THE INDIAN ALUMINIUM CO. LTD. versus THE C.I.T., WEST BENGAL, CALCUTTA

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THE INDIAN ALUMINIUM CO. LTD. v. THE C.I.T., WEST BENGAL, CALCUTTA March 29, 1972 [S. M. SiKRI, C.J., A. N. GROVER, A. N. RAY, D. G. PALBKAll

· AND M. H. BEG, JJ.J

Income Tax Act, (1.1 of 1922), $. 10(1) and (2)(xv)-AsseSlt'e a trading company-Payment of weal.~1 tax-If could be deducted in com puting inconze for purposes of income tax.

The assossee, a trading company, paid wealth tax and sought to cbduct it as a business expense under s. 10(1) and s. 10(2) (xv) of t'ie Income Tax Act, l 922, in computing its assessable incom'~ from business for the puroo es of the Income Tax Act. The High Court held against the as- sesSee followirig the decision of this Court in Travancore Titanium Pro· duct Ltd. v. C.I.T., [1966] 3 S.C.R. 321. The test adopted by this Court in the Travancore Titanium case was that "to b~ a permissible deduction, there must te a direct and intimate connection between the expenditure and the business, that is, between the expenditure and the character of the assessee as a trader, and not as an owner of the assets, even if they _are the assets of the business".

Allowing the appeal to this Court, HELD : The Court is unanimous that the t"'t laid down in the de Cision in: the Travancore Titanhun case should be 1nodified. [20A, 3981

(Per S.M. Sikri, C. 1., A. N. Grover, A. N. Ray and D. G, Palekar, JJ.) : (I) Cert•1n important a peels of the qcestion were not brought to the attention of this Court when· the earlier case was decided. Jf that decision is modified as erroneous, it is not likely to cause any public in convenience hard"'hip or mischief; and numerous assessees would be affected oy the decision. [20A-B]

Ke"hav Mill" Co. Lid. v. C.1.T. [1965] 2 S.C.R. 908, 922, followed.

(2) There 's no doubt that in one sense when rate.s and taxes on . property are paid by a trader he pays them as owner or occupier, be· cause taxes are either on possession of p'roperty or on its ownership. But when a person has the dual capacity of a trader·cum-owner, and he µays tax in 1•'8p·,ct 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 principles, [25A-B; C-D]

Moffatt v. Webb, [,1913] 16 C.L.R., 120 applied (Not cited in the

Travancore Titanium else.

Smith v. Lion Brewery Company, 5 T.C. 568, Usher's Wiltshire Bre wery Ltd. v. Bruce, 6 T.C. 399, Tlarrods (Buenos Ayres) Ltd. v. Taylor Goobv, 41 T.C. 450 and observations of Lord Davey in Strong and Co. Romsey Ltd, case (5 T.C. 215), referred to.

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(3) Jn the case <•f " trading comuany all the assets are owned and the liabilities are. in"urrd for the purpose of trading, as outlined in its memorandum of assoc;ation. If all the assets are owned and used for the purpose of trade, the net weal•h would also be owned and used for the purpose of trade. The net wealth is as much an instrument of trade as the capital value of assets. Therefore. the test la'd down in the earlier cas: should bo qualified by stating that, if the expenditure is laid out by the

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asscssee as owner-cum-trader, and the expenditure is really incidental to A the carrying on of his business, it must be treated as having be>n laid out by him as a trader and as incidental to his business. f29F-H, 30A-C]

( 4) It may be difficult for the Revenue to allow the deduction of wealth tax in respect of individuals who have both business assets and debts, and non-business assets and debts. But the wealth tax return form itself requires the assessee to show what are bminess assets and liabilities ancl what are the non-business assets and liabilities. At any rate, it B should not ba difficult to evolve a principle or frame statutory rules to find out the proportion of the tax whin is really incidental to the carry- ing on of the trade. f30C·E)

(Per M. H. Beg, J.) : (I) One of the tests laid

·down in Keshav Mills co's case ([1965]/2 S.C.R.908), for decidh1g whether a ·pre\~OUI erronwus view should be set right by this Court, is whether any R<ni- ble advantage to public msulting from doing so would be outweighed by the mischief or harm a revision may cause. [38E-F)

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The Wealth Tax Act was not intended to strike at or check expan sion of commercial activities by either It; underlying purpo~! is the removal of disparifes of individual Or person3! wealth and not injury to trade. The interpretation placed in the Travan core Titanium case (f1966] 3 S.C.R. 321) seems to penalise mere expan- sion of busineso and trade without serving tt .. o underlying purpose of wealth tax. Therefore, a revision of opinion does not involve a11y such mischief or such injury to the public interest as would stand in the way of correcting an erroneous view. [38G-H, 39A-B)

individuals or

companies.

(2) The error which crept into the Travancore Titanium decision could be traced to an application of the criterion stated by the Lord Chancellor in Strong and Co. of Romsey v. Woodfield (5 T.C. 215), that if. the expenses fall on the trader in some charac-'.er other than that of a trader, they could not .be deducted in computing proats. But in the same case, another Law Lord laid down a son1e1,.vhat different test that the payment to be rl.eductible must '1a\e been made for the purpose of earning profits. [30G-H, 3 IA-B]

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(J) Liahiii'ties incurred by a trader to pay damages for injury to his customer due to his personal-neglect in maintaining his premises, even though tb> premis..."1l were used for trade, could be looked upon as out<ide F the course of trading altogether even if they arise out of commercial activity or result from something connected with or meant to serve a commercial purpose. But in Stronf? and co.'s case tt'J.! negligence which resulted in payment of damages, fclr which the deduction was claimed, was that of servants emoloyed as an ordinary incident of trading, so that. the master was only vicariously liable; and the langua~e used bv the Lorri Ch:incellor in that cas~ covers mor"'; tlian what could be attributed .to the trademan's own personal wrongs. [3 lB-E]

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( 4) In later English C'ases the test adopted is ·wh•other the expenses souiz:l-,t to d<>rlncterl "'"'"e, 'wholly or exclusively laid out for the purpose Of earning profits. [3 lF]

Smith v. Lion Brewery Company Limited, 5 T.C. 568; Usher's Wilt- shi•e Brewery Ltd. v. B,,,ce 6 T.C. 399; Atherton v. British Jwulted and Halsby Cables Ltd., 10 T.C. 155; Margan v. Tate and Lyle Ltd., 35 T.C. H 367, referred to.

Rushden Hell Co. Ltd. v. Commissioner of Inland Revenue. 30 T.C. 298 a)ld Smi;h's Potato Estates Ltd. v. Boll.and, 30 T.C. 267 explained

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INDIAN ALUMINIUM CO. LTDi v. C.l.T. (Sikri, C. /.)

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( 5) Where profits, the net gains of business, d•termlned after making all permissible deductions, are tru<ed, the disbursements to meet such tax.e< cannot be deducted. But, when the tax was levied on c~pital. o_r assets used fer the purpose of earning those profits, it was a permLS1ble de duction in calculating profits. [32G:H]

Harrods (Buenoi' Ayres) Ltd. v. Taylor-Goohy, 40 T.C. 450, referred

to.

