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Judgment
Satyanarayana Rao, J.—Two questions were referred to us by the Appellate Tribunal u/s 66 (1) of the Income Tax Act. They are;
(a) Whether on the facts of the case the sum of Rs. 453 being overdrawings of an employee against his salary should be treated as an
irrecoverable loan of the applicants'' money-lending business within the meaning of Section 10 (2) (xi), Income tax Act, when that amount was not
realisable after the death of such employee ?
(b) Whether the sum of Rs. 84,388 paid by the applicants to the Ceylon Government as interest u/s 46 of the Ceylon Ordinance I [1] of 1938 for
default of paying Estate duty is allowable as a deduction either u/s 10 (2) (iii) or 10 (2) (xii), Income Tax Act ?"" (Note:-- Section 10 (2) (xii) in the
question has now been enacted as 10 (2) (xv) by Section 3. Income tax Amendment Act, 1946) The sum of Rs. 453 referred to in the first
question represents an amount of overdrawings by one of the employees of the assessee one Veerabahu Pillai. He was employed at the
headquarters and while he was in service he took advances from time to time and left service. On 7th July 1938, a promissory note was taken
from him for the amount due together with interest and before the expiry of the period of limitation an endorsement of payment of eight annas was
made on the promissory note. During the accounting period ending 13th April 1943 this sum was written off as a bad debt. The deduction claimed
was not allowed by the Income tax authorities and the Appellate Tribunal. It was claimed that the assesses was entitled to deduct this amount u/s
10 (2) (xi) of the Act. Under that clause bad and doubtful debts are allowable deductions provided in the case of banking or money-lending
business the amount represents a loan made in the ordinary course of such business. At its inception the amount was merely an overdrawing and
was not a loan made in the ordinary course of money lending business. There is no doubt no prohibition under the Act for a money lender to lend
his money in the course of his business to his servants or employees. But, in order to enable the money-lender to write off a debt as a bad or
irrecoverable debt, he must in the first instance show that it was even from the very beginning a loan and not an advance or overdrawing of an
employee or servant. The facts clearly establish that the view taken by the Appellate Tribunal on this point is correct. All that was argued on behalf
of the assessee was that when the promissory note was obtained from the employee on 7th July 1938 if was converted into a loan by the assesses
to the employee and that therefore the claim is within the clause. The language of the clause leaves no room for doubt that it is not the conversion of
a liability into a loan, that would enable the asses-see to claim the deduction as a permissible one. The language employed, is that it is in respect of
loans made in the ordinary course of such business"" that the assesses would be entitled to have the deduction if he proves that they are I
irrecoverable debts. The fact that subsequently a promissory note was taken would not affect the nature of the transaction at its inception and
would not enable the assessee to rely upon Clause (xi) of Section 10 (2). The contention therefore urged on behalf of the assessee cannot be
accepted.
The second of the two questions does not present much difficulty. One Arunachalam Chettiar died on 23rd February 1948 and the assesses had
to pay estate duty to the Ceylon Government amounting to nearly 10 lakhs. The duty is leviable u/s 26 (1) of the Ceylon Ordinance I [1] of 1938
and the duty is also made a charge on the estate under that section. It is to be paid within a year of the death of the last owner of the estate and in
default u/s 46 of the Act simple interest at the rate of four per cent, per annum, is payable on the amount of the duty. Under the proviso to Section
46, it is open to the heirs or executors of the deceased to estimate the value of the estate on which the duty is payable and pay it within the period
of one year though the amount was not actually assessed. In the present case, the amount was not paid by the persons responsible to pay the duty
within the time limited under the Act as a consequence of which they became liable to pay interest as pro-vided u/s 46 of the Act. This amounted
to a huge sum of Rs. 84,388. The assessee claimed unsuccessfully that this amount should be deducted either u/s 10 (2) (ii) or u/s 10 (a) (xii)
which now corresponds to (xv) of the Income Tax Act.
Before us the first contention urged on behalf of the assessee by Mr. Bhashyam, the learned advocate, is that in respect of foreign profits the
assessee should not be restricted to the deductions provided u/s 10 of the Act. His argument was that the language of the section applies only to
business carried on in British India and not outside it. He however did not dispute that the legislature had jurisdiction to enact laws which had
extra-territorial force and did not therefore urge that by reason of any disability or restriction imposed upon the power of the legislature to enact
laws, we should read the word ''business'' occurring in the section in a restricted sense so as to confine it to British India. Under the charging
Section 4, a person resident in British India is liable to pay Income Tax in respect of income, profits and gains not only received in British India but
also which arose or accrued outside British India whether he actually brings the income, profits and gains into British India or not. u/s 6, various
sources of taxable income are indicated and Section 10 provides that the assessee is liable to pay tax under the head ""profits and gains of business,
profession of vocation"" in respect of the profit or gains of any business, profession or vocation carried on by him. Under Sub-clause (2) of that
section, such profits or gains have to be computed after making the allowance enumerated in that clause.
