Nos 1694 and 1730 of 1968
Appeals from the judgment and order dated August 11 1967 of the Calcutta High Court in Income tax Reference Nos 106 and 215 of 1963
section R Banerjee N N Goswamy and section N Mukherjee for the appellant in both the appeals
V section Desai R N Sachthry and B D Sharma for the respondent in both the appeals
A K Sen T A Ramachandran and D N Gupta for the intervener in both the appeals
The Judgment of the Court was delivered by Sikri CJ
Beg J gave a concurring but a separate opinion
These appeals have been referred by a Division Bench of this Court to a larger Bench as the Division Bench felt that the decision of this Court in Travancore Titanium Product Ltd vs Commissioner of Income Tax1 might require reconsideration
The only point involved in these appeals is whether the Wealth Tax paid by the assesse a trading company is deductible as an expenditure under section 10  1  and section 10 2 xv of the Income tax Act 1922
The facts in both the appeals are similar
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 159630 as Wealth Tax and claimed to deduct this amount as expense from their assessable income
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 case the sum of Rs 159630 paid by the assessee as wealth tax 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 case1 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 Ltd vs CIT2 it was contended by the learned counsel for the Revenue that we should not review our decision in Travancore Titanium case1
Gajendragadkar CJ speaking for the Court had observed in that case that it is not possible or desirable and in any case it would be inexpedient to lay down any principles which should govern the approach of the Court in dealing with the question of reviewing and revising its earlier decisions
 He further observed It would always depend upon several relevant considerations  What is the nature of the infirmity or error on which a plea for a review and revision of the earlier view is based  On the earlier occasion did some patent aspects of the question remain unnoticed was the attention of the Court not drawn to any relevant and material statutory provision or was any previous decision of this Court bearing on the point not noticed  Is the Court hearing such plea fairly unani mous that there is such an error in the earlier view  What would be the impact of the error on the general administration of law or on public good  Has the earlier decision been followed on subsequent occasions either by this Court or by the High courts  And would the reversal of the earlier decision lead to public inconvenience hardship or mischief  1  2 20 We are inclined to review our earlier decision in Travancore Titanium case  because as will presently appear certain aspects of the question were not brought to the attention of the Court and remained unnoticed and our decision is not likely to cause any public inconvenience hardship or mischief
We are all of the opinion that the decision was erroneous
The decision will affect numerous assessees
In the circumstances we think we should review the decision
Section 10 1 of the Indian Income tax Act 1922 reads 101 The tax shall be payable by an assessee under the he id profits and gains of business profession or vocation in respect of the profit or gains of any business profession or vocation carried on by him Section 102 provides  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 language seems to be simple enough but it has engendered judicial conflict not only in India but also in England Eminent Judges halve 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 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 vs Woodfield2
In that case the Brewing Company which also owned licensed houses in which they carried on the business of lnnkeepers incurred damages and costs on account of injustice caused to a visitor staying at one of their houses by the falling in of a chimney
The House of Lords 1 1066 3 SCR 321 2  21 held that the damages and costs were not allowable as a deduction in computing the Company s profits for Income Tax purposes
The Lord Chancellor observed In my opinion however it does not follow that if a loss is in any sense connected with the trade it must always be allowed as a deduction for it may be only remotely connected with the trade or it may be connected with something else quite as much as or even more than with the trade
I think only such losses can be deducted as are connected with it in the sense that they are really incidental to the trade itself
They cannot be deducted if they are mainly incidental to some other Vocation or fall on the trader in some character other than that of trader
The nature of the trade is to be considered
To give an illustration losses sustained by a railway company in compensating passengers for accident in travelling might be deducted
on the other hand if a man kept a grocer s shop for keeping which a house is necessary and one of the window shutters fell upon and injured a man walking
in the street the loss arising thereby to the grocer ought not to be deducted
Lord Davey did not apply this test and put the matter thus I think that the payment of these damages was not money expended for the purpose of the trade
These words are used in other rules and appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade c
I think the disbursements permitted are such as are made for that purpose
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 purpose of earning the p rofits
Lord Chancellor s observations in Woodfield s case were not accepted by Lord Atkinson in Smith vs Lion Brewery Com pany1
The Brewery_ Company were the owners or lessees of a number of licensed premises which they had acquired as part of their business as brewers and as a necessary incident of its profitable exploitation
The licensed premises were let to tenants who were tied to purchase their beers from the company
