INDIAN ALUMINIUM CO. LTD. v.

COMMISSIONER OF INCOME TAX, WEST B.ENGAL

January 12, 1971

(K. S. HEGDE AND A. N. GROVEi\, JJ.J

Income Tax Act, 1922, s. !0(2)(xi) arrd I0(2)(xv)-Fee paid to foreign collabqrator for technical know.fio}v-No provision in contra.cl for payment of tax on fee by Indian Company-Assessee held in default and tcu recovered frofn it-If allowable as business expenditu1'e and deductible.

The appellant Company which was engaged in the manufacture of aluminium products, entered into a contract with another company in Montreal, Canada, for the supply of technical know-how etc. for the development of its production. This agreement provided for payment of a retainer fee by the appellant on an annual basis and there was no condition or stipulation that the fee would be payable by the assessee without deduction of income tax. In 1951 the Income Tax Officer treated the assessee as being in default under section 18(7) of the Income Tax Act, 1922 in respect of a sum of Rs. 1,24,199 which the appellant was

hable to deduct from the payments made to the Montreal Company under the provisions of sections 18(3-A), 18(3-B) and. 18(3-C). The appellant was required to pay this amount and the Montreal Company refused to accept its claim fdr reimbursement.

The appellant claimed the amount as a deduction from its business income under S. 10( 1) or 10(2) (xi) or

I0(2)(xv) of the Act. Although this claim was allowed by the Appellate Assistant Commissioner. the Tribunal, in appeal. held that the amount in

que, stion was neither expenditure incidental to the business nor was it wnolly and exclusively laid out for that purpose: and nor was it claimabie as a ba; I debt in view of the fact that it had not been incurred as a trade debt in the course of the business.

The High Court. upon a reference made to it, held against the a>i.essee. On appeal to this Court,

F HELD : Dismissing the appeal,

(i) It is well settled that a business or trading debt should spring directly from .the carrying on of a business or trade anu shoulu be incidental to it and it cannot be just any loss sustained by the assessee even if it has some Connection with his business. [355 E]

Although the retamer fees were paid by the assessee to the Montreal Company for technical assistance which had a connection with the bu_siness of the assessee it was not possible to regard the amount which the assessee was bound to deduct from the 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. !0(2)(xi).

The debt was not incidental to the business because it arose out of noncompliance 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 ayail of its continued teehnial assistance and advice. [355 G]

A. V. Thomas & Co. Ltd. v. Commissioner of Income Tax,. 48 I.T.R. 67 at. p. 75, referred to.

(ii) The assessee was presumed to kriow the relevant, provisions of lhe 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). A payment made under a statutory obligation, because the assessee was in default, could not constitute expenditure laid out .for the purpose of the assessee's business and was not tlierefore deductible under s. 10(2) (xv). [356 El

Commissioner of Income Tax, Bombay v. M/s. Pannalal Narotamdas & Co, Bombay, 1969 1 J.T.J. 32, distinguished.

CIVIL APPELLATE JURISDICTION : 1967.

Civil Appeal No. 24 of

Appeal by special leave from the judgment and order dated April 27, 1966 of the Calcutta High Court in Income-tax , Reference No. 90 of 1962. ·

M. C. Chag/a, S. R. Banerjee, N. N. 'Goswami and S. N.

Mukherjee, for the appellants.

Jagad{sh Swarup, Solicitor-General, Ram Panjavani and R. N.

Sachthey, for the respondent.

The Judgment of the Coun was delivered by Grover, J. This is an appeal by special leave from a judgment of the Calcutta High Court answering the following question referred to it under s. 66 (I) of the Indian Income-tax Act, 1922, hereinafter called the "Act" in the negative and agains_t the assessee :-

"Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,24, 1991was deductible from the business income of the assessee either under Section 10(1) or 10(2) (xi) or 10(2)(xv) of the Incometax Act?"

The assessee is •a public limited company having its registered -0ffice at Calcu'lta. Its principal business consists of manufacturing aluminium ingots, sheets and such other products from aluminium.

There is another company known by the name of Alumi-· nium Laboratories Limited, Montreal, i; n Canada, hereinafter called the "Montreal Company", which provided the assessee with technical kaow-how, engineering services etc. regarding development of a production of the goods: An agreement was entered into on January 31, 1947 between the-Montreal Company and the assessee. The agreement provided for payment of a retainer fee on an annual basis. There was no condition or stipulation

~ ''

that the fee would be payable by the assessee without deduction. of tax under the provisions of the Act.

The assessee credited a total fee of Rs. 2,50,808/- in favour of the Montreal Company for a period of seven years between the accounting year ending September 30, 1944 and September 30, 1950.

B In 1951 the Income-tax Officer treated the assessee as being in default under s. 18(7) of the Act in respect of the amount of tax wiJich the assessee was liable to deduct from the payments made to the Montreal Company under the provisions of ss, 18(3-A), 18(3-B) and 18(3-C) of the Act. The amount of tax c which was found to be payable by the assessee came to a toal sum of Rs. 1,24, l 991-. The assessec wrote to the Montreal Company asking for reimburBC111ent of the said amount.

The Montreat Company, however, refused to accept the assessee's claim for reimbursement by means <)f a letter dated August 3, 1954. The assessee wrote off the amount of Rs. 1,24,199/- during the rele- D vant previous year ending on December 31, 1954. The assessee appealed to the Appellate Assistant Commissioner who allowed its claim.

