Full Judgment Text
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PETITIONER:
MITSUI STEAMSHIP CO. LTD.
Vs.
RESPONDENT:
C.I.T. WEST BENGAL, II CALCUTTA
DATE OF JUDGMENT07/02/1975
BENCH:
GUPTA, A.C.
BENCH:
GUPTA, A.C.
KHANNA, HANS RAJ
CITATION:
1975 AIR 657 1975 SCR (3) 467
1975 SCC (1) 394
ACT:
Indian Income-tax Act (11 of 1922) s. 10(2)(xv) and Indian
Income-tax Act (43 of 1961) s. 40, Cl. (ii) (a) as amended
by Amendment Act of 1972--Tax on property paid by owner-cum-
trader--If deductible expenditure.
HEADNOTE:
The appellants, non-resident companies with registered
office s in Japan, had been assessed to Income-tax for the
assessment years 1956-1961 under the Indian Income-tax Act,
1922 in respect of their Indian earnings. In the assessment
proceedings they claimed as deductible allowance, under s.
10(2)(xv), the tax paid by them on their business assets
under the local tax law in force in Japan. But the Income-
tax Officer rejected the claim. The Appellate Assistant
Commissioner, however, allowed the claim and his order was
confirmed by the Tribunal. On reference,.’ the High Court,
on a consideration of the various provisions of the Japanese
statute, held that under the Japanese law it was the
ownership of the assets that was material and not their
actual user in business, and relying on the decision of this
Court in Travancore Titanium Product Ltd. v. C.I.T. Kerala
(60 I.T.R. 277), decided in favour of the Revenue.
Allowing the appeal to this Court,
HELD:(1) In Indian Aluminum Co. Ltd. v. C.I.T. West
Bengal (84 I.T.R. 735) this Court held that the test
adopted in the Travancore Tuanium case, that to be a
permissible deduction there must be a direct and intimate
connection between the expenditure and the business, that
is, between expenditure and the character of the assessee as
a trader, and not as owner of the 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. [470H-471C]
(2)The Income-tax Act, 1961, was amended by the Income-tax
Amendment Act, 1972. The amendments were introduced to
restore the position established in Travancore Titanium case
namely, that Wealth Tax paid by an assessee in respect of
his business assets was not deductible as a business expense
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in computing the assessee’s income from his business, which
was virtually overruled by the later decision in the Indian
Aluminium Company case. But the amendments do not appear to
touch the principle laid down in the later case, that where
a person has a dual capacity of a trader-cum-owner, and he
pays tax in respect of property which is used for the
purpose of the trade, the payment must be taken to be in the
capacity of a trader. The Amendment Act only adds the sum
paid on account of wealth tax to the list of amounts not
deductible in computing the assessee’s income from business.
Therefore, any amount paid by the assessee on account of a
tax other than the wealth-tax on his business assets would
be outside the scope of the Amending Act and would continue
to be governed by the law laid down in the Indian Aluminium
case. The explanation in s. 40 of the Income-tax Act, 1961,
which s. 4 of the Amendment Act adopts for the purpose of
that section defines wealth tax to include, inter alia,
besides wealth tax chargeable under the Indian Wealth Tax
Act, 1957, "any tax of a similar character chargeable under
any law in force in any country outside India,. [47ID-E;
472D-G]
(3)But, unlike the Wealth-tax in India the municipal
property tax in Japan is a local tax imposed on certain
specified properties by the city, town or village in which
the property is located. The Indian Wealth Tax is a
national tax chargeable on the net wealth of the person with
certain specified exemptions. The difference in the manner
of determination of the taxable basis of the proper-
468
ties and the rates of taxation emphasize the basic
difference between the two taxes notwithstanding certain
points of similarity. [473H-474B]
(4)The facts also disclosed that the assets belonging to
the appellants were used by them in their business during
the relevant previous years and also that the payment of tax
under the Japanese law was incidental to the carrying on of
the business of the assessee. [473A-B]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1072 to
1079 of 1970.
From the judgment and order dated the 1st July, 1969 of the
Calcutta High Court in Income, Tax References Nos. 170, 174,
175, 186 and 184, 189, 177 & 176 of 1964.
Schin Chaudhuri (In C.As. Nos. 1076-1079/70), T. A. Rama-
chandran and D. N. GuPta, for the appellants (In all the
appeals).
