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

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

Court's reasoning:
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.