MITSUI STEAMSHIP CO. LTD. versus C.I.T. WEST BENGAL, II CALCUTTA

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MITSUI STEAMSHIP CO. LTD. v. C.I.T. WEST BENGAL, II CALCUTTA February 7, 1975. [H. R. KHANNA AND A. C. GUPTA, JJ)

Indian Incc>me-tax Act (11 of 1922) s. 10(2)(xv) and Indian Income-tax 1ct (43 of 1961) s: 40, cl. (ii) (a) as amended by Amendment Act of l9i2~ Tax 011 property paid by ow11er-cum-trader-If deductible expenditure.

The appellants, non-resident companies wit;1 registered offices in Japan, had been assessed to income-tax for the assessment years 1956-1961 under the Indian In the assessment pro lncome-tax Act, 19.22 in respect .of their Indian earnings. c~0dmgs they claimed as dedt•ct1ble allowance, under s. 10(2) (xv), the tax paid by them on their business assets under the local tax law in force in Japan. But the Income-tax Officer rejected the claim. The Appellate Assistant Commissioner, however, allowed the claim and his order was confirmed by the Tribunal. On re ference, the High Court, on a consideration of the various provisions of the Japanese statute, held that under the Japanese law it was the ownership of the as the sets that was material and not their actual user in business, and relying on decision of this Court in Tran//lcore Titanium Product Ltd. v. C.l. T. Kew/a ( 60 I.T.R. 277), decided in favour of the Revenue.

Allowing the appeal to tliis Court,

HELD: ( l) In Indian Aluminium Co. Ltd. v. C.l.T. West Be11gal (84 I.T.R. 735) this Court held that the test adopted in the Travancore Tita11i11111 case, that to be a permissible deduction there must be a direct and intimate connection bet ween the expend itL<re and the business, that is, between expenditure and the charac ter of the assessee as a trader, and not as owner of the asset~, even if they arc assets of the business, ''needs to be qualified by stating that 1f th~ expenditure is laid out by the assessee as owner-cum-trader, and the expenditure is really inci dental to the carrying on of his business, it must be treated tzi have been laid oct by him as a trader and as incidental to bis business.

[470H-47 Jq

(2} The Income-tax Act, 1961, was amended by the Income-tax Amendment Act, 1972. The amendments were introduced to restore the position established in Travancore Titanium cas~ namely, that Wealth Tax paid by an assessee in res pect of his business assets was not deductible as a business expense in computing the assessee 's income from his business, which was virtually overruled by the later decision in the Indian Aluminium Company case. But the amendments do not appear to touch the principle laid down in the later case, that where a person has a dual capacity of a trader-cum-owner, and be pays tax in respect of property which is used for the purpose of the trade, the payment mu,t be taken to be in the capacity of a trader. The Amendment Act only adds the sum paid on account of wealth tax to the list of amounts no: deductible in computing the assessee's in come from business. Therefore. any amount paid by the assessee on account of a tax other than the wealth-tax on his business assets would be outside the scope of the Amending Act and would continue 'to be governed by the law laid c:own itt the Indian A/11mini11m case. The ex!'lanation in s. 40 of ih~ Income-tax Act, 1961, which s. 4 of the Am~ndment Act adopts for the purpose of that 'ection defines wealth tax to include, illler alia, besides wealth tax chargeable under the Indian Wealth Tax Act, 1957, "any tax of a similar character chargeable under any Jaw in force in any coun~ry outside India.

[4710-E; 4720-G]

(3) But, unlike the Wealth-tax in India the municipal property tax in ~apan is a local tax imposed on certain specified properties by the city! town <;r v1lla.~e in which the. property is located. The Indian. Wealth. Tax 1.s, a national. tax chargeable on the net wealth of the person with certatn sµecmed exempt10ns. The difference in the manner of determination of the taxable basis of the proper-

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lie; aml the r.t'.es of ta1rntion emphasize the basic difference between :lr: two taxes notwi1h>ianding ce:tain points of similarity.

