judgement:
A. No. 2020 of 1972.
Appeal by certificate from the judgment and order dated March 28, 1968 of the Rajasthan High Court at Jodhpur in Income tax ' Reference No. 1 1 of 1963.
N. D. Karkhanis and A. G. Ratnaparkhi, for the appellant.
section C. Manchanda, P. L. Juneja, section P. Nayar and R. N. Sachthey, for the respondent.
The Judgment of the Court was delivered by JAGANMOHAN REDDY, J.
This appeal is by special leave against the judgment of the High Court of Rajasthan in I an income tax reference under section, 66 (1 ) by which it answered the two questions referred to it in the negative.
Before this appeal was filed, Appeal No. 1238/1969 had been filed on a certificate but that is dismissed without costs because this Court had in several cases ' held that in Income tax references if the High Court does not give any reasons while granting the certificate, the certificate can be revoked.
The assessee, a firm carrying on mining business at Udaipur with a branch at Mandal, had pursuant to an invitation to tender for mica mining in accordance with the terms and conditions prescribed in the Mineral Concession Rules, tendered for certain areas for Rs. 1,57,150/ of which Rs. 3,360/ was payable towards the mica scrap lying on the surface.
The lease was for 20 years and the areas which were offered had been worked by other Private companies for 15 years.
This offer of the appellant was accepted and the lease was granted to it.
In the relevant assessment year 1952 53 for which the previous year for the head office ended on October 30, 1951 and for the branch ended 362 on March 30, 1952, the appellant claimed Rs. 7,857/ being the 1/20th of the tender money as revenue expenditure incurred during that year.
The claim of the assessee was rejected by the Income tax Officer on the ground that the money was paid for the value of the land which it had acquired because the mine granted to the assessee had already been worked by the private companies.
In an appeal against this order, the Appellate Assistant Commissioner confirmed the disallowance of the expenditure as in his view, it was a capital nature expended for the acquisition of a, capital asset.
Against this order, an appeal was filed to the Appellate Tribunal.
The Tribunal however allowed Rs. 3,360/paid for mica scrap lying on the surface as a revenue expenditure incurred in the acquisition of stock in trade, but disallowed the claim for the balance of Rs. 1,53,800/ which was paid under the tender as a capital expenditure.
The assessee had also claimed Rs. 3,200 as the fee paid by it a the rate of Re. 1/ per acre per year for prospecting licence.
The income tax Officer disallowed this amount under section 10(2) (xv) of the Indian Income tax Act, 1922 (hereinafter called the 'Act ') on the ground that the licence was obtained by the assessee only that year, that the fee was paid in addition to the royalty payable on the value of the emeralds excavated and sold and that it was an initial expenditure for procuring a right to respect mines.
The Appellate Assistant Commissioner in an appeal by the assessee negatived the claim on the ground that under that licence the assessee had a right to win and commercially exploit the minerals which the assessee actually carried out.
The Tribunal while dismissing the appeal filed against the order of the Appellate Assistant Commissioner observed that the prospecting licence fee cannot be equated to a payment made for the purchase of stock in trade, that it was not based, on any quantity of minerals, that the minerals had to be won and extracted from the earth and the term "prospecting licence" shows that the mine had not yet started working as a mine and that the payment was to initiate the business.
It also held that the period of on, year for which the licence was obtained cannot justify the fee paid as a revenue expenditure.
The assessee thereafter filed ' application under section 66(1) of the Act and as in its opinion a question of law did arise, the, Tribunal referred the following two questions to the High Court for its opinion : 1.
Whether on the facts and in the circumstances of the case, the prospecting licence fee of Rs. 3,200/is allowable as revenue expenditure ? 2.
Whether on the facts and in the circumstances of the caste the appropriate Part of Rs. 1,53,800/ was allowable as revenue expenditure ? 363 Taking the second question first, it is contended before us by the learned advocate for the appellant that Rs. 1,53,800/ paid for pillars of mica standing in the land leased out after the other private companies had worked it was a revenue expenditure because the tender which was given and accepted was on the basis of the calculations in the Indian Mining Hand Book for a specific quantity of mica in the mines which was the assessee 's stock intrade.
The revenue however submits that the amount of the lease was a capital outlay incurred for the initiation of the business, and that the pillars of mica cannot be stock in trade unless the mica was excavated, and brought to the surface.
A large number of cases decided in this country and in England, dealing with different topics were referred and arguments addressed before us dealing with many analogies of one kind or other, tendu leaves mangoes, apples, sand, brickearth, lime and other commodities all with a view to persuade us to ascertain what is the true test to be applied to the particular facts of this case ' We do not however propose to refer to cases dealing with variety of topics except perhaps to determine the nature of the expenditure incurred in this case by the assessee.
This Court in Pingle Industries Ltd. vs Commissioner of Income tax, Hyderabad(1) had occasion to examine exhaustively the relevant Indian and English cases for determining what is a capital expenditure and what is a revenue expenditure.
That was also a case of mining where the assessee obtained leases for excavating Shahabad stones for a period of 12 years for which an annual payment of Rs. 28,000 was agreed upon.
The majority of Judges, Kapur, J. and Hidayatullah, J. (as he then was) (section K. Das, J. dissenting) held that the assessee acquired by his long term lease the right to win stones, that the stones in situ were not its stock in trade in a business sense but a capital asset from which after extraction it converted the stones into its stock in trade.
It was also held that the payment was neither rent nor royalty but a lump payment in instalments for acquiring a capital asset of enduring benefit to its trade; the amounts being out goings on capital account, were therefore not allowable deductions.
The proposition as qualified by Lord Cave in Atherton vs British insulated and Helsby Cables.
Ltd.(2) that in the absence of any special circumstances leading to the 'opposite conclusion, when an expenditure is made, not only once and for all, but with a view to bringing it into existence an asset or advantage for the enduring benefit of a trade, has been applied, explained and varied from time to time as the circumstances of the particular case required.
The application of these principles to the various cases and the conclusions reached by courts in those cases often (1) (2) ,213.
6 L498Sup CI/73 364 lead to irreconciliable results.
It is because the topic itself is a troublesome one and is not rendered any the less difficult by resorting to principles.
"It is not always easy" observed Romer, L.J. in (;olden Horse Shoe (New) Ltd. vs Thurgood (H. M. Inspector of Taxes(1) "to determine whether a particular asset belongs to one category or the other" nor does it depend in any way "on what may be the nature of the asset in fact or in law.
" In our own Court this difficulty has been put very tersely,.
if we may say so with respect, by Hidayatullah, J. (as lie then was) in Abdul Kayoom vs Commissioner of Income tax(2) when he said: ". none of the tests is either exhaustive or universal.
Each case depends on its own facts, and a close similarity between one case and another is not enough, because even A single significant detail may alter the entire aspect.
In deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo.
The nature of the Judicial Process, p. 20) by matching the colour of one case against the colour of another.
To decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive.
What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases.
" The determining factor will depend largely on the nature of the tract , in which the asset is employed.
The several cases which do not deal with the mining leases but are concerned with different assets are of little help in the same way as in Mohanlal Hargovind vs C.I.T.(3), cases relating to the purchase or leasing of mining quarries, deposits of brick earth were considered not to be of assistance by the Privy Council in case of a contract for collecting and removing tendu leaves.
The principles enunciated for determining the nature of the expenditure have been sought to be applied to different situations arising on the facts of each case, but the difficulty in matching them with the seeming irreconciliabiliiy are perhaps explicable only on the ground that the determination in any particular case is dependent on the character of the lease or agreement, the nature of the asset, the purpose for which the expenditure was incurred and such other factors as in the facts and circumstances of that case would indicate.