Under the Licensing Act 1904 compensation Fund Charges were levied in respect of the excise on licences held by the tenants who paid the charges and recouped themselves by 1 22 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 LJ 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 lie 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 and exclusively of setting up the tied house system of trading
If the Company took under lease a plot of land to enlarge their brewery or took similarly premises in which to establish a depot to sell their beer through an agent the same criticism might be applied with equal force to the payment of the rent reserved by the lease
They would pay it as lessees not as brewers
They would pay it whether they continued to brew or not
Yet under the provisions of the very rule relied upon in this case they would be entitled to deduct the rent from the profits earned and that too utterly irrespective of whether the receiver of the rent used it to pay for his support or for his pleasure or even to set up a rival brewery
Indeed even in a contract made for the purchase of material such as hops or malt the Company would have to pay for the commodity supplied not because they are brewers but because they were contracting parties utterly irrespective of whether they carried on their trade or had abandoned it
Yet it can hardly be suggested that the price paid for the hops or malt under the contract should not be deducted from the receipts
There is therefore in my opinion nothing in this ob jection
In Usher s Wiltshire Brewery Ltd vs Bruce1 a brewery company were the owners or lessees of a number of licensed premises which they had acquired solely in the course of and for the purpose of their business as brewers and as a necessary incident to the more profitably carrying on of their said business
The licensed premises were let to tenants who were tied to purchase their beers etc from the Company
The Company claimed that in the computation of their profits for assessment under Schedule D the following expenses incurred in connection with these tied houses should be allowed A repairs to tied houses B differences between rents of leasehold houses or Schedule Assessment of freehold houses on the one hand and the rents received from the tied tenants on the other hand C fire and licence insurance premises D rates and taxes It was held by the House of Lords that all the expenses claimed were admissible as being money wholly and exclusively laid out of expended for the purpose of the trade of the Brewery Company
In this case Horridge J held that on the facts found the Fire 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 vs The Brewery Company1 and are proper deductions
 The Court of Appeal regarding Rates and Taxes said The next head is D Rates and Taxes pound 3 8 7s
 These are sums which the tenants were under a legal obligation to pay pursuant to their covenant in the tenancy agreement
The Company however did not for the reasons stated under A in the Case enforce the tenants  covenants 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
 1 2 24 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 hat where a trader bona fide creates in himself or acquires a particular estate or interest in premises wholly and exclusively for the purposes of using that interest to secure a better market for the commodities which it is part of his trade to vend the money devoted by him to discharge a liability imposed by Statute on that estate or interest or upon him as the owner of it should be taken to have been expanded by him wholly and exclusively for the purposes of his trade Then regarding these items he observed The small items were not much contested in arguments
I concur however with Mr Justice Horridge in thinking they ought to be allowed
Lord Parker observed My Lords the Appellants claim deductions under three other heads  1 Fire and licence insurance premiums 2 Rates and taxes and 3 Legal and other costs
The Attorney General did not object to these deductions being allowed and indeed having regard to what I have already said and to the facts ad mitted in the Supplementary Statement p 7 of the Appendix it would be difficult to contend that they were not proper and necessary deductions in ascertaining the balance of profits and gains of the Appellants  trade or that they are within any of the prohibitions contained in the Rules
 Lord Summer observed The remaining items rates and taxes premiums and costs call for no special observation
In my view the case means to find them all to be disbursements and money wholly and exclusively expanded for the purposes of the trade and that being so in fact I think there is no reason why they may not be so in law
They are accordingly covered by the decision on the rent and the repairs
It may be mentioned that there was no express statutory provision for deduction of rates and taxes in the English Income Tax Act and yet they were allowed as a necessary deduction for the purpose of carrying on trade
There is no doubt that in one 25 sense when rates and taxes on property are paid by a trader he pays them as owner or occupier because taxes are either on possession of property or on its ownership
But when the assessee has a dual capacity ie he is owner cum trader why should it be not deductible when according to ordinary commercial principles he would be treated as paying it as trader
Take the case of taxation on a motor vehicle
The tax is levied under the Motor Vehicles Act on the possession or owner ship of a motor car 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 deductibles 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 tradercum 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 vs Webb1 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 17970 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 44924
He paid Commonwealth land tax amounting to pound 3 87 on the unimproved value of the Said lands
The taxpayer claimed to deduct this tax from his income as an outgoing incurred by him as a disbursement or expenditure being wholly and exclusively laid out or expanded for the purpose of his trade
