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Income‑tax Reference No. 91 of 1952, decided' on 13th February 1962.

Foreign income‑Inclusion in total income of person ordinarily resident‑Business profits tax paid in foreign country‑ Whether deductible‑Income‑tax Act, 1922, Ss. 4(1) (b)(ii) & 10(2)(xv).

In computing the foreign income of a person ordinarily resident in India, which has to be included in his total income under section 4(1)(b)(ii) of the Indian Income‑tax Act, 1922,, busi ness profits tax paid by him under the laws of the foreign country in respect of that foreign income is not deductible. It cannot be deducted either as business expenditure under the Indian Income‑tax Act or on the analogy of the business profits tax levied in India. ,

Commissioners of Inland Revenue v. Dowdall O'Mahoney & Co. Ltd. (1952) 33 Tax Cas. 259 ; Ratilal B. Daftari v. Commis sioner of Income‑tax (1959) 36 I T R 18 and Smith's Potato Estates Limited v. Inland Revenue Commissioners 1948 A C 508 ref.

By this application presented on June 19, 1952, the assessee company requires the Appellate Tribunal to refer to the High Court under section 66(1) of the Income‑tax Act certain questions of law said to arise out of the order of the Appellate Tribunal dated April 2, 1952, in I. T. A. No. 2903. As, in our opinion, questions of law do arise out of the aforesaid order, we hereby draw up a statement of the case for reference to the High Court.

2. The assessee‑company, Jeewanlal (1929) Limited, is a com pany incorporated in India with its registered office in Calcutta. It carries on business at several places in India and has a sale depot at Rangoon in Burma. The assessee‑company was assessed under section 23(3) of the Indian Income‑tax Act for the assess ment ,year 1948‑49 as a resident and ordinarily resident. Indian company on the profits of the accounting year ended 31^st December 1947.

In adding the profits of the Rangoon branch to the taxable income, the Income‑tax Officer disallowed an item of Rs. 50,157 deducted by the assessee‑company as business profits tax paid in Burma under the Burma Business Profits Tax Act, 1948. An appeal was filed before the Appellate Assistant Commissioner. The assessee‑company's contention was that the Burma business profits tax, viz , Rs. 50,157, ought to have been allowed as a deduc tion under section 10(2) (xv) of the Indian‑tax Act. The Appellate Assistant Commissioner negatived this. In, appeal before the Appellate Tribunal it was contended that out of the Burma income the Burma business profits tax should have been deducted before adding Burma income to the Indian income for income‑tax pur poses. It was contended that, for the purposes of section 4 of the Income‑tax Act, the Burma profits can only amount to the income earned in Burma less the amount of the business profits tax paid in Burma. It was only this net amount that really came to the pocket of the assessee company in India. In was further said that section 10 of the Business Profits Tax Act allowed deduc tion of business profits tax for the purpose of calculating in come‑tax.

For reasons stated in its order dated April 2, 1952, which is made a part of this statement as Annexure "A", the Appellate Tribunal was of the opinion that, under section 4(1)(b)(ii) of the Income‑tax Act, the assessee‑company's income without the taxable territories (Burma) has to be included in its income in the taxable territories for the purposes of determining its Indian income‑tax. liability. The Tribunal was of the opinion that the income in Burma has to be the total income earned there irrespective of the income‑tax or business profits tax to which that income may be chargeable in Burma. The Tribunal, there fore, rejected the assessee‑company's claim. From these facts, the following question of law arises:

"Whether, in computing the total income of the assessee for the purpose of section 4 (1) (b)(ii), of the Indian Income‑tax Act, the income, profits or gains accruing or, arising in Burma should be taken to be the profits of the business in Burma without deducting therefrom the business profits tax paid in Burma."

3. The second question suggested by the applicant refers to the double taxation relief provisions between the Indian Govern ment and the Burma Government. The question as suggested by the applicant seems to mean that double taxation relief provisions between India and Burma for income‑tax purposes should be interpreted to include business profits tax along with the income‑tax. This question was not argued by the applicant at the appeal stage. It has not therefore been dealt with in the order of the Appellate Tribunal. It further appears that after the Independence on the 15th of August 1947, the previous arrangement between the Indian Government and the Burma Government for double taxation relief has not been renewed. This question, not arising out of the order of the Appellate. Tribunal, cannot therefore be referred to the High Court.