If we confine our attention to the mining leases, what appears to us (1) (3) (2) at 703.
36 5 to be an empirical test is that where minerals have to be won, extracted and brought to surface by mining operations, the expenditure incurred for acquiring such a right would be of a capital nature.
But where the mineral has already been gotten and is on the surface, then the expenditure incurred for obtaining the right to acquire the raw material that is the mineral, would be a revenue expenditure laid out for the acquisition of stock in,trade.
An expenditure incurred for acquiring a right to take away sand from the surface of river beds has been treated as if the sand was stock in trade, M.A. Jabbar vs Commissioner of Income tax(1) in the same way as tendu leaves have been treated by the Privy Council in Mohanlal Hargovind 's case.
In the former case, Bhargava, J. indicated a number of factors which led to the conclusion that the expenditure incurred by the assessee in obtaining the lease was revenue expenditure for the purpose of obtaining stock in trade and not capital expenditure which were : (1) that the lease was for a very short period of 11 months only; (2) that the sole right which was acquired by the assessee under the lease deed was to take away the sand lying on the surface of the leased land where no question of raising, digging or excavating for the sand before obtaining it was involved.
In other words, no operation had to be performed on the land itself and "is not a case where the gravel is in any true sense" as appointed out in Golden Horse Shoe (New) Ltd. 's case "was won from the soil . it is merely shovelled up where it lies.
" In the latter case the Privy Council said that the leases for the right to collect and remove tendu leaves under which a certain sum was payable by instalments as a consideration for the grant of that was a revenue expenditure it pointed 'Out that the contracts were short term contacts, that the picking of the leaves had to start at once or practically at once and to proceed continuously and that under the contract it is tendu leaves and nothing but tendu leaves that are acquired.
At page 478 while comparing that case with the case of Kauri Timber Co. Ltd. I.,.
Commissioner of Taxes(2 )where the company 's business consisted in cutting and disposing of timber and it had in some cases acquired timber bearing lands and in other cases it purchased the standing timber, the lease itself being for 99 years, the Privy Council observed "In the present case the trees were not acquired nor were the leaves acquired until the appellants had reduced them into their own posse ssion and ownership by picking them.
The two cases can, in their Lordshops ' opinion, in no sense be regarded as comparable.
If the tendu leaves had.
been stored in a (1) (2) [1913] A.C. 771.
366 merchant 's godown and the appellants had bought the right to go and fetch them and so reduce them into their possession and ownership it could scarcely have been suggested that the purchase price was capital expenditure.
Their Lordships see no ground in principal or reason for differentiating the present case from that supposed.
" The analogy referred to in the above passage is sought to be applied to the facts of this case but in our view there is hardly any justification for such a conclusion having regard to the findings of the Tribunal and the income tax authorities.
The learned advocate for the assessee contends that the Income tax Officer, the Appellant Assistant Commissioner and the Tribunal, each of them had given different findings for coming ,to the conclusion that the expenditure was of a capital nature while the High Court gave yet another reason to answer the questions against the assessee.
Inasmuch as the correctness or otherwise of the order depends greatly upon what has been found as facts.
of this case, it would be useful to examine the respective orders.
The Income tax Officer, as we have earlier stated held that the money was paid for the value of the land which the assessee had acquired because the mine granted to the assessee had already been worked by other private companies.
This finding, according to the learned advocate, is contrary to the facts set out in the statement of the case by the Tribunal in which a reference was made to paragraph 5 of the invitation to tender.
It reads "As the area has been worked by a private com pany during the past fifteen years, all the known mines and quarries and prospecting pits have acquired a value which can be determined on the principles of 'mine valuation '.
Intending applicants are therefore requested to visit the area before April 15, 1950 and assign their own value and offer it.
According to the assessee, as already pointed out, it had offered Rs. 1,57,150/ after the mica had been valued on the principles of mine valuation which represented a payment of stock in trade.
The Appellate Assistant Commissioner has rejected the claim of the assessee with these observations : "On merits the appellant 's claim cannot be sustained because the circumstances detailed above, clearly indicate that the payment of tender money was for the acquisition of capital asset and not, as sought to be made out, for the stock of ores.
The stock was not 367 here on the surface but it was still embedded with the only difference that its availability could be more definitely gauged than in the case of an unworked area.
It would not make any material difference whether the miner acquires a lease on ordinary terms for an area which does not give a clear indication of the possible existence of ore or he acquires on more expensive terms an area which is in such a condition that it gives definite indication about the possibility of existence of ore therein and also broadly the extent thereof.
Acquisition in either case would be of a capital asset and payment therefore, small or large, a capital expenditure.
" Earlier the Appellate Assistant Commissioner had stated that when the lease was allotted to the appellant by the Mining Department "it was made clear that any mica scrap left by the predecessor exploiters M/s. Duduwala & Co., on the surface would be removed either by these exploiters within three months or if not so removed it would stand forfeited to the Rajasthan Government in any case it was not to come to the appellants.
" In the light of what has been stated, it is clear that the Appellate Assistant Commissioner made a distinction between mica that has been ,excavated and brought it; the surface and the mica which was still embedded and had to be excavated even though it was more easily avail able because of the labour already expanded in the working out of the mine by the other private companies.
The conclusions of the Tribunal are set out in the following passage . "In our opinion, the amount paid cannot be equated to payment for raw materials.
The raw materials have to be won and extracted before they could be said to be stock in trade.
The sum represents the price that was paid by the assessee for obtaining the right to, extract and win emerald and mica in an area which had already been worked and developed by a predecessor for 15 years.
If the assessee had to start running a mine, it had to incur similar expenditure.
In this case, the amount had been incurred and was paid for by the assessee.
Thus this amount in our opinion represents capital expenditure incurred for the purpose of obtaining certain benefits of a capital nature.
This is not in the nature of any royalty or rent paid by the assessee to the authorities.
In this connection, reference was made on behalf of the assessee to the provisions of Rule 51 of the Mineral Concession Roles which prohibits premium being paid for obtaining such a licence.
This rule occurs in Chapter 5 which applies to grant 368 of mineral concessions by Private persons and we do not consider that the rule is relevant for considering the question in issue before us where the grant is by the State.
We do not also think that this is in the nature of any premium.
This is merely for the purpose of getting benefits of certain structures and other works carried out in the area which had already been worked as a mine previously.
This cannot be equated to a premium that is contemplated by rule 5 1.
We therefore agree with the authorities below in holding that the assessee has not made out the claim for de duction of the amount.
" The finding of the Tribunal given in the above excerpt is clear and consistent with that given by the Income tax Officer and the Appellate Assistant Commissioner in that all of them distinguished between raw materials which had already been extracted and brought to the surface and those that have still to be extracted.
Apart from the objection that no question was formulated by which the findings of the Tribunal were challenged on any admissible grounds, there are, in our view, no contradictions in the fin ding of the Tribunal as submitted by the learned advocate for the assessee because what the Tribunal was dealing with in the latter part of the passage cited above, were the contentions urged on behalf of the assessee, firstly, that the amount was a royalty or rent 'paid to the authorities and secondly, what was paid was in the nature of premium.
While rejecting these contentions the Tribunal gave its reasons but that is not to say that the conclusion that the amount was a capital expenditure was not based on the finding that mica had to be extracted and brought to the surface before it could be considered as the assessee 's stock in trade.
In our view the principles which have been applied in the Pingle Industries ' case are equally applicable to the facts and circumstances of this case.
The test for ascertaining whether the amount spent is of a capital nature is, whether it was spent for obtaining a right of an enduring character which in the case of mining leases is to acquire rights over land for winning the mineral.
