Full Judgment Text
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6
PETITIONER:
INDIAN ALUMINIUM CO. LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, WEST BENGAL
DATE OF JUDGMENT12/01/1971
BENCH:
GROVER, A.N.
BENCH:
GROVER, A.N.
HEGDE, K.S.
CITATION:
1971 AIR 2284 1971 SCR (3) 351
ACT:
Income Tax Act, 1922, s. 10(2) (xi) and 10(2)(xv)-Fee paid
to foreign collaborator for technical know-how-No provision
in contract for payment of tax on fee by Indian Company-
Assessee held in default and tax recovered from it-If
allowable as business expenditure and deductible.
HEADNOTE:
The appellant Company which was engaged in the manufacture
of aluminium products, entered into a contract with another
company in Montreal, Canada, for the supply of technical
know-how etc. for the development of its production. This
agreement provided for payment of a retainer fee by the
appellant on an annual basis and there was no, condition or
stipulation that the fee would be payable by the assessee
without deduction of income tax. In 1951 the Income Tax
Officer treated the assessee as being in default under
section 18(7) of the Income Tax Act, 1922 in respect of a
sum of Rs. 1,24,199 which the appellant was liable to deduct
from the payments made to the Montreal Company under the
provisions of sections 18(3-A), 18(3-B) and 18(3-C). The
appellant was- required to pay this amount and the Montreal
Company refused to accept its claim for reimbursement. The
appellant claimed the amount as a deduction from its
business income under S. 10(1) or 10(2)(xi) or 10(2)(xv) of
the Act. Although this claim was allowed by the Appellate
Assistant Commissioner, the Tribunal, in appeal, held that
the amount in question was neither expenditure incidental to
the business nor was it wholly and exclusively laid out for
that purpose; and nor was it claimable as a bad debt in view
of the fact that it had not been incurred as a trade debt in
the course of the business.
The High Court. upon a reference made to it, held against
the assessee. On appeal to this Court,
HELD : Dismissing the appeal,
(i) It is well settled that a business or trading debt
should spring directly from the carrying on of a business or
trade and should be incidental to it and it cannot be just
any loss sustained by the assessee even if it has some
connection with his business. [355 E]
Although the retainer fees were paid by the assessee to the
Montreal Company for technical assistance which had a
connection with the business of the assessee it was not
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6
possible to regard ’the amount which the assessee was bound
to deduct from the payment made to the Montreal Company
under s. 18(3-B) of the Act and which it failed to recover
from that company, as a debt which could be deducted under
s. 10(2) (xi). The debt was not incidental to the business
because it arose out of noncompliance with the provisions of
the Act. The payment which the assessee made to the income
tax authorities and which it failed to recover from the
Montreal Company was more a matter of commercial expediency
and proceeded out of motives of business relationship,
because the assessee was anxious not to annoy or offend the
Montreal Company So as to avail of its continued technical
assistance and advice. [355 G]
352
A. V. Thomas & Co. Ltd. v. Commissioner of Income Tax, 48
I.T.R. 67 at p. 75, referred to.
(ii) The assessee was presumed to know the relevant
provisions of the Act at the time when it entered into an
agreement with the Montreal Company. There was no provision
in the agreement with the Montreal Company which created a
contractual obligation on the assessee to make payment of
the taxes deductible under s. 18(3-B). A payment made under
a statutory obligation, because the assessee was in default,
could ;lot constitute. expenditure laid out for the purpose
of the assessee’s business and was not therefore deductible
under s. 10(2) (xv). [356 E]
Commissioner of Income Tax, Bombay v. M/s. Pannalal
Narotalindas & Co. Bombay, 1969 1 I.T.J. 32, distinguished.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 24 of 1967.
Appeal by special leave from the judgment and order dated
April 27, 1966 of the Calcutta High Court in Income-tax
Reference No. 90 of 1962.
M. C. Chagla, S. R. Banerjee, N. N. Goswami and S. N.
Mukherjee, for the appellants.
Jagadish Swarup, Solicitor-General,, Ram Panjavani and R. N.
Sachthey, for the respondent.
The Judgment of the Court was delivered by
Grover, J. This is an appeal by special leave from a
judgment of the Calcutta High Court answering the following
question referred to it under S. 66(1) of the Indian Income-
tax Act, 1922, hereinafter called the "Act" in the negative
and against the assessee
"Whether, on the facts and in the
circumstances of the case, the sum of Rs.
1,24,199/- was deductible from the business
income of the assessee either under Section 10
( 1 ) or 10 (2) (xi) or 10 (2) (xv) of the
Incometax Act ?"