The High Court of Australia held that the tax was properly deductible either as an outgoing actually incurred by him in production of income or a disbursement of money wholly and exclusively laid out or expanded for the purpose of trade
Griffith CJ summed up the argument as follows  The possession of land is necessarily incident to carrying on the business of a grazier the payment of land tax is it necessary consequence of the possession of land of tax able value whether the land is freehold or leasehold the payment of land tax is therefore a  necessary incident of carrying on the business of grazing
The case therefore seems to me to come within the exact words of the first paragrapher sec9 Sec 9 is substantially similar to section 102 xv of the Indian Income Tax Act 1922
Barten J observed  the sole use to which the appellant puts the land is for the purposes of his business as a grazier
He needs a large area of land for that purpose and this area of about 18000 acres is applied to his business needs
It seems too much altogether to say that he would have to pay
the federal tax on this land if he did not carry on the grazing business
Somebody would be wed no doubt but would it be the appellant  It cannot be predicated that he would own the land at all if he carried on any other business
It is scarcely an inference from the case to say that he hold  the lands simply as an instrument essential to the proper conduct of his business  I think it is the fair meaning of the first paragraph at which we can arrive without inserting anything not imported by the words
If I am right there then is the land tax payment a disbursement or expense wholly and exclusively laid out or expanded for the purposes of the business  It may not be so if the criterion is whether the business could be carried on without payment of the tax
But I do not think that is the criterion
Is the payment wholly and exclusively incidental to the carrying on of the business  Well it is only by reason of the necessity of land for his business that he holds this land and it is only because of his holding it for his business 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
Issaes J was impressed by the reasoning of Lord Halsbury and Lord Atkinson in Smith vs Lion Brewery Co Ltd1
He observed  And Lord Atkinson reasons out the position and shows convincingly to my mind that though a tax may in I one sense be paid as owner or lessee in another it is paid as trader
The instance 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 1 27 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 contrary doctrine consists in this it confuses not so much the meaning as the application of the word purpose
The land tax is enacted by legislature for its own purpose that is to tax the owner and when he pays it to the Crown he pays it as the owner it is true but so far not for any purpose of his
He simply pays it because he is obliged to by law
But when he uses the property to produce an income that is for his business purposes he pays the tax inseparably connected with the land also for his business purposes namely as an outlay necessary in the existing state of the law to obtain that income by means of that land
The unsoundness of the test of the capacity in which payment is Made was commented upon in Harrods Bueonos Aires Ltd vs Taylor Gooby1 by the Court of Appeal
The facts can be conveniently taken from the head note
The Appellant Company which was incorporated and resident in the United Kingdom carried on the business of a large retail store at Buenos Aires
In consequence the Company was liable in Argentina to a tax known as the substitute tax which was levied on joint stock companies incorporated in Argentine and on companies incorporated outside Argentine which carried on business there as did the Appellant Com pany through an empress estable
The tax was charged annually at the rate of one per cent on the Company s capital and was payable whether or not there were profits liable to Argentine income tax
Under Argentine law there were sanctions available to remedy non payment of the tax
On appeal against an assessment to Income Tax under Schedule D for the year 1959 60 it was contended on behalf of the Company that it paid the substitute tax solely for the purpose of enabling it to carry on business in the Argentine since if it had not paid it it would have been unable to carry on its business there and that the tax was therefore deductible as money wholly and 1 28 exclusively laid out or expended for the purposes of its trade within the meaning of Section 137a Income Tax Act 1952
For the Crown it was contended inter alia that the Company paid the tax in the capacity of taxpayer rather than trader
 Willmer LJ referred to Commissioners of Inland Revenue vs Dowdall O Mahoney  Co 1 and observed I can find no sup port whatever in this case for the proposition that the question depends on the capacity in which the taxpayer pays the taxes
 After referring to Smith vs Lion Brewery2 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
 Dancwerts LJ observed In Rushden Heal Co Ltd vs Keens3 to which I have referred Lord Greene MR in 30 TC page 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 be is taxed and is a taxpayer
Diplock LJ also criticized the test in these words it is contended for the Crown that the Company Paid the tax in its capacity as a taxpayer not in its capacity as a trader
But with great respect to Lord Greene MR s Judgment in the Rushden Heel Co s on which this Convention was mainly based this is merely playing with words
As pointed out by Willmer L J this
ratio decidendi was not adopted by the House 1 3 2 29 of Lords in the same case and cannot in my view survive Lord Atkinson s earlier criticism of a similar argument in the Lion Brewery case which Willmer LJ has already cited
You can always find some label other than trader to describe the capacity in which a trader makes any disbursement for the of his trade