In other words, where the mineral is part of the land and some mining operations have to be performed to extract it from the earth, the amount paid to acquire a right over or in the land to win that mineral is of an enduring character and hence a capital expenditure.
In this case the mica pillars which have been exposed by the mining operation of other private companies had no doubt enhanced the value of the right which was leased 369 to the appellant but nonetheless.the appellant still had to carry out some mining operations to extract the mineral from the pillars which was embedded in the land.
If the private companies before the mica was exposed had taken the lease, they would have paid a much lesser amount which nonetheless would have been a capital expenditure.
It is the labour and expense which the private companies expanded that has enured for the benefit of the Government and enhanced the capital value of the lease.
This is not a case as is contended, of mica having been given so as to form part of the stock in trade of the assessee as in the case of Golden Horse Shoe (New) Ltd. vs Thurgood (H. M. Inspector of Taxes) (1) In that case the company had acquired rights in certain dumps of 'tailings ' or residuals that remained after the extraction of gold from ore taken from certain gold mines.
It was contended on behalf of the revenue that the company 's rights in tailings and dumps were part of the undertaking which the company was formed to acquire and any sum paid therefore was capital expenditure, and that the company 's rights in the dump was the purchase of a wasting asset.
This contention was negatived and it was held that the purchase price of, the tailings was an admissible deduction in computing the company 's profits for income tax purposes .
Lord Hanworth, M.R. at page 298 observed "After careful consideration of, the present case, in the course of which my mind has fluctuated on either side, I think it is to be decided upon its own facts that none of the tests suggested affords a strict rule of guid ance.
It seems, then, that the Company bought these dumps which were no longer in a natural but in an artificial condition; which were in such a state that they would not have passed under a lease of "beds opened, or unopened, minerals", see Boileau vs Heat Ch.
D. 301) for the purpose of treating them as the stock in trade, lying stored and ready to their hand, at a fair price of pound 122,750, and their intention was to use them up and make what they could of them by and after treatment.
They had not to win them from the soil; they had been gotten already.
If the metaphor of working a mine be applied, it might be said that the purchase of the dumps was a capital outlay.
If the metaphor of making gas or coke from coal, or of a miller making flour from wheat, be applied, it may be said that it was an outlay to be placed in the profit and loss account.
But metaphors do not provide exact definitions and are often misleading.
It is safer (1) 370 to give an interpretation to the facts of this case as found in the case stated and upon the law relevant to them. " This passage at once indicates the difficulties which he in common with other Judges have felt When called :upon determine the nature of the expenditure.
The lease in this case was for a long period it conferred a right to excavate the mica because on the findings of the Tribunal mica had to be extracted from the mine though, the ,earlier working out of the those mines by other companies had made it much easier to perform the final operations and because of it a higher amount had to be paid.
Nonetheless the amount paid was for acquiring a right of enduring nature to extract and remove the mica to bring it to the surface, grade it and pay royalty to the Government in accordance with the quality of Leach grade of mica extracted.
We accordingly hold that the ,expenditure incurred is a capital expenditure and that the second question has been rightly answered.
On the first question whether the prospecting licence fee of Rs. 3,200/ is allowable as revenue expenditure, the contention on behalf of the assessee is that it is a licence fee, not a lease amount nor does it create an interest in the land.
The Income tax Officer, the Appellate Assistant Commissioner and the Tribunal have all held that the fee paid for prospecting licence was not ,of a revenue nature.
It was submitted before the Tribunal that under a prospecing licence issued under Chapter 3 of the Mineral Concession Rules, 1943 the licensee had a right to win and carry away the minerals for commercial purposes, and for that reason the amount should be treated as in the nature `of a purchase price of a stock in trade.
In support of this contention the provisions of T. 23 were referred to but the Tribunal rejected that contention because in its view the amount was paid, as and by way of prospecting fees which was for initiation of a business as in the case of other minerals and that the character of the licence did not change merely because the licensee had certain rights over the minerals obtained under the prospecting licence nor was it based on any quantity ' of minerals.
The minerals had to be won and extracted from the earth and the term 'prospecting licence ' shows that the mine has not yet started working as a mine.
It was a fee paid irrespective of the quantity of minerals obtained which demonstrated clearly that the object of the payment was to initiate the business.
That apart, the period for which the licence was obtained viz., one year, does not also make it a revenue payment and consequently it held that the authorities Tightly disallowed the amount.
The finding by the Income tax ;authorities as well as the Tribunal that it was a payment for 371 initiating the mining operations was a finding of fact.
In oar view also the, fee was paid to obtain a licence to carryout, investigate, search and find the mineral with the objectof conducting the business of extracting ore from the earth.
It is therefore clear that the fee was paid for initiating the business and is of a capital nature.
By no stretch of argument can the fee paid for a prospecting licence be equated to a payment made for the purposes of stock in trade.
We think that the Income tax authorities, the Tribunal and the High Court are right in coming to that conclusion.
Our answer to the first question is, therefore also in the negative.
The two questions having been answered against the assessee, the appeal is dismissed with costs.
V.P.S. Appeal dismissed.

summary:
The assessee, a firm carrying on mining business, took on lease for 20 years certain areas which had been worked previously by.
others, and in which mica pillars had been exposed by those earlier mining operations.
Mica scrap was also lying on the surface.
The assessee paid a sum of money, part of which was towards the mica scrap lying on the surface.
The assessee also paid at Re. 1 / per acre per year as fee for prospecting licence., The assessee claimed the 1/20th part of the money paid for the lease as well as the fee paid for the prospecting licence as revenue expen diture for purposes of income tax.
The Tribunal allowed the money paid for the mica scrap lying on the surface as revenue expenditure, but disallowed the other claims.
The High Court also, on reference, held against the assessee (appellant).
Dismissing the appeal to this Court, HELD : The expenditure incurred for the lease, as well as the fee paid for the prospecting licence, were not allowable as revenue expenditure.
[362G H; 371C] (1)The test for ascertaining whether the amount spent for the lease is of a capital nature, is whether it was spent for obtaining a right of an ,enduring character, which, in the case of mining lease is to acquire rights over land for winning the mineral.
In other words, where the mineral is part of the land and some mining operations have to be performed to extract it from the earth, the amount paid to acquire a right over, or in the land, to win that mineral, is of an enduring character, and hence, a capital expenditure.
But where the mineral has already been gotten and is on the surface, then the expenditure incurred for obtaining the right to acquire the raw material, that is, the mineral would be a revenue expenditure laid out for the acquisition of a stock in trade.
[365A B; 368G H] In the present case, the findings of the Tribunal are clear and consistent with those given by the Income tax Officer and the Appellate Assistant Commissioner, in that, all of them distinguished between the raw materials which had already been extracted and brought to the surface, and those that are still to be extracted.
The mica pillars which had been exposed by the earlier mining operations, had enhanced the value of the right which was leased to the appellant, but none the less, the appellant still had to carry out some mining operations to extract the mineral from the pillars which were embedded in the land.
The lease was for a long period and it conferred a right to excavate the mica.
The amount paid was therefore for acquiring a right of an enduring nature to extract and remove the mica, to bring it to the surface, grade it, and pay royalty to the Government in accordance with the quality of each grade of mica extracted.
[368C D, H; 369A C; 370B D] Pingle Industries Ltd. vs Commissioner of Income tax Hyderabad, , followed.
