Case ID: 2156

Judgment:
Appeal No. 235 of 1963 Appeal by special leave from the judgment and order dated August 26	 1963 of the Kerala High Court in Income tax Referred Case No. 29 of 1962. G.B. Pai	 T. A. Ramachandran and O. C. Mathur	 for the appellant. A. V. Viswanatha Sastri	 N. D. Karkhanis	 R. H. Dhebar and R. N. Sachthey	 for the respondent. 322 The Judgment of the Court was delivered by Shah	 J. In computing the total earned income of the appellant Company for the calendar year 1959	 the Income tax Officer	 Trivandrum	 disallowed a claim for deduction of Rs. 80	255/ in respect of liability for payment of tax under the Wealth Tax Act 27 of 1957 incurred by the Company for the calendar years 1957 and 1958. The order was confirmed by the Appellate Assistant Commissioner and by the Appellate Tribunal. On the following question referred by the Wealth Tax Appellate Tribunal	 "Whether on the facts and circumstances of the case	 the assessee Company is entitled to a deduction of Rs. 12	873/ being the wealth tax paid during the account year ended 29 2 1960. against the profits and gains of its business for the assessment year 1960 61 under Sec. 10 (2)(xv) of the Indian Income tax Act ?" the High Court of Kerala recorded an answer in the negative. The Company has appealed to this Court with special leave. The Company claims that wealth tax paid by it represented expenditure laid out wholly and exclusively for the purpose of its business	 and on that account is a permissible allowance under section 10(2)(xv) of the Income tax Act. In determining the admissibility of this claim	 it is necessary to ascertain the true character of the liability for payment of tax under the Wealth Tax Act. Tax is charged under section 3 of the Wealth Tax Act	 1957	 for every financial year in respect of the net wealth of every individual	 Hindu undivided family and Company at the rate or rates specified in the Schedule to the Act; and 'net wealth ' under the Act means the amount by which the aggregate value computed in accordance with the provisions of the Act of all the assets belonging to the assessee on the valuation date is in excess of the aggregate value of all the debts owed by the assessee on that date other than the debts specified. The tax under the Act is payable by all individuals	 Hindu undivided families 	and Companies on the value of taxable assets belonging to the taxpayer: it is charged on the net value of the assets	 and not on the business or trading activity carried on by the taxpayer. The rates of tax for companies as well as individuals and Hindu undivided families are prescribed by the Second Schedule. The slabs on which the rate of tax is nil are not uniform in the case of different taxable entities and a special exemption is given to a Company which has incurred in any year loss computed in accordance with sections 8	 9	 1 0 and 12 of the Income tax Act without referring to depreciation allowances and development rebates and without taking into account the losses brought forward from the earlier years	 and which has not declared any dividend on its equity capital in respect of that year. It is also provided by r. 5 of the Schedule that where the profits of a company in respect of any year	 before deducting any 32 3 of the allowances referred to in the second paragraph of Part 11	 are less than the amount of wealth tax payable by it in respect of the relevant assessment year	 the wealth tax payable by the company for such assessment year shall be limited to the amount of such profits provided that the company has not declared any dividend on its equity capital in respect of that year. But by relating the quantum of liability of a company to wealth tax in these special cases to the profits earned	 the character of the tax is not altered. It is and remains a tax charged upon the net wealth	 and it is not made a tax related to or incidental to the carrying on of a business. The rules in the Schedule merely extend the exemption which is primarily declared in favour of a Company of which the net wealth does not exceed Rs. 5 lakhs	 to a company which has in the previous year made a loss	 and grant a partial exemption if the company has made profits which are inadequate to meet the wealth tax liability at the prescribed rate. In computing the profits or gains of an assessee who carried on business	 certain allowances are permitted under section 10(2) from the business profits	 and one such head is: "(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 for personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business	 profession or vocation." An allowance permissible under cl. (xv) in the computation of taxable income is therefore expenditure incurred in the year of account in respect of a business carried on by the assessee: the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee and it must have been laid out or expended wholly and exclusively for the purpose of the business. The argument for the Company in this case turns upon the meaning of the expression "for the purpose of such business." On behalf of the Company it is urged that for the purpose of its business	 it holds assets and by the use of those assets profits are earned and therefore tax paid in respect of those assets is expenditure laid out for the purpose of the business. Whether an item of expenditure falls within that description has of necessity to be determined having regard to the nature of the business	 the nature of the expenditure and the relation between the business and the expenditure. In adjudicating upon the claim that an outgoing is a permissible deduction under section 10(2)(xv) of the Income tax Act	 the primary question is whether in the light of accepted commercial practice	 trading principles and the relation between the business and the outgoing	the outgoing can be said to arise out of the carrying on of the business and to be incidental to that business. In the context of a variety of 324 trading transactions and the relation between the transactions and the expenditure claimed as a permissible deduction	 in the decisions of the courts under the Indian Income tax Act and of the courts in the United Kingdom under the English taxing statutes	 different tests are suggested. Those tests	 though adequate for the specific problem under discussion	 cannot be regarded as exhaustive or necessarily applicable to other problems. When Rowlatt	 J.	 in The Commissioners of Inland Revenue vs The Anglo Brewing Company Ltd.(1) said that the expression "for the purpose of the trade" meant for the purpose of keeping the trade going	 and of making it pay	 he was making that statement in relation to the facts of the case	 and he did not intend to suggest a universal test. Similarly when because of the special nature of the business	 expenditure incurred for payment of rates	 taxes and duties was held a permissible allowance in the computation of taxable income	 it was not intended and could not be intended to be laid down that expenditure incurred for payment of rates	 taxes or duties in respect of another business would be regarded necessarily as a permissible allowance. Illustrations of this class are to be found in Smith vs Lion Brewery Company Ltd.(2) Usher 's Wiltshire Brewery Ltd. vs Bruce(3) and Harrods (Buenos Aires) Ltd. vs Taylor Gooby.(4) In the Lion Brewery Company 's case(2) a Brewery Company who were owners or lessees of licensed premises acquired as part of their business as brewers and as a necessary incident to profitable exploitation were held entitled to the allowance in the computation of their income under Sch. D of Compensation Fund Charges imposed under the Licensing Act upon their tenants and which the tenants after paying recouped themselves by deduction from the rents payable to the Company. In Usher 's Wiltshire Brewery Ltd. 's case(3) the claim of a Brewery Company as owners or lessees of licensed premises acquired in the course of and for the purpose of their business as brewers and as a necessary incident to the more profitable conduct of their business of certain expenses in connection with those licensed houses was allow ed in the computation of their profits. In Harrods (Buenos Aires) Ltd 's case(4) Harrods (Buenos Aires)Ltd a company incorporated in the United Kingdom carried on business of a retail store in Argentina and was liable to pay a tax known as "substitute tax" which was levied on joint stock companies incorporated in Argentina and on companies incorporated outside but which carried on business in Argentina through an "empresa estable" (a "commercial establishment"). In proceedings for assessment of income tax of the business the claim of the Company to deduct the "substitute tax" paid to the Argentina Government was accepted	 for it was an expenditure without paying which the assessee Company could not carry on its business at all. In all the three cases the expenditure was directly related to the business Organisation of the taxpayer. (1) (2)) (3) 325 But every item of expenditure merely because it is connected with the trade may not necessarily be treated as a permissible deduction. A fairly reliable approach for determining what may be regarded normally as expenditure laid out or expended wholly and exclusively for the purpose of the business was suggested in Strong and Company of Romsey Ltd. vs Woodifield.