[473H-474Bl

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· ( 4) The facts also disclosed that the assets b~longing lo the appellant:; were used by them in their business during the relevant prev10us years andalso that the payment of tax under the Japanese law was incidental to th~ carr; mg on of the business of the assessee.

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CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1072

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1079 of 1970.

Fro~ the judgment and order date<l th~ 1st July, 1969 cif the Calcutta High Court in Income Tax References Nos. 170, 17 4, 175, 186 and 184. 189, 177 & 176 of 1964.

Scl;in Chaudhuri (in C.As. Nos. 1076-1079;70), T. A. Nwwi chandran and D. N. Gupfll, for the appellants (In all the appeals). s. C. Manchanda, (ln C.As. Nos. 1076-1079) s. P. Nayar

and R. N. Sachthey, for the respondent (In all the appeals).

The Judgment of ~e Court was delivered by

Gu PTA, J .-These/ two groups of appeals, brought Qn certificates granted by the Highi Court ~t Calcutta, arise out of two r~feren~s under sec. 66(2) of the lndian Income-Tax Act, 1922 mvolvrng similar questions of law.

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Mitsui Steamship Co. ltd,. appellant in Civil Appeals Nos. 1072-1075 of 1970 and M/s. Kawasaki Kisen Kaisha Ltd., appellant in Civil Appeals Nos. 1076-1079 of 1970, are both non-resident shipping companies having their registered offices in Japan. Civil Appeals Nos. 1072-1075 of 1970 relate to assessment years 1957-. the previous years 58, 1958-59, 1959-60 and 1960-61 for which were the financial years ending on the 31st March, 1957, 1958, 1959 and 1960 respectively Civil Appeals Nos. 1076-1079 of 19/0 relate to assessment years 1956-57, 1957-58, 1958-59 and 1959-60, the corresponding previo.us years being the financial years ending on the 31st March 1956, 1957, 1958 and 1959 respectively. The appellant in each case had been assessed to income-tax for the years mentioned above u;idcr the Indian Income-Tax Act, 1922 (hereinafter l'.eferred to as the Act of 1922) in respect of its net Indian earnings.'. In the assessment proceedings the appellant companies had claimed as deductib:e allowance under sec. 10(2) (xv) of the Act of 1922 the ~x paid by them on tht:ir business assets under the Local Tax Law Ill force in Japan. The Income-tax Officer rejected the claim on the view that the incidence of tax uD.der the Japanese law falls on the ~ssessee companies in their capacity as the owners of the business a~sets and not as traders. On appeal preferred by the assessees , the Appellate Assistant Commissioner took the view that the tax onid under the Local Tax Law in Japan was an allowable expenditure Under sec. 10(2 l (xv) of the Act of 1922. The Tribunal also affirmed the view taken by the Appellate Assistant Commissioner overruling t~e contention raised on behalf of the' revenue that the miture of tax

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MITSUI STEAMSHIP co. v. C.I.T. (G.upta, J.)

·469

imposed by the Japanese statute was similar to the wealthrtax pay able in India which was not permissible deduction under sec. 10(2) (xv).

In Civil Appeals Nos. 1_072-75 of 1970 the question

referred

under sec .. 66(2) was :

"Whether on the facts and in circumstances of the case, in - the property tax and vessels tax paid by the assessee Japan on its land, buildings and other tangible assets and ships were allowable as deduction under sec. 10(2)(xv) of the Income-Tax Act, 1922 ?"

Jn Civil Appeals Nos. 1076-1079 of 1970 the question referred

tvas :

"Whether on the facts and in the circumstances of the case the property tax paid by the assessee in Japan on its vessels was allowable as deduction under sectio:ii 10(2) (xv) of the Income-Tax Act, 1922 ?"

The two questipns, though worded a little differently, depend for the

the character of

their answers on a correct appreciation of Japanese tax.