361 Artherten vs British Insulated and Helsby Cables Ltd. , 213, Kauri Timber Co. Ltd. vs Commissioner of Taxes, [1913] A.C. 771, Golden Horse Shoe (New) Ltd. vs Thurgood (H.M. Inspector of Taxes), 18T.C. 280, Abdul ayoom vs Commissioner of Income Tax, at 703, Mohanlal Hargovind vs C.I.T., and M.A. Jabbar vs Commissioner of income Tax, , referred to.
(2)The term prospecting licence ' shows that the mine has not yet started working as a mine.
The finding by the authorities and the Tribunal that the fee paid for the prospecting licence was a payment for initiating the mining operations was a finding of a fact.
It was, in fact, a fee paid irrespective of the quantity of minerals obtained showing that the object of the payment was to initiate the business.
The period for which the licence was obtained, namely one year, does not also make it a revenue payment.
The fee paid to obtain the licence to carry out, investigate, search and find the mineral with the object of conducting the business of extracting ore from the earth, is a fee paid for indicating the business and therefore, is of a capital nature and could not be equated to a payment for the purposes of stock in trade.
[370D H; 371A B]


judgement:
Nos. 1694 and 1730 of 1968.
Appeals from the judgment and order dated August 11, 1967 of the Calcutta High Court in Income tax Reference Nos. 106 and 215 of 1963.
section R. Banerjee, N. N. Goswamy and section N. Mukherjee, for the appellant (in both the appeals).
V. section Desai, R. N. Sachthry and B. D. Sharma, for the respondent (in both the appeals).
A. K. Sen, T. A. Ramachandran and D. N. Gupta, for the intervener (in both the appeals).
The Judgment of the Court was delivered by Sikri C.J.
Beg J. gave a concurring but a separate opinion.
These appeals have been referred by a Division Bench of this Court 'to a larger Bench as the Division Bench felt :that the decision of this Court in Travancore Titanium Product ,Ltd. vs Commissioner of Income Tax(1) might require reconsideration.
The only point involved in these appeals is whether the Wealth Tax paid by the assesse, a 'trading company is deductible as an expenditure under section 10 ( 1 ) and section 10 (2) (xv) of the Income tax Act, 1922.
The facts in both the appeals are similar.
They relate to two separate accounting and assessment years and two assessment orders have been challenged.
We may give a few facts in one appeal The Indian Aluminium Co. Ltd., in respect of the year of assessment 1959 60 (accounting period Calendar year 1958), paid Rs. 1,59(630/ as Wealth Tax and, claimed to deduct this amount as expense from their assessable income.
Income Tax Officer allowed the deduction but the Appellate Assistant Commissioner held that the Company was not entitled to the deduction of Wealth Tax as an expense.
The Appellate Tribunal upheld the order of the Appellate Assistant Commissioner.
On the application of the assessee, the following question was referred to the High Court : "Whether on the facts and circumstances of case the sum of Rs. 1,59,630/ paid by 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 this Court in Travancore Titanium case(1), answered the question against the assessee.
Having obtained certificate of fitness from the High Court, the assessee has appealed to us.
Basing himself on Keshav Mills Co. Ltd. vs C.I.T.(2) it was contended by the learned counsel for the Revenue that we should not review our decision in Travancore Titanium case(1).
Gajendragadkar, C.J., speaking, for the Court, had observed in that 'case that "it is not possible or desirable, and in any case it would be inexpedient to lay down any principles which should govern the approach of the Court in dealing with the question of reviewing and revising its earlier decisions.
" He further observed "It would always depend upon several relevant considerations : What is the nature of the infirmity or error on which a plea for a review and revision of the 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 relevant and material statutory provision, or was any previous decision of this Court bearing on the point not noticed ? Is the Court hearing such plea fairly unani mous that there is such an error in the, earlier view ? What would be the impact of the error 'on the general administration of law or on public good ? Has the earlier decision been followed on subsequent occasions either by this Court or by the High courts ? And, would the reversal of the earlier decision lead to public inconvenience, hardship or mischief ?" (1) ; (2) 20 We are inclined to review our earlier decision 'in Travancore Titanium case(, '), because, as will presently appear, certain aspects of the question were not brought to the attention of the Court and remained unnoticed, and our decision is not likely to cause any public inconvenience, hardship or mischief.
We are all of the opinion that the decision was erroneous.
The decision will affect numerous assessees.
In the circumstances we think we should review the decision.
Section 10 (1) of the Indian Income tax Act, 1922, reads: "10(1) The tax shall be payable by an assessee under the he, id profits and gains of business, profession or vocation in respect of the profit or gains of any business, profession or vocation carried on by him." Section 10(2) provides : "Such profits or gains shall be computed after making the following allowances, namely,. " (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 or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.
" The language seems to be simple enough but it has engendered judicial conflict not only in India but also in England Eminent Judges halve striven to formulate correct tests to determine whether an expenditure has been laid out or expended wholly and exclusively for the purposes of business or not, but no one has been able to find a test in the application of which differences of opinion do not arise.
It seems to us therefore essential that in each case, the Courts must always keep in mind language of the section.
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 and Company of Romsey Ltd. vs Woodfield(2).
In that case the Brewing Company, which also owned licensed houses in which they carried on the business of lnnkeepers, incurred damages and costs on account of injustice caused to a visitor staying at one of their houses by the falling in of a chimney.
The House, of Lords (1) [1066] 3 S.C.R. 321 (2) ; 21 held that the damages and costs were not allowable as a deduction in computing the Company 's profits for Income Tax purposes.
The Lord Chancellor observed: "In my opinion, however, it does not follow that if a loss is in any sense 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.
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 travelling 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 walking.
in the street, the loss arising thereby to the grocer ought not to be deducted.
Lord Davey did not apply this test and put the matter thus: I think that the payment of these damages was not money expended "for the purpose of the trade".
These words are used in other 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 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.
It must be made for the purpose of earning the p rofits."
Lord Chancellor 's observations in Woodfield 's case were not accepted by Lord Atkinson in Smith vs Lion Brewery Com pany(1).
The Brewery_ Company were the owners or lessees of a number of licensed premises which they had acquired as part of their business as brewers and as a necessary incident of its profitable exploitation.
The licensed premises were let to tenants, who were "tied" to purchase their beers from the company.
Under the Licensing Act, 1904, compensation Fund Charges were levied in respect of the excise "on" licences held by the tenants who paid the charges and recouped themselves by (1) 22 deduction from the rents which they paid to the company.
It was claimed by the company that in computing their, profits 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 reversed in the Court of Appeal (Kennedy, L.J., dissenting), and opinions in the House of Lords being equally divided the judgment of the Court of Appeal was sustained.
Earl Halsbury, in holding in favour of the Brewery, observed that "lie (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 "Again,, it is urged that the landlord pays his contribution 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 Company have become landlords and thus liable to pay the charge, for the purpose solely and exclusively of setting up the tied house system of trading.
If the Company took under lease a plot of land to enlarge 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 lease.
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 the very rule relied upon 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 pleasure 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 because they are brewers, but because they were contracting parties, utterly irrespective of whether they carried on their trade or had abandoned it.
Yet it can hardly be suggested that the price paid for the hops or malt under the contract should not be deducted from the receipts.
There is, therefore, in my opinion, nothing in this ob jection."
In Usher 's Wiltshire Brewery Ltd vs Bruce(1) a brewery company were the owners or lessees of a number of licensed premises which they had acquired solely in the course of and for the purpose of their business as brewers and as a necessary incident to the more profitably carrying on of their said business.
The licensed premises were let to tenants who were "tied" to purchase 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 was held by the House of Lords that all the expenses claimed were admissible as being money wholly and exclusively laid out of expended for 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 expenditure essential to the earning of the profits, and I think they also are governed by Smith vs The Brewery Company(1) and are proper deductions.