( 6) The principle, that tax paid by an assessee on property used by him to earn income is deductible in computing the income for paying income tax, was also laid down in Moffatt v. Webb [1913] 16 C.L.R. 120, which was not cited before this Court when tin 'fravancore Tit!anium· case was argued. [34A-B]

( 7) The test of trading character when incurring an expense

for C which deduction is claimed can be utilised usefully only in cases wtme the question is whether a payment was gratuitous or unnece sary Qr not made f0r a bona fide commercial purpose or connected mote with scm' ulterior obje<~ really falling outside the normal S)lhere or regular courre of commerc.:o, such as the compounding of an offenc" even if committed while trading; but this could not be so in cases of payment of tru<es- [340-F]

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J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. Commissioner of

Income Ta.,-A.l.R. 1957 All. 513, referred to.

( 8 )· There is no accepted commercial practice or

trading pyinciplc

according to whidh wealth tax could not be deducted in the com!4utation . of profits under s. IO(i) and (ii) of the Income Tax Act. Except the observation in the Travancore T itaniunt case, all the other cases indicate that commercial practice and trading princiP.les ;lso warrant such deduc tions of tax on capital assets used wholly and exclusively for carrying on trade or fdr earning profits. Dzductions of tru<es on net profits may not be p•rmited, but those imposed on net assets or wealth, .used exclusively for making profits, can be deducted in computing income for purposes of income tax. Ml?reov~r, what~ver commercial practice o'r trai;ting princi ples may imply or import, they could not alter the meaning of statutory provisions. All that the lan~uag' elf s. 1 10(.2) (xv) requires, for claim- ing its. benefit, is proof of direct causal <ionnection between an outgoin~ and the comm~rcial purpose--which necessitated it. To lay down that it is the causal c.onnection between tb' payment of tax and that part of the r-"t wealth which is used whollv .and exclusively for trade, and not the mere character or capacity for th-o possession of which the tax is de manded, which determines whether it is ·an allowa~le deduction or not, under s. 10(2)(xv); i- nothin2. more than givin2 effedt to tt.e plain and literal meaning of a provision of a tru<ing statute. [35A-B, 35B·CJ

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(9) To exclude from the purview of s. 10(2) (xv) wealth-tax simply because it was a tax on assets or net wealth paid by its owner so as to reduce his wealth, is to bring .in the misleading test of either of capac;ty of the owner for the possession of which, or the purpose for whirh, the wealth t•x mav be demaoded. instead of the inevitab'e need and tt.e pur pose of the trader in paying the tru<, as relevant matters. [350-F]

(10) Wealth tax is imoosed on ret wealth- of a5'e0 se·s who ar-e ccr sons both natural and artifidal. Jn the case of an artificial or juristic th' oerson like a companv, it is difficult to seoarate me pur~ose of the dharact~r of inristic "perSona" which is certainlv commercial, from the "persona" Itself. Even as regards. other traders that part of the tax which falls on assets used exclusively for trade could be reallv ascribed

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only to a trading charact2r. To the exteat it is a tax on property UJed for earning profits it must enror into a computation of profits from tradin&. Therefore, nothing less than express. statutory provision would jus'tify a denial of the rignt to a deduction which the language of s. 10(2)(xv) -confers upon as3essees. [36D-F]

( 11 ) The Court is not con02m:id with any difficulty in separating that part of the tax whi'h is levied on any part of the net wealth, used wholly or exclusively for traJe, from the rest of it. The Court is con cerned only with the interpr,tation of s. 10(2) (xv) and not with any difficulty which I!lay arise in actually computing the deductible am~unt. Moreo'ler, since net wealth is an amount by which an aggregation of all

*" assets exceeds all . tbo debts there can be no intractable difficulty in

CJ~ufa1ing what part of the net wealth is used for trade 01· business of a"· a sc~-ze arid what is not, an aggregation being collection of item'.i ~ can lie separated, and not a mixture whose ingredients became insoparab:·~. Further, the wealth-tax return fdrm divides wealth under two heads, one of business assets and another of other assets, showing that the Wealth Tax Act it&olf mak•s that part of the net wealth separable which is used wholly and exclusively for trade from the reminder of it. If this can be done, tbzre is no difficulty in reparating that part cf the wealth tax "'~lch coula be deducted und" s. 10(2) (xvi of the Income Tax Act. [37D-G]

,A~,,.,,.,,;.,rr tlu>r~ is S"·me difficnltv. the principle involved or the mean

ing of the relevant provisions will not be affected thereby. [37G]

CIVIL APPELLATE JURISDICTION: C.A. Nos. 1694 and 1730

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A.pneals from the judgment and order dated Augi$fll, 1967 of the Calcutta High Court in Income-tax Reference Nos.-'106 and E 215 of 1963.

S. R. Banerjee, N. N. Gnswamy and S. N. Mukherjee, for the

appellant (in both the appeals).

V. S. Desai, R. N. Sachthey and B. D. Sharma, for t)le respon

dent (in both the appeals).

A. K. Sen, T. A. Ramachandran and D. N. Gupta, fJr the

intervener (in both the appeals).

The Judgmen of the Court was delivered by Sikri C.J., Beg

J. gave a concurring but a separate . opinion.

Sikri C.J.-These appeals have been referred by a Division Bench of this Court ;o a larger Bench as tho~ Division Bench felt ~hat the decision of this Court in Travancore Titanium Product ltd. v. Com.missioner of Income Tax(') might recon sideration. The only point involved in these appeals is whether the Wealth Tax paid by the asses~e. a trading company is deduc tible as an exc.~nditure under s. 10(1) ands. 10(2) (xv) of the Income-tax Act, 1922. The fac'.s in both the app~als are simi lar. They rela,te to two separate accounting and assessment years and two assessment orders ha'le been challe!J'ged. We may

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(I) [1%6] 3 S.C.R. 321.

INDIAN ALUMINIUM.CO. LTD . .V. C.I.T. (Sikri, C.J.)

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give a few facts in one appeal. The Indian Aluminium Co. Ltd., in respect of the year of as&~ssment 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. Tb.e Income Tax Officer allowed the deduction but the Appellate Assistant Commissioner held that the Company was not entitled to ihe deduction of Wealth Tax as an expense. The Appdlate Tribunal uph,eld the order of the Appellate Assistant Commissioner. On the application of the assessee, the follow ing question was referred 1o the High Court :

· .the sum of Rs. 1,59,630/- paid by

"Whelher on the facts and circumstances of ca>e, the assessee as wealth-tax legally deductible as a business expense in computing the assessee's income from business ?"

