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PETITIONER: TRAVANCORE TITANIUM PRODUCTS LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, KERALA

DATE OF JUDGMENT: 17/01/1966

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

CITATION:  1966 AIR 1250            1966 SCR  (3) 321  CITATOR INFO :  D          1972 SC  19  (6,8)  O          1972 SC1880  (1,2,3,23,28,38,40,51)  D          1972 SC2674  (2)  RF         1973 SC1344  (2,3)  RF         1975 SC  97  (22)  RF         1975 SC 657  (7,8)

ACT: Income  Tax Act, 1922 (11 of 1922), s.  10(2)(xv)-Wealth-tax paid  on  assets  owned for purpose  of  business-Whether  a permissible deduction.

HEADNOTE: In  computing  the  total earned  income  of  the  appellant company  for the calendar year 1959, the Income Tax  Officer disallowed a claim for deduction of Rs. 80,255 in respect of liability for payment of tax under the Wealth Tax Act, 27 of 1957  incurred by the company.  The order of the Income  Tax Officer  was confirmed in appeal by the Appellate  Assistant Commissioner, the Tribunal and, on a reference, by the  High Court. It  was  contended by the appellant company that  since  the company  held  the assets on which tax was  levied  for  the purpose  of its business and profits were earned by the  use of  those  assets, tax paid in respect of those  assets  was expenditure laid out wholly and exclusively for the  purpose of  the  business  and on that  account  was  a  permissible allowance under s. 10(2)(xv) of the Income-tax Act, 1922, HELD:The amount of tax paid on the net wealth of an assesses under Wealth Tax Act is not a permissible deduction under s. 10(2)  (xv) of the Income-tax Act, for tax is imposed  under the Wealth Tax Act on the owner of the assets and not on any commercial activity.  The charge of tax is the same, whether the asset are part of or used in the trading organization of the owner or are merely owned by him. [326 G-H] For  expenditure to be regarded as being for the purpose  of the  assessee’s  business within the meaning of  s.  10  (2) (xv),  the  nature of the expenditure of  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

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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 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. [326 F] Case law discussed.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 235 of 1963 Appeal  by special leave from the judgment and  order  dated August  26,  1963  of the Kerala High  Court  in  Income-tax Referred Case No. 29 of 1962. G.B.  Pai, T. A. Ramachandran and O. C. Mathur,  for  the appellant. A.   V. Viswanatha Sastri, N. D. Karkhanis, R. H. Dhebar and R. N.  Sachthey, for the respondent. 322 The Judgment of the Court was delivered by Shah,  J.  In  computing  the total  earned  income  of  the appellant Company for the calendar year 1959, the Income-tax Officer, Trivandrum, disallowed a claim for deduction of Rs. 80,255/-  in respect of liability for payment of  tax  under the  Wealth Tax Act 27 of 1957 incurred by the  Company  for the  calendar years 1957 and 1958.  The order was  confirmed by the Appellate Assistant Commissioner and by the Appellate Tribunal.  On the following question referred by the  Wealth Tax Appellate Tribunal,               "Whether on the facts and circumstances of the               case,  the assessee Company is entitled  to  a               deduction of Rs. 12,873/- being the wealth tax               paid during the account year ended  29-2-1960.               against the profits and gains of its  business               for the assessment year 1960-61 under Sec.  10               (2)(xv) of the Indian Income-tax Act ?" the High Court of Kerala recorded an answer in the negative. The Company has appealed to this Court with special leave. The  Company claims that wealth-tax paid by  it  represented expenditure laid out wholly and exclusively for the  purpose of  its  business,  and on that  account  is  a  permissible allowance  under  s. 10(2)(xv) of the  Income-tax  Act.   In determining the admissibility of this claim, it is necessary to ascertain the true character of the liability for payment of tax under the Wealth Tax Act.  Tax is charged under S.  3 of  the  Wealth Tax Act, 1957, for every financial  year  in respect  of  the  net  wealth  of  every  individual,  Hindu undivided family and Company at the rate or rates  specified in  the Schedule to the Act; and ’net wealth’ under the  Act means  the amount by which the aggregate value  computed  in accordance with the provisions of the Act of all the  assets belonging to the assessee on the valuation date is in excess of the aggregate value of all the debts owed by the assessee on that date other than the debts specified.  The tax  under the  Act  is  payable by all  individuals,  Hindu  undivided families  ,and  Companies  on the value  of  taxable  assets belonging to the taxpayer: it is charged on the net value of the  assets,  and not on the business  or  trading  activity carried on by the taxpayer.  The rates of tax for  companies as  well  as individuals and Hindu  undivided  families  are prescribed  by the Second Schedule.  The slabs on which  the rate of tax is nil are not uniform in the case of  different

