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TMI Blog1972 (3) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. Ltd., in respect of the year of assessment 1959-60 (accounting period calendar year 1958), paid Rs. 1,59,630 as wealth-tax and claimed to deduct this amount as expense from their assessable income. The Income-tax Officer allowed the deduction but the Appellate Assistant Commissioner held that the company was not entitled to the deduction of wealth-tax as an expense. The Appellate Tribunal upheld the order of the Appellate Assistant Commissioner. On the application of the assessee, the following question was referred to the High Court : " Whether, on the facts and circumstances of the case, the sum of Rs. 1,59,630 paid by the assessee as wealth-tax was legally deductible as a business expense in computing the assessee's income from business ?" The High Court, following the decision of this court in Travancore Titanium case, answered the question against the assessee. Having obtained certificate of fitness from the High Court, the assessee has appealed to us. Basing himself on Keshav Mills Co. Ltd. v. Commissioner of Income-tax, it was contended by the learned counsel for the revenue that we should not review our decision in Travancore Titanium case. Gajendragadkar C. J., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial conflict not only in India but also in England. Eminent judges have striven to formulate correct tests to determine whether an expenditure has been laid out or expended wholly and exclusively for the purposes of business or not, but no one has been able to find a test in the application of which differences of opinion do not arise. It seems to us, therefore, essential that, in each case, the courts must always keep in mind the language of the section. One of the tests which have been laid down and applied by some of the judges in England is whether the expenditure has been made in the capacity of a trader or an owner. One of the earliest cases in which this test was suggested was Strong and Company of Romsey Ltd. v. Woodifield. In that case the brewing company, which also owned licensed houses in which they carried on the business of innkeepers, incurred damages and costs on account of injuries caused to a visitor staying at one of their houses by the falling in of a chimney. The House of Lords held that the damages and costs were not allowable as a deduction in computing the company's profits for income-tax purposes. The Lord Chancellor observed : " In my opinion, howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... timately borne by them in respect of the Compensation Fund Charges. The Court of King's Bench held that the deduction claimed was inadmissible. This decision was reversed in the Court of Appeal (Kennedy L.J. dissenting), and opinions in the House of Lords being equally divided, the judgment of the Court of Appeal was sustained. Earl Halsbury, in holding in favour of the brewery, observed that " he (the trader) must if he carries on that business or that trade pay this tax ; it is the act of the legislature which makes him pay it and it is not a thing that is open to his own will or option ". Lord Atkinson observed : " Again, it is urged that the landlord pays his contribution as landlord and because of his proprietary interest in the premises, and not as trader, since he would be equally liable to it whether he traded or not. That, no doubt, is so, but in the present case the company have become landlords and thus liable to pay the charge, for the purpose solely and exclusively of setting up the tied-house system of trading. If the company took under lease a plot of land to enlarge their brewery or took similarly premises in which to establish a depot to sell their beer thro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Court of Appeal, regarding rates and taxes, said : " The next head is 'D., Rates and Taxes, pound 38 7s. 6d.' These are sums which the tenants were under a legal obligation to pay pursuant to their covenants in the tenancy agreement. The company, however, did not, for the reasons stated under A in the case enforce the tenants' covenant to pay, and consequently paid the rates and taxes themselves. These reasons have been stated and appear in the case, and need not be repeated ; in brief, they are commercial interest and expediency, and avoidance of inconvenience. I am of opinion that these rates and taxes so paid are in no sense deductions which are allowable from the company's profits. " The House of Lords, however, allowed these items. Lord Atkinson, at page 422 of the report, said : " Stated broadly, I think that that doctrine amounts to this, that where a trader bona fide creates in himself or acquires, a particular estate or interest in premises wholly and exclusively for the purposes of using that interest to secure a better market for the commodities which it is part of his trade to vend, the money devoted by him to discharge a liability imposed by s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , why is it deductible ? The only rational explanation seems to us to be 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 according to ordinary commercial principles. This aspect is also clearly brought out in Moffatt v. Webb, which was not cited before this court then. The taxpayer was a grazier, and during the year 1911, carried on business and was still carrying on business as such in Victoria upon lands of the fee simple of which he was during the said year and still was the owner. The said lands comprised 17,970 acres or thereabouts, and