Full Judgment Text
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PETITIONER:
T. S. KRISHNA
Vs.
RESPONDENT:
C. I. T. MADRAS
DATE OF JUDGMENT03/10/1972
BENCH:
REDDY, P. JAGANMOHAN
BENCH:
REDDY, P. JAGANMOHAN
DUA, I.D.
KHANNA, HANS RAJ
CITATION:
1972 AIR 2674 1973 SCR (2) 533
ACT:
Weather Tax Act read with S. 57(iii) of the Income Tax Act--
whether Wealth Tax paid can be deducted as an expenditure
allowable under S. 57(iii) of the Income Tax Act, 1961.
HEADNOTE:
During the accounting period 1962-63, the assessee paid
Wealth Tax of Rs. 21,963/- in respect of the shares held by
him and deducted this amount from his dividend income and
interest as an expenditure allowable under S. 57(iii) of the
Income Tax Act, 1961. The I.T.O. rejected the claim on the
ground that there was no connection between the payment of
Wealth Tax and the earning of dividend income and both the
Appellate Assistant Commissioner as well as the Tribunal
confirmed the order of the I.T.O. The High Court, on a
reference, also rejected the contention of the assesses.
The appellant contended that the preservation of assets is
incidental for earning income and that the assets themselves
produce income. Therefore, payment of Wealth Tax was
virtually a condition for earning income and default in
payment of such tax will endanger the ownership of the asset
and will gradually destroy the very Source of income.
Dismissing the appeal,
HELD :(i) The Income Tax (Amendment) Ordinance of July 15,
1972 and the Income-Tax (Amendment) Act of 1972 have
provided for disallowing the Wealth Tax paid as an
expenditure in respect of incomes derived from other
sources.
(ii) Even apart from the amendment disallowing the
deduction, the very nature of the income from dividends in
respect of which deduction Wealth Tax is claimed does not,
bear any relationship direct or incidental to the earning of
that income and cannot be laid out or expended exclusively
for the purpose of making or earning such income within the
meaning of Sub-clause (iii) of S. 57 of the Act, or under
the corresponding provisions of S. 10(2)(xv) of the Indian
Income Tax Act 1922. [540F]
Travancore Titanium Products Ltd. v. C.I.T. Kerala; 60
I.T.R. 277 and India Aluminum Co Ltd., v. C.I.T.; 84 I.T.R.
735 referred to.
The assessee therefore cannot treat the Wealth Tax Paid as
an expenditure allowable under S. 57(iii) of the Income Tax
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Act 1961.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1671 of
1969.
Appeal by certificate from the judgment and order dated
September 27, 1967 of the Madras High Court in T. C. No. 219
of 1965.
S. Swaminathan, D. P. Mohanthy and S. Gopalkrishna for
the appellant.
B. D. Sharma and R. N. Sachthey for the respondent.
534
The Judgment of the Court was delivered by
Jaganmohan Reddy, J. This appeal is by certificate against
the judgment of the Madras High Court on a reference under
s. 256(1) of the Income-tax Act, 1961 (hereinafter called
the "Act’) answering the question referred to it by the
Tribunal against the assessee.
During the relevant accounting period 1962-63 the assessee
paid wealth-tax of Rs. 21,963/- in respect of the shares
held by him and claimed to have this amount deducted from
the dividend income and interest as an expenditure allowable
under S. 57(iii) ,of the Act. The Income-tax Officer
rejected the claim on the ground that there was no direct or
immediate connection between the payment of the wealth-tax
and the earning of the dividend income. In the subsequent
appeals against this order, both the Appellate Assistant
Commissioner as well as the Tribunal con-firmed the order of
the Income-tax Officer. The High Court on a reference in
that case as well as in others raising a similar ,question,
while rejecting the contention of the assessee, observed
that the wealth-tax was paid by him as the owner and on the
,value of the totality of his assets which has nothing to do
with his making or earning income from such assets and that
the production of the income from the assets appeared to it
to be wholly ,unconnected with the payment of wealth-tax.
The Court drew support from the Kumbakonam Electric Supply
Corporation Ltd. ,v. Commissioner of Income-tax, Madras(1)
and Travancore Titanium Products Ltd. v. C.I.T. Kerala(2).
