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TMI Blog1970 (11) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1944, when the firm was again dissolved and all its assets were purchased by Seth Narsingdas Daga, one of the erstwhile partners, for a sum of Rs. 50 lakhs. An agreement was signed on October 14, 1945, giving effect to the transaction from October 18, 1944, the date on which the original purchase was made. On the same date that the formal agreement was signed, namely, October 14, 1945, Seth Narsingdas Daga, who had a large family consisting of his wife and several sons, disrupted the Hindu joint family and all members of the Hindu family constituted themselves into a new firm of 7 partners, including therein his wife, Smt. Sodradevi Daga, and his sons. That new partnership deed is dated October 24, 1945, though the new firm was stated to have been constituted from October 18, 1944, for a period of five years. In the present reference we are concerned with two assessment years, namely, 1955-56 and 1956-57, corresponding to the income-tax years ending Diwali of 1954 and 1955. Several questions had arisen in connection with the assessment of the firm from 1946-47 onwards. One of the principal questions was how the valuation of the property which was transferred from hand to hand sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harma v. Commissioner of Income-tax, which is in favour of the department. Since the latter is a decision of a Division Bench of this Court, the department has followed it and founded its decision upon it. Before we turn to the controversy upon the decisions, it is well that we should examine first the statute itself. The relevant portion of section 10 of the Indian Income-tax Act, 1922, runs as follows : " Business--(1) The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely--. . . . . . (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 or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. . . . . " The key words are " wholly and exclusively for the purpose of such business. " The word " wholly " in plain English means completely or in its ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference. Now the majority view in the Smith's Potato Estates Ltd. case was taken upon 2 grounds. First that there was a distinction between accounts made upon a purely trading basis and those which are prepared and accepted for the purpose of income-tax before the authorities of the Inland Revenue and that the purpose of taxation is quite different from the purpose of business. No doubt the two duties of keeping accounts of a business on the one hand and paying taxes on the other overlap and in practice are almost indivisible, but nonetheless the distinction is clear-cut and decisive. Based upon this distinction, the majority took the view that the expenses for preferring appeals in cases of income-tax impositions are really for the purpose of ascertaining the tax payable by the assessee and not for the purpose of ascertaining the profits. The profits they said were ascertained when the assessee's year of account ended. Once the business profits were ascertained, the task of paying income-tax began and the expenses were incurred for that purpose alone. These two points were brought out with great force in the following passage in the judgment of Lord Porter : " Regarding the circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excess profits tax, and whether successful or unsuccessful is, in my opinion, incurred at any rate in part in order to determine the correct amount of income tax or excess profits tax, as the case may be, and not in order to earn gain even though that phrase be given a broad significance. " Lord Simonds also relied upon the dictum of Lord Davey in Strong and Company v. Woodifield. Lord Simonds approved the following expression of the Master of the Rolls : " But his obligation to pay it (the tax) is his obligation as a subject and a taxpayer, and in ascertaining the amount of his liability he is putting himself in a position to discharge his duty to the Crown. " and drew the same distinction. The minority view in the Smith's Potato Estates case is powerfully expressed in the dissenting judgment of Viscount Simon and the reasoning which prevailed with the minority was this : No doubt there may be a distinction between accountability for purpose of the tax and accountancy in business and that the two may be made up upon different considerations. No doubt also that taxation depends upon the business profits which are ascertained by a business man and that when the business man pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the trader from carrying on the trade would not be reduced by taxation, and it is the purpose of trade (at any rate under private enterprise) to make its legitimate profit. Viewed in this light, I do not see why the expenditure here in question is not wholly and exclusively laid out for the purposes of the trade--if it had not been incurred, the trade would be less profitable. " Taking this view Viscount Simon further pointed out that the view which he had taken did not conflict with Lord Davey's dictum, for even assuming that the purpose of the