CIVIL APPELLATE JURISDICTION: C.A. 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. S. R. Banerjee, N. N. Goswamy and S. N. Mukherjee, for the appellant (in both the appeals). V. S. 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. Sikri C.J.-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. v. 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 s. 10 ( 1 ) and S. 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 (1) [1966] 3 S.C.R. 321. 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. v. 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) [1966] 3. S.C.R. 321. (2) [1965] S.C.R. 908-922. 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. v. 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 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 v. Lion Brewery Company(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 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 v. 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 v. 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. 6d." 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." 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 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 v. 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 s. 10(2)
(xv) of the Indian Income Tax Act, 1922). (1) [1913] 16 C.L.R. 120. L1208SupCI/72 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 v. 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
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. v. 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
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
v. 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 v. 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. v. 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
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 v. Webb(1) or with "tied house’ in Smith v. Lion Brewery Compnay(2) or with the "Company’s Capital" in Harrods (Bueonos Aires) Ltd. v. 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) [1913] 16 C.L.R. 120. (2) 5 T.C. 568. 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-cumtrader, 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 nonbusiness 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. v. 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. v. 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. v.Woodfield(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) [1966] 3 S.C.R. 321. (2) [1965] 2 S.C.R. 908. (3) 5 T. C. 215. 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 v. 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. v. Bruce(2), although lie had himself not accepted it in Lion Brewery’s case. in In Rushden Heel Co. Ltd. v. 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 (1) 5 T.C. p. 568. (2) 6 T.C. p. 399. 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. v. 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 v. 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 v. 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. v. 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. But. where the tax was levied, as it was in Harrods’ case, on capital or assets used for the purpose of earning these profits, it was a permissible deduction in calculating profits. (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. 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 "tiedhouse" 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 v. 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, 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 v. 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. v. 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. s. (1) and (2) of the Income-tax Act are concerned. One of the grounds given by this Court, to support, its view there, was that "the nature of the expenditure of the 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. 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 provisions 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 "netwealth" 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, s. (1) & (2) of the Income-tax Act. The nature of the Wealth Tax was examined by this Court in Union of India v. 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.
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-s. (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. s. (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. s. (2) (xv) confers upon an assessee. On looking at the position of law in America on this subject, I find that there are statutory provisions which deny deductions 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
"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 difficulty 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. s. (2) (xv) of the Act and with the definition of "netwealth" 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 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 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.