The· High Court, following the decision of

in Travarcore Titanium case(1), answered the queS'lion against the asseiSee. Having obtained certificate of fitness from the High Court, the assessee has appealed to us.

this Court

Basing himself on Keshav Mills Co. Ltd. v. C.l.T.( 2

) it was contended by the learned counsel for the Revenue that WJ should in Travancore Titanium case("). not review our decision Gajendragadkar, C.J., speakinl!, for the Court, had observed in that case !hat "it is not possible or desirable, and in any case it would be inexped'·~n't to lay down any principles which should gov.~rn the approach of the Court in dealing \vith the question of reviewing and revising i1s earlier decisions." He further ob served :

"It would always depend upon several relevant con infirmity or siderations :-What is the nature of the the error on which a pl·~a for a review and revision of earlier view is based ? On the earlier occasion, did some patent aspects of the question remain unnoticed, was the attention of the Court not drawn to any rele vant and material statutory provision, .or was any pre vious d~cision of this Court bearing on the point not Is the Court hearing such plea· fairly unani noticed ? mous that there is sJch an error in 1he earlier view ? What would be the impact of the ·~rror on the general administrnlion of law or on public good ? Has the earlier decision been followed on subsequent occasions either by this Court or by ' the High ourts ? And, would the reversal d 'the earlier d·~cision lead to public inconvenience, hardship or mischief?"

(1) [1966] 3. S.C.R. 321.

(2) [1'6'.] 2. S.C.R. ~08:-922.

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in Travancore We are inclined to review our earlier decision Titanium case("), .because, as will presently appear, certain as pects of the qi:estion were not brought to the attention of the Court and remained unnoticed, and our decision is pot likely to cause any public inconvenience, hardship or mischief. We are all of the opinion that the decision was erroneoqs. The decision will affect numerous assessees. Tn the circumstances we think we should review the decision.

Section 10 ( I ) of the Indian Income-tax Act, 1922, reads :

"l 0( 1) The •tax shall be payable by an assessec unde.r the he id profits and gains of business, profession or vocation in respect of the profit or gains of any busi• ness, profession or vocation carried on by him."

Section 10(2) provides :

"Such profits or gains shall be computed after mak

ing the following allowances, namely, ....

(xv) any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) in clusiv~, and not beinl!. in the nature of capital expendi ture or personal expenses of 1he assessee laid out or ex- pended wholly and exclusively for the purpose of sud1 business, profession or vocation."

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The language seems to be simple enough but it has en gendered judicial conflict not onlv in India but also in England. Emine.nt Judges have striven to fomrnlate correct tests to deter mine whe·ther an expenditure has been laid out or expended wholly and exclusively for the purposes of business or not, but F no one has been able to find a test in the application of which therefore differences of opinion do ndt arise. essential that in each case, the Courts must always keep in mind the language of the section.

It seems

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One of the tests which have been laid down and applied by some of the Judges in England is whether the expenditure 'has been made in the capacity of a •trader or an owner. One of the earliest cases in which this test was suggested was Strong a11d In that case the Company of Ramsey Ltd. v. Woodfie/,d('). Brewing Company, which also owned lic·~nsed houses in which they carried on the business of Innkeepers, incurred damages and costs on account of injustice caused to a visitor staving at one of their hornes by the falling in of a chimney. The House of Lords

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(I) fl066] 3 S.C.R. 321

(:J 5 T.C. 215.

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. JNDIAN ALUMINIUM CO. LTD. v. C.I. T. (Sikri, C. /. i

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held that the dall!aJ!es and costs were not allowable as a deduction in compll'ling the Company's profits for Income Tax · purposes. The Lord Chancellor ob_served :

trade,

"In my opinion, however, it does not follow that if a loss is in any sense connected with the it must always be allowed as a deduction; for it may be only remotely connected with the trade or it may be conn.~cted wi'th something else quite as much· as or eve :i more than with the trade. I think only such losse; can be deducted as are connected with it in the sense that they are r>~ally incidental to the rtrade itself. They cannot be deducted if they are mainly incidental to some other vocation, or fall on the trader in some charac er other than that of trader. The nature of the trade is to be considered. To give an illustration, losses sustained by a railway company in compensating passengers for accident in trawlling might be deducted. on the other hand, if a man kept a grocer's shop, for keeping which a house is necessary and one of the window shutters fell ·upon and injured a man walkinJ! in the -street, the loss arisinJ! .the groo~r ought not to be deducted

thereby to

Lord Davey did not apply this test and put

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matter thus :

"I think that the payment d these damages was not money expended "for th·~ purpose of the trade". These words are used in oth·~r rules, and appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade, &c. I think the disburse mentB 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 tb~ trade. It must be made for the purpose of earning ·:he profits."

Lord Chancellor's observations in .Woodfield's case were not I.ion Brewery Com accepted by Lord Atkinson in Smith v. pany (1). The Brewery Company were the own·~rs or lessees of a number of licensed premises which •:hey had acquired as part (if their business as brewers and as a necessary incident of its let profitable exploitation. to tenants, who were "tied" to purchas·~ their beers from •the com pany. Under the Licensing Act, 1904, compensation Fund Charges were levied in respect of 1he excise "on" licences held by the tenants who paid the charges and recouped themselves by

licensed premises were

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(I) 5 T.C. 568.

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to the company.

It dcJuction from the rents which they paid was claimed b,.v the company that in computing their profrts for assessment to Income Tax they should be allowed to deduct the sum of the amounts ultimately borne by them in respect of the Compensation Fund Charges. The Court of King's Bench held that the deduction claimed was inadmissible. This decision was (Kennedy, L.J., dissenting), reversed in the Court of Appeal and opinions in. the House of Lords being equally C:ivided the judgment of th.e Court of Appeal was sustained. Ea!'! Halsbury, in holding in favour of the Brewery, observed that "he (trader) must if he carries on that business or that trade pay this tax; it is the act of the Legislature which makes him pay it and it is not a thing that is open to his own will or option." Lord Atkinson observed :

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"Again, it is urged that the landlord pays his con tribution as landlord and because of his proprietary interest in the premises and not as trader, since he would be equally liable to it whether he traded or not. That, no doubt, is so, but in the present case the Com pany have become landlords and thus liable to pay 1he charge, f()r the pul-pose solely and exclusively of setting up the tied-house system of trading. If the Company took under lease a plot of land to enlarg.e their brewery or took similarly premises in which to establish a depot to sell their beer through an agent,· the same criticism might be applied with equal force 'to the payment of the rent reserved by the leas-~. They would pay .it as lessees, not as brewers. They would pay it whether they continued to brew or not Yet under the provisions of th.e very rule relied up0n in this case, they would be entitled to deduct the/rent from the profits earned. and. that, too, utterly irrespective of whether the receiver of the rent used it to pay for his support or for his pkasure or even to set up a rival brewery.

Indeed, even in a contract made for the purchase of material such as hops or malt, the Company would have to pay for the commodity supplied, not b•xause tr"~v are brewers, but because they were contracting parties, utterly irrespective of whether they carried on their trade or had abandoned it. Yet it can hardlv be suggested that the price paid for the hops or malt und·~r the contract should not be deducted from the receipts. There is, therefore, in my opinion, nothing in this ob jection."