The learned advocate ’who appeared for the assessee and who
has also addressed his argument before us had contended
before the High Court that the preservation of assets is
incidental to the purpose of making or earning income, that
these are cases in which the assets them selves
automatically produced income and that therefore payment of
wealth-tax was virtually a condition for making or earning
income because default in payment of such tax will endanger
the ownership of the asset which in its turn will destroy
,the very source of income. Several cases were cited in
support of that proposition but the High Court after
distinguishing them ,observed :
"We find it difficult to hold that the wealth-
tax was paid by each of the assessees in these
cases as incidental to making or earning
income. In a sense it may be that in order to
preserve the total net assets, the assessee
has to pay wealth tax and that without such
assets there can be no question of making or
earning the income. But these facts do not
establish the nexus
(1) 50 1. T. R 809. (2) 60 1.
T. R. 277.
535
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required for the expenditure by way of wealth
tax to be a permissible deduction. The
connection, if any, of the expenditure by way
of wealth tax with the assessee’s making or
earning the income appears to be too remote.
The expenditure in order to be a permissible
’deduction, should be directly connected with
the purpose of making or earning of income
for, otherwise it cannot be said that the
expenditure is for the purpose of making or
earning income."
The case of Travancore Titanium Products
decided by this Court was dealing with the
deduction of excess profits tax on the asset
which a trader owned and which was employed in
the business. The assessee had in that case
sought to claim under s. 10(2) (xv) of the
Income-tax Act, 1922, deduction of the excess
profits tax It paid on the asset so utilised
in earning the business income. was observed
by this Court:
" In determining whether an amount expended by
the assessee is deductible under s. 10(2)(xv)
of the Indian Income-tax Act, the nature of
the expenditure or outgoing must be adjudged
in the light of accepted commercial practice
and trading, principles. The. expenditure
must be incidental to the business ’and must.
be necessitated or justified by commercial
expediency. It must be directly and
intimately connected with the business and
must be laid out by the tax payer in his
character as a trader. To be a permissible
deduction, there must be a direct and intimate
connection between the expenditure and the
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."
The dichotomy between the trader owning an
asset and his utilisation of it in earning a
business income therefrom, according to this
Court, lacked the nexus for holding that the
asset was directly and intimately connected
with the business and was laid out by the
assessee in his character as a trader. A
larger Bench of this Court recently in Indian
Aluminium Co. Ltd. v. C.I.T.(1) has not
accepted the test adopted in Travancore
Titanium case that:
" to he 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."
(1) 84 1. T. R. 735.
536
That view was 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 further
held that in the case of individuals who have both business
assets and debts and non-business assets and debts, it
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should not be difficult to evolve a principle or frame
statutory rules to find out the proportion of the wealth-tax
which is really incidental to the carrying on of the trade.
Immediately after the judgment was rendered the President
issued the Income-tax (Amendment) Ordinance on July 15, 1972
by the addition of sub-cl. (iia) to cl. (a) of S. 40 and
sub-s. (1A) to s.58. This was followed by the Income-tax
(Amendment) Act 41 of 1972, the preamble of which enacted
that it was "further to ,amend the, Income-tax Act, 1961 and
to provide for barring in the computation of total income in
respect of certain assessment years prior to the assessment
year 1962-63, deduction of amounts paid on account of
wealth-tax". It may be observed that both the Travancore
Titanium Products case as well as the Indian Alliminium case
dealt with deductions of Excess Profits tax as an
Expenditure in respect of business income. They were not
dealing ’with deduction of wealth-tax paid by individuals on
the assets owned by them from income derived from other
sources under the Income-tax Act, but even so the ordinance
and the Act have made provision for disallowing the wealth
tax paid as an expenditure in respect of both the above
categories of income.
It is contended be-fore us by the learned advocate that
-notwithstanding these amendments, wealth-tax paid on
particular assets of the business or profession have been
excluded from the disallowance under the amended sub-s.(1A)
of s. 58 which by reference incorporates sub-cl. (iia) of
cl. (a) to S. 40 added by the Amending Act., S. 40 of
the Act inhibits the deduction of any expenditure specified
therein notwithstanding anything to the contrary in ss. 30
to 39 which permit deductions of certain items of
expenditure incurred by the assessee in respect of his
business or profession. Similarly, under s. 58 of the Act
the ,expenses categorised therein are not to be deducted in
computing the income chargeable under the head "’income from
other sources" notwithstanding that under s. 57 certain
deductions are permissible in respect of that category of
income. It may be specified that in so far as dividend
income or interest derived by the assessee is concerned
sub-s. (i) and sub-s. (iii) of s. 57 :permit deductions in
computing assessable income as follows
(i) in the case of dividends, any reasonable
sum paid by way of commission or remuneration
to a banker or any other person for the
purpose of realising such dividend on behalf
of the assessee;
537
(ii)
(iii) any other expenditure (not being in the
nature of capital expenditure) laid out or
expended wholly and exclusively for the
purpose of making or earning such income."