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taxable  entities  and  a special exemption is  given  to  a Company  which  has incurred in any year  loss  computed  in accordance  with ss. 8, 9, 1 0 and 12 of the Income-tax  Act without referring to depreciation allowances and development rebates  and without taking into account the losses  brought forward  from the earlier years, and which has not  declared any dividend on its equity capital in respect of that  year. It  is also provided by r. 5 of the Schedule that where  the profits  of  a  company  in  respect  of  any  year,  before deducting any 32 3 of  the  allowances referred to in the second  paragraph  of Part  11, are less than the amount of wealth-tax payable  by it  in respect of the relevant assessment year, the  wealth- tax payable by the company for such assessment year shall be limited  to  the amount of such profits  provided  that  the company has not declared any dividend on its equity  capital in  respect  of that year.  But by relating the  quantum  of liability of a company to wealth-tax in these special  cases to  the  profits  earned, the character of the  tax  is  not altered.   It  is  and remains a tax charged  upon  the  net wealth, and it is not made a tax related to or incidental to the  carrying on of a business.  The rules in  the  Schedule merely  extend the exemption which is primarily declared  in favour of a Company of which the net wealth does not  exceed Rs.  5  lakhs, to a company which has in the  previous  year made  a loss, and grant a partial exemption if  the  company has made profits which are inadequate to meet the wealth-tax liability at the prescribed rate. In computing the profits or gains of an assessee who carried on business, certain allowances are permitted under s. 10(2) from the business profits, and one such head is:               "(xv)  any expenditure not being an  allowance               of the nature described in any of the  clauses               (i)  to (xiv) inclusive, and not being in  the               nature  of  capital expenditure  for  personal               expenses of the assessee laid out or  expended               wholly and exclusively for the purpose of such               business, profession or vocation." An  allowance permissible under cl. (xv) in the  computation of  taxable income is therefore expenditure incurred in  the year  of account in respect of a business carried on by  the assessee:  the  expenditure  must not be in  the  nature  of capital expenditure or personal expenses of the assessee and it   must  have  been  laid  out  or  expended  wholly   and exclusively for the purpose of the business. The  argument  for the Company in this case turns  upon  the meaning   of  the  expression  "for  the  purpose  of   such business." On behalf of the Company it is urged that for the purpose  of its business, it holds assets and by the use  of those  assets profits are earned and therefore tax  paid  in respect  of  those assets is expenditure laid  out  for  the purpose  of  the business.  Whether an item  of  expenditure falls  within  that  description  has  of  necessity  to  be determined having regard to the nature of the business,  the nature  of  the  expenditure and the  relation  between  the business  and  the expenditure.  In  adjudicating  upon  the claim  that an outgoing is a permissible deduction under  s. 10(2)(xv)  of  the Income-tax Act, the primary  question  is whether  in  the  light  of  accepted  commercial  practice, trading principles and the relation between the business and the  outgoing,the outgoing can be said to arise out  of  the carrying  on  of the business and to be incidental  to  that business.  In the context of a variety of 324

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trading   transactions   and  the   relation   between   the transactions  and the expenditure claimed as  a  permissible deduction,  in the decisions of the courts under the  Indian Income-tax Act and of the courts in the United Kingdom under the English taxing statutes, different tests are  suggested. Those tests, though adequate for the specific problem  under discussion, cannot be regarded as exhaustive or  necessarily applicable  to  other problems.  When Rowlatt,  J.,  in  The Commissioners of Inland Revenue v. The Anglo Brewing Company Ltd.(1)  said  that the expression "for the purpose  of  the trade" meant for the purpose of keeping the trade going, and of  making it pay, he was making that statement in  relation to the facts of the case, and he did not intend to suggest a universal  test.   Similarly  when because  of  the  special nature of the business, expenditure incurred for payment  of rates, taxes and duties was held a permissible allowance  in the  computation of taxable income, it was not intended  and could  not  be  intended to be laid  down  that  expenditure incurred for payment of rates, taxes or duties in respect of another   business  would  be  regarded  necessarily  as   a permissible  allowance.  Illustrations of this class are  to be  found in Smith v. Lion Brewery Company  Ltd.(2)  Usher’s Wiltshire  Brewery  Ltd.  v. Bruce(3)  and  Harrods  (Buenos Aires)   Ltd.  v.  Taylor-Gooby.(4)  In  the  Lion   Brewery Company’s  case(2)  a  Brewery Company who  were  owners  or lessees  of  licensed  premises acquired as  part  of  their business   as  brewers  and  as  a  necessary  incident   to profitable exploitation were held entitled to the  allowance in  the  computation  of  their  income  under  Sch.   D  of Compensation  Fund Charges imposed under the  Licensing  Act upon  their  tenants  and which  the  tenants  after  paying recouped  themselves by deduction from the rents payable  to the Company. In Usher’s Wiltshire Brewery Ltd.’s case(3) the claim of a Brewery Company as owners or lessees of  licensed premises  acquired in the course of and for the  purpose  of their business as brewers and as a necessary incident to the more  profitable  conduct  of  their  business  of   certain expenses in connection with those licensed houses was allow- ed in the computation of their profits.  In Harrods  (Buenos Aires)  Ltd’s  case(4)-Harrods (Buenos  Aires)Ltd-a  company incorporated in the United Kingdom-carried on business of  a retail store in Argentina and was liable to pay a tax  known as  "substitute  tax"  which  was  levied  on  joint   stock companies   incorporated  in  Argentina  and  on   companies incorporated  outside  but  which  carried  on  business  in Argentina  through  an  "empresa  estable"  (a   "commercial establishment").   In proceedings for assessment of  income- tax  of the business the claim of the Company to deduct  the "substitute  tax"  paid  to  the  Argentina  Government  was accepted, for it was an expenditure without paying which the assessee Company could not carry on its business at all.  In all the three cases the expenditure was directly related  to the business Organisation of the taxpayer. (1)  12 T.C. 803.                                    (2))  5 T.C. 568. (3)  6 T.C.  399.                                         41 T.C. 450.                             325 But every item of expenditure merely because it is connected with  the  trade  may  not  necessarily  be  treated  as   a permissible  deduction.   A  fairly  reliable  approach  for determining  what  may be regarded normally  as  expenditure laid out or expended wholly and exclusively for the  purpose of  the  business  was suggested in Strong  and  Company  of Romsey  Ltd. v. Woodifield.(1) That was a case of a  Brewery