their unimproved value had for the purposes of the Land Tax Assessment Act, 1910, of the Commonwealth of Australia been assessed at pound 44,924. He paid Commonwealth Land Tax amounting to pound 387on the unimproved value of the said lands. The tax payer claimed to deduct this tax from his income as an outgoing incurred by him " as a disbursement " or expenditure being wholly and exclusively laid out or expended for the purpose of his trade. The High Court of Australia held that the tax was p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purposes of his trade." Isaacs, J., was impressed by the reasoning of Lord Halsbury and Lord Atkinson in Smith v. Lion Brewery Co. Ltd. He observed : " And Lord Atkinson reasons out the position and shows convincingly, to my mind, that though a tax may in one sense be paid as owner or lessee, in another it is paid as trader. The instances he puts as to licences are undeniable, and I cannot distinguish them from this case. To carry the matter further : Suppose the Federal Parliament were to lay a tax on the owners of motor cars, and carts, and guns, and dogs and sheep, so that the tax was payable whether these things were employed in trade or not ; could it be doubted that the tax would be a real outgoing necessary for the production of the income of a business in which they were all used ? The land is as necessary to the business as the personal property. . . . And the fallacy of the contrary doctrine consists in this; it confuses, not so much the meaning, as the application of the word 'purpose'. The land tax is enacted by the legislature for its own purpose, that is, to tax the owner ; and when he pays it to the Crown, he pays it as the owner, it is true, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on behalf of the Crown in the present case, but that the ratio decidendi of both cases, as stated by Lord Atkinson, is really decisive in favour of the company." Danckwerts L.J. observed : " In Rushden Heel Co. Ltd. v. Keene, to which I have referred, Lord Greene M. R. in 30 T.C., pages 316-7, introduced a test of a different kind from that to which I have referred. He seems to draw a distinction between payments made by a trader in the character of taxpayer and not, or not wholly, as trader. I find this idea difficult to follow and not very helpful in discussing the subject in issue. It seems to me very difficult to say where to draw the line between the two capacities, and not as satisfactory as the test which has been adopted in the cases to which I have referred. Everyone who pays taxes pays because he is taxed and is a taxpayer." Diplock L.J. also criticised the test in these words : " It is contended for the Crown that the company paid the tax in its capacity as a taxpayer, not in its capacity as a trader. But with great respect to Lord Greene M.R.'s judgment in the Rushden Heel Co.'s case on which this contention was mainly based, this is merely playing with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al value of assets ? The net wealth is as much an instrument of trade as the capital value of assets. We find it very difficult to distinguish the case of a trading company like the assessee, on principle, from that of the grazier or the brewery company, in the cases referred to above. In our view, the test adopted by this court in Travancore Titanium case that " 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" 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 pointed out by the learned counsel for the revenue that it would be difficult to allow the deduction of wealth-tax in respect of individuals who have both business assets and debts and non-business assets and debts. But the wealth-tax return form itself requires the assessee to sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purposes of paying income-tax just as he could not claim a deduction for damages he will have to pay as a wrong-doer for assaulting or defaming a customer who comes into his shop. It is no part of normal business to commit such wrongs. Liabilities so incurred could very well be looked upon as outside the course of trading altogether even if they arise out of commercial activity or result from something connected with or meant to serve any commercial purpose. Their Lordships, however, used language which could cover more than what could be attributed to the tradesman's own purely personal wrongs. The facts of that case show that the negligence which resulted in payment of damages, for which a deduction was claimed, was that of servants employed as an ordinary incident of trading so that the master was only vicariously liable as an inn-keeper and an employer. And, this aspect of the case made Lord James, in Strong's case, doubt the correctness of the opinion which he, very hesitatingly, decided to accept. In Smith v. Lion Brewery Co. Ltd. compensation fund charges levied under statutory provisions were held, by the Court of Appeal, to be permissible deductions in comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formula of the Lord Chancellor, in Strong's case, to cases for which it could not have been meant. In Harrods' case deduction was claimed in computing annual profits of a company, of a " substitute tax " which had to be paid on the company's capital in Argentina, irrespective of the profits made on it (just like the wealth-tax before us). The Court of Appeal quoted passages from the opinions of the law Lords in Rushden Heel Co.'s case and Smith's Potato Estates case to show that the ratio decidendi of these two decisions confined the principle applied there to cases where taxes, like