S.C. Manchanda, (In C.As. Nos. 1076-1079) S. P. Nayar and
R. N. Sachthey, for the respondent (in all the appeals).
The Judgment of the Court was delivered by
GUPTA, J.-These two groups of appeals, brought on
certificates granted by the High Court at Calcutta, arise
out of two references under sec. 66(2) of the Indian Income-
Tax Act, 1922 involving similar questions of law.
Mitsui Steamship Co. Ltd., appellant in Civil Appeals Nos.
1072-1075 of 1970 and M/s. Kawasaki Kisen Kaisha Ltd.,
appellant in Civil Appeals Nos. 1076-1079 of 1970, are both
non-resident shipping companies having their registered
offices in Japan. Civil Appeals Nos. 1072-1075 of 1970
relate to assessment years 195758, 1958-59, 1959-60 and
1960-61 for which the previous years were the financial
years ending on the 31st March, 1957, 1958, 1959 and 1960
respectively Civil Appeals Nos. 1076-1079 of 1970 relate to
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assessment years 1956-57, 1957-58, 1958-59 and 1959-60, the
corresponding previous years being the financial years
ending on the 31st March 1956, 1957, 1958 and 1959
respectively. The, appellant in each case had been assessed
to income-tax for the years mentioned above under the Indian
Income-Tax Act, 1922 (hereinafter referred to as the Act of
1922) in respect of its net Indian earnings. In the
assessment proceedings the appellant companies had claimed
as deductible allowance under sec. 10(2)(xv) of the Act of
1922 the tax paid by them on their business assets under the
Local Tax Law in force in Japan. The Income-tax Officer
rejected the claim on the view ’that the incidence of tax
under the Japanese law falls on the assessee companies in
their capacity as the owners of the business assets and not
as traders. On appeal preferred by the assessees the
Appellate Assistant Commissioner took the view that the tax
paid under the Local Tax Law in Japan was an allowable
expenditure under sec. 10(2)(xv) of the Act of 1922. The
Tribunal also affirmed the view taken by the Appellate
Assistant Commissioner overruling the contention raised on
behalf of the revenue that the nature of tax
469
imposed by the Japanese, statute was similar to the wealth
tax Payable in India which was not permissible deduction
under sec. 10(2) (xv).
In Civil Appeals Nos. 1072-75 of 1970 the question referred
under sec. 66(2) was
"Whether on the facts and in circumstances of
the case, the property tax and vessels tax
paid by the assesses in Japan on its land,
buildings and other tangible assets and ships
were allowable as deduction under sec. 10(2)
(xv) of the Income-Tax Act,1922 ?"
In Civil Appeals Nos.1076-1079of 1970 the question referred
was:
"Whether on the facts and in the circumstances
of the case the property tax paid by the
assessee in Japan on its vessels was allowable
as deduction under section 10(2)(xv) of the
Income-Tax Act, 1922?"
The two questions, though worded a little differently,
depend for their answers on a correct appreciation of the
character of the Japanese tax.
The High Court on a consideration of the various provisions
of the Japanese statute held that under the Local Tax Law in
Japan it was the ownership of the assets that was material
and not their actual user in business, and relying on the
decision of this Court in Travancore Titanium Product Ltd.
v. Commissioner of Income-tax, Kerala(1) answered the
question referred to it in both cases in the negative and in
favour of the revenue. In the case of Travancore Titanium
Product Ltd.(2) this Court was considering the question
whether a sum paid as wealth-tax was deductible from the
profits and gains of the assessee’s business under sec.
10(2) (xv) of the Act of 1922. In holding that the amount
of tax paid on the net wealth of an assessee under the
Wealth-Tax Act was not a permissible deduction, this Court
observed :
"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
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
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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 Judgment of the High Court mainly turned on Article
341(4) of the Japanese statute. From an English translation
of the statute filed before the tribunal it appears that the
statute is divided into
(1) 60 I.T.R. 277
470
four Books. All the Articles to which we will refer for the
purpose of these appeals are in Chapter III, Section 2 of
Book Four which contains Article 341 to 746. Chapter 111
bears the heading "Ordinary Taxes of City, Town or Village"
and Section 2 deals with "Municipal Property Tax.," Article
341 defines certain terms concerning municipal property tax,
and in so far as it is relevant for the present purpose, it
reads as follows :
"With respect to municipal property tax, the
terms listed in the following items shall have
the definition given to them under the
respective items:
(1) PropertyLand, houses and depreciable
assets;
(2) Lands x x x
(3) Houses x x x
(4) Depreciable assets : Assets (excluding
the mining rights, fishing right, patent right
and other depreciable intangible property)
other than land and house which can be used
for business purpose and the amount of
depreciation of which is included in the loss
or necessary expenditures in the computation
of income as provided for in the Corporation
Tax Law or the Income-Tax Law (including the
property similar to those properties which are
owned by the person upon whom the corporation
tax or the income tax has not been imposed).
