far  as  dividend income  or  interest derived by the assessee  is  concerned sub-s.  (i) and sub-s. (iii) of s. 57 :permit deductions  in computing assessable income as follows               (i)   in the case of dividends, any reasonable               sum paid by way of commission or  remuneration               to  a  banker  or any  other  person  for  the               purpose of realising such dividend on  behalf               of the assessee;                537               (ii)                (iii) any other expenditure (not being in the               nature  of  capital expenditure) laid  out  or               expended   wholly  and  exclusively  for   the               purpose of making or earning such income."               The  amendments  to ss. 40 and 58 as  stated               earlier  do not allow deduction of  wealth-tax               or  tax of similar character etc. where it  is               levied  and paid under the law of any  country               outside India.  The following are the relevant               provisions of the Amendment Act :-               "  (2) In section 40 of the  Income-,tax  Act,               1961 (hereinafter referred to as the principal               Act), after subclause (ii) of clause (a),  the               following  sub-clause shall be, and  shall  be               deemed  always to have been, inserted,  namely               :-               ’(iia) any sum paid on account of wealth-tax.

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             Explanation.-For  the  purposes of  this  sub-               clause,,   "  wealth-tax"   means   wealth-tax               chargeable  under the Wealth-tax Act, 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 profession               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;               3.    Section  58, as originally  enacted,  of               the principal   Act shall ’be deemed always to               have been renumbered as    sub-section     (1)               thereof, and after sub-section, the  following               sub-section  shall  be, and  shall  be  deemed               always to have been, inserted, namely -               (1A)  The  provisions of sub-clause  (iia)  of               clause (a) of section 40 shall, so far as  may               be,  apply in computing the income  chargeable               under the head "income from other sources"  as               they apply in computing the income  chargeable               under the head "Profits and gains of  business               or profession.  "               4.    Nothing contained in the Indian  Income-               tax Act. 1922 shall be deemed to authorise. or               shall  be deemed ever to have authorised,  any               deduction in the computation of the income  of               any assessee chargeable               538               under   the,  head  "Profits  and   gains   of               business,  profession or vocation" or  "Income               from  other sources" :or the  assessment  year               commencing  on the 1st day of April,  1957  or               any  subsequent  assessment year, of  any  sum               paid on account of wealth-tax.               Explanation-For  the purpose 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.               5.    Where, before the 15th day of July, 1972               (being  the  date  on  which  the   Income-tax               (Amendment)  Ordinance, 1972 came into  force,               the Supreme Court has, on an appeal in respect               of  the  assessment  of an  assessee  for  any               particular assessment year. held that wealth-               tax  paid  by the assessee  is  deductible  in               computing the total income of that year, then,               nothing  contained  in  sub-clause  (iia)   of               clause  (a) of section 40, or subsection  1(A)               of  section  58,  of  the  principal  Act,  as               amended  by this Act, or, as the  case  maybe,               section  4  of this Act, shall  apply  to  the               assessment   of   such   assessee   for   that               particular year." It will be observed from s. 5 of the Amendment Act that  the judgment  of this Court in the Indian Aluminium Co. case  in so  far  as the deduction of the wealth-tax was held  to  be allowable  in computing the assessee’s income in that  case,