This statement was sent to the parties for their sugges tions. The respondent had no .suggestions to make and the only suggestions made by the applicant referred to the form of question No. 1. This suggestion was not considered material.

S. Mitra and S. R. Banerjee for the Assessee.

E. R. Meyer with B. L. Pal, for the Commissioner.

The assessee‑company is incorporated in India and has its registered office at Calcutta. It carries on business at several places in India and has a sales depot at Rangoon in Burma. The assessee was assessed for the assessment year 1948‑49 as a resident and ordinarily resident Indian company on the profits of the accounting year ending December 31, 1947. ‑In adding the profits of the Rangoon branch to the taxable income, the Income‑tax Officer disallowed an item of Rs. 50,157 deducted by the assessee as business profits tax paid in Burma under the Burma Business Profits Tax Act. An appeal was filed before the Appellate Assistant Commis sioner. The assessee contended that the Burma business Profits Tax namely Rs. 50,157, ought to have been allowed as a deduc tion under section 10(2) (xv) of the Indian Income‑tax Act. The assessee's contention was not accepted. The assessee pre ferred an appeal before the Appellate Tribunal and contend ed that the Burma business profits tax should have been deduc ted before adding Burma income to the Indian income for income‑tax purposes: The assessee contended that the Burma profits can only amount to the income earned in Burma less the amount of the business profits tax paid in Burma. The Appellate Tribunal came to the conclusion that the income in Burma was the total income earned there irrespective of the income‑tax or the business profits tax to which the income was chargeable in Burma.

On these facts the following question of law has been referred:

"Whether, in computing the total income of the assessee for the purpose of section 4(1)(b)(ii) of the Indian Income‑tax Act, the income, profits or gains accruing or arising in Burma should be taken to be the profits of the business in Burma without deducting therefrom the business profits tax paid in Burma "

Counsel on behalf of the assessee contended first that in making an assessment regarding profits and gains under section 10 of the Indian Income‑tax Act, if on general commercial principles profits were determined after deducting an expen diture or a business loss, then it did not matter that such a deduc tion was not contained in any of the sub‑clauses of subsec tion (2) of section 10. Thus it was contended that, though a deduction might not be categorically mentioned in the various clauses of subsection (2) of section 10, yet in the ascertain ment of profits of a business, it was open to the assessee to contend that the payment of business profits tax in Burma should be allowed as a deduction in the determination of the real profits of the assessee, inasmuch as profits and gains are ordi narily those sums which are received less expenditure. Counsel for the assessee submitted that in Burma the tax which is payable on business profits is neither received nor receivable by the assessee as a receipt‑ because of the overriding provi sions of the Burma statute and the amount paid by way of tax in Burma was diverted in the beginning at the source. Counsel for the assessee, secondly, contended that income‑tax has all along been treated as an application of the income after the income is received, whereas the business profits tax is allowed under the Business Profits Tax Act in India as a proper deduc tion for income‑tax purposes. Therefore, counsel for the assessee contended that since business profits tax is allowable as a deduction under the Indian Business Profits Tax Act, 1947, it should follow that a similar deduction should be permitted and allowed in determining the Burmese income of the assessee.

Counsel for the Commissioner contended that but for the Business Profits Tax Act in India the amount paid by way of business profits tax would not be allowed as a deduction in this country and business profits tax paid under the Indian Act is not allowed as a deduction under section 10, subsec tion (2). Therefore, counsel for the Commissioner contend ed that business profits tax paid in Burma was also not deductible under the provisions of subsection (1) of section 10 of the Indian Income‑tax Act. Counsel for the Commissioner referred to the provisions contained in subsection (4) of section 10 of the Indian Income‑tax Act, where it is enacted that nothing in clause (ix) or clause (xv) of subsection (2) of section 10 shall be deemed to authorise the allowance of any sum paid on account of any cess, rate or tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or gains and contended that if business profits tax paid in a foreign country by a company resident in India was allowed as and by way of deduction on general principles in the ascertainment of profits under section 10, subsection (1), there would be discord and disharmony between the subsections of section 10.