" The Court of Appeal, regarding Rates and Taxes, said "The next head is "D., Rates and Taxes pound 3 8 7s.
" These are sums which the tenants were under a legal obligation to pay pursuant to their covenant in the tenancy agreement.
The Company, however, did not, for the reasons stated under A in the Case enforce the tenants ' covenants to pay, and consequently paid the rates and taxes themselves.
These reasons have been stated and appear in the Case, and need not be repeated; in brief; They are commercial interest and expediency, and avoidance of inconvenience.
I am of opinion that these rates and taxes so paid are in no sense deductions which are allowable from the Company 's profits.
" (1) (2) 24 The ' House of Lords, however, allowed these items.
Lord Atkinson at page 422 of the report said "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 wholly and exclusively for the purposes of using that interest to secure a better market for the commodities which it is part of his trade to vend, the money devoted by him to discharge a liability imposed by Statute on that estate or interest, or upon him as the owner of it, should be taken to have been expanded by him wholly and exclusively for the purposes of his trade;" Then regarding these items he observed: "The small items were not much contested in arguments.
I concur, however, with Mr. Justice Horridge in thinking they ought to be allowed."
Lord Parker observed: "My Lords, the Appellants claim deductions under three other heads : (1) Fire and licence insurance premiums, (2) Rates and taxes, and (3) Legal and other costs.
The Attorney General did not object to these deductions being allowed, and indeed having regard to what I have already said and to the facts ad mitted in the Supplementary Statement, p. 7, of the Appendix, it would be difficult to contend that they were not proper and necessary deductions in ascertaining the balance of profits and gains of the Appellants ' ,trade, or that they are within any of the prohibitions contained in the Rules.
" Lord Summer observed "The remaining items, rates and taxes, premiums and costs call for no special observation.
In my view, 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 decision on the rent and the repairs."
It may be mentioned 'that there was no express statutory provision for deduction of rates and taxes in the English Income Tax Act and yet they were allowed as a necessary deduction for the 'purpose of carrying on trade.
There is no doubt that in one 25 sense when rates and taxes on property are,, paid by a trader he pays them as owner or occupier because taxes are either on possession of property or on its ownership.
But when the assessee has a dual capacity, i.e., he is owner cum trader, why should it be not deductible when according to ordinary commercial principles he would be treated as paying it as trader.
Take the case of taxation on a motor vehicle.
The tax is levied under the Motor Vehicles Act on the possession or owner ship of a motor car, When a owner cum trader pays the tax in respect of a vehicle used solely for the purpose of trade, nobody doubts, and the, learned counsel for the Revenue did not contest the position, that the tax would be deductibles 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 tradercum owner, and he pays tax in respect of property which is used for the, purpose of trade, the payment must be taken to be in the capacity of a trader according to ordinary commercial principles.
This aspect is also clearly brought out in Moffatt vs Webb(1), which was not cited before this Court then.
The taxpayer was a grazier, and during the year '1911, carried on business, and was still carrying on ' business as such in Victoria upon lands of the fee simple, of which he was during the said year and still was the owner.
The, said lands comprised 17,970 acres or thereabouts, and their unimproved value had for the purposes of the Land Tax Assessment Act 1910 of the Commonwealth of Australia been assessed at pound 44,924.
He paid Commonwealth land tax amounting to pound 3 87 on the unimproved value of the Said lands.
The taxpayer claimed to deduct this tax from his income as an outgoing incurred by him "as a disbursement" or expenditure being wholly and exclusively laid out or expanded for the purpose of his trade.
The High Court of Australia held that the tax was properly deductible either as an outgoing actually incurred by him in production of income or a disbursement of money wholly and exclusively laid out or expanded for the purpose of trade.
Griffith, C.J., summed up the argument as follows : "The, possession of land is necessarily incident to carrying on the business of a grazier the payment of land tax is it necessary consequence of the possession of land of tax, able value, whether the land is freehold or leasehold; the payment of land tax is therefore a ' necessary incident of carrying on the business of grazing.
The case therefore, seems to me to come within the exact words of the first paragrapher sec.9." (Sec. 9 is substantially similar to section 10(2) (xv) of the Indian Income Tax Act, 1922).
Barten, J., observed ". 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 needs.
It seems too much 'altogether to say that he would have to pay.
the federal tax on this land if he did not carry on the grazing business.
Somebody would be wed, no doubt, but would it be the appellant ? It cannot be predicated that he would own the land at all if he carried on any other business.
It is scarcely an inference from the case to say that he hold ' the lands simply as an instrument essential to the proper conduct of his business : I think it is the fair meaning of the first paragraph at which we can arrive without inserting anything not imported by the words.
If I am right 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 payment of the tax.
But I do not think that is the criterion.
Is the payment wholly and exclusively incidental to the carrying on of the business ? Well, it is only by reason of the necessity of land for his business 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 particular facts, I think the payment is incidental to the conduct of his business, and that it is money wholly and exclusively expended for the purposes of his trade."
Issaes, J., was impressed by the reasoning of Lord Halsbury and Lord Atkinson in Smith vs Lion Brewery, Co. Ltd.(1).
He observed : "And Lord Atkinson reasons out the position and shows convincingly, to my mind that, though a tax may in I one sense be paid as owner or lessee, in another it is paid as trader.
The instance he puts as to licences are undeniable, and I cannot distinguish them from this case.
To carry the matter further : Suppose the Federal Parliament were to, lay a tax on the owners of motor cars, and carts, and guns, and dogs and sheep.
so that (1) 27 the tax was payable whether these things were employed in trade or not could it be doubted 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 in this; it confuses, not so much the meaning, as the application of the word "purpose".
The land tax is enacted by legislature for its own purpose, that is, to tax the 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 income 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."
The unsoundness of the test of the capacity in which payment is 'Made was commented upon in Harrods (Bueonos Aires) Ltd. vs Taylor Gooby(1) by the Court of Appeal.
The facts can be conveniently taken from the head note.
"The Appellant Company, which was incorporated and resident in the United Kingdom, carried on the business of a large retail store at Buenos Aires.
In consequence the Company was liable in Argentina to a tax known as the substitute tax, which was levied on joint stock companies incorporated in Argentine, and on companies incorporated outside, Argentine which carried on business there, as did the Appellant 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 Argentine law there were sanctions available to remedy non payment of the tax.
On appeal against an assessment to Income Tax under Schedule D for the year 1959 60 it was contended on behalf of the Company that it paid the substitute tax solely for the purpose of enabling it to carry on business in the Argentine since, if it had not paid it, it would have been unable to carry on its business there, and that the tax was therefore deductible as "money wholly and (1) 28 exclusively laid out or expended for the purposes of (its) trade", within the meaning of Section 137(a), Income Tax Act, 1952.
For the Crown, it was contended (inter alia) that the Company paid the tax in the capacity of taxpayer rather than trader.
" Willmer, L.J., referred to Commissioners of Inland Revenue vs Dowdall O 'Mahoney & Co. (1) and observed: "I can find no sup port 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 vs Lion Brewery(2) case he observed "It appears to, me that these two decisions of the House of Lords are not only quite inconsistent with the principal submission put forward on behalf of the Crown in the present case, but that the ratio decidendi of both cases, as stated by Lord Atkinson, is really decisive in favour of the Company.
" Dancwerts, L.J. observed "In Rushden Heal Co. Ltd. vs Keens(3), to which I have referred, Lord Greene, M.R., in 30 T.C. page 316 7, introduced a test of a different kind from that to which I have referred.
