1967 (9) TMI 31 - HC - Income Tax

Sum paid as wealth-tax - claim for deduction of wealth-tax paid by the assessee as an admissible expenditure is not lawful

Summary

Issues:
1. Deductibility of wealth-tax paid by the assessee as an admissible expenditure under section 57(iii) of the Income-tax Act, 1961.

Analysis:
The judgment dealt with the question of whether wealth-tax paid by individual assessees could be deducted as an allowable expenditure under section 57(iii) of the Income-tax Act, 1961. The assessees had paid wealth-tax on their stock holdings and sought to deduct this amount from their income comprising of dividends and interest. Both the revenue and the Tribunal had denied the deduction, leading to the references before the High Court. The court emphasized that for an expenditure to be deductible under section 57(iii), it must be laid out or incurred wholly and exclusively for the purpose of making or earning income and should be connected with the income-making activity. The court concluded that wealth-tax paid by the assessees on the net value of their stock holdings did not meet these criteria as it was not directly related to the process of making or earning income from the assets.

The court referred to previous judgments, including Kumbakonam Electric Supply Corporation Ltd. v. Commissioner of Income-tax and Travancore Titanium Products Ltd. v. Commissioner of Income-tax, which had ruled that wealth-tax paid was not an allowable expenditure in computing taxable income. The court highlighted the need for a direct and intimate connection between the expenditure and the business or income-making activity. It was noted that wealth-tax paid by the assessees was in their capacity as owners of assets, not as traders or income earners, and thus, did not qualify as a permissible deduction under section 57(iii).

The court rejected the argument that payment of wealth-tax was essential for preserving assets and, therefore, indirectly linked to making or earning income. It distinguished cases such as Raja Probhat Chandra Barua v. Commissioner of Income-tax and Commissioner of Income-tax v. Jagannatha Govindas, where deductions were allowed for specific taxes related to income-generating assets, as the nature and purpose of those taxes differed significantly from wealth-tax. The court emphasized that the expenditure for it to be deductible must have a direct connection with the purpose of making or earning income, which was lacking in the case of wealth-tax paid by the assessees.

The court also addressed the argument that disallowing the deduction of wealth-tax could result in assets becoming a liability due to higher income tax rates. However, the court clarified that such policy considerations were beyond its scope, and the decision on deductibility of wealth-tax rested on the legal provisions and established principles. Ultimately, the court answered the question against the assessees, ruling that wealth-tax paid by them was not deductible as an allowable expenditure under section 57(iii) of the Income-tax Act, 1961.