Nowhere in this section or in Section 6 is there any basis for restricting the words business, profession or vocation to business, profession on
vocation carried on only in British India and not outside it.
Mr. Bhashyam was alive to this circumstance and therefore argued that in cases where extra-territorial operation is claimed to a provision in the
Act, unless the legislature indicates by suitable language that it should have operation outside British India also, it should not be interpreted as
extending to places outside British India. When the language of the statute is general and the context does not justify any restriction and when it is
conceded that the legislature had the power to enact laws having extraterritorial operation, it is difficult to accept and construe the section in the
manner contended. In fact he did not cite in support of such a rule of construction any authority, English or Indian, The argument therefore must be
rejected and the section must be read as applying not only to business in British India but also outside it.
The second head of his argument is based upon Sub-clause (iii) and (xv) of Section 10 (2). Under Sub-clause (iii) the amount of interest paid in
respect of borrowed capital for the purpose of the business, profession or vocation is an allowable deduction. In order however to justify the
deduction it must be established that there was capital borrowed for the purpose of the business profession or vocation. In the present case, the
sum of Rs. 10,00,000 which was payable as estate duty under the Ceylon Ordinance continued to remain in the hands of the assessed and it is said
that the sum was utilised even in his money, lending business which earned profits. The profits were taken into consideration in arriving at the
assessable foreign income of the assessee. As the money was utilised in earning profits it is contended that the liability to pay interest u/s 46 of the
Ceylon Ordinance must be treated as a permissible deduction as the Income Tax authorities while claiming the benefit of the utilisation of that large
amount in the money lending business could not be permitted to get rid of the liability to pay interest. No doubt, if in fact, Rs. 10,00.000 was
utilised in the money leading business and it earned profits, it might appear inequitable that the Government should take the benefit of it but dispute
the liability in respect of it. We are not, however, concerned whether the refusal to recognise this large sum of interest paid by the assessee to the
Government of Ceylon was morally justified or not. The assessee in order to succeed in his claim must bring himself within one or other of the
provisions of the Act recognising his claim as an allowable deduction. The liability to pay estate duty is a statutory liability and the money remained
in the hands of the assesses without its being applied to the payment of the estate duty. The situation in which the assessee placed himself by reason
of the non-payment of the duly in time cannot be described as a borrowing of the amount for the purposes of the business by the assesses from the
Government of Ceylon. It is not, every liability, even if it amounts to a debt in certain circumstances that can aptly be described as a borrowing.
Borrowing implies a consensual act by a debtor receiving money from a creditor and in this case none of these elements are present. The
Government never advanced any amount as a loan to the assessee. The amount he was having in his hands was an amount belonging to the
Government of Ceylon and can in no sense be described as a borrowing. The very fact that the origin of the liability is based on a statute negatives
the conception of borrowing and the conception of a consensual act on the part of the assesses and the Government of Ceylon. Even the interest is
made payable not under any contract or agreement but by reason of the provision in Section 46 of the Ordinance and is also a statutory liability. It
is no doubt not in the nature of a penalty but it is a liability which the assessee had incurred under the provisions of the Ordinance and which liability
he delayed in discharging, though he had ample funds in his hands. The contention therefore that the assessee is entitled to take advantage of Sub-
clause (iii) of Section 10 (2) cannot be accepted as the very requisite of the section, namely, ""borrowing of capital"" is absent in the present case.
The next clause which has to be referred to and which is relied on is (xv) of Section 10 (2). Under that clause,
any expenditure (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 vacation,
is an allowable deduction under the Act but in Order to claim the deduction the expenditure must have been wholly and exclusively incurred or
expended for the purpose of such business. In the present case, the Estate Duty was payable Dot only in respect of the business, viz, money-
lending business, but also in respect of the other properties of the assessee in Ceylon. As was rightly contended by Mr. Rama Rao Sahib on behalf
of the Income Tax Commissioner, it is composite payment and such composite payment; is not within the purview of the clause. The language of
the clause is plain and does not admit much of an argument to see that the expenditure in this case is not an exclusive expenditure for the purpose
of the business and therefore clause (xv) also has no application.