He seems to draw a distinction between payments made by a trader in the character of taxpayer and not, or not wholly, as trader.
I find this idea difficult to, follow and not very helpful in, discussing the subject in issue.
It seems to me very 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 be is taxed and is a taxpayer."
Diplock, L.J., also criticized the test in these words "it is contended for the Crown that the Company Paid the tax in its capacity as a taxpayer, not in, its capacity as a trader.
But with great respect to Lord Greene, M.R. 's Judgment in the Rushden Heel Co. 's on which this Convention 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 (1) (3) (2) 29 of Lords in the same case and cannot, in my, view, survive Lord Atkinson 's earlier criticism of a similar argument in the Lion, Brewery case which Willmer L.J., has already cited.
You can always find some label other than "trader" to describe the capacity in which a trader makes any disbursement for the of his trade.
He pays rent for his business premises in the capacity of "tenant", rates in the capacity of "Occupier ", wages in the capacity of "employer", the price of goods in the capacity of "buyer".
But if he has become tenant or occupier of those particular 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 computing the profits of his trade.
The learned counsel for the Revenue did not say that these cases had been 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 vs Webb(1) or with "tied house in Smith vs Lion Brewery Compnay(2) or with the "Company 's Capital" in Harrods (Bueonos Aires) Ltd. vs Taylor Gooby(3).
He said that in all these cases the tax was being levied on the asset of the business which was being used for the purpose of business.
In the present case, according to him, the net wealth could not be likened to an asset owned by the trading company.
To this the learned counsel for the appellant retorted that in the case especially of a trading company all the assets are owned and liabilities incurred for the purposes of trading, as outlined in its Memorandum of Association; if, all the assets are owned and used for the purpose of the trade the 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 its net assets to a bank and if a company did that, it could not be said that the net wealth or net assets had not been used for the purposes of business.
If tax was levied on the capital value of assets without allowing deduction of debts it is clear that the tax would be deductible.
What difference does it make if debts are deducted from the capital value of assets.
The net wealth is as much an instrument of trade as the capital value of assets.
We find it very difficult to distinguish the case of a trading company like the assessee, on principle, from that of the grazier or the brewery company, in the cases referred to above.
(1) ; (2) (3) 30 In our view the test adopted by this Court in Travancore Titanium case(1) that "to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i. e., between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business" needs to be qualified by stating that if the expenditure is laid out by the assessee as Owner cum trader, and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business.
It was pointed out by the learned counsel for the Revenue that it would be difficult 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 the business assets and liabilities and what are non business assets and liabilities.
At any rate it should not be difficult to evolve a principle or frame statutory rules to find out the proportion of the tax which is really incidental to the carrying on of the trade.
On the facts of this case it is clear that payment of wealth tax was really incidental to the carrying on, of the assessee company 's trade.
Accordingly, we hold that the appellant is entitled to succeed.
The appeals are allowed, the judgment of the High Court set aside and the question answered in favour of the assessee.
Parties will bear their own costs throughout.
Beg, J.
My lord the Chief Justice has quoted certain tests laid down by Gajendragadkar, C.J., speaking for this Court, in Keshav Mills Co. Ltd. vs Commissioner of Income Tax, Bombay North(2), which have to be satisfied before we could properly dissent from a previous decision of this Court.
In such a case, I think I should indicate my reasons for reaching a concurring conclusion, with very great respect, that an earlier, opinion of this Court, on the very question before us now, needs revision.
The error which crept into the decision of Travancore Titanium Products Ltd. vs Commissioner of Income tax, Kerala(1) could be traced to an application of the rather speciously stated criterion laid down, in the House of Lords in Strong & Co. of Romsey Ltd. vsWoodfield(3), by the Lord Chancellor who said there that expenses cannot be deducted, in computing profits, "if they are mainly incidental to some other vocation, or fall on the trader in some character other than that of trader.
The nature of the trade is to be considered".
But, Lord Davey, looking at the case from (1) ; (2) ; (3) ; 31 a somewhat different angle, "said:, "it was not enough that the bursement 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.
It must be made for the purpose of earning profits". 'The two tests were not identical.
The ratio decidendi 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 tradesman who has to pay damages for injury to his customer due to his personal neglect in maintaining his premises, even though these premises are used for trade, was not entitled to deduct them in computing his profits for the purposes of paying income tax just as he Could not claim a deduction for damages he will have to pay as a wrong doer for assaulting or defaming a customer who comes into his shop.
It is no part of normal business to commit such wrongs.
Liabilities so incurred could very well be looked upon ,is outside the course of trading altogether even if they arise out of commercial activity or result from something 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 personal wrongs.
The facts of that case show that the negligence which resulted in payment of damages, for which a deduction was claimed, was that of servants employed as an ordinary incident of trading 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 which he, very hesitatingly, decided to accept.
In Smith vs Lion Brewery Company, Limited(1), 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 to be upheld by the House of Lords where opinion was evenly divided when the case was taken up there.
Hence, the test laid down there by the Court of Appeal was held by Farl Loreburn to he binding upon him, in Usher 's Wiltshire Brewery Ltd. vs Bruce(2), although lie had himself not accepted it in Lion Brewery 's case.
in In Rushden Heel Co. Ltd. vs Commissioner of Inland Revenue (3) Lord Greene, M.R., in disallowing deduction of expenses 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 which the expense was incurred.
He held that the disbursment had to be disallowed on the ground "that the expenditure was incurred by the Company primarily in its capacity as a taxpayer and for the purpose of regulating the Position as between itself as a taxpayer and the Crown.
" The House of Lords upheld the decision, following its slightly earlier pronouncement by a majority, in Smith 's Potato Estates Ltd. vs Bolland(1), 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.
In Artherton vs British Insulated and Helsby Cables Ltd.(1), 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 purposes of the trade".
In Mogan vs Tata & Lyle Ltd. (3), 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 exclusively for the company 's trade".
The decision of the Court of Appeal, in Harroda (Buenos Aires) Ltd. vs Taylor Gooby (4), fully exposed the fallacy involved in applying, without close examination, the test of capacity, for the possession of which in a tax may be imposed, to every levy of a tax, by extending the alluringly simple formula of the Lord Chancellor, in Strong 's case, to cases for which it could not have been meant.
In Harrods ' case, deduction was claimed, in computing annual profits of a Company, of a 'Substitute Tax which had to be paid on the Company 's capital in Argentina, irrespective of the profits made on it (just like the Wealth Tax before us).
The Court of Appeal quoted passages from the opinions of the Law Lords, in Rushden Heel Co. 's case (supra) and Smith 's Potato Estates ' case (supra), to show that the ratio decidendi of these two decisions confined the principle applied there to cases where taxes, like the Income Tax and the Excess Profits Tax, had to be paid upon and after a calculation of profits and did not extend to other cases.
In other words, where profits, the net gains of business determined after making all permissible deductions, are taxed, the disbursements to meet such taxes cannot be deducted 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.
(1) 30 T.C. p. 267.
(2) 10 T. C. P. 15 5.
(3) 35 T.C. p. 367.
(4) 41 T.C. p. 450.
33 In Harrods ' case, both Willmer, L.J., and Diplock, L.J. had made use of Lord Davey 's test set out above, from Strong 's case (supra).
They held the ratio decidendi of the "tied house" cases and not Lord Loreburn 's test to be applicable to payment of taxes on assets used for trading exclusivelye.
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 contribution 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 Company have become landlords and thus liable to pay the charge, for ,the purpose solely and exclusively of setting up the tied house system of trading."