expenditure must be " the purpose of enabling a person to carry on and earn profits in the trade ", still upon the view which Viscount Simon took that the business man was trying to save himself from taxation he was trying to increase the profits of his business. All the subsequent decisions refer to this pronouncement of the House of Lords in Smith's Potato Estates case. In India, no doubt, each " previous year " is a " separate self-contained period of time " for the purposes of assessment, yet the assessment is made on the income, profits and gains of the " previous year " (subject to some very minor exceptions) and not as in Engl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sident shareholder. Such a statutory duty was unconnected with the business. The occasion for the imposition arose because of the territorial nexus afforded by the accident of its doing business in India. In connection with the question whether the amounts could be said to be expended wholly or exclusively for the purpose of the business of the assessee under section 10(2)(xv) of the Act, however, the Supreme Court was called upon to consider the remarks of Lord Davey in Strong and Company's case and to the decision in Rushden Heel Co. Ltd. v. Keene (His Majesty's Inspector of Taxes) which was decided at the same time as Smith's Potato Estates cases to which we have just referred. Chief Justice Subba Rao, who delivered the judgment on behalf of the court, pointed out that even in the majority judgment there was a difference in the interpretation of the words of the English statute " wholly and exclusively laid out or expended for the purposes of the trade " between the Lord Chancellor and the dictum of Lord Davey in Strong and Company's case. Whereas the Lord Chancellor had interpreted the words to mean that the expenses would not be deducted if they were " mainly incidental to som ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, and it must be made for the purpose of earning the profits. " In view of this decision of the Supreme Court it is at least to be doubted whether the majority view in the English case can prevail in India. The decision in Malayalam Plantations' case was reaffirmed and followed by the Supreme Court in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, where Mr. Justice Shah observed : " The High Court also thought that expenditure to fall within the terms of section 10(2)(xv) must be one for the purpose of earning income, and there was no material on the record to show that the expenditure was so incurred. If it is intended thereby to imply that the primary motive in incurring the expenditure admissible to deduction under section 10(2)(xv) must be directly to earn income thereby, we are with respect unable to agree with that view. " Then the learned judge referred to the decision in Malayalam Plantations Ltd. case, and after quoting the very passage from the judgment of Chief Justice Subba Rao which we have quoted above proceeded : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 10(2)(xv) must, as we have stated before, be directly incurred for the purpose of the business. It may also be of indirect benefit to the business. In the light of these important pronouncements of the Supreme Court we think that so far as India is concerned considerable doubt is thrown on the majority view taken in Smith's Potato Estates. The view which has commended itself to us has also been taken in Binodiram Balchand v. Commissioner of Income-tax. The question there involved was the same as the question in the present case so far as the first item is concerned. There also sums paid by an assessee, by way of professional fees to an income-tax adviser for services rendered during and for the conduct of assessment proceedings before the income-tax authorities, were in question. The department disputed that the expenditure was wholly and exclusively for the purpose of business. The Madhya Pradesh High Court laid down that the test to be applied is whether the expenditure was necessary on grounds of " commercial expediency " and on the principles of " ordinary commercial trading ". Another test which the Division Bench accepted was whether the expenditure was in order di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of income-tax proceedings before the Income-tax Officer or laid out in conducting appeals, including fees paid to the accountants and lawyers would be expenditure incurred wholly and exclusively for the purpose of business and would be allowable under section 10(2)(xv). The allowance contemplated in section 10(2)(xv) is not necessarily an allowance for amounts expended to increase profits only so long as it is for the purpose of the business. It is not also necessary that profits should be earned by such expenditure, nor is it necessary that it should be expended directly for the purposes of business so long as the business indirectly profits. While upon the provisions of law and the authorities we have taken this view, we may immediately point out the limits of the principle also. We should not be understood to lay down any proposition wider than the one we intend to lay down in this case. The present case is one where an expenditure