The assessee is a public limited company having its
registered office at Calcutta. Its principal business
consists of manufacturing aluminium ingots, sheets and such
other products from aluminium. There is another company
known by the name of Aluminium Laboratories Limited,
Montreal, in Canada, hereinafter called the "Montreal
Company", which provided the, assessee with technical know-
how, engineering services etc. regarding development of a
production of the goods. An agreement was entered into on
January 31, 1947 between the Montreal Company and the
assessee. The agreement provided for payment of a retainer
fee on an annual basis. There was no condition or
stipulation
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6
353
that the fee would be payable by the assessee without
deduction of tax under the provisions of the Act. The
assessee credited a total fee of Rs. 2,50,808/- in favour of
the Montreal Company for a period of seven years between the
accounting year ending, September 30, 1944 and September 30,
1950.
In 1951 the Income-tax Officer treated the assessee as
being in default under s. 18 (7) of the Act in respect of
the amount of tax which the assessee was liable to deduct
from the payments made to the Montreal Company under the
provisions of ss. 18(3-A), 18(3-B) and 18(3-C) of the Act.
The amount of tax which was found to be payable by the
assessee came to a total sum of Rs. 1,24,199/-. The
assessee wrote to the Montreal Company asking for
reimbursement of the said amount. The Montreal Company,
however, refused to accept the assessee’s claim for re-
imbursement by means of a letter dated August 3, 1954. The
assessee wrote off the amount of Rs. 1,24,199/- during the
relevant previous year ending on December 31, 1954. The
assessee, appealed to the Appellate Assistant Commissioner
who allowed its claim. The department preferred an appeal
to the Tribunal which held that the amount in question was
neither expenditure, incidental to the business nor was it
wholly and exclusively laid out for that purpose nor was it
claimable as a bad debt in view of the fact that it had not
been incurred as a trade debt in the course of the business.
The departmental appeal was therefore allowed and the order
of the Income-tax Officer was restored. The High Court was
of the view that there was a nexus between payment and the
business of the assessee inasmuch as it had an indirect
bearing upon the technical aid which the assessee had
obtained from the Montreal Company but was of the opinion
that even if the payment had some connection with the
business it could not be said to be incidental to it as the
liability could have been avoided by the assessee if it had
deducted at the source the required amount of income-tax
from the retainer fee which was payable to the Montreal
Company. The High Court also considered the question
whether the amount paid to the Montreal Company could be
treated as a bad debt within the meaning of s. 10(2) (xi)
but came to the conclusion that as it had not been advanced
as a trading debt in the course of business it was not
deductible as a bad debt. According to the High Court the
provisions- of s. 18 (3-B) had not been complied with and
since the statutory provisions had been disobeyed and as a
result thereof the assessee had incurred a liability it
could not be construed as a part of business expense within
the meaning of s. 10 (2) (xv) nor could it be said that such
an expense was wholly and exclusively laid out for the
purpose of the business. 807Sup.CI/71
354
In order to decide the contentions raised before us it is
necessary to refer only to ss. 18(3-B) and 18 (7) of the Act
a they stood at the material time :-
S. 18(3-B)-"Any person responsible for
paying to a person not resident in the
territories any interest not being "interest
on securities" or any other sum chargeable
under the provisions of this Act shall, at the
time of payment, unless he is himself
liable to pay any income-tax and super-tax
thereon as an agent, deduct income-tax at the
maximum rate and super-tax at the rate
applicable to a company or in accordance with
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6
the provisions of sub-clause (b) of sub
section (1) of section 17, as the case may be
:
Provided that where the person not resident is
not a company, the proviso to sub-section (2B)
shall apply to the deduction of income-tax and
super-tax under this sub-section as it applies
to the deduction of income-tax and super-tax
under sub-section (2B) :
Provided further that nothing in this section
shall apply to any payment made in the course
of transactions in respect of which a person
responsible for the payment is deemed under
the first proviso to section 43 to be an agent
of the payee."
S. 18(7)--’If any such person does not
deduct or after deducting fails to pay the tax
as required by or under this section, he, and
in the cases specified in subsection (3D) the
company of which he is the principal officer
shall, without prejudice to any other
consequences which he or it may incur, be
deemed to be an assessee in default in respect
of the tax."
Provided that................"