It is indisputable that business profits tax paid under the Busi ness Profits Tax Act in India is deductible as an expense only under the provisions of the Business Profits Tax Act. The Burma Excess Profits Tax Act is a foreign law. Counsel for the Commis sioner rightly contended that foreign law had to be proved as a fact and there is nothing on record as to what the provisions of the Burma Excess Profits Tax Act are. It is manifest that the assessee can claim, deduction only under the provisions of the Indian Income‑tax Act and the Indian Business Profits Tax Act does not apply to business profits tax paid in Burma.

In the case of Commissioners of Inland Revenue v. Dowdall O'Mahoney & Co. Ltd. ((1952) 33 Tax Cas. 259) a similar question arose as to whether a. company managed, controlled and resident in Eire, where it carried on the business of margarine manufacturers and butter merchants, and had two branches in England, where it conducted a general grocery business, could contend that in computing the profits of the English branches it was entitled to deduct that proportion of the Irish taxes which was attributable to those profits. The Commissioners held that it was a necessary expense for the company in carrying on part of its trade as branches in England to incur Irish taxes: The Crown preferred an appeal. Counsel for the assessee relied on the observations of Somervell L. J. at page ‑269 of the report that the Irish taxes could and should be regarded as a disbursement laid out for the purposes of trade in England. The case went up to the House of Lords: Lord Oaksey said at page 274 of the report that the authorities established that the payment of such taxes by a trader is not a disbursement wholly and exclusively laid out for the purposes of his trade and that this is so whether such taxes are United Kingdom taxes or foreign or Dominion taxes. Lord Oaksey further said that taxes like these are not paid for the purpose of earning the profits of the trade : they are the application of those profits when made and not the less so that they are exacted by a Dominion or foreign Government. Lord Reid said at page 282 of the report that there is not and never was any right under the principles applicable . . . to deduct income‑tax or excess profits tax, British or foreign, in computing trading profits. Lord Radcliffe at page 285 of the report said that, once it is accepted that the criterion is the purpose for which the expenditure is made in relation to the trade of which the profits are' being computed, no material distinction could be found between a pay ment to meet such taxes abroad and a payment to meet a similar tax at home.

Counsel for the assessee relied on the decision in Ratilal B. Daftari v. Commissioner of Income‑tax ((1959) 36 I T RC 18) in support of the proposition that in ascertaining real income every part of that income which may seem to be income is not income if that part has been diverted and never constituted the real income. In that case the assessee contended that the assessee was a partner in a partnership consisting of 16 partners and he was assessed at Rs. 14,661. The assessee contended that the whole sum did not belong to him but only 2/5th of the amount and relied upon an agreement between himself and four others which provided that the five parties who had contributed the diverse sums were to share profits and losses in proportion to their individual contributions. It was held that the real income was what remained after deduct ing the amount which might be said to have been diverted and never constituted the. real income. The ratio of the decision was that the sub‑partnership among the five persons determined the real income of the assessee after the other sub‑partners had taken their respective shares. In my opinion, the principle in Ratilal Daftari's case does not apply in the present case for the reason that the assessee here is assessable on his world income and he can claim a deduction only if the expense is for the purpose of earning profits in the business. The decision in Dowdall O'Mahoney's case is, in my opinion, an authority for the proposition that foreign taxes are not paid for the purpose of earning profits and, therefore, they are not deductible. Lord Normand said in Smith's Potato Crisps case "...a payment out of profits after they have been earned is not within ‑ the purposes of the trade carried on by the tax‑payer. But excess profits tax also is levied on profits after they are earned and, apart from the statutory. provision, is in pari passu with income‑tax". I am therefore of opinion that business profits tax paid in Burma is not deductible as a business expense under the Indian Income‑tax Act nor is it deductible under the Income‑tax Act on the analogy of the Business Profits Tax Act in India. The question is there fore answered in the affirmative. The assessee is to pay the costs. Certificate for two counsel.

Question answered in the affirmative.

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