He pays rent for his business premises in the capacity of tenant rates in the capacity of Occupier  wages in the capacity of employer the price of goods in the capacity of buyer
But if he has become tenant or occupier of those particular pre mises employer of those particular servants or buyer of those particular goods solely for the purposes of his trade the money which he has expended in any of the capacities so labelled is a deductible expense in computing the profits of his trade
The learned counsel for the Revenue did not say that these cases had been wrongly decided
What he said was that if the real nature of wealth tax is appreciated it is impossible to equate the net wealth with land used by the grazier in Moffatt vs Webb1 or with tied house in Smith vs Lion Brewery Compnay2 or with the Company s Capital in Harrods Bueonos Aires Ltd vs Taylor Gooby3
He said that in all these cases the tax was being levied on the asset of the business which was being used for the purpose of business
In the present case according to him the net wealth could not be likened to an asset owned by the trading company
To this the learned counsel for the appellant retorted that in the case especially of a trading company all the assets are owned and liabilities incurred for the purposes of trading as outlined in its Memorandum of Association if all the assets are owned and used for the purpose of the trade the net wealth would also be owned and used for the purpose of trade
He said that it would be possible for a company to mortgage its net assets to a bank and 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
1  2 3 30 In our view the test adopted by this Court in Travancore Titanium case1 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 and as incidental to his business
It was pointed out by the learned counsel for the Revenue that it would be difficult to allow the deduction of wealth tax in respect of individuals who have both business assets and debts and non business assets and debts
But the Wealth Tax Return form itself requires the assessee to show what are the business assets and liabilities and what are non business assets and liabilities
At any rate it should not be difficult to evolve a principle or frame statutory rules to find out the proportion of the tax which is really incidental to the carrying on of the trade
On the facts of this case it is clear that payment of wealth tax was really incidental to the carrying on of the assessee company s trade
Accordingly we hold that the appellant is entitled to succeed
The appeals are allowed the judgment of the High Court set aside and the question answered in favour of the assessee
Parties will bear their own costs throughout
Beg J
My lord the Chief Justice has quoted certain tests laid down by Gajendragadkar CJ speaking for this Court in Keshav Mills Co Ltd vs Commissioner of Income Tax Bombay North2 which have to be satisfied before we could properly dissent from a previous decision of this Court
In such a case I think I should indicate my reasons for reaching a concurring conclusion with very great respect that an earlier opinion of this Court on the very question before us now needs revision
The error which crept into the decision of Travancore Titanium Products Ltd vs Commissioner of Income tax Kerala1 could be traced to an application of the rather speciously stated criterion laid down in the House of Lords in Strong  Co of Romsey Ltd vsWoodfield3 by the Lord Chancellor who said there that expenses cannot be deducted in computing profits if they are mainly incidental to some other vocation or fall on the trader in some character other than that of trader
The nature of the trade is to be considered
But Lord Davey looking at the case from 1  2  3  31 a somewhat different angle said it was not enough that the bursement 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 purpose of earning profits The two tests were not identical
The ratio decidendi of Strong s case would not have been open to criticism 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 is 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 and an employer
And this aspect of the case made Lord James in Strong s case doubt the correctness of the opinion which he very hesitatingly decided to accept
In Smith vs Lion Brewery Company Limited1 compensation fund charges levied under statutory provisions were held by the Court of Appeal to be permissible deductions in computing profits on the ground that they were wholly or exclusively laid out  for the purpose of earning profits
This decision had to be upheld by the House of Lords where opinion was evenly divided when the case was taken up there
Hence the test laid down there by the Court of Appeal was held by Farl Loreburn to he binding upon him in Usher s Wiltshire Brewery Ltd vs Bruce2 although lie had himself not accepted it in Lion Brewery s case
in In Rushden Heel Co Ltd vs Commissioner of Inland Revenue 3 Lord Greene MR in disallowing deduction of expenses incurred in contesting claims for payment of Excess Profits Duty from a computation of profits for purposes of paying Income tax applied the test of character or capacity in which the expense was incurred
He held that the disbursment had to be disallowed on the ground that the expenditure was incurred by the Company primarily in its capacity as a taxpayer and for the purpose of regulating the Position as between itself as a taxpayer and the Crown
 The House of Lords upheld the decision following its slightly earlier pronouncement by a majority in Smith s Potato Estates Ltd vs Bolland1 but it did so on the ground that the expenses under consideration incurred on litigation related to a computation of Excess Profits Duty which had to take place after profits had been calculated
In Artherton vs British Insulated and Helsby Cables Ltd1 however the test in Usher s Wiltshire Brewery case supra was applied to hold that even sums expended not of necessity with a view to a direct and immediate benefit to the trade but voluntarily and on the grounds of commercial expediency and in order to directly facilitate the carrying on