Now the Act contains provisions for collecting taxes in two
modes; ,one is by direct levy and the other by means of
deduction at the source. Section 18 provides for deduction
in cases inter alia of "Salaries" ",Interest on securities",
"Dividends", interest and other sums chargeable under the
Act and paid to non-residents. There is no dispute that in
the present case the assessee was bound under sub-section
(3-B) to deduct the sum chargeable under the provisions of
the Act at the time of payment of the retainer fees to the
Montreal Company. Under sub-section (7) if the assessee did
not deduct the amount of tax as required under the section
it was to be deemed to be in default in respect of the tax.
The argument raised on behalf of the appellant is that the
Montreal Company refused to reimburse it for the payment of
the
355
amount in question for the reasons stated in the letter
dated August 3, 1954. It was stated in this letter that
the Montreal Company was not contractually bound to meet the
obligation of Indian tax liability. The concluding portion
of the letter ",as as follows :-
"Again, this involves a question of principle
for us. If every State to which we have to
render technical assistance, based on the
researches carried on by us in our plant and
laboratories, starts demanding incometax and
super-tax on our charges, no such State could
ever receive any technical assistance at all
and we ourselves could hardly afford to render
such technical assistance and the expensive
taxes involved. We have given this matter our
serious consideration and cannot bring
ourselves on any score, equitable, legal
contractual, or moral to reimburse to you any
monies you may have to pay to the Indian-
taxing Authorities."
The claim of the assessee principally is two fold. It is
maintained firstly that after the refusal of the Montreal
Company in the matter of reimbursement the amount of Rs.
1,24,199/- was written off as a bad and irrecoverable debt.
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6
It was, therefore deductible under s. 10(2) (xi) of the Act.
In the section the debt certainly means something more than
a mere advance. It is something which is related to
business or results from it. To be claimable as a bad and
irrecoverable debt it must first be shown as a proper debt.
(vide A. V. Thomas & Co. Ltd. v. Commissioner of Income-
tax(1). It is well settled that a business or trading debt
should spring directly from the carrying on of a business or
trade and should be incidental to it and it cannot be just
any loss sustained by the assessee even if it has some
connection with his ’business.
Although it is true that the retainer fees were paid by the
assessee to the Montreal Company for technical assistance
which had a connection with the business of the assessee but
it is not possible to regard the amount which the assessee
was bound to deduct from the total payment made to the
Montreal Company under s. 18(3-B) of the Act and which it
failed to recover from that company as a debt which could be
deducted under s. 10 (2) (xi). The debt was not incidental
to the business because it arose out of non-compliance with
the provisions of the Act. The payment which the assessee
made to the income-tax authorities and which it failed to
recover from the Montreal Company was more a matter of
commercial expediency and proceeded out of motives of
business relationship because the assessee was anxious
(1) 48 I.T. R. 67 at p. 75.
356
not to annoy or offend the Montreal Company so as to avail
of its continued technical assistance and advice. Indeed
the argument on behalf of the appellant has rested a great
deal on this aspect of the matter and it has been urged
strenuously that the assessee could not afford to displease
the Montreal Company as it stood greatly in need of the
latter’s technical assistance.
Secondly the question is whether the assessee could claim
deduction under s. 10(2) (xv) of the Act. For that purpose
the assessee had to establish that the amount in question
had been wholly and exclusively laid out for the purpose of
its business. Our attention has been invited to a decision
of the Bombay High Court in Commissioner of Income-tax,
Bombay v. M/s. Pannalal Narotamdas & Co. Bombay(") in which
it was held that the amount of penalty imposed not for the
fault of the assessee but because he had to pay the same for
the, purpose ’of getting the goods released from the Customs
Authorities could be regarded as wholly and exclusively
incurred for the purpose of his business. We consider it
unnecessary to pronounce on the correctness of this
decision. The point which came up for consideration there
was altogether different and it can afford no assistance to
us in determining whether an amount which an assessee had to
pay by virtue of the provisions of the Act could be regarded
as an expense incurred wholly and exclusively for the
purpose of the business. The assessee was presumed to know
the relevant provisions of the Act at the time when it
entered into an agreement with the Montreal Company. There
was no provision in the agreement with the Montreal Company
which created a contractual obligation on the assessce to
make payment of the taxes deductible under s. 18(3-B). At
any rate it is difficult to understand how a payment made
under a statutory obligation because the assessee was in
default, could constitute expenditure laid out for the pur-
pose of the assessee’s business.
We find no reason or justification to interfere with the
answer returned by the High Court with the result that the
appeal fails and it is dismissed with costs.
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6
R.K.P.S.
(1) [1969] 1 L.T.J. 32.
Appeal dismissed.
357