The department preferred an appeal to the Tribunal which held that the amount in question was neither expenditure incidental to the business nor was it wholly and exclusively laid' out for that purpose nor was it claimable as a bad debt in view of the fact that it had not been incurred as a trade debt in the E , course of the business.

The departmental appeal was therefore allowed and the order of the Income-tax Officer was restored.

The High Court was of the view that there was a nexus betwp payment and the business of the assessee inasmuch as it had an indirect bearing upon the technical aid which the assessee l):ad

obtained from the Montrealompany but was of the opinion F . that even if the payment had some connection with the business it could not be said to be incidental to it as the liability could have been avoided by the assessee if it had deducted at the source the required amount of income-tax from the retainer fee which was payable to the Montreal Company.

The High Court also considered the question whether the amount paid to the Montreal G Company could be treated as a bad debt 'within the meaning of s. 10(2) (xi) but came to the conclusion that as it had not been advanced as a trading debt in the course of business it was not deductible as a bad debt. According to the High Court the provisions of s. 18(3-B) had not been complied with and since the statutory provisions had been disobeyed and as a result thereof H the assessee had incurred a liability it could not be construed as a part of business expense within the meaning of s. 10(2)(xv} nor could it be said that such an expense was wholly and exclusively laid out for the purpose of the business. 9-L807SuP.Cl/71

,._ /

In order to decide the contentions raised before us it is neces- :sary to refer only to ss. 18 ( 3 -B) and 18 ( 7) of the Act as they .stood at the material time :- ·

S. 18(3-B)-"A, ny person responsible for paying to a person not resident in the territories any interest not being "interest on securities" or any other sum chargeable under the provisions of this Act shall, at the time of payment, unless he is himself liable to pay any income-tax an._d super-tax thereon as an agent, deduct income-tax at the maximum rate. and super-tax at the rate applicable to a company or in accordance with the provisions of sub-clause (b) of sub section (1) of section 17, as the case may be :

Provided tht where the person not resident. is. not a company, the proviso to sub-section (2B) shall apply to the deduction of ineome-tax and super-tax under this sub-section as it applies to the <!eduction of income-tax and super-tax under sub-section (2B) : ' ' Provided further that notbing in this section shall apply. to any payment made in the course of transac. tions in respect of which a person responsible for the payment is deemed unr the first proviso to ection 43 to be an agent of the payee.''

S. 18(7)-"If any such person does not deduct or after deducting fails to pay the tax as required by or under this, section, he, and in the cases specified in sub-

ection (3D) the company of which he is the principal 9fficer sball, without prejudice. to any other consequences which he or it may incur, be deemed to be 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 by means of deduction at the source.

SeC't[Qn 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-residts.

There is no dispute that in-the present case the assessee was bound under sub-section (3-B) to deduct the sum chargea.ble under the provisions of the Act at the time of payment of the retainer fees to the Montreal Company.

Under sub-section (7) if the assessee did not deduct the amount of tax as required under the section it was to be deefiled to be in dault in reSpect of 'he tax. The argument raised on Oeh!llf of the apoell; mt is that th~ Montreal Company refused to reimburse it for the payment of the.

amount in questio11 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 obJlgation of Indian tax liability. The concluding partion of the letter was as follows :-

"Again, this invqlves a question of principle for us.

If every State to whih we have to render technical assistance, based on the researches carried on by us in our plant and laboratories, starts demanding incometax and super-tax on our charges, no such State could ever receive any technical assistance at all and we ourselyes could hardly affprd 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." o The claim of the assessee principally is two fold. It is maintained firstly that after the refusal of the Montreal Company in the matter of reimbursement the amount of Rs. 1,24, 1991was 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 E is something which is related to business or re!ul.ts from it. To be. claimable as a bad and irrecoverable debt it must first be shown as aproper debt. (vide A. V. Thomas & Co. td. v.

Commissioner of lncome-tax( 1). It is well settled that a busi- 1ness or trading debt should spring directly from the carrying on of a business or trads and should be incidental to it and it cannot be just any loss sustained by the assessee even if it has some F connection with his business.

Although it is true that the retainer fees were paid by the assessee to the Montreal Company for technical assis•tance 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. l S ( 3-B) of the Act and which it failed to recover from that company as a debt which could be deducted ooder s. 10 ( 2) (xi). The debt was not incidental to the businesLJiecause it arose out of non-compliance with the provisions Act. The . payment which the assessee made to the income-tair authorities and which it failed to recover frQm the Montreal Company was H more a matter of commercial expediency and proceeded out of motives of business relation-ship because the assessee was anxious

' (I) 48T.T.R.67atp.75.

SUPREME COURT REPORTS [1971 ]3 s.c.Ji.

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 <ill 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 latter's technical assistance.

Secondly tht; 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

wolly and exclusively laid out for the purpose of its business. 01.<r attention has been invited to a decision of the B.:>mbay High Court in Commissioner of Income-tax, Bombay v. M/s. Pamrplµ/

Narotamdas & Co. Bombay('') in which it was @Id 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 Aut!lorities could be regarded as wholly and exclusively incurred for the purpose of hise business.

We consider it umlecessary to prnnolljllce 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 B!Il amount which an assessee had to pay by virtue of the provisions of the Ast 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 assessP.e to make payment of the 1axes 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 assessee's business.

We find no reason or justification to interfere with the answer returned by the High Court with the result that the appeal fails and it is dismissed with costs.

R.K.P.S.

Appeal dismissed.

(I) [1969] 1 L.T.J. 3~.