the business may yet be expended wholly and exclusively for the purposes of the trade
In Mogan vs Tata  Lyle Ltd 3 the House of Lords had used Lord Davey s test in Strong s case supra to justify deduction of sums spent on propaganda to oppose threatened nationalisation of the Sugar Refinery industry as money spent wholly and exclusively for the company s trade
The decision of the Court of Appeal in Harroda Buenos Aires Ltd vs Taylor Gooby 4 fully exposed the fallacy involved in applying without close examination the test of capacity for the possession of which in 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 supra and Smith s Potato Estates  case supra to show that the ratio decidendi of these two decisions confined the principle applied there to cases where taxes like the Income Tax and the 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 taxed the disbursements to meet such taxes cannot be deducted where the tax was levied as it was in Harrods  case on capital or assets used for the purpose of earning these profits it was a permissible deduction in calculating profits
1 30 TC p 267
2 10 T C P 15 5
3 35 TC p 367
4 41 TC p 450
33 In Harrods  case both Willmer LJ and Diplock LJ had made use of Lord Davey s test set out above from Strong s case supra
They held the ratio decidendi of the tied house cases and not Lord Loreburn s test to be applicable to payment of taxes on assets used for trading exclusivelye
Willmer LJ quoted the following passage from Lord Halsbury s opinion in Lion Brewery case p466 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 and exclusively of setting up the tied house system of trading
Lord Atkinson s view expressed in the following words in the same case was also relied upon by the learned Judge p466  Stated broadly I think that doctrine amounts to this that where a trader bona fide creates in himself or acquires a particular estate or interest in premises wholly and exclusively for the purposes of using that interest to secure a better market for the commodities which it is part of his trade to vend the money devoted by him to discharge a liability imposed by Statute on that estate or interest or upon him as the owner of it should be taken to have been expended by him wholly and exclusively for the purposes of his trade
In Harrods case the Court of Appeal after a comprehensive survey of all the relevant English authorities considered the proposition accepted by it that the substitute tax  levied on the company s capital was a permissible deduction in calculating the profits of a company for paying income tax to be so clear and free from doubt on the authorities then existing and applied that it refused even leave to appeal to the House of Lords
If there could be any doubt about the correct position of a tax like the one before us a perusal of the opinions given by Australian Judges in Moffat vs Webb 1 where after a discussion of the 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 1 16 Commonwealth Law Reports p 120 34 constituting a part or whole of the taxable net wealth used exclusively for purposes of trade from being deducted as allowable expense under Sec 102xv of the Income tax Act 1922
On the earlier occasion when Travancore Titanium Co s case supra was argued in this Court Moffat vs Webb supra 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 supra 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 decidendi of tied house cases and Harrods  case supra which is the same as that of the Australian case that applies here and not Lord Chancellor Lorebum s test laid down in a very different context than that of payment of a tax as a necessary precondition of earning more profits
I do not think that the test of trading character when incurring an expense for which a deduction is claimed is without its uses
There are cases where the question has arisen whether a payment was gratuitous or unnecessary or not made for a bona fide commerical purpose or connected more with some ulterior object really falling outside the normal sphere or regular course of commerce such as the compounding of an offence even if committed while trading
In J K Cotton Spinning  Weaving Mills Co Ltd vs Commissioner of Income Tax1 I had occasion to consider a case where the test of trading character or capacity in which a payment is made as well of causal connection between the payment and a legitimately commercial purpose could it seemed to me be both simultaneously employed
But in cases of payment of taxes a concentration on the test of capacity for which payment becomes necessary is certainly liable to mislead us
A question which did trouble my mind was whether in view what this Court had held in Travancore Titanium case supra it could be said that any accepted commercial practice and trading principles could exclude wealth tax from the computation of profits with which Sec10 subsection 1 and 2 of the Income tax Act are concerned
One of the grounds given by this Court to support its view there was that the nature of the expenditure of the outgoing must be adjudged in the light of accepted commercial practice and trading principles
Speaking for myself I was inclined to take the view that if the earlier decision of this Court could be justified by a reference to some commercial practice or trading principles which could be implied by or read into the very process of computation of profits with which provisions of Section 1 ATR 1967 Allp 51335 101  2 of the income tax Act 1922 are concerned it must stand
I find however that no case apart from the Observations mentioned above contained in the Travancore Titanium Co s case was cited to support this line of reasoning
All the other cases brought to our notice which are discussed above indicate that commercial practice and trading principles also warrant such deductions of a tax on assets for 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 Sec102xv 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 pro visions or travel beyond it