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INDIAN ALUMINIUM CO. LTD. v. C.I.T. (Sikri, C, J,)

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In r!shets. Wiltshire Brewery Ltd. v. Bruce(') a brewery oompany were the owners or les~ees of a number of licensed pre mis~ which· they had acquired solely in the course of and for the purpose of their business as brewers and as a necessary inci dent to the more profitably carrying on of their said business. The licensed premises were let to tenants who were "tied" to pur chase their beers, etc. from the Company. The Company claimed that in the computation of their profits for assessment under Schedule .D. the following expenses incurred in connection with these tied houses should be allowed

(A) repairs to tied houses; (B) differences between rents of leasehold houses or Schedule Assessment of freehold houses on the one hand and the rents received from the tied tenants on the other hand; (C) fire and licence insurance premises; (D) rates and taxes;

It waJ held by 1the Hou£e of Lords that all the expenses claimed were admissible as being money wholly and exclusively laid out or expended1for the purpose of the trade of the Brewery Company.

In this case, Horridge, J. held that "on the facts found the Fire and Licence insurance Premiums, the Rates and Taxes and the Gas and Water were all exp;mditure essential to the earning of the profits, and I think they also are governed by Smith v. The Brewery Company( 2

) and are proper deductions."

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The Court of Appeal, regarding Rates and Taxes, said :

"The next head is "D., Rates and Taxes. £38 7s. 6d." These ar.e sums which the tenants were under a legal obligation ~o pay pursuant to tr;dr covenant in the tellJ!ncy a_greement. The Company, however, did not, for the reasons stated under A in the Case enforce the tenants' covenants to pay, and consequently paid the rat!<s and taxes themselves. These ro~asons have been stated and app.ear in the Case, and need not be re peated; in brief; they are commercial interest and ex pediency, and avoidance of inconvenience.

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I am of opinion that tkse rates and taxes so paid from

are in J!O sense deductions which are allowable the Company's profits."

(l) 6 T.C. 3?9.

(2) s r.c. 568.

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The Hoµse of Lords, however, allowed Atkinson at page 422 of the report said :

these

item•. Lord

"Stated broadly, I think 'that that doctrine amounts to this, •hat where a trader bona fide creates in himself or acquires a particular estate or interest in premises that wholly and exclusively for the purposes of using interes1 to secure a better market for the commodities which it is part of his trade to vend, tire money devoted by him tc;i discharge a liability imposed by Statute on that estate or interest, or upon him as the owner of it, shoµld be taken to liave been expanded by him wholly and exclusively for the purposes of his trade."

Then reqarding th.~se items he observed :

"The small items were not much cont'.!sted in argu I concur, however, with Mr. Justic~ Horridge

ments. in thinking they ought to be allowed."

Lord Parker observed :

licence

"My Lords, the Appellants claim deductions under three other heads : insurance. ( 1) Fire and premiums, (2) Rates and taxes, and (3) Legal and oth.~r costs. The Attorney-General did not objec·t to these d·~ductions being allowed, and indeed having rc J!ard to what I have already said and to thli facts ad mitted in the Supplementary Statement, p. 7, of the they Appendix, it would be. difficult to contend were not proper and necessary deductions in ascertain ing the balance of J)rofits and gains of •the Appellants' •trade, or that they are within any of the prohibitions contained in the Rules.'.'

that

Lord Summ.~r observed :

"The 1>~maining items, rates and taxes, premiums In my view, and costs, call for no special observation. the case means to find.· •them all ·to be disbursements and money "wholly and exclusively expanded· for the purposes of the trade," and that being so in fact, I think there is no reason why they. may not be so in law. They are accordingly covered by the d·~cision on the rent and the repairs."

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It may be mentioned •that there was no express statutory. pro vision for deduction of rates and taxes in the English Ineome Tax Act and vet 1they were allowed as a n•~cesSilrv deduction for' the purpose of carrying on trade. There is no -Ooubt that in. o,ne

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INDIAN ALUMINIUM CO. LTD. V. C.I.T. (Sikri, C. /.)

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sense when rates and taxes Oil 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 wben the assessee has a dual capacity, i.e., he is owner-cum-trader, why should it be not deductible when according to ordinary commer- cial principles he would be treated as paying it as trader.

Take the case of taxation on a motor vehicle. The tax is levied under the Motor Vehicles Act on 1the possession or owner ship of a motor car. When a owner-cum-trader pays the tax in respect of a v~hicle 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 payinent must be taken to be in the capacity of a trader according to ordinary commercial principles.

This aspect is also clearly brought out in Moffatt v. Webb(i), 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 iii 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 co~onwealth of Australia been assessed at £44,924. He paid Commonwealth land tax amount ing to £387 on the unimproved value of the said lands. The taxpayer claimed to deduct this tax from his income as an out going incurred by him "as a disbursement" or expenditure being wholly and exclusively laid out or expanded for the purpose of his trade. The High Court of Australia held that the tax was pro perly deductible either as an outgoing actually incurred by him in production of income or a disbursement of money wholly and exclusively laid out or expanded trade. Griffith, C.J., summed up the argument as follows :

the purpose of

for

''Tiit possession of land is necessarily incident to carrying on the business of a grazier; the paymenif: of land tax is a necessary consequence of the oossessiori of land of taxable value, whether the land is freehold or leaseh9ld;. the payment of land tax is therefore a neces sary 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 s.ec. 9." (Sec. 9 is sub-· stantially similar to s. 10(2) (xv) of tbe Indian Income Tax Act, 1922). (1) [1913] 16 C.L.R. 120.

'H

f

:3-L1208SupCT/72

26

SUPREME COURT REPORTS

[1973} l S.C.R.

Barten, J., observed :

the

" . . . . the sole use to which the appellant puts the land is for the purposes of his business as a grazier. He needs a large area of land for that purpose, and this area of about 18,000 acres is applied to his business It seems too much altogether to say that he needs. would have to pay the federal tax on this land if he did not carry on the grazing business. Somebody would be taxed, no doubt, but would it be the appellant ? It can not be predicated tha!t he would own the land at all if It is scarcely an in he carried on any other business. ference from the case to say that he holds land simply as an instrument essential to the proper conduct I think it is 'the fair meaning of the of his business : first para2raph at which we can arrive without inserting anything not imported by the words. H I am rig]rt there, then is the land tax payment a disbursement or expense wholly and exclusively laid out or expanded for the purposes of the business ? It may not be so if the criterion is whether the business could be carried on without m1yment of the tax. But I do not think that is the criterion. Is the payment wholly and exclusively incidental. 10 the carrying on of the business? Well. it is only by reason of the necessity of land for his busi: ness that he holds this land, and it is only because of his holding it for his business that he necessarily pays the tax, for without the business it cannot be said that he would hold the land at all. In view. then, of the parti cular facts, I think the payment is the incidental conduct of his business, and that it is money wholly and exclusively expended for the purposes of his trade." Issacs, J., was impmssed by the reasoning of Lord Halsbury and Lord Atkinson in Smith v. Lion Brewery Co. Ltd.( 1). He observed :

to

"And Lord Atkinson reasons out the position and shows convincingly, to my mind that, though a tax may in one sense be paid as owner or Jessee, in another it is paid as trader. The instance he puts as to licences are undeniable, and I cannot distinguish them from this case.