the income-tax and excess profits tax, had to be paid upon and after a calculation of profits and did not extend to other cases. In other words, where profits, the net gains of business determined after making all permissible deductions, are taxed, the disbursements to meet such taxes cannot be deducted. But, where the tax was levied, as it was in Harrods' case, on capital or assets used for the purpose of earning these profits, it was a permissible deduction in calculating profits. In Harrod's case, both Willmer L.J. and Diplock L.J. had made use of Lord Davey's test, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x department, to prevent wealth-tax paid on even the wholly commercial assets, constituting a part or whole of the taxable " net wealth ", used exclusively for purposes of trade, from being deducted as allowable expense, under section 10(2)(xv) of the Income-tax Act,1922. On the earlier occasion, when Travancore Titanium Co.'s case was argued in this court, Moffatt v. Webb was not cited. Although, there are references in the judgment of this court, in the earlier case, to the " tied-house " cases and to Harrods' case, these were held to be distinguishable on facts, but the test propounded by Lord Chancellor Loreburn, in Strong's case was applied to disallow deduction of wealth-tax in computing profits. After going through all the relevant authorities, I have no doubt whatsoever left in my mind that it is the ratio decidendi of " tied-house " cases and Harrods' case, which is the same as that of the Australian case, that applies here and not Lord Chancellor Loreburn's test laid down in a very different context than that of payment of a tax as a necessary precondition of earning more profits. I do not think that the test of trading character, when Incurring an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing principles " could vary. These terms appear to be rather vague and indefinite. The meanings of the relevant statutory provisions seem much more fixed and definite. All that the language of section 10(2)(xv) apparently requires, for claiming its benefit, is proof of a direct causal connection between an outgoing and the commercial purpose which necessitates it. Whatever " commercial practice or trading principles " may imply or import, they could not alter the meaning of statutory provisions or travel beyond it. Another question which engaged my attention was whether wealth-tax could be excluded from the purview of section 10(2)(xv) simply because it was a tax on assets or " net wealth" paid by its owner so as to reduce his wealth. This line of thinking, however, seemed to me to bring in, through the backdoor, the misleading test of either the capacity as owner for the possession of which or the purpose for which the wealth-tax may be demanded, instead of the inevitable need and the purpose of the trader in paying the tax, as relevant matters. In Lion Brewery's case, Lord Halsbury had declared the unavoidable need to satisfy a statutory demand for the purpose of making prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial from the character of the " persona " itself. Even as regards other traders, that part of tax which falls on what is used exclusively for trade could be really ascribed only to a trading character. To the extent it is a tax on property used for earning profits, it must enter into a computation of profits from trading. On going through the provisions of the Wealth-tax Act as well as the Income-tax Act it was not possible for me to infer that the payment of wealth-tax must be excluded from the computation of profits under section 10, sub-sections (1) and (2) of the Income-tax Act. It appears to me that nothing less than express statutory provision would justify a denial of the right to a deduction which the language of section 10, sub-section (2)(xv), confers upon an assessee. On looking at the position of law in America on this subject, I find that there are statutory provisions which deny deductions of certain taxes only, such as income-tax, and taxes on war profits and excess profits, gifts, inheritance, legacies, and succession (See U. S. Code, 1958 edition, Titles 22-26, Internal Revenue Code, page 4287, paragraph 164). A general statement of the law on this subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncerned here, will be affected. Mr. Chagla, appearing for an assessee, drew our attention to the division into two heads, one of business assets and another of the "other assets", which is found in form 'A' prescribed by the rules for the wealth-tax return. This means that the Wealth-tax Act itself makes that part of the net-wealth separable which can be utilised wholly and exclusively for trade from the remainder of it. If this can be done, it is difficult to see how that part of wealth-tax could escape deduction, under section 10(2)(xv) of the Income-tax Act, which is attributable to such portion of the net wealth as is used wholly and exclusively for earning profits. To lay down, as we are doing in this case, that it is the causal connection between payment of tax and that part of net wealth which is used wholly and exclusively for trade and not the mere character or capacity for the possession of which the tax is demanded, which determines whether it is an allowable deduction or not, under section 10(2)(xv) of the Act, seems to me to amount to nothing more than to give effect to the plain and literal meaning of a provision of a taxing statute. There seems no need, in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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