The amendments to ss. 40 and 58 as stated
earlier do not allow deduction of wealth-tax
or tax of similar character etc. where it is
levied and paid under the law of any country
outside India. The following are the relevant
provisions of the Amendment Act :-
" (2) In section 40 of the Income-,tax Act,
1961 (hereinafter referred to as the principal
Act), after subclause (ii) of clause (a), the
following sub-clause shall be, and shall be
deemed always to have been, inserted, namely
:-
’(iia) any sum paid on account of wealth-tax.
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Explanation.-For the purposes of this sub-
clause,, " wealth-tax" means wealth-tax
chargeable under the Wealth-tax Act, 1957 or
any tax of a similar character chargeable
under any law in force in any country outside
India or any tax chargeable under such law
with reference to the value of the assets of,
or the capital employed in, a business or
profession carried on by the assessee, whether
or not the debts of the business or profession
are allowed as a deduction in computing the
amount with reference to which such tax is
charged, but does not include any tax
chargeable with reference to the value of any
particular asset of the business or
profession;
3. Section 58, as originally enacted, of
the principal Act shall ’be deemed always to
have been renumbered as sub-section (1)
thereof, and after sub-section, the following
sub-section shall be, and shall be deemed
always to have been, inserted, namely -
(1A) The provisions of sub-clause (iia) of
clause (a) of section 40 shall, so far as may
be, apply in computing the income chargeable
under the head "income from other sources" as
they apply in computing the income chargeable
under the head "Profits and gains of business
or profession. "
4. Nothing contained in the Indian Income-
tax Act. 1922 shall be deemed to authorise. or
shall be deemed ever to have authorised, any
deduction in the computation of the income of
any assessee chargeable
538
under the, head "Profits and gains of
business, profession or vocation" or "Income
from other sources" :or the assessment year
commencing on the 1st day of April, 1957 or
any subsequent assessment year, of any sum
paid on account of wealth-tax.
Explanation-For the purpose of this section,
"wealth-tax" shall have the same meaning as is
assigned to it in the Explanation to sub-
clause. (iia) of clause (,a) of section 40 of
the principal Act.
5. Where, before the 15th day of July, 1972
(being the date on which the Income-tax
(Amendment) Ordinance, 1972 came into force,
the Supreme Court has, on an appeal in respect
of the assessment of an assessee for any
particular assessment year. held that wealth-
tax paid by the assessee is deductible in
computing the total income of that year, then,
nothing contained in sub-clause (iia) of
clause (a) of section 40, or subsection 1(A)
of section 58, of the principal Act, as
amended by this Act, or, as the case maybe,
section 4 of this Act, shall apply to the
assessment of such assessee for that
particular year."
It will be observed from s. 5 of the Amendment Act that the
judgment of this Court in the Indian Aluminium Co. case in
so far as the deduction of the wealth-tax was held to be
allowable in computing the assessee’s income in that case,
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was left untouched but any sum paid on account of wealth-tax
in respect of assessment years prior to 1962-63 and those
under the Income-tax Act, 1922 in respect of assessments
commencing on the 1st day of April 1957 or on any subsequent
year, the amendment was given retrospective operation. The
changes introduced in sections 40 and 58, we, should have
thought, were clear in disallowing any deduction of the
wealth-tax from the computation of an assessee’s income.
The learned advocate for the assessee however has made a
valiant attempt which attempt we think is totally abortive
even if we were inclined to stretch and strain
interpretation in favour of the assessee because neither the
language nor the diction of the amended provisions permit
the construction sought to be placed on the amendments.
What the learned advocate seeks to contend is that the Ex-
planation to sub-clause (iia) of cl. (a) of S. 40 which
Explanation mutates mutandis is by reference to be read into
sub-s. (1A) of S. 58 so far as may be applicable in
computing the income chargeable under the income from ’other
sources’ as they apply in computing the income chargeable
under the head "profits and gains of business and
profession" saves the excess profits tax
539
chargeable with reference to the value of any particular
asset of the business or profession. In other words, this
contention amounts to saying that the legislature left
untouched the decision of this Court in Indian Aluminum
Company. Reliance for this submission is based on the words
"but does not include any tax chargeable with reference to
the value of any particular asset of the business or
profession" in the last part of the Explanation to the said
sub-clause because according to him the prohibition to
deduction under s. 2 of the Amending Act is the amount paid
on account of wealth-tax which expression has been given an
extended meaning to cover the wealth-tax payable under the
Wealth-tax Act in this country as well as taxes of similar
character and other taxes on assets of or the capital
employed in the business or profession carried on by the
assessee payable under the law of any country outside India.