Another question which engaged my attention was whether Wealth Tax could be excluded from the purview of of Sec102xv 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 misleading test of either the capacity as owner for the possession of which or the purpose for which the wealth tax may be demanded instead of the inevitable need and the purpose of the trader in paying the tax as relevant matters
In Lion Brewery s case supra Lord Halsbury had declared the unavoidable need to satisfy a statutory demand for the purpose of making profits as the really relevant question for consideration in such cases
He said about the purpose for which the Government have exacted the tax whatever that purpose may be it is immaterial
It may be that the purpose of the tax before us could be considered in order to determine whether its nature is such as to necessarily imply that it cannot be taken into account in calculating profits or gains of business under Sec10 sub section 1  2 of the Income tax Act
The nature of the Wealth Tax was examined by this Court in Union of India vs Harbhajan Singh Dhillon1
where the following passage was quoted from Readings on Taxation in Developing Countries by Bird  Oldman dealing with the concept of Wealth tax  The term net wealth tax  is usually defined as a tax annually imposed on the net value of all assets less liabilities of particular tax payers especially individuals
1 1971 2 Supreme Court Cases p 779  806
36 This definition distinguished the net wealth tax from other types of taxation of net wealth such as death duties and a capital levy the former are imposed only at infrequent intervals once a generation while the latter is a one time charge usually with the primary Purpose of redeeming a war time national debt
The net wealth tax is really intended to tax the annual yields of capital rather than the principal itself as do death  duties or a capital levy even though it is levied on the value of the principal
Since it tax es net wealth it also differs from Property taxes imposed on the gross value of property primarily real property in a number of countries
The net wealth tax gives consideration to the tax payer s taxable capacity through the deduction of all outstanding liabilities and personal exemptions as well as through other devices while the property tax generally does not take these factors into account
The net wealth tax is therefore deemed to be imposed on the person of the taxpayer while the property tax often deemed to be imposed on an object the property itself
It is true that wealth tax is imposed on net wealth of assessees  as defined by Sec2 sub sectionc 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 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 Sec10 subsection 1  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 Sec10 subsection 2 xv confers upon an assessee
On looking at the position of law in America on this subject I find that there are statutory provisions which deny deductions of certain taxes only such as income tax and taxes on war profits and excess profits gifts inheritance legacies and succession See US Code 1958 edTitles 22 26 Internal Revenue Code p 4287 paragraph 164
A general statement of the law on this subject there is that it 37 does not prevent a a deduction therefor under Sec23a provided it represents an ordinary and necessary expense paid or incurred during the taxable year by a corporation or an individual in carrying on any trade or business or in the case of an individual for the production or collection of income or for the management Conservation or maintenance of property held for the production of income or b the inclusion of such tax paid or incurred during the taxable year by a corporation or an individual as a part of the cost of ac quisition or production in the trade or business or in the case of an individual as a part of the cost of property held for the production of income with respect to which such tax is paid or incurred
See Jacob Mer tens Law of Federal Income Taxation Vol 5 1954 Cumulative Pock et Supplement Chapter 27 paragraph 2701
Learned Counsel for the Department relied upon the diffi culty in separating that Dart of the tax which is levied on any part of the net wealth used wholly and exclusively for trade from the rest of it
We arc strictly speaking concerned only with the correct interpretation of Sec10 sub section 2 xv of the Act and with the definition of net wealth given in Sec 2m of the Wealth Tax Act on which incidence of the tax levied under Sec3 falls
In order to determine whether as a matter of principle a tax so defined and imposed would be covered by Sec10 subs2xv of the relevant Income tax Act the difficulty which may arise in actually computing the deductible amount does not seem to be a material consideration
Moreover the fact that net wealth is an amount by which an aggregation of all the assets exceeds all the debts does not seem to impose any intractable difficulty in the way of calculating what part of the net wealth is used for trade or business of an assessee and what is not
An aggregation means a collection of items added up which can be separated and 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 38 deduction under Sec102 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 wealth which is used wholly and exclusively for trade and not the mere character or capacity for the possession of which the tax is demanded which determines whether it is an allowable deduction or not under Sec
102xv of the Act seems to me to amount to nothing more than to give effect to the plain and literal meaning of a provision of a taxing statute
There seems no need in such a clear case to invoke the aid of the well established cannon of construction that where a taxing provision is reasonably capable of two equally possible constructions the one which favours the assessee must be preferred
