TMI Blog1972 (3) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... milar. They relate to two separate accounting and assessment years and two assessment orders have been challenged. We may give a few facts in one appeal. The Indian Aluminium 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. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. The language seems to be simple enough but it has engendered judicial 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by deduction from the rents which they paid to the company. It was claimed by the company that in computing their profits for assessment to income-tax they should be allowed to deduct the sum of the amounts ultimately 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and licence insurance premiums, the rates and taxes and the gas and water were all expenditure essential to the earning of the profits, and I think they also are governed by Smith v. Lion Brewery Company and are proper deductions. 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 particul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or ownership of a motorcar. When a owner-cum-trader pays the tax in respect of a vehicle used solely for the purpose of trade, nobody doubts, and the learned counsel for the revenue did not contest the position, that the tax would be deductible as an expense. Now, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness that he necessarily pays the tax, for without the business it cannot be said that he would hold the land at all. In view, then, of the particular facts I think the payment is incidental to the conduct of his business, and that it is money wholly and exclusively expended 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 cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the proposition that the question depends on the capacity in which the taxpayer pays the taxes. After referring to Smilh v. Lion Brewery case he observed : It appears to me that these two decisions of the House of Lords are not only quite inconsistent with the principal submission put forward 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if a company did that, it could not be said that the net wealth or net assets had not been used for the purposes of business. If tax was levied on the capital value of assets without allowing deduction of debts it is clear that the tax would be deductible. What difference does it make if debts are deducted from the capital 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icism if the noble Lords could have held there and had made it clear that they were holding nothing beyond that a tradesman who has to pay damages for injury to his customer due to his personal neglect in maintaining his premises, even though these premises are used for trade, was not entitled to deduct them in computing his profits for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holly and exclusively for the company's trade . The decision of the Court of Appeal in Harrods (Buenos Aires) Ltd. v. Taylor-Gooby, fully exposed the fallacy involved in applying, without close examination, the test of capacity, for the possession of which a tax may be imposed, to every levy of a tax, by extending the alluringly simple 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant English authorities, land-tax paid by a grazier on land used by him to earn income was held to be deductible in computing it for paying income-tax, would lay to rest, if I may so put it, the disembodied ghost of a tradesman's non-trading character, a pure abstraction, which is sought to be used before us, by the learned counsel for the income-tax 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d above, indicate that commercial practice and trading principles also warrant such deductions of a tax on assets or capital used wholly and exclusively for carrying on trade or earning profits. They may preclude deductions of taxes on net profits but not those imposed on net assets or wealth used exclusively for making profits. Commercial practice and trading 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property itself. It is true that wealth-tax is imposed on net wealth of assessees, as defined by section 2, sub-section (c), who are all persons . These persons are both natural and artificial. In the case of an artificial or juristic person like the company before us, it seems very difficult to separate the purpose of the juristic persona , which is certainly 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not a mixture, the ingredients of which become inseparable. Assuming, however, that there is some difficulty in separating that part of the tax which is payable in respect of net wealth used only for trade from that part of it which is imposed on a portion of net wealth not so used, I fail to see how the principle involved or meaning of the relevant provisions, with which we are concerned 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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