The High Court on a consideration of the various provisions of the Japa~se statute held that under the Local Tax Law in Japan it was the ownership of the assets that was material and not their actual user in business, and relying on the decision of this Court in Travan core Titanium Product Ltd. v. Commissioner of Income-tax, Kerala( 1 ) answered the question referred to it' in both cases in, the negative and in favour of the revenue. 'In the case of Travancore Titanium Pro duct Ltd. ( 1) this Court was considering the question whether a sum paid as wealth-tax was deductible from the profits and gains of the assessee's business under sec. 10(2) (xv) of the Act of 1922. In ho~d­ ing that the amount of tax paid on the net wealth of an assessee under this Court the Wealth-Tax Act was not a permissible deduction. · observed:

"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 busi ness, i.e., between the expenditure and the character of the if assessee as a trader, and not as owner of assets, even they are assets of the business."

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The Judgment of the High Court mainlv turned on Article 341 ( 4) of the Japanese statute. From an English translation of the statute into filed before the tribunal it appears t]iat the statute is divided

(l) 60 J.T.R. 277

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four Books. All the Articles to •.•:hich we will refer for the purpose of these appeals are in Chapter III, Section 2 of Book Four which contains Artic:le 341 to 7 46. Chapter III bears the heading "Ordi nary Taxes of City, Town or Village" and Section 2 deals with "Municipal Property Tax .. " Article 341 defiaes certaini terms con cerning municipal property tax, and in so far as it is relevant for the present purpose, it reads as follows :

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''With respect to municipal property tax, the terms listed in the following items shall havt< the definition given to them under the: respective items :

(1) Property : Land, houses and depreciable assets; x (2) Lands :

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(3) Houses :

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( 4) Depreciable assets : Assets (excluding the mining rights, fishing right, patent right and other depre ciable intangible property) other than land and house which can be used for business purpose and the amount of depreciation of which is included in the loss or m:cessary expenditures in the computation of income as provided for in the Corporation Tax Law or the Income-Tax Law (including the pro1- perty similar to those properties which are owned by the person upon whom the corporation tax or the income itax has not been imposed). However, automobiles and bicycles which are the objects of the automobile tax, and bicycles and carts which are the objects of the cart tax respectively shall be excluded;"

Referring to the definition of 'depreciable assets' the High Court pointed out that under the Japanese law the assets which could be it was not used for business purpose· were subjected to tax arld ·: · required that !these assets should in fact be used for business purpose . the assessees . The High Court took the view .that the tax paid by · under the Japanese law was in their capacity as owners of the aissets and not as traders, and applying the. te~t adopted in the Travancore Titanium case (supra) the High Court held that the tax paid by the assessees under the Local Tax Law in Japan was riot deductible as a busine~s expense under the Act of !922.

Travcncore Titanium Product case(!) was decided by a Division Bench of this Court in the year 1966. The impugned orders of the High Court in the two references out of which these appeals arise were both made in 1969. In 1972 a larger Benj::h of this Court ex pressed the view in the case of Indian Aluminium Co. Ltd. v. Com" in that the test adopted missioner of Income-Tax, West Bengal( 2 ) that to be permissible deduc- T__ravan_c_01:__~ __ Ti!f!!!!1!1!_1_ Prod1!ct case( 1)

(J) 60 J.T.R. ?.77.

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(2) 84 J.T.R. 735.·

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MITSUI STEAMSHIP co. v. C.I.T. (G,upta, J.)

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tion thete must be a direct and intimate connection between the ex . penditure and the bus1ness, i.e., between the expenditure and the · · chaq1cter of the assessee as a trader, and not as owner of assets, even . if they are assets 0f the business "needs to be qualified by stating that . • ·0 •. ,if the expenditure is laid out by the assessee as owner-cum- trader, · 'D'. and the expenditure is really incidental to the carrying on of his busin~ss, it must be treated to have been laid out by him as a trader B and as incidental to his business". It was held in In4ian Aluminium that the wealth-tax paid on assets held by the Company's case( 1) assessee for the purpose of his business, was deductihle as a business expense in computing the assessee's income from business.