However, automobiles and bicycles which are
the objects of the automobile tax,, and
bicycles and carts which are the objects of
the cart tax respectively shall be excluded;"
Referring to the definition of ’depreciable assets’ the High
Court pointed out that under the Japanese law the assets
which could be used for business purpose were subjected to
tax and it was not required that these assets should in fact
be used for business purpose. The High Court took the view
that the tax paid by the assessees under the Japanese law
was in their capacity as owners, of the assets and not as
traders, and applying the test adopted in the Travancore
Titanium case (supra) the High Court held that the tax paid
by the assessees under the Local Tax Law in Japan was riot
deductible as a business expense under the Act of 1922.
Travancore Titanium Product case(1) was decided by a
Division Bench of this Court in the year 1966. The impugned
orders of the High Court in the two references out of which
these appeals arise were both made in 1969. In 1972 a
larger Bench of this Court expressed the view in the case of
Indian Aluminium Co. Ltd. v. Commissioner of Income-Tax,
West Bengal (2) that the test adopted in Travancore Titanium
Product case(1) that to be permissible deduc-
(1) 60 I.T.R. 277.
(2) 84 I.T.R. 735.
471
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tion 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 held in Indian Aluminium Company’s
case(1) that the wealth-tax paid on assets held by the
assessee for the purpose of his business, was deductible as
a business expense in computing the assessee’s income from
business.
Within a few months of the decision in Indian Aluminium Com-
pany’s case(2) which was rendered on March 29, 1972, Income
Tax (Amendment) Ordinance 1972 (7 of 1972) was promulgated
on July 15, 1972 with the object of 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. The Ordinance was
later repealed and replaced by the Income-Tax (Amendment)
Act, 1972 (41 of 1972) containing similar provisions. The
Amendment Act which received the assent of the president on
August 28, 1972 sought to restore, as the Statement of
Objects and Reasons says, the position established in the
case of Travancore Titanium Products Ltd. v. Commissioner of
Income-tax, (supra) which was virtually overruled by the
later decision in Indian Aluminium Co. Ltd. v. Commissioner
of Income tax,(1) that wealthtax paid by an assessee in
respect of his business assets was not deductible as a
business expense in computing the assessee’s income from
business. Section 2 of the Amendment Act inserted with
retrospective effect a new sub-clause (iia) in clause (a) of
section 40 of the Income-Tax Act, 1961 which specifies the
amounts not deductible in computing the income chargeable
under the head "Profits and gains of business or profession"
Sub-clause (iia) adds to the list of amounts not to be
deducted "Any sum paid on account of wealthtax". To this
sub-clause an explanation was added extending the meaning of
the expression Wealth-tax for the purpose of the subclause.
The Explanation reads:
"Explanation.-For the purposes of this sub-
clause, wealth-tax means wealth-tax chargeable
under the Wealthtax Act, 1957 (27 of 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 profes-
sion 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;"
(1) 84 I.T.R.735.
472
Section 4 of the Amendment Act which bears directly on the
,appeals before us provides:
"4. Wealth-tax not deductible in computing
the total income for certain assessment
years.-Nothing contained in the Indian Income-
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tax Act, 1922 (11 of 1922), shall be deemed to
authorize, or shall be deemed ever to have
authorized, any deduction in the computation
of the income of any assessee chargeable under
the head "Profits and gains of business,
profession or vocation" or "Income from other
sources" for the assessment year commencing on
the 1st day of April, 1957, or any subsequent
assessment year, of section 40 of the
principal Act."
To this section also an explanation was added
saying
"Explanation,-For the purposes 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."
Section 5 of the Amendment Act contains a saving clause to
which it is not necessary to refer for the purpose of these
appeals.