Lord Atkinson 's view, expressed in the following words in the same case, was also relied upon by the learned Judge (p.466) : "Stated broadly, I think that doctrine amounts to this, that where a trader bona fide creates in himself or acquires a particular estate or interest in premises wholly and exclusively for the purposes of using that interest to secure a better market for the commodities which it is part of his trade to vend, the money devoted by him to discharge a liability imposed by Statute on that estate or interest, or upon him as the owner of it, should be taken to have been expended by him wholly and exclusively for the purposes of his trade".
In Harrods case, the Court of Appeal, after a comprehensive survey of all the relevant English authorities, considered the proposition accepted by it, that the 'substitute tax ', levied on the company 's capital, 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, that it refused even leave to appeal to the House of Lords.
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 vs Webb, (1) where after a discussion of the relevant 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 paying income tax, would lay 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 the wholly commercial assets, (1) 16 Commonwealth Law Reports p. 120, 34 constituting a part or whole of the taxable "net wealth", used ,exclusively for purposes of trade, from 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 vs Webb (supra) was not cited.
Although, there are references in the, judgment ,of this Court, in the earlier 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 through all the relevant authorities, I have no doubt whatsoever left in my mind that it is the ratio decidendi of "tied house" cases and Harrods ' case (supra) which is the same as that of the Australian case, that applies here and not Lord Chancellor Lorebum 's test laid down in a very different context than that of payment of a tax as a necessary precondition 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 was gratuitous or unnecessary or not made for a bona fide commerical purpose or connected more with some ulterior object really falling outside the normal 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. vs Commissioner of Income Tax(1), I had occasion to consider, a case where the test of trading character or capacity in which a payment is made as well of causal connection between, the payment and a legitimately commercial purpose could, it seemed to me, be both simultaneously employed.
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.section (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 outgoing must be adjudged in the light of accepted commercial practice and trading principles".
Speaking for myself, I was inclined to take the view that, if the earlier decision of this Court could be justified by a reference to some "commercial practice or trading principles" which could be implied by, or, read into, the very process of computation of profits with which provisions of Section (1) A.T.R. 1967 All.p. 513.35 10(1) & (2) of the income tax Act, 1922, are concerned, it must stand.
I find, however that no case, apart from the Observations mentioned above, contained in the Travancore Titanium Co. 's case was cited to support this line of reasoning.
All the other cases brought to our notice, which are discussed above, indicate that ,.commercial practice and trading principles" also warrant such deductions of a tax on assets for capital used wholly and exclusively for carrying on trade or earning profits.
They may preclude deductions of taxes on net profits but not those imposed on net assets or wealth used exclusively for making profits.
"Commercial practice and trading principles" could vary ' These terms appear to be rather vague and indefinite.
The meanings of the relevant statutory provisions seem much more fixed and definite.
All that the language of Sec.10(2)(xv) apparently requires, for claiming its benefit, is proof of a direct causal connection between an outgoing and the commercial purpose which necessitates it.
Whatever "commercial practice or trading principles" may imply or import, they could not alter the meaning of statutory pro visions or travel beyond it.
Another question which engaged my attention was whether Wealth Tax could be excluded from the purview of of Sec.10(2)(xv) 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 the 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 inevitable need and the purpose of the trader in paying the tax, as relevant matters.
In Lion Brewery 's case (supra), Lord 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 purpose for which the Government have exacted the tax"; "whatever that purpose may be it is immaterial".
It may be that the purpose of the tax before us could be considered in order to determine whether its nature is such as to necessarily imply that it cannot be taken into account in calculating profits or gains of business under Sec.10 sub, section (1) & (2) of the Income tax Act.
The nature of the Wealth Tax was examined by this Court in Union of India vs Harbhajan Singh Dhillon(1).
where the following passage was quoted from "Readings on Taxation in Developing Countries, by Bird & Oldman, dealing with the concept of Wealth tax : "The term 'net wealth tax ' is usually defined as a tax annually imposed on the net value of all assets less liabilities of particular tax payers especially individuals.
(1) [1971] (2) Supreme Court Cases p. 779 @ 806.
36 This definition distinguished the net wealth tax from other types of taxation 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 tax es 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 therefore 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 wealth" of assessees , as defined by Sec.2 sub section(c), who are all "persons".
These persons are both natural and artificial.
In the case of an artificial or juristic person like the Company before us, it seems very difficult to separate the purpose of the juristic "persona" 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 property used for earning profits, it must enter into a computation of profits from trading.
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.section (1) & (2) of the Income tax Act.
It appears to me that nothing less than express statutory provision would justify a denial of the right to a deduction which the language of Sec.10 sub.section (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 of certain taxes only, such as income tax, and taxes on war profits and excess profits, gifts, inheritance, legacies, and succession (See U.S. Code 1958, ed.Titles 22 26 "Internal Revenue Code", p. 4287 paragraph 164).
A general statement of the law on this subject there is that it 37 "does not prevent (a) a deduction therefor under Sec.23(a) provided it represents an ordinary and necessary 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 management, 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 property 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 Pock et Supplement, Chapter 27, paragraph 27.01).
Learned Counsel for the Department relied upon the diffi culty in separating that Dart 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 arc, strictly speaking, concerned only with the correct interpretation of Sec.10 sub section (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 whether, 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 Act, 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 wealth is used for trade or business of an assessee and what is not.
An aggregation means a collection of items added up which can be separated and not a mixture the ingredients of which become inseparable.
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 principle 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 the 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 exclusively for trade from the remainder of it.
If this can be, done, it is difficult to see how that part of Wealth Tax could escape 38 deduction, under Sec.10(2) (xv) of the Income tax Act, which is attributable to such portion of the net wealth as is used wholly and, exclusively for earning profits.
To lay down, as we are doing in this case, that it is the causal connection between payment of tax and that part of net wealth which is used wholly and exclusively for trade and not the mere character or capacity for the possession of which the tax is demanded, which determines whether it is an allowable deduction or not, 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 meaning of a provision of a taxing statute.
There seems no need in such a clear case, to invoke the aid of the well established cannon of construction that, where a taxing provision is reasonably capable of two equally possible constructions, the one which favours the assessee must be preferred.
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, goes no further.
One of the tests laid down in Keshav Mills Company 's case (Supra) for deciding whether a previous erroneous view should be set right by this Court, 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 deciding whether a previous interpretation of the law, as it exists, by this Court, even if it be erroneous in some respe ct , needs revision by it, a consideration of what public good demands undoubtedly 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 commercial activites by either individuals or companies.
Its underlying purpose was the removal of disparities of individual or personal wealth and not injury to trade.
It could be said to be a tax aimed at individuals whose wealth exceeds certain limits.
In so far as Ole particular interpretation which we are abandoning, because of the infirmities found in it, seemed to penalise mere expansion of business and 39 trade 'without serving the assumed underlying purpose of Wealthtax, 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.

dataset_name: IN-Abs

summary:
The assessee, a trading company, paid wealth tax and sought to, deduct it as a business expense under section 10(1) and section 10(2) (xv) of the Income Tax Act, 1922, in computing its assessable incomes from business for the purpose of the Income Tax Act.
The High Court held against the assessee following the decision of this Court in Travancore Titanium Product Ltd. vs C.I.T., ; The test adopted by this Court in the Travancore Titanium case was that "to be a permissible deduction, there must be 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 test laid down in the decision in the Travancore Titanium case should be modified.
[20A, 39B] (Per S.M. Sikri, C. J., A. N. Grover, A. N. Ray and D. G. Palekar, JJ.) : (1) Certain important aspects of the question were not brought to the attention of this Court when the earlier case was decided.
if that decision is modified as erroneous, it is not likely to cause any public inconvenience hardship or mischief; and numerous assessees would be affected by the decision.