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Company  owning a licensed house in which it carried on  the business of inn-keepers.  The Company had to pay damages  to a  customer who was, when sleeping in the inn, injured by  a falling  chimney, the fall of the chimney being due  to  the negligence of the Company’s servants.  The Company was  held disentitled  to  deduct  the expenditure  in  computing  its profits  for  income-tax purposes.  Lord Loreburne,  L.  C., observed,   in  disallowing  the  claim  as  a   permissible expenditure  under the head expenditure laid out wholly  and exclusively for the purpose of the business:               "A  deduction cannot be allowed on account  of               loss not connected with or arising out of such               trade.   That is one indication.  And  no  sum               can be deducted unless it be money wholly  and               exclusively  laid  out  or  expended  for  the               purposes  of  such  trade.   That  is  another               indication . .               connected  with the trade, it must  always  be               allowed  as  a deduction: for it may  be  only               remotely connected with the trade or it may be               connected with something else quite as much as               or  even  more than with the trade.   I  think               only  such  losses  can  be  deducted  as  are               connected  with it in the sense that they  are               really  incidental to the trade itself.   They               cannot   be  deducted  if  they   are   mainly               incidental to some other vocation, or fall  on               the  trader in some character other than  that               of trader."               In the same case Lord Davey observed:               "These  words........ appear tome to mean  for               the  purpose of enabling a person to carry  on               and  earn profits in the trade, etc.  I  think               the  disbursements permitted are such  as  are               made for that purpose.  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."               In  Badridas Daga v. Commissioner  of  Income-               tax,(2)  Venkatarama Aiyar, J., observed  that               whether  the expenditure is admissible or  not               will  depend  upon whether it can be  said  to               arise  out of the carrying on of the  business               and   be  incidental  to  it,  and  this   was               reaffirmed  by this Court in a later  judgment               in  Commissioner  of  Income-tax,  Bombay   v.               Abdullabhai Abdulkadar.(3)               (1)  5  T.C.  215                          (2)               [1959] S.C.R.  690=34 I.T.R. 10               (3)   [1961] 2 S. C. R. 949=41 1. T.R. 545.               326               In   a   recent   judgment   of   this   Court               Commissioner   of   Income-tax,   Kerala    v.               Malayalam Plantations Ltd.(1) certain  amounts               paid as estate duty under s. 84 of the  Estate               Duty   Act,  1953,  by  a   resident   company               incorporated  outside  India on the  death  of               shareholders  not  domiciled  in  India,  were               sought  to be deducted under S. 10(2) (xv)  as               expenditure  laid out or expended  wholly  and               exclusively for the purposes of the  business.               Subba Rao, J., speaking for the Court observed                             at p. 705:               "The  expression  "for  the  purpose  of   the               business"   is   wider  in  scope   than   the

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             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 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 precondition 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 the carrying on of  the               business  and the assessee shall incur  it  in               his  capacity  as  a person  carrying  on  the               business." The position may therefore be summarised thus: the nature of the expenditure or outgoing must be adjudged in the light of accepted  commercial practice and trading  principles.   The expenditure  must be incidental to the business and must  be necessitated or justified by commercial expediency.  It must be  directly and intimately connected with the business  and be  laid out by the taxpayer in his character as  a  trader. To  be a permissible deduction, there must be a  direct  and intimate connection between the expenditure and the business ie.  between  the  expenditure  and  the  character  of  the assessee  as a trader, and not as owner of assets,  even  if they are assets of the business. In the light of the principles the amount of tax paid on the net wealth of an assessee under the Wealth Tax Act is not  a permissible  deduction  under  s. 10(2)(xv)  of  the  Indian Income-tax  Act in his assessment to income-tax, for tax  is imposed under the Wealth Tax Act on the owner of assets  and not  on any commercial activity.  The charge of the  tax  is the same, whether the assets are" part of or (1)  (1964] 7 S.C.R. 693=53 I.T.R. 140.                             327 used in the trading Organisation of the owner or are  merely owned  by him.  The assets of the  taxpayer-incorporated  or not-become chargeable to tax because they are owned by  him, and not because they are used by him in the business. The appeal therefore fails and is dismissed with costs. Appeal dismissed. 10 Sup.C.I./66-8 328