K. Mahesh and Others vs Commissioner of Income Tax, Madras

Veeraswami, J.—These tax cases raise a common question as to whether on the facts and in the circumstances, the claim for deduction of

Wealth Tax paid by the assesses as an admissible expenditure is lawful. The Revenue as well as the tribunal negatived the claim and the references

have come before us u/s 66 (1) of the Income Tax Act 1922 or u/s 256(1) of the Income Tax Act 1961. Each of the assessees as an Individual

received dividend Income and interest in the relative previous year and paid Wealth Tax in a certain sum on his holding of stock. The sum paid as

Wealth Tax was sought to be deducted from the income that comprised of dividends and interest as an allowable expenditure u/s 57(iii) of the

Income Tax Act 1961, but unsuccessfully before the Revenue.

The Tribunal relied on Kumbakonam Electric Supply Corporation Ltd., and Others Vs. Commissioner of Income Tax, Madras., and dismissed the

aseessee''s appeal in each case. That was of course a case u/s 10(2)(xv) in which a Division Bench of this Court Was of opinion that Wealth Tax

paid on the net wealth of the company there was not an allowable expenditure in computing its taxable income.

The assessee in each case as an individual was charged to Income Tax under the head ""other sources"". In computing his net income chargeable

to tax, he will be entitled to allowance of any expenditure not being in the nature of capita! expenditure, laid out or expended wholly and

exclusively for the purpose of making or earning such income. The point is whether the Wealth Tax paid by each of the assessees on the net value

of the stock held by him is such expenditure. Though the question is by no means capable of an easy answer, we have come to the conclusion that

the Wealth Tax paid is not an expenditure of that character. In order an expenditure to come within the ambit of Section 57(iii) it must satisfy the

tests which obviously suggest themselves from the language employed by that provision. The expenditure should be laid out or incurred wholly and

exclusively and should be for the purpose of making or earning such income. It should be connected with in the sense it must be incidental to the

making or earning of the income. In other words, there must be a nexus between the character of the expenditure and the making or earning of

income. If the sum laid out is on a capacity different from that in making or earning income, that will clearly be outside the scope of Section 57(iii).

In the present cases, we fail to see how the wealth tax paid is for the purpose of making or earning income. The assessee paid wealth Tax as

Owner and on the value of the totality of his assets. That has nothing to do with his making or earning income from such assets. The production of

income from the assets appears to be wholly unconnected with the payment of wealth Tax. This view of ours, as we think, receives support from a

parity of reasoning in Kumbakonam Electric Supply Corporation Ltd., and Others Vs. Commissioner of Income Tax, Madras., Travancore

Titanium Products Ltd. Vs. Commissioner of Income Tax, Kerala, . These cases, no doubt, are related to Section 10(2)(xv) but what fell for

decision in them was the scope of the words ""any expenditure ......... laid out or expended wholly and exclusively for the purpose of such business,

profession or vocation"". A Division Bench of this Court in the first case and the Supreme Court in the second, have expressed the view that Wealth

Tax paid by an assessee was not an allowable expenditure in computing the taxable income of that assessee u/s 10(2)(xv). The Supreme Court in

the second case pointed out''--

In determining whether an amount expended by the assessee is deductible u/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 taxpayer 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 Supreme Court repelled an argument on behalf of the assessee in that case that for the purpose of its business, it held assets and by the use

of those assets profits were earned, and therefore, tax paid in respect of those assets was expenditure laid out for the purpose of the business. The

deduction sought for is disallowed because the nexus required was not established and the Wealth Tax paid by the assessee there was as an owner

on its net worth and not as a trader for the purpose of carrying on its business. It is true that the concluding words of Section 10(2)(xv) are wider

in their scope than those of Section 57(iii). But for purposes of answering the reference before us, that can make no difference: because in the case

of both the provisions, the question of deductibility of an expenditure depends on the scope of the words ""purpose of"" which provide the link

between the expenditure and the carrying on of business in the one case or making or earning income in the other