A

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f

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To carcy the matter further : Suppose the Federal Parliament were to lay a tax on the owners of motor cars, and carts, and gnns. and dogs. and sheep, so ihat

H

I

0 I 5 T.C. 568.

INDIAN· ALUMINIUM CO. LTD. v. C.I.T. (Sikri, C. J.)

.

27

the tax _was payable whether these things were em ployed in trade or not; could it be doubled that the tax would be a real outgoing necessary for the production of the income of a business in which they were all used ? The land is as necessary to the business as the personal property ...... .

And the fallacy of the contrary doctrine consists i!l this; it confuses, not so much the meaning, as the appli ·cation of the word "purpose". The land tax is enacted th;e by legislature {or its own purpose, that is, to owner; and when he pays it to the Crown, he pays It as the owner, it is true, but so far, 'not for any purpose of his. He simply pays it because he is obliged to by law. But when he uses the property to produce an in come, that is, for his business purposes, he pays the tax inseparably connected with the land also for his business purposes, namely, as an outlay necessary in the existing state of the law to obtain that income by means of that land."

ta:)(

The unsoundness of the test of the capacity in which pay ment is made was commented upon in Harrods (Bueonos Aires) Ltd. v. Taylor-Gooby(") by 1he 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, drried on the busines§ of a large retail store at Buenos Aires. In consequence the Company was liable in Argentina to a tax known as the substitute tax. which was levied on joint s\ock compani'.!s incorporated in Argentine, and on companies incorporated outside, Argentine which carried on busineis there, as did the Ap'pellant Com pany, through an "empress estable". The- tax was charged annually at the rate of one per cent on the Company's capital and was payable whether or not there were profits liable to Argentine income tax. Under Arg.en'tine law there were sanctions available to remedy non-payment of the t!Q\.

On appeal against an assessment to In~ome 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 busi ness in the Argen6le Since, if it' had not paid it, it would hav·~ been unable to ·carry on its business there, and that the tax was therefore deductible as "money wholly and (I) 41 T.C. 450.

A

B

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D

E.

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I H

28

. SUP&nl:B •COURT REPORTS

[1973] l S.C.R .

exclusively laid out or expended for the purposes of (its) ttade", wit)lin the meaninR of Section 137(a), Ilioom' Tax Act,' 1952. For the Cwwn, it was con tended (inter alia) that the Company paid the tax in the capacity of taxpayer rather than trader."

Willmer, L.J., referred to Commissioners of Inland Revenue

v. Dowdall O'Mahoney & Co.( 1 ) 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 Smith v. Lion Brewery(') 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 boll:! cases, as stated by Lord Atkinson, is really decisive in favour of the Company."

Dancwerts, L.J. observed :

"In Rushden Heal Co. Ltd. v. Keens("), 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 distinc tion bCtween payments made by a trader in the diarac I ter of taxpayer and not, or not wholly, as trader. find this idea difficult to follow and not very helpful in discussinR the subject in issue. It seems to me very difficult 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."

Diplock, L.J., also .criticized the test in these words.

"lt 1s contended for the Crown tha:t the Company paid tne tax in its capacity as a taxpayer, not in its capa to Lord city as a trader. But with great Greene. M.R.'s Judgment in the Rushden Heel Co.'s case 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

respect

(I) 33 T.C. 259.

(2) 5 T.C. 568.

(3) 30 T.C. 298.

A

B

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D

E

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G

H

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'"

29

find

INDLltN ALUMINIUM CO. LTD. V. C.l.T. (Slkri, C._/.) ·of Lord$ in the same case and cann<>t, in my view, sur· vive Lord Atkinson's earlier criticism of a similar argu ihe Lion Brewery case which Willmer ment in L.J., has already crted. You can always sOme in label other than ''ttader" to describe the capacity 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 1he capacity of "employer", the prioe ot goods in the capacity of "buyer". But if he has-become tenant or occupier of those particular pre mises, 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 com pU'ting the profits of his trade."

this

The learned counsel for the Revenue did not say that

these cases had l:r...en wrongly decided. What he said was that if the real nature of wealth tax is appreciated, it is impossible to equate the "net. wealth" with "land" used by the grazier in Moffatt v. Webb(') or with "tied houses" in Smith v. Lion Brewery Com pany(') or with the "Company's Capital" in Harrods (Bueonos Aires) Ltd. v. Taylor-Gooby( 3 ). He said that in all these cil!;e~ !he taic. was bl)mg levied on the asset of the business which was In the present case, being used -for the purpose of business. according 'to him, thoe net wealth could not be to an likened asset owned b_v the. learned the trading company. To . counsel for the appellant retorted that in the case especially of a trading company all the assets are owned and in curred for the purposes of trading, as outlined in its Memoran dum of Associaiion; if, all the assets are owned and us.ed for the purpose of 1he 'trade, thoe net wealth would also be owned and used for the purpose of trade. He said that it would be possible for a company to mortgage rts net assets to a bank.and if a com pany did that. 1t could not be said that the net wealth or bet If tax assets had not been used for the purposes of business. was levied 0•1 the capital value of assets without allowing deduc tion of debts it is clear that the tax would be doouctible. What difference does 1t make if debts are deducted from the capital '.The net wealth is •as much an instrument of value of assets _ _:; trade as the capital value of assets. We find it very difficult 10 distinguish tl)e case of a trading company like the assessee, on principle, from that of the grazier or the brewery company, in the cases. referr!l(I ,_to above.

liabilities

(I) [1913] 16 C.L.R. 120.

(2) 5 T.C. 568.

(3) 41 T.C. 450.

30

SUPREME· COURT REPORTS

[1973) l S.C R.

In our Y!Cl1'1, the test adopted by . this Coqn

in Travancore Titanilllft cal't'(') that "lo be a permissible deduction, there mW>t be a direct aru1 intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the asses.see as a trader, and not as owner of assets, even if they are assets of the business" needs to be qualified by stating that if the ex:penditure is laid out by the. assessee as OW'...1er-cum trader, and tne expenditure is really incidental to the carrying on of hi~ business, it must be treated to have been laid out by him as a trader and as incidental to his business.

It was pointed out by the learned counsel for the Revenue that it would De difficult to allow the deduction of wealth tax in respect of indjviduals who have both business assets and debts and non-business assets and debts. But the Wealth Tax Return fonn itself reouires the assessee to show what are the busines> assets and liabilities and what are non-business assets and liabili ties.

At any rate it should not be difficult to evolve a principle or frame statutQ11£ 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 inci dental to 'the carrying on of the assessee company's trade.

A

B

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D

Accordingly, we hold that the appellant is entitled to succeed. The appeals are allowed, the judgment of the High Court set aside and the ql!"~iqn_pnswered in favour of the assessee. Parties will bear 'th;:ir own co>.'ls throughout.