(1) That was a case of a Brewery Company owning a licensed house in which it carried on the business of inn keepers. The Company had to pay damages to a customer who was	 when sleeping in the inn	 injured by a falling chimney	 the fall of the chimney being due to the negligence of the Company 's servants. The Company was held disentitled to deduct the expenditure in computing its profits for income tax purposes. Lord Loreburne	 L. C.	 observed	 in disallowing the claim as a permissible expenditure under the head expenditure laid out wholly and exclusively for the purpose of the business: "A deduction cannot be allowed on account of loss not connected with or arising out of such trade. That is one indication. And no sum can be deducted unless it be money wholly and exclusively laid out or expended for the purposes of such trade. That is another indication . 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. " In the same case Lord Davey observed: "These words. . appear tome to mean for the purpose of enabling a person to carry on and earn profits in the trade	 etc. 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. " In Badridas Daga vs Commissioner of Income tax	(2) Venkatarama Aiyar	 J.	 observed that whether the expenditure is admissible or not will depend upon whether it can be said to arise out of the carrying on of the business and be incidental to it	 and this was reaffirmed by this Court in a later judgment in Commissioner of Income tax	 Bombay vs Abdullabhai Abdulkadar.(3) (1) ; (2) ; I.T.R. 10 (3) ; 326 In a recent judgment of this Court Commissioner of Income tax	 Kerala vs Malayalam Plantations Ltd.(1) certain amounts paid as estate duty under section 84 of the 	 by a resident company incorporated outside India on the death of shareholders not domiciled in India	 were sought to be deducted under section 10(2) (xv) as expenditure laid out or expended wholly and exclusively for the purposes of the business. Subba Rao	 J.	 speaking for the Court observed at p. 705: "The expression "for the purpose of the business" is wider in scope than the expression "for the purpose of earning profits. " Its range is wide: it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation	 coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be	 its limits are implicit in it. The purpose shall be for the purpose of the business	 that is to say	 the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. " The position may therefore be summarised thus: the nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and be laid out by the taxpayer in his character as a trader. To be a permissible deduction	 there must be a direct and intimate connection between the expenditure and the business ie. 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. In the light of the principles the amount of tax paid on the net wealth of an assessee under the Wealth Tax Act is not a permissible deduction under section 10(2)(xv) of the Indian Income tax Act in his assessment to income tax	 for tax is imposed under the Wealth Tax Act on the owner of assets and not on any commercial activity. The charge of the tax is the same	 whether the assets are" part of or (1) (1964] 7 S.C.R. 693=53 I.T.R. 140. 327 used in the trading Organisation of the owner or are merely owned by him. The assets of the taxpayer incorporated or not become chargeable to tax because they are owned by him	 and not because they are used by him in the business. The appeal therefore fails and is dismissed with costs. Appeal dismissed.

Summary:
In computing the total earned income of the appellant company for the calendar year 1959	 the Income Tax Officer disallowed a claim for deduction of Rs. 80	255 in respect of liability for payment of tax under the Wealth Tax Act	 27 of 1957 incurred by the company. The order of the Income Tax Officer was confirmed in appeal by the Appellate Assistant Commissioner	 the Tribunal and	 on a reference	 by the High Court. It was contended by the appellant company that since the company held the assets on which tax was levied for the purpose of its business and profits were earned by the use of those assets	 tax paid in respect of those assets was expenditure laid out wholly and exclusively for the purpose of the business and on that account was a permissible allowance under section 10(2)(xv) of the Income tax Act	 1922	 HELD:The amount of tax paid on the net wealth of an assesses under Wealth Tax Act is not a permissible deduction under section 10(2) (xv) of the Income tax Act	 for tax is imposed under the Wealth Tax Act on the owner of the assets and not on any commercial activity. The charge of tax is the same	 whether the asset are part of or used in the trading organization of the owner or are merely owned by him. [326 G H] For expenditure to be regarded as being for the purpose of the assessee 's business within the meaning of section 10 (2) (xv)	 the nature of the expenditure of outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and be laid out by the tax payer in his character as a trader. 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. [326 F] Case law discussed.