for preparation and settlement of tax liability before the Income-tax Officer and expenditure incurred in appeals preferred by the assessee simpliciter is concerned. In this case there is no finding or allegation that the expenditure was unreasona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had evaded payment of income-tax of about 4 crores of rupees during the years 1941-42 to 1947-48. In that case, therefore, it could well have been argued that part of the motive or purpose in expending large amounts of money towards fees of counsel was not wholly and exclusively for the purpose of the assessee's business, but partly in order to escape the consequences of the assessee's own previous evasion of tax. Indeed, it appears that the counsel for the assessee distinguished that case from other cases of " expenses simpliciter ", i. e., where no such allegation is made against the assessee. When the decision of this court in S. D. Sharma v. Commissioner of Income-tax, and the decision of the Allahabad High Court in J. K. Cotton Manufacturers Ltd. v. Commissioner of Income-tax were referred to and the contrary view of the Madhya Pradesh High Court in Binodiram Balchand v. Commissioner of Income-tax were pointed out to the Division Bench, the counsel for the assessee distinguished those cases on that very ground. At page 585 this was what the Division Bench observed : " Mr Gauri Mitter, learned counsel for the revenue, contended that none of the decisions of the Supreme Court, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en concluded as also in respect of the assessment years 1946-47, 1947-48 and 1948-49 which were then pending before the Income-tax Officer " in order to straighten out matters in respect of income concealed from the assessments which had already concluded and which were about to be reopened, as well as from the returns originally submitted in respect of the pending assessments ". The purpose of the expenditure was, therefore, at least partly to save the assessee from the consequence of his own concealment. The expenditure was, therefore, not wholly and exclusively for the purpose of business. It also appears that in the meanwhile there came into force the " voluntary disclosure scheme " and the assessee attempting to take advantage of that scheme and for that purpose had engaged a consultant. It is clear from the statement of the case that the income-tax authorities took the view that, since the income-tax consultant's services were required by the assessee in connection with the offer of settlement made by him to the department under what is known as the " voluntary disclosure scheme ", which is not a general feature in completing income-tax assessments in the normal course, the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which falls within the first category of expenditure simpliciter where no such allegation or finding is made. S. D. Sharma's case, therefore, need not detain us here. No doubt, they have in discussing the law referred to the diversity of opinion in the English courts and in India on the interpretation of the expression " wholly and exclusively for the purpose of business " in section 10(2)(xv) of the Act and no doubt also they have expressed a preference for the majority view in the Smith's Potato Estates Ltd. case but really these remarks must be treated as obiter remarks in view of the passage which we have quoted above. Even after referring to the majority decision they have said that we will for the purposes of that case assume that usual accountancy expenses for ascertaining the commercial profits on a trade basis would be allowable. Unfortunately S. D. Sharma's case has been taken as a decision on that point in many of the subsequent cases in the High Courts. It is on this very point that Chief Justice Dixit distinguished it in Binodiram Balchand's case when he remarked that " a careful perusal of the judgment in S. D. Sharma's case shows that the judgment in that case did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains. " The latter words were substituted by the words " for the purpose of such business ". This amendment in the Act itself was not brought to the notice of the Kerala High Court, otherwise the sharp distinction drawn between the words used before and after the amendment would have been dealt with. In any case the ratio decidendi of Sree Meenakshi Mills' case was not adverted to. Apart from that, we may say that the Kerala High Court having followed the decisions of the Allahabad High Court and the Bombay High Court on the basis of the majority view in the Smith's Potato Estates Ltd.'s case, we are unable to agree with that decision for reasons which we have indicated above. A reference was also made on behalf of the department to Rushden Heel Co. Ltd. v. Keene (H. M. Inspector of Taxes), a case which was decided along with Smith's Potato Estates Ltd.'s case. A report to be found in Smith's Potato Estates Ltd.'s case gives a statement of the case as stated by the Commissioners and it does appear from that statement of the case that even in Rushden Heel's ..... X X X X Extracts X X X X X X X X Extracts X X X X
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