Beg, J. My lord the Chief Justice has quoted certain test~ laid down by Gajendragadkar, C.J., speaking for this Court, in Keshhv Mills Co. Ltd. v. Commissioner of Income-Tax, Bombay North("), which have to be satisfied before we could ·properly In such a case, I dissent from a previous decision of this Court. think I should indicate my reasons for reaching a concurring con clusion, with very great respect, that an earlier, opinion of this Court, on the very question before us now, needs revision.

E

F

•

•

The error which crept into the de.cision of Travancore Titanium Products Ltd. v. Commissioner of Income-tax, Kerala( 1 ) could G be traced to an application of the rather speciously stated criterior. laid down, in the House of Lords in Strong & Co. of Ramsey Ltd. v.Woodfield("), by the Lord Chancellor who said that expenses cannot be deducted, in computing profits, "if they are mainly incidental to some other vocation, or fall on the trader in· some charac1!er other than that of trader. The nature of the trade is to be considered". But. Lord Davey. looking at the case from

there

H

(!) (1966] 3 S.C.R. 321.

(2) (1965] 2 S.C.R. 908.

13) 5 T. G. 215.

INDIAN ALUMINIUM" CO. ,LTD. V. C,LT. (Beg, J.)

31

11

c

D

a somewhat different aligle, said : "It was not enough that the dis bursement is made in the course or; or arises 011t of, or is connected with, the trade or is made out of tht: profits" of the' tr;ade. It must be made for the purpose of earajng' profits". The two tests were not ideqtical.

The ratio deciaendi of Strong's case would not have been open -to criticism if the noble Lords ,could have held there and had made it clear that they were holding nothing beyond that a. tradesn13n who has to pay <lama,gC!i . for injury to his customer due to his personal neglect in· maintaining his premises, even th!>Ugh these premises are ui!ed for trade, was not entitled to deduct them in computing his ptofi~ for the purposes of paying income-tax just as ·he .could not claim a deductionJor damages he will have to pay as a wrong-doer for .assaulting or defaming a customer· who comes It Is no part of normal ·business to commit such into his shop. wrongs. Liabilities so incurred could very well be looked upon as outside the course of trading altogether even if fuey arise out of commercial aetivity or result from ~omething connected with · or meant to serve -any commercial purpose. ' Their Lordships, however, used language which could cover more than what could be attributed to the tradesman's own purely pen;6nal wrongs. The facts of that case show that the negligence which n:sulted in pay ment of damages, for which a deduction was Claimed, was that of servants employed as an ordinary incident of tading so that the master was only vicariously liable as an inn-keeper and an employer. And, this aspect of the case made Lord James, in Strong's case, doubt the correctness of the opinion wtich he, very

_ hesitatingly, decided to accept.

•

In Smith v. Lian Brewery Corripan)I Limited(l), compensation fund charges levied under statutory provisions were held, by the Court of Appeal, to be permissible deductions in computing profits on the. ground that they/ were "wholly or exclusively laid out" for the purpose of earning' profits. This decision had lio be upheld by the House of Lords where opinion was evenly divided when the -Henr.e, the test laid d1• vn there by case was taken up, there. ~e C?urt of Appeal was held by Earl Loreburn to k. ;Jinding upon hlill, m Usher's Wiltshire Brewery Ltd. -v. Brue (°), although he had himself not accepted it in Lion Brewery's lC 1::e.

F

G

In Rushden Heel Co. Ltd. v. Commissioner of In/aM Revenue(') Lord Greene, M.R., in disallowing deduction of expen ses incurred in contesting claims for payment of Excess Profits Duty, from a computation of profits for purposes of paying Income-tax, applied the test of character or capacity in whi~h t'he expense was incurred. He held that the disbursement had to be disallowed

(I) 5 T.C. p. 568.

(2) 6 T.C. P. 399.

(3 ! 30 T.C. 298.

f H

32

SUPREME COURT REPQll.TS

[1973] 1 S.C.R.

on .the ground "that the_ expenditure •was incurred by the Company primarily in its capacify as a taxpayer and for the purpose · of regulating the position as between itself as a taxpayer and the Crov;n." The House of Lords upheld the decision, following its slightly earlier pronouncement by a majority, in Smith's Potato Estates Ltd. v. Bolland(!), but it did so on the ground that the expenses under consideration, incurred on litigation, related to a computation of Excess Profits Duty which had to take place after profits had been calculated.

A

B

In Artherton v. British Insulated and Helsby Cables Ltd.('), however, the test in Usher's Wiltshire Brewery case (supra) was applied to hold that even sums expended "not of necessity with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order to directly facilitate the carrying on the business may yet be expended wholly and exclusively for the purpo~s of the trade".

c

....

ln Mogan v. Tata & Lyle Ltd.('), the House of Lords had used Lord Davey's test in Strong's case (supra) to justify deduction of sums spent on propaganda to oppose threatened nationalisation of the Sugar Refinery industry as money spent "wholly and exclu sively for the company's trade".

D

The decision of the Court of Appeal, in Harroda (Buenos Aires) Ltd. v. Taylor-Gooby('), fully exposed the fallacy involved .in applying, without close examinatioR, the test of capacity, for the possession of which a tax may be imposed, to eve!) levy of the Lord a tax, by extending ti)e alluringly simple formula . of Chancellor, in Strong's case, to cases for which lt eould not have been meant. In Harrods' case, deduction was claimed, in com puting annual profits ~f a Company, of a 'Substitute Tax' which had to be paid on the Com:)any's capital in Argentina, irres,ective of the profits made on it (ii st like the Wealth Tax before us). The Court of Appeal quoted 1assages from the opinions of the Law Lords, in Rushden Heel :o:s case (supra) and Smith's Potato Estates' case (supra), to 'how that the ratio decidendi of these two decisions confined 'he principle applied there to cases where taxes, like the Income ' 'ax and the Excess Profits Tax, had to be paid upon and after a · :alculation of profits and did not extend to In other words, where profits, the net gains of busi other cases. ness determined after making all permissible deductions, are taxed. the di,bursements to meet such taxes cannot be deducted. But. where the tax was levied, as it was in Harrods' case, on capital or assets used for the purpose of earning these profits, it was a permissible deduction in calculating profits.

(I) 30T.C. p. 267. 35 T.C. p. 367.

(2) to T.C. p.155. (4) 41 T.C. p.450:

•

F

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l [ I

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INDIAN ALUMINIUM CO, LTD •. V. C.l.T~ (Beg, /.)

33

IIY Harrods' case, both Willmer, L.J., and Pip lock, L.J. had made use of· Lord Pavey's test set .out above, from Strong's case (supra). They held the ratio decidendi of the "tied-house" cases. al).d not Lord Loreburn's test to be applicable to payment of taxes on assets used for tradinl! exclusivelv. Willmer, L.J., quoted the following passage from Lord Halsbury's opinion in Lion Brewery. case ( p.466) :

"Again, it is urged that the landlord pays his contri bution as landlord and because of his proprietary interest in the premises and not as trader, since he would be· ·That, no equally liable to it whether he traded or not doubt, is so, but in the present case the Company have become landlords and thus liable to pay the charge, for 1the purp0se solely and exclusively of setting up the tied house syste.m of trading."