The learned advocate further proceeds to submit that the
Explanation however excludes from the prohibition to deduct
sum wealth-tax under the sub-clause or sub-section the tax
chargeable with reference to a particular asset whether such
charge is either under the laws of this country i.e. the
Wealth-tax Act or under the laws in force outside India.
There is no warrant for this construction because the words
upon which reliance has been placed are related to the tax
chargeable under a law in force in any country outside India
with reference to the value of the assets of/or employed in
a business or profession carried on by the assessee. The
exclusion contemplated by the exception on which emphasis is
placed is wholly unrelated to the scheme of the Wealth-tax
Act because wealth-tax under that Act is not chargeable with
reference to. the value of any particular asset of the
business or profession but under S. 3 the charge is in
respect of the net wealth on the corresponding valuation
date of every individual Hindu undivided family and company
at the rate or rates specified in the Schedule. "Net
wealth’ under s. 2(m) means the amount which the aggregate
value computed in accordance with the provisions of the
Wealth-tax Act of all the assets, wherever located,
belonging to the assessee on the valuation date, including
assets required to be included in his net wealth as on that
date under hat Act is in excess of the aggregate value of
all the debts owed by the assessee on the valuation date
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other than those specified in items (i), (ii) And (iii) of
that section. S. 4 includes certain assets in the net
wealth while s. 5 provides for exemption in respect of
specified assets on which wealth-tax is not payable and such
assets are not to be taken into account in computing the net
wealth of the assessee. S. 6 concerns with the exclusion of
assets and debts outside India and s. 7 deals with the
determination of the value of the assets which are to be
included in the net wealth. It is thus clear that tinder
the scheme of the Wealth-tax Act, tax is leviable not on
17-L498SuPCI/73
540
any separate or particular asset but on the net wealth as
defined under that Act. The learned advocate wanted us to
read "and, particular asset" in Explanation to sub-cl. (iia)
of cl. (a) of S. 40 " as the aggregate of the assets as
defined in ’net wealth’," under s. 2 (m). To accept such an
argument would be to give a go by to the scheme of the
Wealth-tax Act where though each asset comprised in the net
wealth can be separately valued under S. 7, nevertheless net
wealth would be the amount by which the aggregate value of
all those assets, exceed the aggregate value of debts owed
by the assessee on the valuation date. Even otherwise to
read the exception "but does no include any tax chargeable
with reference to the value of any particular asset of the
business or profession" with the first part of the
Explanation "wealth-tax" means wealth-tax chargeable under
the Wealth-tax Act, 1957 " would not grammatically make any
sense. These two read together would make the following
sentence" ‘wealth-tax means wealth-tax chargeable under the
Wealth-tax Act, 1957. but does not include any tax
chargeable with reference to the value of any particular
asset of the business or profession." As already pointed
out, on the scheme of the Act there is no logical connection
between the import of each of the two parts of that
sentence, the first definitely indicates the wealth-tax
chargeable under the wealth-tax Act while the latter seeks
to except a tax chargeable with reference to the value of
any particular business or profession which is not a tax
leviable as such under the wealth-tax Act and hence does not
relate to that part of the Explanation where wealth-tax in
sub-cl. (iia) means that it is the wealth-tax chargeable
under the Wealth-tax Act. In our view, sub-section (IA) of
section 58 clearly excludes any deduction as claimed.
Even apart from the amendment disallowing the deduction the
very nature of the income from dividend in respect of which
deduction of wealth-tax is claimed does not, as pointed out
by the High Court, bear any relationship direct or
incidental to the earning of that income and cannot
therefore be said to be laid out or expended exclusively for
the purpose of making or earning such income within the
meaning of sub-cl. (iii) of s.57 of the Act or under the
corresponding provisions of s.10 (2) (xv) of the Indian
Income-tax Act, 1922. In any view of the matter, the answer
to the question rendered by the High Court is unex-
ceptionable and the appeal is consequently dismissed with
costs.
S.C. Appeal dismissed.
541