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was left untouched but any sum paid on account of wealth-tax in  respect of assessment years prior to 1962-63  and  those under  the  Income-tax Act, 1922 in respect  of  assessments commencing on the 1st day of April 1957 or on any subsequent year, the amendment was given retrospective operation.   The changes  introduced in sections 40 and 58, we,  should  have thought,  were  clear in disallowing any  deduction  of  the wealth-tax  from  the computation of an  assessee’s  income. The  learned  advocate for the assessee however has  made  a valiant  attempt which attempt we think is totally  abortive even   if   we   were  inclined  to   stretch   and   strain interpretation in favour of the assessee because neither the language  nor the diction of the amended  provisions  permit the construction sought to be placed on the amendments. What  the learned advocate seeks to contend is that the  Ex- planation  to  sub-clause (iia) of cl. (a) of  S.  40  which Explanation mutates mutandis is by reference to be read into sub-s.  (1A)  of  S.  58 so far  as  may  be  applicable  in computing the income chargeable under the income from ’other sources’  as they apply in computing the  income  chargeable under   the  head  "profits  and  gains  of   business   and profession" saves the excess profits tax 539 chargeable  with  reference to the value of  any  particular asset  of the business or profession.  In other words,  this contention  amounts  to  saying that  the  legislature  left untouched  the  decision of this Court  in  Indian  Aluminum Company.  Reliance for this submission is based on the words "but  does not include any tax chargeable with reference  to the  value  of  any  particular asset  of  the  business  or profession" in the last part of the Explanation to the  said sub-clause  because  according  to him  the  prohibition  to deduction under s. 2 of the Amending Act is the amount  paid on account of wealth-tax which expression has been given  an extended  meaning to cover the wealth-tax payable under  the Wealth-tax  Act in this country as well as taxes of  similar character  and  other  taxes on assets  of  or  the  capital employed  in  the business or profession carried on  by  the assessee payable under the law of any country outside India. The  learned  advocate further proceeds to submit  that  the Explanation however excludes from the prohibition to  deduct sum  wealth-tax under the sub-clause or sub-section the  tax chargeable with reference to a particular asset whether such charge  is  either under the laws of this country  i.e.  the Wealth-tax  Act  or under the laws in force  outside  India. There is no warrant for this construction because the  words upon  which reliance has been placed are related to the  tax chargeable under a law in force in any country outside India with reference to the value of the assets of/or employed  in a  business or profession carried on by the  assessee.   The exclusion contemplated by the exception on which emphasis is placed  is wholly unrelated to the scheme of the  Wealth-tax Act because wealth-tax under that Act is not chargeable with reference  to.  the value of any particular asset  of  the business  or  profession  but under S. 3 the  charge  is  in respect  of  the net wealth on the  corresponding  valuation date of every individual Hindu undivided family and  company at  the  rate  or rates specified  in  the  Schedule.   "Net wealth’  under s. 2(m) means the amount which the  aggregate value  computed  in accordance with the  provisions  of  the Wealth-tax   Act  of  all  the  assets,  wherever   located, belonging  to the assessee on the valuation date,  including assets required to be included in his net wealth as on  that date  under hat Act is in excess of the aggregate  value  of all  the  debts owed by the assessee on the  valuation  date

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other  than those specified in items (i), (ii) And (iii)  of that  section.   S.  4 includes certain assets  in  the  net wealth  while  s.  5 provides for exemption  in  respect  of specified assets on which wealth-tax is not payable and such assets are not to be taken into account in computing the net wealth of the assessee.  S. 6 concerns with the exclusion of assets  and  debts  outside India and s. 7  deals  with  the determination  of  the value of the assets which are  to  be included  in the net wealth.  It is thus clear  that  tinder the scheme of the Wealth-tax Act, tax is leviable not on 17-L498SuPCI/73 540 any  separate or particular asset but on the net  wealth  as defined  under that Act.  The learned advocate wanted us  to read "and, particular asset" in Explanation to sub-cl. (iia) of  cl.  (a) of S. 40 " as the aggregate of  the  assets  as defined in ’net wealth’," under s. 2 (m).  To accept such an argument  would  be  to give a go by to the  scheme  of  the Wealth-tax Act where though each asset comprised in the  net wealth can be separately valued under S. 7, nevertheless net wealth  would be the amount by which the aggregate value  of all  those assets, exceed the aggregate value of debts  owed by  the assessee on the valuation date.  Even  otherwise  to read  the exception "but does no include any tax  chargeable with  reference to the value of any particular asset of  the business   or  profession"  with  the  first  part  of   the Explanation  "wealth-tax" means wealth-tax chargeable  under the Wealth-tax Act, 1957 " would not grammatically make  any sense.   These  two read together would make  the  following sentence" ‘wealth-tax means wealth-tax chargeable under  the Wealth-tax   Act,  1957.  but  does  not  include  any   tax chargeable  with  reference to the value of  any  particular asset  of  the business or profession." As  already  pointed out, on the scheme of the Act there is no logical connection between  the  import  of  each of  the  two  parts  of  that sentence,  the  first definitely  indicates  the  wealth-tax chargeable  under the wealth-tax Act while the latter  seeks to  except a tax chargeable with reference to the  value  of any  particular  business or profession which is not  a  tax leviable as such under the wealth-tax Act and hence does not relate  to that part of the Explanation where wealth-tax  in sub-cl.  (iia)  means that it is the  wealth-tax  chargeable under the Wealth-tax Act.  In our view, sub-section (IA)  of section 58 clearly excludes any deduction as claimed. Even apart from the amendment disallowing the deduction  the very nature of the income from dividend in respect of  which deduction of wealth-tax is claimed does not, as pointed  out by   the  High  Court,  bear  any  relationship  direct   or incidental  to  the  earning  of  that  income  and   cannot therefore be said to be laid out or expended exclusively for the  purpose  of making or earning such  income  within  the meaning  of  sub-cl. (iii) of s.57 of the Act or  under  the corresponding  provisions  of s.10 (2) (xv)  of  the  Indian Income-tax Act, 1922.  In any view of the matter, the answer to  the  question  rendered  by  the  High  Court  is  unex- ceptionable  and the appeal is consequently  dismissed  with costs. S.C.                           Appeal dismissed. 541