Lord Atkinson's view, expressed in the following words in the sume case, was also relied upon by the learned Judge (p.466) :

"'Stated broadly, I 1hink

that doctrine amounts to this, that where a trader bona fide creates in himself in premises or acquires a particular estate or interest that wholly and exclusively for the purposes of using interest to secure a better market for the commodities which it is part of his trade to vend, the money devoted by him to dischaq;:e a liability imposed by Statute on that estate or interest, or upon him as the owner of it, sho•1ld be taken to have been expended by him wholly and exclu sively for the pu112qses of his trade".

..

F

G

H

In Harrods case, the Court of Appeal. after a comprehensive survey of all the relevant English authorities, considered the pro poi;ition accepted by it, that the 'substitute tax', the company's c.apital, was a permissible deduction in. calculating the profits of a company for paying income tax, to be so clear and free from doubt, on the authorities then existing and applied, tJuit it refused even leave to appeal to the House of Lords.

levied on

If there could be any doubt about the correct position of a tax like the one before us, a perusal of the opinions given by Australian Judges, in Moffat v. Webb, (1) where after a discus siµn of the relevan~ English authorities, land-tax paid by a grazier on land used by him to earn income was held to be deductible in computing it for payin_g income tax, would fay to rest, if I may so put it, the disembodied ghost of ·a tradesman's non-trading character, a pure abstraction, which is sought to be used before us, by the learned Counsel for the Income-tax Department, . to prevent wealth tax paid on even tl'le wholly commercial assets,

(1) 16 Commonwealth Law Reports p. 120.

34

SUPREME COURT REPORTS

[1973] l S.C.R.

constituting a part or whole of the taxable "net wealth", used exclusively for purposes of trade,Jrom being deducted as allowable expense, under Sec. 10(2)(xv) of the Income-tax Act, 1922.

On the earlier occasion, when Travancore Titanium Co.'s case (supra) was argued in this Court, Moffat v. Webb (supra) \Vas not cited. Although, there are references in the judgment .of this Court, in the earii.er case, to the "tied-house" cases and to Harrods' case (supra), these were held to be distinguishable on facts, but, the test propounded by Lord Chancellor Loreburn, in Strong's case, was applied to disallow deduction of wealth tax in computing profits. After going througr1 all the relellant autho rities, I have no doubt whatsoever left in my mind that it is the ratio decidendi of "tied-house" cases and Harrods' case (supra l which is the same as that of the Australian case, that applies here and not Lord Chanceilor Loreburn's test laid down in . a very different context than that of payment of a tax as a necessary p•·c condition of earning more profits.

I do not think that the test of trading character, when incurring an expense for which a deduction is claimed, is without its uses. There are cases where the question has arisen whether a payment wa~ gratuitous or unnecess".T)' or not made for a bona fide com merical purpose or connected more with some ulterior ol}~t really falling outside the nornrnl sphere or regular course of commerce, such as the compounding· of an offence even if committed while trading. In J. K. Cotton Spinning & Weaving Mills Co. Ltd. v. Commissioner of Income Tax(1), I had occasion t" ..;onsider a case where the test of trading character or capacity in which a Jtayment is made as well of causal connection between the payment and a legitimately commercial purpose could, it seemed to me, be both simultaneously eJ)1.ployed. But, in cases of payment of taxes. a concentration on the test of capacity for which payment becomes necessary is certainly liable; to mislead us.

A question which did trouble my mind was whether, in view what this Court had held in Travancore Titanium case (supra); it could be said that any "accepted commercial practice and trading principles" could exclude wealth tax from the computation of profits with which Sec. 10 sub. s. (1) and'(2) of the Income-tax Act are concerned. One of the grounds given by this Court, to support. its view there, was that "the nature of the expenditure of the out· going must be adjudged in the light of accepted commercial prac tice and tradipg principles". Speaking for myself, I was inclined to ·ake the view that, if the earlier decision of this Court could be justified by a .refer_ence to some "commercial practice or trad k,.. ·'rincipies" which could be implied by, or, read into, the very i,, • ...ess of computation of profits with which provisions of Section

fl) A.T.R. 1967 All. p. 513.

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INDIAN ALUMIN!UM cci. LTD. v. C.l.T. (Beg,!.)

35

A

10(1) & (2) of the Income-tax Act, 1922, are concerned, it must stand. I find, however, that no case, apart from the observations .nentioned above, contained in the Travancore Titanium Co.'s case, was cited to support this line of reasoning. All the other cases brought to our nQtice, which are discussed above, indicate that ··commercial practice and trading principles" also warrant such de- B ductions of a ta.-i: on assets for capital used wholly and exclusively for carrying on trade or earning profits. They may preclude deduc tions of taxes on net _prQfits bl!t not those imposed on net assets. or wealth used exclusively for making profits.

t

c

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''Commerciai practice and trading principles" could vary. These terms appear to be rather vague and indefinit£. The meanings of the relevant statutory provisicins seem much more fixed and de- ·. finite. All that the language of Sec. IO ( 2)(xv) apparently require>. for claiming its benefit, is proof of a direct causal connection bet ween an outgoing and the commercial purpose which necessitates it. Whatever "commercial practice or trading principles" may _im- ply or import, they could not alter the meaning of statutory pro- · visions or travel beyon!l it.

., ..

Another question which engaged my atten~ion was whether Wealth Tax could be excluded from the purview of of Sec. 10(2Xxv) simply because it was a tax on assets or "net-wealth" paid by its owner so as to reduce his wealth. This line of thinking, however, seemed to me to bring in, through die backdoor, the misleading test of either the capacity as owner for the possession of which or the .. purpose for which the wealth tax may be demanded, instead of the inevit@le need and the purpose of the trader in paying the In Lion Brewery '.1 case (supra), Lord tax, as relevant matters. Halsbury had declared the unavoidable need to satisfy a statutory demand for the purpose of making profits as the really relevant questiOn for consideration in such cases. He said, about "the pur pose for which the Government have exacted the :ax"; "whatever that purpose may lie it is in1ffiaterial''.

'

It may be that the· purpose of the tax before us could be consi dered in order to. determine whether its nature is such as to Ilel;eSSarily imply that it cannot be taken into account in calculat ing profits or gains of business under Sec. 10.sub. s. (l) & (2) of · the Income-tax Act. The nature of the Wealth Tax was examined by this Court in Union of India v. Harbhaian Singh Dhillon('). where the following passage was quoted from "Readings on Taxa tion in Developing Countries", by Bird & 'Oldman dealinu with the concept of Wealth~tax : -

"

'

I H.

"The term 'net wealth tax' is ·usuallv defined as a tax annually imposed on the nee value of all assets less liabi tax-payers-especially individuals. lities of particular

(1) [1971] (2)SupremcCourtCasesP. 779@806.

36

SUPREME COURT REPORTS.