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Within a few months of the decision in Indian Aluminium Com~ pany's case( 1) which was rendered on March 29, 1972, Income Tax (Amendment) Odinance 1972 (7 of 1972) was promulgated on July 15, 1972 with the object of barring, in the computation of total income in respect of certain assessment years prior to the assessment year 1962-63, deduction of amounts paid on account of wealth-tax. The Ordinance was later repealed and replaced by the Income-Tax (Amendment) Act, 1972 (41 of 1972) containing similar provisions. ·The Amendment Act which received the asseJlit of the President on August 28. 1972 sought to restore, as the Statement of Objects and Reasons says, the position established in the case of Travancore (supra) Titanium Products Ltd. v. Commissioner of which was virtually overruled by the later decision in Indian Alumi nium Co. Ltd. v. Commissioner of Income tax,(1) that wealth- tax paid by an assessee ill respect of his business assets was not deductible as a business expense in computing the assessee's income from business. Section 2 of the Amendment Act inserted with retros- pective effect a new sub-clause (iia) in clause (a) of section 40 of the Income-Tax Act, 1961 which specifies the amounts not dedueti- ble inl computing the income chargeable under the head "Profits and gains of business or profession". Subi·clause (iia) adds to the list of amounts not to be deducted "Any sum paid on account of wealth tax". To this sub-clause an explanation was added extending th.e meaning of the expression Wealth-tax for the purpose of the sub- clause. The Explanatio!l reads:

Income-tax,

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"Explanation.-For the purposes of this

sub-clause, "wealth-tax means wealth-tax chargeable under the Wealth- 1~x Act, 1957 (27 of 1957), or any tax of a similar charac- . ter chargeable under any law in force in any country out law with side India or any tax chargeable under the capital reference to the value of the assets of, or employed in, a busi*ss or profession carried on by the n_ssessee, whether or not the debts of the business cir profes,h sion are allowed as a deduction in computing the amount with reference to Which such tax is charged, but does not include any tax chargeable with reference to the value of any Particular asset of the business or profession;"

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(I) 84 T.T.R. 735.

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Section 4 of the Amendment Act which bears directly on the

appeals before us provides:

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"4. Wea/,th·tax not deductible in comp~lting the.

tot~l income for certain assessment years.-Nothmg contamed m the Indian Income-tax A.ct, 1922 ( 11 of 1922), sh al; be deemed to authorise or shall be deemed ever to ha vc authorised, any dedu~tion in the computation of the income of any assessee chargeable under the head "Profits and gains of business, profession or vocation" or "In~ome from other sources" for the assessment year commencmg on the 1st day of April, 1957, or any.subsequent assessment year, of section 40 of the principal Act."

To this section also an explanation was added saying : this,

"Explanation.·-For the purposes of

section, "wealth-tax" shall have the same meaning as is assigned ·to it in the Explanation to sub-clause (iia) of clause (a) of section 40 of the principal Aot."

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Section 5 of the Amendment Act contains a saving clause to which it is not necess.ary to rder for the purpose of these appeals.