It has been held by this Court in Sri MTT.AR.S.AR. Arunachalam Chettiar Vs. The Commissioner of Income Tax, that the cost of defending a
suit to recover death duty payable to the Government of the Federated Malay States was an expenditure outside the business and was not and
expenditure incurred wholly or exclusively for the purpose of the business. This decision supports the argument of Mr. Rama Rao Sahib.
The decision in Ramaswami v. Commr. of Income Tax, Madras, I. L. R. (1944) Mad. 636: A.. I. R. 1944 Mad 154 does not carry the matter
further as in that case the deduction that was claimed was with reference to expenditure incurred in obtaining letters of administration and probate
of a will and also an amount of death duty that was paid. The two amounts were disallowed. With reference to the death duty that was paid, it was
pointed out that it was a duty imposed by the State for the benefit of the State and whether the business was carried on or not, it has to be paid
and it was no concern of the State. It was a payment which the State had imposed and could not be claimed as a permissible deduction.
For these reasons, the two questions referred to us must be answered in the negative and in favour of the Income Tax Commissioner. The
assessee will pay the costs of the Commissioner which we fix at Rs. 250.
Viswanatha Sastri J.-- On the first question referred to us, I am of opinion that the contention that if an employee of a money lending firm
overdraws money for his own private purposes it could be considered as a loan made to him in the course of the money-lending business is
untenable. Such overdrawings are not loans or advances made in the course of the money-lending business on the credit of the borrowers but are
mere overdrawings permitted as a matter of favour shown to an employee. Be-cause a man is doing money-lending business it does not follow that
every payment of money made by him to another is part of the money-lending business. There is nothing to prevent a banker or a person carrying
on money-lending business from lending money to those employed under him. That is not the case here. When the money was overdrawn at its
inception it was debited to the personal account of the employee. After he left service, a promissory note was taken for the amount evidently as a
sort of voucher or acknowledgment of liability. Thereafter the employee died and there was no means of recovering the debt. In the circumstances
it could not be stated that the original advance was by way of a loan in the course of the money-lending business or that the loan became a bad
debt in the course of the year of account within the meaning of Section 10 (2) (XI).
The next question that has been argued relates to the claim for deduction in respect of Rs. 84,388 paid as interest by the assessees on unpaid
death duty to the Ceylon Government. u/s 26 (1) of the Estate Duty Ordinance of Ceylon death duties are levied with reference to all the
properties left by a deceased person at his death and u/s 46 of the same Ordinance interest at 4 per cent, is payable on the amount of the death
duty which remains unpaid before the expiration of one year of the death. It is open to the executor, administrator or other legal representatives of
a deceased person to pay the amount of the duty within that year and avoid liability for interest. It is true as Mr. Bhashyam contended that there is
no obligation on the part of the Government to assess the death duty within one year of the date of the death of the deceased. But it does not
follow that the interest which is made a statutory charge along with the principal amount of death duty is anything more than a statutory liability
imposed on the estate of the deceased person.
It is not the contention of Mr. Bhashyam that it was not competent to the Indian Legislature to tax the foreign incomes of the subjects of British
India. So far as subjects of a State are concerned, there is nothing to prevent the Legislature from regulating the dealings of the subjects of the
State even to the extent of taxing incomes derived by them from foreign countries. There is no question of extra-territorial operation in the legal
sense of that term in such a scheme of taxation. This has been ruled by the Federal Court in AIR 1945 9 (Federal Court) , affirmed by the Judicial
Committee on appeal (1948) 16 ITR 240 (Privy Council) . Mr. Bhashyam''s Contention, however, is that there is nothing either in the express
provisions of the Income Tax Act or what may be considered to be their necessary implication to compel the Court to take the view that income
from foreign businesses of British Indian residents has been regulated by the provisions of the Income Tax Act. Mr. Bhashyam maintains that it is
implicit in Section 10 as well as the other sections of the Act that foreign business profits of residents should be calculated on equitable principles
and according to methods which would commend themselves as fair and equitable to layman unhampered by the specific directions contained in
Section 10. This argument seems to me to run counter to the whole scheme of the Income Tax Act. Section 2 (4) which defines ''business'' does
not confine it to business carried on in British India. Section 4 which is the charging section expressly and definitely subjects to Indian Income Tax
foreign profits arising or accruing to residents in British India. Section 6 which deals with the sources of income also does not ignore or exempt
either expressly or by implication, sources of income situated abroad from which residents of British India derive their income. Section 10 also is
not confined to business carried on in-British India.