We have mentioned earlier the assessment years concerned in
the instant appeals. The question is, what is the effect of
the Income-Tax (Amendment) Act, 1972 on these appeals. The
amendments introduced do not appear to touch the Principle
laid down in Indian Aluminium Company’s case (supra) that
when a person has a dual capacity of a trader-cum-owner, and
he pays tax in respect of property which is used for the
purpose of trade, the payment must be taken to be in the
capacity of a trader. The Amendment Act only adds the sum
paid on account of wealth tax to the list of amounts not
deductible in computing the assessee’s income from business.
,Therefore, any amount paid by the assessee on account of a
tax ,other than the wealth-tax on his business assets would
be outside the scope of the Amendment Act and would continue
to be governed by the law laid down in Indian Aluminium
Company’s case (supra). The explanation to the new sub-
clause (iia) inserted in section 40 ,of the Income-Tax Act,
1961 which section 4 of the Amendment Act adopts for the
purposes of that section, defines "wealth-tax" to include,
infer alia, besides wealth-tax chargeable under the Wealth-
Tax Act, 1957, "any tax of a.similar character chargeable
under any law in, force in any country outside India". The
only contention raised before us on behalf of the revenue
was that the nature of the tax paid by the assessees in
Japan an their business assets is similar to the wealthtax
payable under the Wealth-Tax Act, 1957. This leads to a
comparison of the two statutes, Wealth-Tax Act, 1957 and the
Local Tax Law of Japan, to find out whether they are of a
similar character. The supplementary statement of case
drawn up by the Tribunal pursuant to an order of this Court
dated April 11, 1973 discloses that the assets belonging to
the- appellants with which we
473
are concerned in these, appeals were all used by them in
their business during the relevant previous years and also
that the payment of tax under the Japanese law was
incidental to the carrying on of the business of the
assessees.
From an examination of the provisions contained in Book Four
of the Japanese statute, it appears to us that there is a
basic difference between the Wealth-Tax Act, 1957 and the
Local Tax Law of Japan. Wealth tax in, India is charged on
the net wealth of the assessee. Net wealth as defined in
sec. 2(m) of the Wealth-Tax Act, 1957 means, broadly, the
aggregate value of all the assets, wherever located, be-
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longing to the assessee minus the total amount of the debts,
with certain exceptions, owned by him. Generally speaking,
by the value of an asset, other than cash, is meant its
’market value. ’Assets, has been defined in clause (e) of
sec. 2 of the Act as including property of every
description, moveable or immoveable, with certain specified
exemptions. Wealth-tax in India is a national tax charged
by the Central Government. The municipal property tax in
Japan is imposed on property as defined in Article 341(1).
In this definition, property includes only land, houses and
depreciable assets and not property of every description.
Depreciable assets has been defined in Article 341(4), inter
alia, as assets other than losid and house which can be used
for business purpose, but these assets again exclude all
depreciable intangible property and property which are the
objects of other taxes like automobiles, bicycles and carts.
Article 342 lays down that the municipal property tax shall
be imposed on property by the city, town or village in which
the property concerned is located and provides that with
respect to vessels, vehicles and other objects similar in
nature which are included in depreciable assets, the city,
town and village in which the principal port of anchorage or
regular keeping place is located shall be the city, town or
village authorized to impose the municipal property tax.
Further, it appears that under the Japanese law, tax is
charged at the standard rate of 1.4 per cent on the value of
the property computed in the manner laid down in the statute
providing the taxable basis, and in certain special cases it
may go UP to 2.5 per cent, which is the maximum; in India,
the rates of wealth tax vary, increasing progressively with
the amount of net wealth of the assessee.
The broad features of the two statutes we have noted above
reveal their basic dissimilarity. Unlike the wealth tax in
India, ,the municipal property tax of Japan is a local tax
imposed on certain specified properties by the city, town or
village in which the properties are located. The wealth tax
is a national tax chargeable on the
474
net wealth of a person with certain specified exemptions.
The difference in the manner of determination of the taxable
basis of the properties and the rates of taxation emphasize
the basic difference between the two taxes. of course,-
there are certain points of similarity between the two laws,
as there must be, both being taxing statutes, but these
similarities do not remove the fundamental difference in
’the aim, object and the basic structure of the two Acts.
Accordingly we allow the appeals, discharge the answers
given by the High Court to the questions referred to it in
these two cases, and answer the questions in the affirmative
and in favour of the assessees. In the circumstances of the
case we direct the parties to bear their own costs both here
and in the High Court.
V.P.S. Appeals allowed.
475