of course the burden of proving whether the whole or a part of the Wealth tax paid by an assessee is attributable wholly and exclusively to the carrying on of a trade and therefore is an allowable deduction must rest upon the assessee in each case
The argument on behalf of the assessees as I understand it goes no further
One of the tests laid down in Keshav Mills Company s case Supra for deciding whether a previous erroneous view should be set right by this Court was whether any possible advantage to the public resulting from doing so would be outweighed by the mischief or harm a revision may cause
of course the ultimate determination of what public good requires the law to be must take place elsewhere But in deciding whether a previous interpretation of the law as it exists by this Court even if it be erroneous in some respe ct  needs revision by it a consideration of what public good demands undoubtedly lies within the province of our powers
It seems to me that the Wealth Tax Act was not intended to strike at or check expansion of commercial activites by either individuals or companies
Its underlying purpose was the removal of disparities of individual or personal wealth and not injury to trade
It could be said to be a tax aimed at individuals whose wealth exceeds certain limits
In so far as Ole particular interpretation which we are abandoning because of the infirmities found in it seemed to penalise mere expansion of business and 39 trade without serving the assumed underlying purpose of Wealthtax a revision of opinion does not appear to involve any such mischief or injury to the public as could stand in the way of correcting an erroneous view
I have therefore no hesitation left in my mind in holding that the view expressed by this Court in Travancore Titanium case Supra must be modified as indicated by My lord the Chief Justice
VPS Appeal allowed


Summary:
The assessee a trading company paid wealth tax and sought to deduct it as a business expense under section 101 and section 102 xv of the Income Tax Act 1922 in computing its assessable incomes from business for the purpose of the Income Tax Act
The High Court held against the assessee following the decision of this Court in Travancore Titanium Product Ltd vs CIT  The test adopted by this Court in the Travancore Titanium case was that to be a permissible deduction there must be a direct and intimate connection between the expenditure and the business that is between the expenditure and the character of the assessee as a trader and not as an owner of the assets even if they are the assets of the business
Allowing the appeal to this Court HELD  The Court is unanimous that the test laid down in the decision in the Travancore Titanium case should be modified
20A 39B Per SM Sikri C J A N Grover A N Ray and D G Palekar JJ  1 Certain important aspects of the question were not brought to the attention of this Court when the earlier case was decided
if that decision is modified as erroneous it is not likely to cause any public inconvenience hardship or mischief and numerous assessees would be affected by the decision
20A B Keshav Mills Co Ltd vs CIT   922 followed
2 There is no doubt that in one sense when rates and taxes on property are paid by a trader he pays them as owner or occupier because taxes are either on possession of property or on its ownership
But when a person has the 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
25A B C D Moffatt vs Webb  applied Not cited in the Travancore Titanium case
Smith vs Lion Brewery Company  Usher s Wiltshire Brewery Ltd vs Bruce  Harrods Buenos Ayres Ltd vs TaylorGooby and observations of Lord Davey in Strong and Co Romsey Ltd case   referred to
3 In the case of a trading company all the assets are owned and the liabilities are incurred for the purpose of trading as outlined in its memorandum of association
If all the assets are owned and used for the purpose of trade the net wealth would also be owned and used for the purpose of trade
The net wealth is as much an instrument of trade as the capital value of assets
Thereforethe test laid down in the earlier case should be qualified by stating that if the expenditure is I aid out by the 16 assessee as owner cum trader and the expenditure is really incidental to the carrying on of his business it must be treated as having bean laid out by him as a trader and as incidental to his business
29F H 3OA C 4 It may be difficult for the Revenue to allow the deduction of debts and non business assets and debts
But the wealth tax return form itself requires the assessee to show what are business assets and liabilities and what are the non business assets and liabilities
At any rate it should not be difficult to evolve a principle or frame statutory rules to find out the proportion of the tax which is really incidental to the carrying on of the trade
30C E Per M H Beg J  1 One of the tests laid down in Keshav Mills co s case 19652 SCR908 for deciding whether a previous erroneous view should be set right by this Court is whether any Possible advantage to public resulting from doing so would be outweighed by the mischief or harm a revision may cause
38E F The Wealth Tax Act was not intended to strike at or check expansion of commercial activities by either individuals or companies
Its underlying purpose is the removal of disparities of individual or personal wealth and not injury to trade
The interpretation placed in the Travancore Titanium case 1966 3 SCR 321 seems to penalise mere expansion of business and trade without serving the underlying purpose of wealth tax
Therefore a revision of opinion does not involve any such mischief or Such injury to the public interest as would stand in the way of correcting an erroneous view
38G H 39A B 2 The error which crept into the Travancore Titanium decision could be traced to an application of the criterion stated by the Lord Chancellor in Strong and Co of Romsey vs Woodfield   that if
the expenses fall on the trader in some character other than that of a trader they could not be deducted in computing profits