The next contention of Mr. Bhashyam and the one which was urged before the Appellate Tribunal is that even applying Section 10 of the Act
the computation of the business profits derived by the assessees from Ceylon, the asses-sees are entitled to a deduction in respect of the sum of
Rs. 84,388 paid by them by way of interest on the unpaid death duty payable to the Ceylon Government. It is true that profits and gains of a
business have to be computed on ordinary principles of commercial dealing in the way in which merchants would calculate their profits, but then the
specific directions in the Act must be complied with and ordinary principles of mercantile accounting must yield to these specific directions.
Section 10 (2) (iii) allows a deduction in respect of interest paid on borrowed capital for the purposes of the business, profession or vocation,
The contention of Mr. Bhashyam is that by withholding the payment of Rs. 10,00,000 payable as death duty to the Ceylon Government this sum
was invested and kept in the money lending business and was fetching interest which is taxed as the income of the money-lending business, He
contends that if the sum of Rs. 10,00,000 had been paid to the Ceylon Government as death duty, this sum could not have been kept and utilised
as the capital of the business and the interest income of the money-lending business would have been much less than the sum returned and taxed.
He, therefore, argues that, as a matter of rough and ready justice, the sum of Rs. 84,388 paid to the Ceylon Government on the sum of ten lakhs
withheld from payment as death duty, must be allowed as a deduction in computing profits of the Ceylon money-lending business. Attractive as it
may seem, there is no warrant in law for this contention. The sum of Rs. 10,00,000 never left the purse of the assesses. It never reached the
Ceylon Government. It continued to remain as part of the assets of money lending business of the assesses. By no stretch of imagination could it be
said that this sum which the assessee had to but did not pay was borrowed by the assessee from the Ceylon Government and on this borrowing he
was paying interest to the Ceylon Government just as a debtor would pay interest to his creditor. By reason of the Ceylon Government''s
Ordinance a heavy death duty became eligible and by force of the same statute, interest was also payable on the amount of unpaid death duty. This
statutory provision had not the effect of converting the liability of the assessee as a representative of the deceased, to pay death duty, into a
borrowing of the sum represented by the unpaid death duty from the Ceylon Government with a stipulation for payment of interest on that sum.
Section 10 (2) (iii), in my opinion, contemplates lending of money by a lender and borrowing of fee lender''s money by the borrower with
contractual stipulations for the payment of interest on the loan, If a loan so borrowed is employed in, and for the purposes of the business, the
Interest payable or paid on such loan is allowed as a deduction. In my opinion, there was no borrowing of capital in the present case from the
Ceylon Government. The assessees were trading with their own capital and earning interest. The assessees are not entitled to the deduction
Claimed in respect of the interest on death duty paid to Ceylon Government.
It may be observed that there is no other provision in Section 10 authorising the deduction unless it be Section 10 (2) (xv) on which reliance
was also placed. Under that clause ""any expenditure 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
IS allowed as a deduction. In the present case this sum of Rs. 10,00,000 is not proved to have been expended or laid out wholly and exclusively
for the purpose of this money-lending business. It was eligible from the entire estate of a deceased person by force of a statute. The payment of
death duty as well as interest on the unpaid arrears of death duty is not necessitated by or connected with the carrying on of the money-lending
business of the assessee. The death duty is a capital charge levied on all the assets of a deceased person irrespective of the fact whether he was
conducting a business or practising a profession or vocation. It is not like a licence fee which has to be paid to enable a person to conduct a
particular business or follow a profession or vocation. It is levied not merely on the business assets of a person but on the entire assets consisting of
lands, houses and other properties. It cannot be said, therefore that the payment of death duty is an expenditure which is incurred for the purpose
of the business much less an expenditure incurred wholly and exclusively for that purpose. The principal amount of the death duty has been held to
be an inadmissible deduction in computing the business profits of the assessee in the decision in Ramaswami Iyengar v. Commr. of Income Tax,
Madras, I. L. R. (1944) Mad. 685: A. I R. 1944 Mad. 154. It has also been held by this Court that costs and expenses incurred by an assessee in
resisting the claim of a foreign Government to levy death duty is not admissible deduction in the computation of his foreign profits, the reason being
that the expenditure is not one incurred exclusively or solely for the purposes of the foreign business. Sri MTT.AR.S.AR. Arunachalam Chettiar
Vs. The Commissioner of Income Tax, . The same principle, in my opinion, would also apply to the payment of interest on unpaid death duty by
virtue of the provisions of the Ceylon Ordinance.
I, therefore, agree with my learned brother in the answers which he has given to this reference and the direction regarding costs.