But Mr. Swaminathan, for the assessee, strenuously pressed before us Raia Probhat Chandra Barua v. Commissioner of Income Tax Bengal. 5

ITC 1: A1R 1930 PC 209. Eastern Investments Ltd. Vs. Commissioner of Income Tax, West Bengal, , Commissioner of Income Tax, Madras

Vs. Jagannatha Govindas, and Harrode (Buenos Aires) Ltd. v. Tavlor Gooby, (1964) 41 Tax Cas 450. He argues that preservation of assets is

incidental to the purpose of making or earning income, that these are cases in which the assets themselves 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. The argument thus presented at first sight looks attractive. But on

further scrutiny we are of opinion that it cannot be accepted. We do not think that the cases relied on by him support his proposition.

The Privy Council In AIR 1930 209 (Privy Council) held that in bringing to tax Income derived from lands in permanent settled estates, allowance

should be made for the jama paid by the land-holder. The income was brought to charge under the head ""other sources"" and dealing with the

eligibility of the jama to deduction. Lord Russell of Killowen, who delivered the judgment for the Board, expressed the view--

Their Lordships were unable to ascertain upon what footing the appellant had been assessed in respect of the income derived from his zamindari,

i.e.. whether on the gross income or after some allowance had been made In respect of the jama assessed and paid upon the lands. Their

Lordships are of opinion that, in assessing the appellant to income tax in respect of the income derived from his zamindari, his income, profits and

gains from that source should be computed after making proper allowance in respect of the jama assessed and paid"".

A perusal of the Judgment of the Privy Council shows that in taking that view it was persuaded to think that payment of the jama was a condition

of the landholder holding the estate. Apart from that, it seems to us that the nature and incidence of the jama have no relation to those of Wealth

Tax under the provisions of the Wealth Tax Act Further, the land-holder paid the jama in that capacity and also was charged to tax on income

received by him from the estate which he held as a landholder.

Commissioner of Income Tax, Madras Vs. Jagannatha Govindas, allowed deduction of municipal tax paid by the assesses on his talkie cinema

equipment including machinery and furniture, in computing his chargeable income consisting of the rents received by him as a lessor of the

equipment. It may be seen that the municipal tax was paid by the assesses not as owner per se of the cinema equipment. The nature of such tax is

that its incidence is on the property itself and is collected from the owner or occupier thereof, and it is not comparable to Wealth Tax in its

character and incidence. While we think that Mr. Swaminathan is justified in reiving on this case, we are at the same time not satisfied that the

principle of the decision can properly govern the references before us.

Eastern Investments Ltd. Vs. Commissioner of Income Tax, West Bengal, even less helpful to the assessee. There the interest sought to be

deducted in the computation of chargeable income of the investing company was paid on certain debentures which were issued by it in lieu of the

value of certain shares which it had purchased. The Supreme Court in that case considered that the payment of interest was an expenditure within

the ambit of Section 12(2) and was a permissible deduction. The investing company earned income in that capacity and also paid interest under the

debenture in the same capacity, it was apparently for this reason a nexus was found between the expenditure and its purpose, namely, making or

earning income within the meaning of Section 12(2).

In (1964) 41 Tax Case 450 the English Court of Appeal held that a foreign Tax charged annually on percentage of capital was a permissible

deduction as the Tax was incurred wholly and exclusively for the purpose of the assessee''s trade. The basis for this view appears to be that

payment of such tax was a condition precedent to the carrying on of the assessee''s business in Argentine.

As we mentioned earlier, we find It difficult to hold that the Wealth Tax was paid by each of the assessees in these cases as incidental to the

making or earning of 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 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.

Mr. Swaminathan appealed to us that if the expenditure tax paid is not allowed to be deducted, the result would be that having regard to the

higher slabs of the Income Tax rate which the assessee will be subjected to the assets would prove more a liability. That may be so; not that we

express any opinion on that. That is not, however, a matter in respect of which we can possibly give any relief. That is a question of policy which

should be left to the Legislature.

The question referred to us is answered against the assessee. There will be no order as to costs.