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TMI Blog1968 (8) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... ala will come under 'mortgage or other capital charge' in section 5(f) of the Agricultural income-tax Act ? 3. Whether the floating charge on the estate in Kerala can be a charge on the said property unless and until the amount or a portion of it becomes irrecoverable from the properties specifically mortgaged for the amount and such a contingency had not arisen in the accounting year ? " The assessee is an incorporated company, deriving agricultural income from lands situate in the States of Kerala and Mysore. The assessee had issued debentures for which its Mysore properties are mortgaged ; and it has created also a floating charge on its properties in Kerala State. For the assessment year 1962-63, for which the previous year ended on 31st September, 1961, the assessee submitted a return showing a net loss of Rs. 80,674. In computing the said loss, the assesee had made several deductions from its income. We are concerned in these cases only with two items. One was an amount of Rs. 50 which it claimed as the remuneration paid to its auditor for preparing the necessary statements and filing the return of its income before the Income-tax Officer. The other item was a sum of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also read the relevant part of section 10 of the 1922 Act : " 10. Business.--(1) The tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely : . . . . (xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and 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 . . . " The learned counsel for the revenue submitted that the provisions of the two statutes are not the same in this respect. He submitted that under clause (j) of section 5 of the Agricultural Income-tax Act, the expenditure must be one laid out or expended " for the purpose of deriving the agricultural income ", while under clause (xv) of section 10(2) of the Indian Income-tax Act, it is enough if it is laid out or expended " for the purpose of such business, profession or vocation ". He sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for making up accounts on income-tax principles--it would suffice to make up the ordinary commercial accounts. The computation of accounts for tax purposes is therefore not directly associated with the carrying on of the business. It is an obligation imposed upon the company for another and extraneous purpose, i.e., for the purpose of ascertaining the tax to be paid out of profits. It is not, at any rate directly, undertaken for trade purposes but to satisfy the revenue authorities. It is true that as a matter of convenience the cost of making up accounts for the Inland Revenue is allowed by the authorities as a deduction from profits as is the cost of making up the strictly business accounts of the trade, but this is not a matter of principle but of expediency. " The opposite view his been very forcibly expressed by Viscount Simon. He said : " It seems to me that it is essential for the proper carrying on of a trade that the trader should know what portion of his profits in a given year is left to him after the revenue has taken its share by taxation. If therefore he considers that the revenue seeks to take too large a share and to leave him with too little, the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure, but fees paid to accountants for preparing accounts in the ordinary course of business and not specifically for contesting liability or conducting proceedings before tax authorities are an ordinary business expense and allowable as such. The point is that expenditure antecedent to the ascertainment of profits is allowed, not that relating to the appropriation of profits. In practice, however, accountant's and lawyer's fees are allowed for appearance before the Income-tax Officer but not on appeal or revision ". In our opinion, this passage states the correct legal position. In the matter of assessment of income-tax, the Central Board of Revenue appears to have issued a circular for allowing reasonable expenses incurred by an assessee by way of remuneration paid to auditors and advocates for conduct of the assessment proceedings before the Income-tax Officer. Question No. 3 does not actually arise out of the order of the Appellate Tribunal. It only contains the argument of the Commissioner of Agricultural Income-tax, which we have to consider for the decision of question No. 2. The claim for deduction of Rs. 8,822 said to have been paid by the assessee as interest on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a definition of when and under what circumstances a charge is properly spoken of as 'dormant' . " This decision went in appeal before the House of Lords in Illingworth v. Houldsworth . In his speech delivered in the above case, Lord Macnaghten noticed the above comment made by Vaughan Williams L.J. ; and the learned Law Lord clarified his earlier statement as follows : " With regard to the criticism which Vaughan Williams L.J. passed, not I think unkindly, on some words of mine in the Manila case, I only wish to observe that what I said was intended as a description, not as a definition, of a floating security. I should have thought there was not much difficulty in defining what a floating charge is in contrast to what is called a specific charge. A specific charge, I think, is one that, without more, fastens on ascertained and definite property or property capable of being ascertained and defined ; a floating charge, on the other hand, is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t day. If that is so, there was a crystallisation of the security as the cessation of the company to carry on the business is one of the events which in law would operate to crystallise the security. " This decision has quoted with approval the passages which we have extracted above from the speeches of Lord Macnaghten ; and we are unable to see how it can support the decision of the Appellate Tribunal. As we see it, it is an authority for the opposite position. The Appellate Tribunal has extracted the following passage from the above decision and has underlined it : " A floating charge is no doubt an existing charge and is rightly termed so, but care must be taken to remember that it does not settle down and fasten on the property which is the subject of the charge until a particular act is done. " The above statement appears to be based on the decision of the Court of Appeal in Evans v. Rival Granite Quarries Ltd. Fletcher Moulton L.J., in his concurring judgment, after quoting the passage which we have extracted above from the speech of Lord Macnaghten in Illingworth v. Houldsworth, said : " I think that Lord Macnaghten was here keeping in view the two characteristic f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on the property which it is intended to affect from the date of the execution of the bond. if the learned judges of the Calcutta High Court have laid down any such proposition, with great respect, we are unable to agree with them. Such a charge would be a specific charge, and not a floating charge. We shall, however, point out that the following passage from the judgment of Buckley L.J. in Evans v. Rival Granite Quarries Ltd. was quoted by the learned judges of the Calcutta High Court as containing a correct statement of law : " A floating security is not a future security ; it is a present security, which presently affects all the assets of the company expressed to be included in it. On the other hand, it is not a specific security ; the holder cannot affirm that the assets are specificaly mortgaged to him. The assets are mortgaged in such a way that the mortgagor can deal with them without the concurrence of the mortgagee. A floating security is not a specific mortgage of the assets, plus a licence to the mortgagor to dispose of them in the course of his business, but is a floating mortgage applying to every item comprised in the security, but not specifically affecting any i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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