Case: The Indian Aluminium Co. Ltd Vs. The Commissioner of Income Tax, West Bengal, Calcutta

Sikri, CJ. (on behalf of self, A. N. Grover, J., A. N,. Ray, J. and D. G. Palekar, J.) 1. 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. v. Commr. of Income-tax (1966) 3 SCR 321 = (AIR 1966 SC 1250 ) might require reconsideration. The only point involved in these appeals is whether the Wealth Tax paid by the assessee, a trading company, is deductible as an expenditure under S. 10 (1) and S. 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. 1,59,630/- as Wealth Tax and claimed to deduct this amount as expense from their assessable income. The 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 Rupees 1,59,630/- paid by the assessee as wealth-tax was legally deductible as a business expense in computing the assessee income from business? 2. The High Court, following the decision of this Court in Travancore Titanium case, (1966) 3 SCR 321 = (AIR 1966 SC 1250 ), answered the question against the assessee, Having obtained certificate of fitness from the High Court, the assessee has appealed to us. 3. Basing himself on Keshav Mills Co. Ltd. v. Commr. of I. T. (1965) 2 SCR 908 at p. 922 = (AIR 1955 SC 1636) it was contended by the learned counsel for the Revenue that we should not review our decision in Travancore Titanium case, (1966) 3 SCR 321 = (AIR 1966 SC 1250 ). Gajendragadkar, C. J., 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 or 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 unanimous 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? We are inclined to review our earlier decision in Travancore Titanium case, (1966) 3 SCR 321 = (AIR 1966 SC 1250 ) 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 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. 4. Section 10 (1) of the Indian Income-Tax Act, 1922, reads : "10 (1) The tax shall be payable by an assessee under the head 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 10 (2) 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." 5. The language seems to be simple enough but it has engendered judicial conflict not only in India but also in England. Eminent Judges have 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 the language of the section. 6. 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 earlier cases in which this test was suggested was Strong and Co. of Romsay Ltd. v. Woodifield, (1906) 5 Tax Cas 215. In that case the Brewing Company, which also owned licensed house in which they carried on the business of innkeepers, incurred damages and costs on account of injuries caused to a visitor staying at one of their house by the falling in of a chimney. The House of Lords held that the damages and costs were not allowable as a deduction in computing the Companys profits for Income Tax purposes. The Lord Chancellor observed : "In my opinion, however, it does not follows 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 trander 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 grocers 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." 7. 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, and 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 profits." 8. Lord Chancellors observations in Woodifieldss case. (1906) 5 Tax Cas 215 were not accepted by Lord Atkinson in Smith v. Lion Brewary Co. Ltd. (1911) 5 Tax Cas 568. The Brewary Company were the owners or lessees of a number of licensed premises which they had acquired as part of their business as brewers an 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 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 Kings Bench held that the deduction claimed was inadmissible. This decision was reversed in the Court of Appeal (Kennedy, L. J., 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 "he (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 irrespectively or 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 objection." 9. In Ushers Wiltshire Brewery Ltd. v. Bruce, (1913) 6 Tax Cas 399, 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 which these tied houses should be allowed : (A) repairs to tied houses : (B) differences between rents of leasehold houses or Schedule A 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 premiums; (D) rates and taxes. (E) legal and other costs. It was held by the House of Lords that all the expenses claimed were admissible as being money wholly and exclusively laid out or expended for the purpose of the trade of the Brewery Company. 10. 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 (1911) 5 Tax Cas 568 and are proper deductions." 11. The Court of Appeal, regarding Rates and Taxes, said : "The next head is "D, Rates and Taxes ? 38 7s. 6d." 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 convenants to pay and consequently paid the rates and taxes themselves. The 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 Companys profits." 12. The House of Lords, however, allowed these items. Lord Atkinson at page 422 of the report said : "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." 12A. 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." 13. 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 admitted 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." 14. Lord Sumner observed : "The remaining items, rates and taxes, premiums and costs, call for no special observation. In may view, the case means to find them all to be disbursements and money "wholly and exclusively expended 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." 15. 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 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, i.e., 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 a trader. 15A. Take the case of taxation on a motor vehicle. The tax is levied under the Motor Vehicles Act on the possession or ownership 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 deductible 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 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. 16. This aspect is also clearly brought out in Moffatt v. Webb, (1913) 16 CLR 120 (AUS) 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 17,970 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 Rs. 44,924. He paid Commonwealth Land Tax amounting to Rs. 387 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 expended 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 expended for the purpose of trade. Griffith, C. J. 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 necessary consequence of the possession of land of taxable 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 paragraph of Section 9". (Section 9 is substantially similar to Section 10 (2) (xv) of the Indian Income Tax Act, 1922). 17. 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 18,000 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 taxed, 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 holds the land 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 expended 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 reasons 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 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." 