Lawyers Directory Listing
Chat with us free on WhatsApp — tell us your city and legal matter and our team connects you with the right lawyer. No form, no fee.
Income‑tax Referred Case No. 46 of 1962, decided on 23rd August 1963.
Business expenditure‑Wealth‑tax paid by assessee‑Indian Income‑tax Act, 1922, S. 10 (2) (xv), S. 10(1).
Wealth‑tax paid by a company carrying on the manufacture of tea, in respect of the value of the tea estate, is not allowable as a deduction against the profits and gains derived from the business of manufacturing tea under section 10 (2) (xv) of the Indian Income‑tax Act, 1922. It is not an expenditure incurred "for the purposes of such business" within the meaning of section 10(21 (xv).
[Their Lordships were not called upon to decide whether the assessee was entitled to any relief under section 10 (1) of the Act and expressed no opinion on that point].
Kumbakonam Electric Supply Corporation Ltd. v. Commis sioner of Income‑tax ([963) 50 I T R 809 fol.
Smith's Potato Estates Ltd. v. Bolland (1948) A C 508 and Strong & Co. of Romsey Ltd. v. Woodifield (1906) A C 448 ref.
S. Padmanabhan and C. M. Devan for the Assessee.
G. Rama lyer for the Commissioner.
M. S. MENON, C. J.‑This is a reference by the Income‑tax Appellate Tribunal, Madras Bench, under section 66 ([) of the Indian Income‑tax Act, 1922. The assessment year concerned is 1960‑61 and the accounting period, the twelve months ended February 29, 1960. The question referred is "Whether, on the facts and circumstances of the case, the assessee‑company is entitled to a deduction of Rs. 12,873 being the wealth‑tax paid during the account year ended February 29, 1960, against the profits and gains of its business for the assess ment year 1960‑61, under section 10 (2) (xv) of the Indian Income‑tax Act
The liability to pay wealth‑tax arises from the Wealth‑tax Act, 1957. The substantive provisions of that Act are sections 3 to 7. Of these, section 3 is the charging section. It follows closely the language adopted for the charge of income‑tax in section 3 of the Indian Income‑tax Act, 1922, and reads as follows.
Subject to the other provisions contained in this Act, there shall be charged for every financial year commencing on and from the first day of April, 1957, a tax (hereinafter referred to as wealth‑tax) in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule."
According to Sampath Iyengar's commentary on the Wealth -tax Act, 1957, the wealth‑tax paid under that Act is not a deduc tible item. He says
Section 12 (1) of the Excess‑ Profits Tax Act, 1940, and section 10 of the Business Profits Tax Act, 1947, authorise the deduction of the amount of excess profits tax and business profits tax in the computation of the total income for the purposes of the Income‑tax Act. A similar provision is lack ing in this Act. In consequence, no deduction is permissible in respect of wealth‑tax paid, in calculating total income' for the purpose of the Income‑tax Act,
Section 10 (1) of the Indian Income‑tax Act, 1922, provides that 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, and subsection (2) that such profits or gains shall be com puted after making the allowances specified in that subsection. Allowance No. (xi,) is worded as follows:
"Any expenditure (not being an allowance of the nature described in any of the clause (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 question for determination is whether the wealth‑tax paid can be considered as laid out or expended wholly and exclusively for the purpose of the business of the assessee. We have come to the conclusion that it cannot be so considered, and that as a result the question referred muit be answered in the negative and against the assessee.
The governing words are "for the purpose of such business, profession or vocation" qualified by the adverbial expression "wholly and exclusively". The celebrated dictum of Lord Davey regarding the words "for the purposes of the trade" in Strong & Co. of Romsey Ltd. v. Wood-field ((1906) A C 448), has now held the field for over half a century. The dictum is:
It is not enough 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. It must be made for the purposes of earning the profits."
A determined attempt to upset the dictum was made before the House of Lords in the Smith's Potato Estates Ltd. v. Bolland ((1948) A C 508). The attempt did not succeed.
One of the ways of finding out whether an expenditure was laid out or expended wholly and exclusively for the purpose of a business in the case of an owner‑trader is to find out the character in which the expenditure was incurred by him. Was it in his capacity as an owner Or was it in his capacity as a trader If the expenditure was incurred in his capacity as a trader then and then alone will the expenditure constitute an admissible deduc tion under section 10 (2) (xv) of the Indian Income‑tax Act, 1922.
The wealth‑tax is payable whether an assessee carries on a business or not. The obligation to pay that tax stems from the ownership of property and not its user. It is not possible to say that it is paid in the capacity of a trader and not that of an owner.
The question whether the wealth‑tax paid is an admissible allowance under sections 10 (1) and 10 (2) (xv) of the Indian Income‑tax Act, 1922, came up for consideration before the High Court of Madras in Tax Cases Nos. 91, 92, 99, 102, 110 and 111 of 1961 Kumbakonani Electric Supply Corporation Ltd. v. Com missioner of Income‑tax. ((1963) 50 1 T R 809). That Court said (1963) 50 1 T R 818:
"It is true that a capital asset of a trading company is an essential requisite for the carrying on of the business. It is also true that such capital asset would fall within the ambit of the Wealth‑tax Act. But these circumstances by itself would not be sufficient to claim the wealth‑tax paid as an allowance under section 10 (2) (xv) or even under section 10 (I). It cannot be said that payment of wealth‑tax is incidental to the carrying on of the business nor can it be said that the tax falls upon the assessee, who owns the wealth and who carries on the business, in his character as a trader or businessman. Payment of wealth‑tax is as a result of a charge on the ownership of the assets and however necessary or compelling it may be that a trader should own and possess wealth, it would be difficult to contend that payment of tax on such ownership would constitute a business expense, that is, an expense incurred in the regular course of business as a necessary step in the conduct of such business. We are, therefore, unable to uphold the con tention of the assessees that the amount of wealth‑tax paid would be a proper allowance under section 10 (2) (xv) or under section 10 (1).
We are not called upon to decide, whether the assessce is entitled to any relief under section 10 (1) of the Act, and we express no opinion on that point. The reference is answered as stated in paragraph 4 above, but without any order as to costs.
A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Appel late Tribunal as required by subsection (5) of section 66, of the Indian Income‑tax Act, 1922.
Dealing with a matter like this? Connect with a verified advocate in your city — free on SJP Lawyers Directory.
🔍 Find a Lawyer