[ 1973]1 S.C.R

This definition distinguished the net wealth tax from other types of t;axation of net wealth, such as death duties and a capital levy; the former are imposed only at infrequent intervals--once a generation-while the latter is a one-time charge, usually with the primary purpose of redeeming a war-time national debt. The net wealth tax is really intended to tax the ,annual yields of capital rather than the principal itself as do death duties or a capital levy, even though it is levied on the value of the principal. Since it taxes net wealth, it also differs from property taxes imposed on the gross value of property-primarily real· property-in a number of countries. The net wealth tax gives consideration to the tax-payer's taxable capacity through the deduction of all outstanding liabilities and personal exemptions as well as through other devices, while the property tax generally does not take these factors into account. The net wealth tax is th~refore deemed to be imposed on the person of _the taxpayer, while the property tax often deemed to be imposed on an object-the property itself'.

It is true that wealth tax is imposed on "net.iwealth" of asses "~es, as defined by Sec. 2 sub-s. ( c), who are all "persons". These In the case of an artifi persons are both natural and artificial. cilli or juristic person like the Company before us, it seems very difficult to separate. the purpose of the juristic "persooa", which is certainly commercial, from the character of the "persona" itself. Even as regards other traders, that part of tax which falls on what is used exclusively for trade could be really ascribed only to a trading character. To the extent it· is a tax on proper11Y used for earninit profits; it must enter into a computation of profits from trading.

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On going through the provisions of Wealth•Tax Act as well as the Income-tax Act it was not possible for me to infer that the payment of Wealth-tax must be excluded from the computation of profits under Sec. 10 sub. s. (I) & (2) of the Income-tax Act. It ~ppears to me that nothing less than express statutory provisipn would justify a denial of the right to a deduction which the langu- G a~e. of Sec. 10 sub. s. (2) (xv) confers upon an assessee.

...

On looking at the position of law in America on this subject, I find that there are statutory provisions which deny deductions c}f certain taxes.only, such as income-tax, and taxes on war profits and excess profits, gifts, inheritance. legacies, and succession (See H U.S. Code 1958, ed. Titles 22-26 "Internal Revenue Code", p. 4287 paragraph 164). A general statement -of the law oh this. wbject there is that it :

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INDIAN ALUMINIUM. CO. LTD. V. C.I.T. ~Beg, /.)

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"does not prevent (a) a deduction therefor under Sec. 23(a) provided it represents an ordinary and neces sary expense paid or incurred during the taxable year, by a corporation or an individual in carrying on any trade or business, or, in the case of an individual, for the production or collection of income, or for the mana gement, conservation, or maintenance of property held for the production of income, or (b) the inclusion of such tax paid or incurred during the taxable year by a corporation or an individual as a part of the cost of ac quisition or production in the trade or business, or, in the case of an individual, as a part of the cost of pro perty held for the production of income with respect to which such tax is paid or incurred". (See Jacob Mer tens Law of Federal Income Taxation: Vol 5, 1954 Cumulative Pocket Supplement, Chapter 27, paragraph 27.01). Learned Counsel for the Department relied upon the difii culty in separating that part of the tax which is levied on any part of the net wealth, used wholly and exclusively for trade, from the rest of it. We are, slrictly speaking, concerned only with the correct interpretation of Sec. 10 sub. s. (2) (xv) of the Act and with the definition of "net-wealth" given in Sec. 2(m) of the Wealth Tax Act on which incidence of the tax levied under Sec. 3 falls. In order to determine wheliher, as a matter of principle, a tax so defined and imposed would be covered by Sec. 10 sub.s. (2)(xv) of the relevant Income.tax .(\ct, the difficulty which may arise in actually computing the deductible amount does not seem to be a material consideration. Moreover, the fact that "net wealth" is an amount· by which an aggregation of all the assets exceeds all the debts does not seem to impose any intractable difficulty in the way of .calculating what part of the net-iwealth is used for trade or business of an assessee and what is not. An ag gregation· means a collection of items added up which can be separated and not a mjxture the ingredients of which . become in separable. Assuming, however, that there is some difficulty in separating that part of the tax which is payable in respect of net wealth used only for trade from that part of it which is imposed on a portion of net-wealth not so used, I fail to see how the prin ciple involved or meaning of the relevant provisions, with which we are concerned here, will be affected. Mr. Chagla, appearing for an assessee, drew our attention to the division into two heads. one of business assets and another of the "other assets", which is found in form 'A' prescribed by the rules for rile Wealth Tax return. This means that the Wealth Tax Act itself makes that part of the net wealth separable which can be utilised wholly and If this can be exclusively for trade from the remainder of it. done. it is difficult to see how that part of Wealth Tax could escape

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SUPREME COURT REPORTS

[197J] 1 S.C.R.

deduction, under Sec. 10(2)(xv) of the Income-tax Act, which is attribut'ab!e to such portion of the net wealth as is used wholly and exclusively for earning profits.

To Jay down, as we are doing in this case, that it is the causal c:onnection between payment of tax and that part of ne~. wealth which is used wholly and exclusively for 1irade and not the mere character or capacity for the possession of which the tax is de mrttded, which determines whether it is an allowable dcluction or .aot, under Sec. 10(2)(xv) of the Act, seems to me to amount to nothing more than to give effect to the plain and literal mean ing of a provision of a taxing statute. There seems no need, jn such a clear case, to invoke the aid of the well established cannon of construction that, where a taxing provision is reasonably cap able of two equally possible construcliions, the one which favours the assessee must be 12referred. Of course, the burden of proving whether the whole or a part of the Wealth tax paid by an assessee is attributable wholly and exclusively to the carrying on of a trade, and, therefore, is. an allowable deduction, must rest "Upon the assessee in each case. The argument on behalf of the assessees. as I understand it, j?oes no further.

One of the tests laid down in Keshav Mills Company's case (Supra) for deciding whether a previoui erroneous view should be set right by this Com:t, ·was whether any possible advantage to the public resulting from doing so would be outweighed by the mischief or harm a revision may cause. Of course, the ultimate determination of what public good requires the law to be must take place elsewhere. But, in d"lciding whether a previous inter JJretation of the law, as it exists, by this Court, even if it be errone ous in some respect, needs revision by it, a consideration of what public good demands undoubiedly lies within the province of our powers.

· It seems to me ,that the Wealth Tax Act was not intended to strike at or check expansion of <;,gmmercial activites by eitilter in dividuals or companies. Its underlying purpose was the removal of disparities of individual or personal wealth and not in_jury to trade. It could be said to be a tax aimed at individuals whose In so far as the particular inter wealth exceeds certain limits. pretation which we are abandoning, because of the infinnities found in it, seemed to penalise mere expansion of business ·and

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INDIAN ALUMINIUM CO. LTD. V. C.I.T. (Beg, /.)

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trade without serving the assumed underlying purpose of Wealth tax, a revision of opinion does not appear to involve any such mischief or injury to the public as could stand in the way of correcting an erroneous view.

I have, therefore, no hesitation left in my mind in holding that the view expressed by this Court in Travancore Titanium case (Supra) must be modified as indicated by My lord the Chief Justice.

V.P.S.

Appeal allowed.

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