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We have mentioned earlier the assessment years concerned in the instant appeals. The que1;tion is, what is the effect of the . Income>-· Tax (Amendment) Act, 1972 on these appeals. The amendments introduced do not appear to touch the principle laid down in Indian Aluminium Company's case (supra) that when a person has a dual capacity of a trader-cum-owner, and he pays tax in respect of pro perty w'hich is used for the purpose of 1trade, the payment must be taken to be in the capacity of a trader. The Amendment Act only adds the sum paid on account of wealth tax to the list of amounts from business. not deductible in computing the assessee's income Therefore, any amount paid by the assessee on account of a tax other than the wealth.-tax on his business assets would be outside the scope of the Amendment Act and would continue <to be governed by the law laid down in Indian Aluminium Company's case (supra). The explanation to the n,ew sub-clause ( iia) inserted in section 40 of the Income-Tax Act, 1961 which section 4 of the Amendment Act adopts for the purposes of that section, defines "wealth-tax" to include, inter alia, besides wealth-tax chargeable under the Wealth Tax Act. 1957, "any tax of a similar· character chargeable under any law in. force in any country outside India". The only contention raised before us on behalf of the revenue was that the nature of the tax paid by the assessees in Japan an their business assets is similar ro the wealth-tax payable under the Wealth-Tax Aot. 1957. This leads to a comparison of the two statutes, Wealth-Tax· Act. 1957 and the Local Tax Law of Japan. to find out whether they are of a simi lar charndter. The supplementary statement of case drawn nn bv the T,ribunal pursuant to an order of this Court dated April 11. 1973 ·discloses that the assets belonging- to·-tbe appellants with which we

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MITSUI STEAMSHIP co. v. C.I.T. ( G,upta, J.)

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are concerned in these appeals were all used by them in their busi nes_s during the relevant previous years and also thait the payment 9f tax under the Japanese law was incidental to the carrying .on of the business of the assessees.

From an examination of the provisions contained in Book Four of the Japanese statute, it appears to us that there is a basic difference between the Wealth-Tax Act, 1957 and 1the Local Tax Law of Japan. Wealth tax in: India is charged on the net wealth of the assessee. Net wealth as defined in sec. 2(m) of the Wealth-Tax Act, 1957 means, broadly. the aggregate value of all the· assets, wherever located, be longing to the assessee minus the total amount of the debts, with certain exceptions, owned by him. Generally speaking, by the value of an asset, other than cash_,_ is mea!llt its . market value. 'Asse's' has been defined in clause (e) of sec. 2 of the Act as including property of every description, moveable or immoveable, with certain specified exemptions. Wealth-tax in India is a national tax charged by the Central Government. The municipal property tax in Japan is imposed on prope1;ty as defined ill/ Article 341 (1). In this definition, property includes only land, houses and depreciable assets and not property of every description. Depreciable assets has been defined in Article 341 ( 4), inter alia, as assets other than la<ad and house which can again exclude all be used for business purpose, but these assets depredable intangible property and property which are the objects of other taxes like automobiles, bicycles and carts. Article 342 lays down t'i:it the municipal· property tax shall be imposed on property by the city, town or village in which the property concerned is located and provides that with respect to vessels, vehicles and other objects similar in nature which are included in depreciable assets, the city, town. :rnd village in which the principal port of anchorage or regular kc~p :1~ place is located shall be the city, town or village authorised to i pose 1the municipal property tax. Further, it appears that under the Japanese law, tax is charged at the standard rate of 1.4 per cent on the value of the property computed in the manner laid down in 1 th~ sta1 ute providing the taxable basis, and in certain special cases it rr/ay go up to 2.5 per cent, which is the maximum; in the rates of wealth tax vary, increasing progressively with the am0unt of net w:::11th of the assessee.

India,

The broad features of the two statutes we have noted above reveal their basic dissimilarity. Unlike the wealth tax in India, the munidpal property tax of Japan is a local tax imposed on certain specified properties by the city, town or village in which the pro p~rties arc located. The wealth tax is a national tax chargeable on tAe

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net wealth of a person with certain specified exemptions. The diffe rence in the manner of determination of the taxabe basis of the: pro perties and the rates of taxation emphasize the basic difference bet ween the two taxes. Of course, there are certain points of similarity between the two laws, as there must be, both being taxing sta.tutes, but these similarities do not remove the fundamental difference in the aim, object and the basic structure of the two Acts.

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Accordingly we allow the appeals, discharge the answers given by the High Court to the questions referred to it in these two cases, and answer the questiions in the affirmative and in the asse~sees. In the circumstances Qf the case we direct the parties to bear their own costs both here and -in the High Court.

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V.P.S.

Appeals allowed.