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

be, and in the cases specified in sub-section (3D) the company of which he is the principal officer shall, without prejudice to any other consequences which he or it may incur, be deemed to lie an assessee in default in respect of the tax."Provided that. . . ." Now the Act contains provisions for collecting taxes in two modes; one is by direct levy and the other is by means of deduction at the source Section 18 provides for deduction in cases inter alia of "Salaries", "Interest on securities", "Dividends", interest and other sums chargeable under the Act and paid to non-residents. There is no dispute that in the present case the assessee was bound under sub-s. (3-B) to deduct the sum chargeable under the provisions of the Act at the time of payment of the retainer fees to the Montreal Company. Under sub-s. (7) if the assessee did not deduct the amount of tax as required under the section it was to be deemed to be in default in respect of the tax. The argument raised on behalf of the appellant is that the Montreal Company refused to reimburse it for the payment of the amount in question for the reasons stated in the letter dated August 3, 1954. It was stated in this letter that the Montreal Company was not contractually bound to meet the obligation of Indian tax liability. The concluding portion of the letter was as follows:Again this involves a question of principle for us. If every State to which we have to render technical assistancee, based on the researches carried on by us in our plant and laboratories, starts demanding income tax and super tax on our charges, no such State could ever receive any technical assistance at all and we ourselves could hardly afford to render such technical assistance and the expensive taxes involved. We have given this matter our serious consideration and cannot bring ourselves on any score, equitable, legal contractual, or moral to reimburse to you any monies you may have to pay to the Indian-taxing Authorities.4. The claim of the assessee principally is two fold It is maintained firstly that after the refusal of the Mortreal Company in the matter of reimbursement the amount of Rupees 1,24,199/- was written off as a bad and irrecoverable debt. It was, therefore, deductible under S. 10 (2) (xi) of the Act. In the section the debt certainly means something more than a mere advance. It is something which is related to business or results from it. To be claimable as a bad and irrecoverable debt it must first be shown as a proper debt. (Vide A. V. Thomas and Co. Ltd. v. Commissioner of Income tax, (1963) 48 ITR 67 at p. 75 (SC). ) It is well settled that a business or trading debt should spring directly from the carrying on of a business or trade and should be incidental to it and it cannot be just any loss sustained by the assessee even if it has some connection with his business.5. Although it is true that the retainer fees were paid by the assessee to the Montreal Company for technical assistance which had a connection with the business of the assessee but it is not possible to regard the amount which the assessee was bound to deduct from the total payment made to the Montreal Company under S. 18 (3-B) of the Act and which it failed to recover from that company as a debt which could be deducted under S. 10 (2) (xi). The debt was not incidental to the business because it, arose out of non-compliance with the provisions of the Act. The payment which the assessee made to the income tax authorities and which it failed to recover from the Montreal Company was more a matter of commercial expediency and proceeded out of motives of business relationship because the assessee was anxious not to annoy or offend the Montreal Company so as to avail of its continued technical assistance and advice.Indeed the argument on behalf of the appellant has rested a great deal on this aspect of the matter and it has been urged strenuously that the assessee could not afford to displease the Montreal Company as it stood greatly in need of the latters technical assistance.6. Secondly the question is whether the assessee could claim deduction under S. 10 (2) (xv) of the Act. For that purpose the assessee had to establish that the amount in question had been wholly and exclusively laid out for the purpose of its business. Our attention has been invited to a decision of the Bombay High Court in Commissioner of Income tax, Bombay v. M/s Pannalal Narotamdas and Co. Bombay (1969) 1 ITJ 32 (Bom) in which it was held that the amount of penalty imposed not for the fault of the assessee but because he had to pay the same for the purpose of getting the goods released from the Customs Authorities could be regarded as wholly and exclusively incurred for the purpose of his business. We consider it unnecessary to pronounce on the correctness of this decision. The point which came up for consideration there was altogether different and it can afford no assistance to us in determining whether an amount which an assessee had to pay by virtue of the provisions of the Act could be regarded as an expense incurred wholly and exclusively for the purpose of the business. The assessee was presumed to know the relevant provisions of the Act at the time when it entered into an agreement with the Montreal Company. There was no provision in the agreement with the Montreal Company which created a contractual obligation on the assessee to make payment of the taxes deductible under S. 18 (3-B). At any rate it is difficult to understand how a payment made under a statutory obligation, because the assessee was in default, could constitute expenditure laid out for the purpose of the assessees business.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]4. The claim of the assessee principally is two fold It is maintained firstly that after the refusal of the Mortreal Company in the matter of reimbursement the amount of Rupees 1,24,199/- was written off as a bad and irrecoverable debt. It was, therefore, deductible under S. 10 (2) (xi) of the Act. In the section the debt certainly means something more than a mere advance. It is something which is related to business or results from it. To be claimable as a bad and irrecoverable debt it must first be shown as a proper debt. (Vide A. V. Thomas and Co. Ltd. v. Commissioner of Income tax, (1963) 48 ITR 67     at p. 75 (SC). ) It is well settled that a business or trading debt should spring directly from the carrying on of a business or trade and should be incidental to it and it cannot be just any loss sustained by the assessee even if it has some connection with his business.5. Although it is true that the retainer fees were paid by the assessee to the Montreal Company for technical assistance which had a connection with the business of the assessee but it is not possible to regard the amount which the assessee was bound to deduct from the total payment made to the Montreal Company under S. 18 (3-B) of the Act and which it failed to recover from that company as a debt which could be deducted under S. 10 (2) (xi). The debt was not incidental to the business because it, arose out of non-compliance with the provisions of the Act. The payment which the assessee made to the income tax authorities and which it failed to recover from the Montreal Company was more a matter of commercial expediency and proceeded out of motives of business relationship because the assessee was anxious not to annoy or offend the Montreal Company so as to avail of its continued technical assistance and advice.Indeed the argument on behalf of the appellant has rested a great deal on this aspect of the matter and it has been urged strenuously that the assessee could not afford to displease the Montreal Company as it stood greatly in need of the latters technicalthat purpose the assessee had to establish that the amount in question had been wholly and exclusively laid out for the purpose of its business. Our attention has been invited to a decision of the Bombay High Court in Commissioner of Income tax, Bombay v. M/s Pannalal Narotamdas and Co. Bombay (1969) 1 ITJ 32 (Bom) in which it was held that the amount of penalty imposed not for the fault of the assessee but because he had to pay the same for the purpose of getting the goods released from the Customs Authorities could be regarded as wholly and exclusively incurred for the purpose of his business. We consider it unnecessary to pronounce on the correctness of this decision. The point which came up for consideration there was altogether different and it can afford no assistance to us in determining whether an amount which an assessee had to pay by virtue of the provisions of the Act could be regarded as an expense incurred wholly and exclusively for the purpose of the business. The assessee was presumed to know the relevant provisions of the Act at the time when it entered into an agreement with the Montreal Company. There was no provision in the agreement with the Montreal Company which created a contractual obligation on the assessee to make payment of the taxes deductible under S. 18 (3-B). At any rate it is difficult to understand how a payment made under a statutory obligation, because the assessee was in default, could constitute expenditure laid out for the purpose of the assessees business.