But in the same case another Law Lord laid down a somewhat different test that the payment to be deductible must have been made for the purpose of earning profits
30G H 31A B 3 Liabilities incurred by a trader to pay damages for injury to his customer due to his personal neglect in maintaining his premises even though the premises were used for trade could 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 a commercial purpose
But in Strong and co s case the negligence which resulted in payment of damages for which the deduction was claimed was that of servants employed as an ordinary incident of trading so that the master was only vicariously liable and the language used by the Lord Chancellor in that case covers more than what could be attributed to the trade man s own personal wrongs
31B E 4 In later English cases the test adopted is whether the expenses sought to deducted wholly or exclusively laid out for the purpose of earning profits
31F Smith vs Lion Brewery Company Limited  Usher s Wiltshire Brewery Ltd vs Bruce  Atherton vs British Insulted and Halsby Cables Ltd  Margan vs Tate and Lyle Ltd  referred to
Rushden Hell Co Ltd vs Commissioner of Inland Revenue and Smith s Potato Estates Ltd vs Bolland 30 TC 267 explained 17 Where profits the net gains of business determined after making all permissible deductions
are taxed the disbursements to meet such taxes cannot be deducted
But when the tax was levied on capital or assets used for the purpose of earning those profits it was a permissible de duction in calculating profits
32G H Harrods Buenos Ayres Ltd vs  Taylor Gooby  referred to
6 The principle that tax paid by an assessee on property used by him to earn income is deductible in computing the income for paying income tax was also laid down in Moffatt vs Webb   which was not cited before this Court when the Travancore Titanum case was argued34A B 7 The test of trading character when incurring an expense for which deduction is claimed can be utilised usefully only in cases where the question is whether a payment was gratuitous or unnecessary or not made for a bona fide commercial purpose or connected more with some ulterior object really failing outside the normal sphere or regular course of commerce such as the compounding of an offence even if committed while trading but this could not be so in cases of payment of taxes34D F JK Cotton Spinning  Weaving Mills Co Ltd vs Commissioner of Income Tax AIR 1957 All 513 referred to 8 There is no accepted commercial practice or trading principle according to which wealth tax could not be deducted in the computation of profits under section 10i and ii of the Income Tax Act
Except the observation in the Travancore Titanium case all the other cases indicate that commercial practice and trading principles also warrant such deductions of tax on capital assets used wholly and exclusively for carrying on trade or for earning profits
Deductions of taxes on net profits may not be permited but those imposed on net assets or wealth used exclusively for making profits can be deducted in computing income for purposes of income tax
Moreover whatever commercial practice or trading principles may imply or import they could not alter the meaning of statutory provisions
All that the Language of section 102xv requires for claiming its benefit is proof of direct causal connection between an outgoing and the commercial purpose which necessitated it
To lay down that it is the causal connection between the payment of tax and that part of the net wealth which is used wholly and exclusively for trade and not the mere character or capacity for the possession of which the tax is demanded which determines whether it is an allowable deduction or not under section 102 xv nothing more than giving effect to the plain and literal meaning of a provision of a taxing statute
35A B 35B C 9 To exclude from the purview of section 102xv wealth tax simply because it was a tax on assets or net wealth paid by its owner so as to reduce his wealth is to bring in the misleading test of either of capacity of the owner for the possession of which or the purpose for which the wealth tax may be demanded
instead of the inevitable need and the purpose of the trader in paying the tax as relevant matters
35D F 10 Wealth tax is imposed on net wealth of of assessees who are persons both natural and artificial
In the case of an artificial or juristic person like a company it is 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 the tax which falls on assets used exclusively for I trade could be really ascribed 18 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
Therefore nothing less than express statutory provision would justify a denial of the right to a deduction which the language of section 102 xv confers upon assessees
36D F 11 The Court is not concerned with any difficulty in separating that pail of the tax which is levied on any part of the net wealth used wholly or exclusively for trade from the rest of it
The Court is concerned only with the interpretation of section 102xv and not with any difficulty which may arise in actually computing the deductible amount
Moreover since net wealth is an amount by which an aggregation of all the assets exceeds all the debts there can be no intractable difficulty in calculating what part of the net Wealth is used for trade or business of an a sessee and what is not an aggregation being collection of items n being collection of items which can be separated and not a mixture whose ingredients became inseparable
Further the wealth tax return form divides wealth under two heads one of business assets and another of other assets showing that the Wealth Tax Act its itself makes that part of the net wealth separable which is used wholly and exclusively for trade from the reminder of it
If this can be done there is no difficulty in separating that part of the wealth tax which could be deducted under section 102xv of the Income Tax Act
37D G Assuming there is some difficulty the principle involved or
the meaning of the relevant previsions will not be affected thereby