18. Isaacs, J., was impressed by reasoning of Lord Halsbury and Lord Atkinson in (1911) 5 Tax Cas 568, He observed: "And Lord Atkinson reasons out the position and shows convincingly, to my mind that, though a tax may in one sense be paid as owner or lessee, in another it is paid as trader. The instances 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 the tax was payable whether these things were employed in trade or not, could it is 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 the 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. 19. The unsoundness of the test of the capacity in which payment is made was commented upon in Harrods (Buenos Aires) Ltd. Taylor-Gooby 41 Tax Cas 450 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 Argentine to a tax known as the substitute tax, which was levied on joint stock companies incorporated in Argentine, and on companies incorporated outside Argentina which carried on business there, as did the Appellant Company through an "empresa estable. The tax was charged annualy at the rate one percent on the Companys 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 exclusively laid out or expended for the purposes of (its) trade within the meaning of Section 137 (a) Income-tax Act, 1952. For the Crown, it was contended (inter alia) that the Company paid the tax in the capacity of a taxpayer rather than trader. 20. Willmer, L. J., referred to Commissioners of Inland Revenue v. Dowdall OMahoney and Co., (1952) 33 Tax Cas 259 and observed: "I can find no support whatever in this case for the proposition that the question depends on the capacity in which the taxpayer pays the taxes. After referring to (1911) 5 Tax Cas 568 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, L. J., observed: "In Rushden Heel Co., Ltd. v. Keene, (1949) 30 Tax Cas 298, to which I have referred, Lord Greene, M. R., in 30 T. C. 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 difficulty 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 he is taxed and is a taxpayer. 21. Diplock, L. J., 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 Greenem, M. R.s judgment in the Rushden Heel Cos case, (1949) 30 Tax Cas 298 on which this contention 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 of Lords in the same case and cannot, in my view, survive Lord Atkinsons earlier criticism of a similar argument in the Lion Brewery case, (1911) 5 Tax Cas 568 which Willmer, L. J., 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 purposes 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 premises, 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. 22. 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 grazier in (1913) 16 CLR 120 or with "tied houses in (1911) 5 Tax Cas 568 or with the "Companys Capital in 41 Tax Cas 450. 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 to 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. 23. In our view, the test adopted by this Court in Travancore Titanium case, (1966) 3 SCR 321 = (AIR 1966 SC 1250 ) 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 heeds 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. 24. 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. 25. 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 companys trade.

Decision:
1[ds]15. 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 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, i.e., 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 a trader15A. Take the case of taxation on a motor vehicle. The tax is levied under the Motor Vehicles Act on the possession or ownership 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 deductible 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 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 principles16. This aspect is also clearly brought out in Moffatt v. Webb, (1913) 16 CLR 120 (AUS) 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 17,970 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 Rs. 44,924. He paid Commonwealth Land Tax amounting to Rs. 387 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 expended 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 expended for the purpose of trade. Griffith, C. J. 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 necessary consequence of the possession of land of taxable 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 paragraph of Section 9". (Section 9 is substantially similar to Section 10 (2) (xv) of the Indian Income Tax Act, 1922)19. The unsoundness of the test of the capacity in which payment is made was commented upon in Harrods (Buenos Aires) Ltd. Taylor-Gooby 41 Tax Cas 450 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 Argentine to a tax known as the substitute tax, which was levied on joint stock companies incorporated in Argentine, and on companies incorporated outside Argentina which carried on business there, as did the Appellant Company through an "empresa estable. The tax was charged annualy at the rate one percent on the Companys 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 taxOn 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 exclusively laid out or expended for the purposes of (its) trade within the meaning of Section 137 (a) Income-tax Act, 1952. For the Crown, it was contended (inter alia) that the Company paid the tax in the capacity of a taxpayer rather than trader.20. Willmer, L. J., referred to Commissioners of Inland Revenue v. Dowdall OMahoney and Co., (1952) 33 Tax Cas 259 and observed:"I can find no support whatever in this case for the proposition that the question depends on the capacity in which the taxpayer pays the taxes. After referring to (1911) 5 Tax Cas 568 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, L. J., observed:"In Rushden Heel Co., Ltd. v. Keene, (1949) 30 Tax Cas 298, to which I have referred, Lord Greene, M. R., in 30 T. C. 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 difficulty 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 he is taxed and is a taxpayer.21. Diplock, L. J., 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 Greenem, M. R.s judgment in the Rushden Heel Cos case, (1949) 30 Tax Cas 298 on which this contention 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 of Lords in the same case and cannot, in my view, survive Lord Atkinsons earlier criticism of a similar argument in the Lion Brewery case, (1911) 5 Tax Cas 568 which Willmer, L. J., 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 purposes 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 premises, 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.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 above23. In our view, the test adopted by this Court in Travancore Titanium case, (1966) 3 SCR 321   = (AIR 1966 SC 1250  ) 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 heeds 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 businessBut 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 liabilities25. 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 companys trade5. The language seems to be simple enough but it has engendered judicial conflict not only in India but also in England. Eminent Judges have 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 the language of the section.