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TMI Blog1964 (4) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... said amounts to revenue in its accounts in ascertaining the profits and gains of its business for the said year. Similarly, for the accounting year ending March 31, 1956, it paid a sum of pound 3,809-1-5 towards estate duty payable on the death of certain shareholders and debited the said amount to revenue in its accounts in ascertaining the profits and gains of its business for that year. The Income-tax Officer included the said amounts so paid towards estate duty in the profits and gains of the company for the said two accounting periods and assessed the company to income-tax for 1955-56 and 1956-57 on that basis. The appeals preferred by the assessee to the Appellate Assistant Commissioner were dismissed. On further appeal to the Appellate Tribunal it held that the assessee was entitled to deduct the said amount in computing its profits ; and on that finding it set aside the orders of the Appellate Assistant Commissioner. On an application made by the Commissioner of Income-tax, the Appellate Tribunal stated a case under section 66(1) of the Act to the Kerala High Court, and referred the following question of law for its opinion : "Whether, on the facts and in the circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he argument turns upon the question whether the estate duty paid by the assessee is an expenditure incurred by it within the meaning of the said provision. Under section 5 of the Estate Duty Act, the property of every person dying after the commencement of the said Act shall be liable to a duty called " estate duty " at the rates fixed in accordance with section 35 thereof. Under section 21 of the said Act there shall not be included in the property passing on the death of the deceased, inter alia, movable property situated outside the territories to which the said Act extends at the time of the death of the person. Under section 53 of the said Act, where any property passes on the death of the deceased, every legal representative to whom such property so passes for any beneficial interest in possession or in whom any interest in the property so passing is at any time vested and others mentioned in the section shall be accountable for the whole of the estate duty on the property passing on the death. Section 84 thereof is aimed to reach the property of a member of a company dying outside India : the section before amendment read : " 84. Company to furnish Particulars of deceased ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid that the company has any legal interest in the shares owned by the third party. That apart, the said sub-section also cannot have extra-territorial operation. Nothing has been placed before us to enable us to come to the conclusion whether in England, where the concerned shareholders died, the resident company could recover the amount representing the estate duty paid by it in India from the legal representatives of the deceased shareholders. We, therefore, assume that the assessee who, as a statutory agent, pays to the State the estate duty, cannot recover the same from the legal representatives of the deceased non-resident shareholders. In that situation the company would be out of pocket to the extent it paid the estate duty of the said persons. We cannot, therefore, accede to the contention of the learned counsel for the appellant that the amounts paid by the assessee towards estate duty were not expenditure incurred by it, but only amounts paid by it on account with a right to recover the same from the persons on whose behalf it paid. The next question is whether the said expenditure was expended wholly and exclusively for the purpose of the business of the assessee with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . noticed that the qualification " for the purpose of earning profits " was a slight expansion of the words of the statute though he expressed the view that it brought out the real import of the relevant section. In Rowntree and Co. Ltd. v. Curtis, in disallowing the deduction claimed by a company of a sum set aside for the relief of the invalid employees, Rowlatt J. applied the test whether the said expenditure incurred by the company was for the purpose of earning profits. In Cooke v. Quick Shoe Repair Service the court allowed a deduction in respect of sums paid by the respondent-firm in discharging the liabilities of the business outstanding at the date the said respondent purchased the business from a third party on the ground that the said expenditure, having been incurred for the purpose of preserving the goodwill and for ensuring the continuity of supply of raw material and labour, was wholly and exclusively laid out for the purpose of its business. After referring to earlier decisions, Croom-Johnson J. made the following observation : " Here is a payment made in the circumstances of this case in order to ensure a supply of leather for the business, a payment made in orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han that of trader. " This decision also restated the two tests, namely, (i) that the expenditure should be for carrying on the business to earn profits in the trade, and (ii) that the expenditure shall be incurred by the assessee in his capacity of a person carrying on the business. Lord Greene M.R. in Rushden Heel Co. Ltd. v. Keene re-affirmed the second test in the following words : " I find, however, in Strong and Co.'s case what appears to me to be a clear answer to the present appeal. It is, I think, a matter not of dictum but of decision in that case that an expense is not deductible if it falls on a trader in some character other than that of a trader. This was the ground of the opinion of Lord Loreburn, L.C., with which Lords Macnaghten and Atkinson agreed. Their Lordships held that the expense there in question fell upon the appellants in their character not of traders but of householders. " In Smith v. Lion Brewery Co. Ltd., the question was whether a brewery company, which was owner and lessee of a number of licensed premises where business was carried on the tied house basis, was entitled to deduct for the purposes of income-tax its liability in respect of compen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st be made for the purpose of earning profits, has been accepted and followed throughout, though the content of that test has been expanded to meet diverse situations. Broadly, English courts applied two tests to ascertain whether a deduction was permissible or not, namely, (i) whether the expenditure was incurred for the purpose of carrying on of the business and for removing obstacles and impediments in the conduct of the business, and (ii) whether the assessee paid the amount in his capacity as businessman or in his personal capacity. Now coming to the Indian decisions, a Division Bench of the Bombay High Court in Tata Sons Ltd. v. Commissioner of Income-tax held that the share of bonus voluntarily paid by a company, which held the managing agency of another company, to some of the officers of the managed company was a permissible deduction under section 10(2)(xv) of the Act. The reason for the conclusion is stated thus : " But having considered the whole case and the question submitted to us I am satisfied that looking purely at it from the point of view of commercial principles what the assessee company has done is something which had as its object increasing the profits o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng jockeys of the club was an allowable deduction within the meaning of section 10(2)(xv) of the Act. Kapur J., speaking for the court, after considering the relevant decisions, concluded thus : " Applying the law, as laid down in those cases to the present case the conclusion is that the amount in dispute was laid out wholly and exclusively for the purpose of the respondent's business because if the supply of jockeys of efficiency and skill failed the business of the respondent would no longer be possible. Thus the money was spent for the preservation of the respondent's business." This decision gives a liberal interpretation to the relevant expression. In Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax this court disallowed deduction of the amount paid by a firm as penalty to release the consignment confiscated by the customs authorities. In coming to the conclusion, Kapur J., speaking for the court, observed : The words 'for the purpose of such business' have been construed in Inland Revenue Commissioners v. Anglo-Brewing Co. Ltd. to mean 'for the purpose of keeping the trade going and of making it pay'. After considering the relevant decisions, the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X
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