[20A B] Keshav Mills, Co. Ltd. vs C.I.T. ; , 922, followed.
(2) There is no doubt that in one sense when rates and taxes on property are paid by a trader he pays them as owner or occupier, because taxes are either on possession of property or on its ownership.
But when a person has the dual capacity of a trader cum owner, and he pays tax in respect of property which is used for the purpose of trade, the payment must be taken to be in the capacity of a trader according to ordinary commercial principles.
[25A B, C D] Moffatt vs Webb, ; applied (Not cited in the Travancore Titanium case.
Smith vs Lion Brewery Company, , Usher 's Wiltshire Brewery Ltd. vs Bruce, , Harrods (Buenos Ayres) Ltd. vs TaylorGooby, and observations of Lord Davey in Strong and Co. Romsey Ltd, case ; , referred to.
(3) In the case of a trading company all the assets are owned and the liabilities are incurred for the purpose of trading, as outlined in its memorandum of association.
If all the assets are owned and used for the purpose of trade, the net wealth 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 laid down in the earlier case should be qualified, by stating that, if the expenditure is I aid out by the 16 assessee as owner cum trader, and the expenditure is really incidental to the carrying on of his business, it must be treated as having bean laid out by him as a trader and as incidental to his business.
[29F H, 3OA C] (4) It may be difficult for the Revenue to allow the deduction of debts, and non business assets and debts.
But the wealth tax return form itself requires the assessee to show what are business assets and liabilities and what are the non business assets and liabilities.
At any rate, it should not be difficult to evolve a principle or frame statutory rules to find out the proportion of the tax which is 'really incidental to the carrying on of the trade.
[30C E] (Per M. H. Beg, J.) : (1) One of the tests laid down in Keshav Mills co 's case ([1965]/2 S.C.R.908), for deciding whether a previous erroneous view should be set right by this Court, is whether any Possible advantage to public resulting from doing so would be outweighed by the mischief or harm a revision may cause.
[38E F] The Wealth Tax Act was not intended to strike at or check expansion of commercial activities by either individuals or companies.
Its underlying purpose is the removal of disparities of individual or personal wealth and not injury to trade.
The interpretation placed in the Travancore Titanium case ([1966] 3 S.C.R. 321) seems to penalise mere expansion of business and trade without serving the underlying purpose of wealth tax.
Therefore, a revision of opinion does not involve any such mischief or Such injury to the public interest as would stand in the way of correcting an erroneous view.
[38G H, 39A B] (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 vs Woodfield ; , that if.
the expenses fall on the trader in some character other than that of a trader, they could not be deducted in computing profits.
But in the same case, another Law Lord laid down a somewhat different test that the payment to be deductible must have been made for the purpose of earning profits.
[30G H, 31A B] (3) Liabilities incurred by a trader to pay damages for injury to his customer due to his personal neglect in maintaining his premises, even though the premises were used for trade, could be looked upon as outside 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 Strong and co. 's case the negligence which resulted in payment of damages, for which the deduction was claimed, was that of servants employed as an ordinary incident of trading, so that, the master was only vicariously liable; and the language used by the Lord Chancellor in that case covers more than what could be attributed to the trade man 's own personal wrongs.
[31B E] (4) In later English cases the test adopted is whether the expenses sought to deducted 'wholly or exclusively laid out for the purpose of earning profits.
[31F] Smith vs Lion Brewery Company Limited, ; Usher 's Wiltshire Brewery Ltd. vs Bruce ; Atherton vs British Insulted and Halsby Cables Ltd., ; Margan vs Tate and Lyle Ltd., , referred to.
Rushden Hell Co. Ltd, vs Commissioner of Inland Revenue, and Smith 's Potato Estates Ltd. vs Bolland, 30 T.C. 267 explained 17 Where profits, the net gains of business, determined after making all permissible deductions.
are taxed, the disbursements to meet such taxes cannot be deducted.
But, when the tax 'was levied on capital, or assets used for the purpose of earning those profits, it was a permissible de duction in calculating profits.
[32G H] Harrods (Buenos Ayres) Ltd. vs ' Taylor Gooby, , 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 vs Webb ; , which was not cited before this Court when the Travancore Titanum case was argued.[34A B] (7) The test of trading character when incurring an expense for which deduction is claimed can be utilised usefully only in cases where the question is whether a payment was gratuitous or unnecessary or not made for a bona fide commercial purpose or connected more with some ulterior object really failing outside the normal sphere or regular course of commerce, such as the compounding of an offence even if committed while trading; but this could not be so in cases of payment of taxes[34D F] J.K. Cotton Spinning & Weaving Mills Co. Ltd. vs Commissioner of Income Tax, A.I.R. 1957 All. 513, referred to; (8) There is no accepted commercial practice or trading principle according to which wealth tax could not be deducted in the computation of profits under section 10(i) and (ii) of the Income Tax Act.
Except the observation in the Travancore Titanium case, all the other cases indicate that commercial practice and trading principles 'also warrant such deductions of tax on capital assets used wholly and exclusively for carrying on trade or for earning profits.
Deductions of taxes on net profits may not be permited, but those imposed on net assets or wealth, used exclusively for making profits, can be deducted in, computing income for purposes of income tax.
Moreover, whatever commercial practice or trading principles may imply or import, they could not alter the meaning of statutory provisions.
All that the Language of section 10(2)(xv) requires, for claiming its benefit, is proof of direct causal connection between an outgoing and the commercial purpose which necessitated it.
To lay down that it is the causal connection between the payment of tax and that part of the net wealth which is used wholly and exclusively for trade, and not the mere character or capacity for the possession of which the tax is demanded, which determines whether it is an allowable deduction or not, under section 10(2) (xv), nothing more than giving effect to the plain and literal meaning of a provision of a taxing statute.
[35A B, 35B C] (9) To exclude from the purview of section 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 capacity of the owner for the possession of which, or the purpose for which, the wealth tax may be demanded.
instead of the inevitable need and the purpose of the trader in paying the tax, as relevant matters.
[35D F] (10) Wealth tax is imposed on net wealth of of assessees who are persons both natural and artificial.
In the case of an artificial or juristic person like a company, it is difficult to separate the purpose of the Juristic "persona" which is certainly commercial, from the character of the "persona" itself.
Even as regards other traders that part of the tax which falls on assets used exclusively for I trade could 'be really ascribed 18 only to a trading character.
To the extent it is a tax on property used for earning profits it must enter into a computation of profits from trading.
Therefore, nothing less than express, statutory provision would justify a denial of the right to a deduction which the language of section 10(2) (xv) confers upon assessees.
[36D F] (11) The Court is not concerned with any difficulty in separating that pail of the tax which is levied on any part of the net wealth, used wholly or exclusively for trade, from the rest of it.
The Court is concerned only with the interpretation of section 10(2)(xv) and not with any difficulty which may arise in actually computing the deductible amount.
Moreover, since net wealth is an amount by which an aggregation of all the assets exceeds all the debts there can be no intractable difficulty in calculating what part of the net Wealth is used for trade or business of an a sessee and what is not, an aggregation being collection of items n being collection of items which can be separated, and not a mixture whose ingredients became inseparable.
Further, the wealth tax return form divides wealth under two heads, one of business assets and another of other assets, showing that the Wealth Tax Act its itself makes 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, there is no difficulty in separating that part of the wealth tax which could be deducted under section 10(2)(xv) of the Income Tax Act.
[37D G] Assuming there is some difficulty the principle involved or.
the meaning of the relevant previsions will not be affected thereby.