TMI Blog1966 (4) TMI 85X X X X Extracts X X X X X X X X Extracts X X X X ..... vice regarding development for an annual retainer fee. The Montreal Co. provided the assessee-company with technical information and advice on specific problems of production and manufacture of aluminium. In view of the agreement the assessee paid a total sum of ₹ 2,50,808 to the said laboratory between the accounting years ended on September. 30, 1944, and on September 30, 1950 In the year 1951, the Income-tax Officer treated the assessee-company as being in default under section 18(7) of the Act in respect of the amount of taxes which the assessee was liable to deduct from the payments made to the said Montreal company under the provisions of section 18(3A), 18(3B) and 18(3C) of the Act. The amount assessed was ₹ 1,24,199. The assessee entered into correspondence with Messrs. Aluminium Laboratories Ltd., Montreal, asking them for reimbursement of the aforesaid sum of ₹ 1,24,199. The latter refused to accept the assessee's claim for reimbursement and their repudiation was communicated to the assessee by their letter dated August 3, 1954. On obtaining such letter of repudiation, the assessee wrote off the amount during the relevant accounting year and claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each year, in four equal installments, each of one quarter of the total amount of the retainer fee mutually agreed upon for that year or, at the discretion of the Indian Aluminium Company, the annual retainer fee for any year may be paid as a single lump sum on the first day of January that year, provided that, in the event that the assessee is unable to make payments on the specified date, due to exchange control regulations or to any other cause beyond its control, the said payment shall be made on the earliest possible date thereafter. The terms of the contract do not show that any provision for payment of income-tax was made either by the assessee or the Aluminium Laboratories Ltd , Montreal. It is quite clear that, by reason of the agreement, the assessee credited a total fee of ₹ 2,50,808 in favour of the said Montreal company in a period of 7 years, that is, between the accounting year ended on 30th September, 1945, and on 30th September, 1950, and it may be presumed that, under the statutory provisions of the Income-tax Act, this amount was deducted from the profits and gains of the business of the assessee-company. What followed next was that the assessee was dealt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction 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). The other proviso need not be quoted here for the decision of this reference. Now, on an analysis of this section it will appear that (a) the payee should be non-resident in the taxable territories, (b) the amount payable should be interest not being interest on securities or any other sum chargeable under the provisions of this Act, and (c) the person responsible for making the payment should not himself be liable to pay income-tax and super-tax thereon as an agent. On a perusal of the entire section 18, it appears to us that it imposes an obligation upon every person responsible for paying any amount coming under the head salary , interest on securities or dividends or any other sums to a non-resident company, to deduct taxes at the time of making the payment and to pay only the balance to the assessee. It is, therefore, clear that in the instant case, irrespective of the contract between the parties, the assessee was under an obligation to deduct the taxes on the sum payable to the Montreal company at the source and if he does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suffer the tax on the payment of the retainer fee, but all the same the assessee had to bear the burden which it would not have borne but for the fact that the assessee-company had taken aid from that company which was a technical aid and was an aid necessary for the proper acceleration of the assessee's business. In support of his contention he has referred us to a number of decisions and has argued that the case comes clearly within the ambit of section 10(1) or 10(2)(xi) or 10(2)( xv). Both the learned counsel appearing for the parties have relied on the observations in Abdullabhai Abdulkadar's case (supra). In this case, the facts were that the respondent carried on business as commission agent and supplied goods from India to a non-resident principal who, on his part, sent cotton to the respondent and others for sale in India. The tax authorities treated the respondent as an agent of the non-resident principal, under section 43 of the Act, and assessed it in respect of the tax payable by the non-resident principal. The respondent in all paid ₹ 3,78,491 which after adjustment against the amounts payable to the non-resident principal, left a debit balance of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and be incidental to it. The loss from which a deduction is claimed must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee even if it has some connection with his business. If that is established, then the deduction must be allowed provided that there is no provision against it express or implied in the Act. Keeping these two decisions in our view, we have to consider whether this amount paid as income-tax by the assessee can be said to have sprung out of the business activities of the assessee and if it was found irrecoverable from the Montreal company whether it should be treated as a bad debt within the meaning of section 10(2)(xi). Before dealing with this aspect of the argument advanced by Mr. Banerjee, we would like to refer to the contentions as raised by Mr. Pal, learned counsel appearing for the revenue. He has advanced this argument that, although the assessee-company cannot in terms of section 18(3B) be treated as an agent, his position under section 18(3B) is in pari materia with the concept of agency. We do not think that we can accept this part of his argument as the liability of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the payment is in the nature of punishment as otherwise the assessee-company could not have been saddled with a personal liability. Such personal liability is the direct result of non-compliance with the provision of section 18(3B) of the Act and for all intents and purposes, this may be construed as a penalty. The expression penalty has not been defined in the Act, but Mr. Banerjee contends that as the relevant clause of sub-section (7) of section 18 does not come within the ambit of section 28, it cannot be treated as penalty and if it cannot be characterised as such, it necessarily follows that the payment made should be treated as incidental to the assessee's business. We have already said that it may have connection with the assessee's business but since it has sprung from non-compliance with the mandatory statutory provision for deduction at the source, it cannot by any show of reason be treated as incidental to the assessee's business. There is no charm in the word penalty and it cannot be said that because such an expression has not been used in section 18(7), the language used therein does not connote that the personal liability imposed is not penal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid by an assessee conducting his business, because in conducting it he has acted in a manner which has rendered him liable to penalty for an infraction of the law, it cannot be claimed as a deductible expense, as it cannot be called a commercial loss incurred in carrying on his business. Infraction of the law is not a normal incident of business. This decision was made by their Lordships on the question whether a penalty imposed under the Sea Customs Act should be considered as an allowable expense. Their Lordships negatived the contention of the assessee on the ground that since the penalty followed the infraction of the law such a deduction was not allowable. This decision, however, does not refer to any infraction of the provisions of the Income-tax Act, but refers to infraction of the statutory provisions in other fields of law. Be that as it may, we are of the view that even if an assessee disobeys the statutory provision as envisaged in the Income-tax Act and as a sequel thereof any liability is imposed upon the assessee, that cannot also in our opinion be construed as a part of the business expense within the meaning of section 10(2)(xv) of the Act, nor can it be said th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss could not be sustained. We agree with Mr. Banerjee that the payment had some nexus to the carrying on of the business in so far as technical advice was necessary for producing aluminium goods, but in view of the payment being characterised as penal in nature this cannot be said to be incidental to the business within the meaning of section 10(1) of the Act. This being our view we do not think that the decisions referred to by Mr. Banerjee have got any bearing whatsoever in the instant case. They are Motipur Sugar Factory Ltd. v. Commissioner of Income-tax [1955] 28 ITR 128, Commissioner of Income-tax v. Mysore Sugar Co. Ltd [1962] 46 ITR 649 (SC), Associated Banking Corporation of India Ltd. v. Commissioner of Income-tax [1965] 56 ITR 1 (SC), Commissioner of Income-tax v. Standard Vacuum Oil Co. Ltd [1965] 57 ITR 384 , Poona Electric Supply Co. Ltd. v. Commissioner of Income-tax [1965] 57 ITR 521 (SC), Narandas Mathuradas Co. v. Commissioner of Income-tax [1959] 35 ITR 461 , Commissioner of Income-tax v. Motiram Nandram [1940] 8 ITR 132 (PC), Commissioner of Income-tax v. Smt. Singari Bai [1945] 13 ITR 224 , Keshav Mills Ltd. v. Commissioner of Income-tax [1953] 23 ITR 230 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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