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TMI Blog1964 (11) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... x levied would not be said to be expended wholly and exclusively for business purposes. This was upheld in appeal by the Appellate Assistant Commissioner. The Tribunal however came to a different conclusion. According to the Tribunal the assets were held by the assessee for the purpose of its business and no other. It was urged that if the assessee had not paid the tax the revenue authorities might have taken measures for bringing the assets to sale for recovery of the tax: from this point of view payment made to avert that contingency was expenditure incidental to the carrying on of the business. It was contended by the revenue that the determination of the wealth-tax was arrived at after the profits had been made and therefore the payment of the wealth-tax was not an expense wholly and exclusively incurred for the purpose of the business. According to the Tribunal it did not matter that the computation had to be made as at the end of the year. Not being satisfied with this the revenue authorities required the Tribunal to refer to this court the question of law which was couched in the following words: Whether, on the facts and in the circumstances of the case, having regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch have to be taken into account for the computation of the profits or gains. The specification is however not exhaustive and clause (xv) of section 10(2) provides for the deduction of any expenditure not being an allowance of the nature described in clauses (i) to (xiv) 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. There is no question here as to whether the expenditure is of a capital nature or whether it is personal to the assessee. The only question is whether the amount was expended wholly and exclusively for the purpose of the assessee's business. The expression for the purpose of such business: has a very wide ambit. It must include anything which will further the cause of the business as also anything which is so linked with the business as to go hand in hand with it or be an unavoidable outgoing by its very nature. Thus an expenditure incurred by a businessman with the idea of increasing his profits, a disbursement made with the object of meeting a threat to it, a payment which is unavoidable by anybody carrying on a particular business must all be i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mere ownership of the assets. It was argued that the capacity in which the assessee paid the tax was that of an owner and not a trader. The argument was sought to be fortified by reference to some decisions of the Supreme Court on the applicability of clause (xv) of section 10(2) to diverse circumstances. Reliance was further placed on two decisions, one of the Madras High Court and the other of the Kerala High Court where the contention of the revenue as to the inadmissibility of payment of wealth-tax by a company on its business assets has been upheld. The first decision to which reference must be made is that of the Supreme Court in Badridas Daga v. Commissioner of Income-tax [1958] 34 I.T.R. 10, 15, 16; [1959] S.C.R. 690 . There the question was whether a sum of money embezzled by an employee of the assessee was allowable as a deduction either under section 10(1) or under section 10(2)(xv). It was laid down that profits and gains liable to be taxed under section 10(1) were such as would be understood to be profits according to ordinary commercial principles and the admissibility of an outgoing under section 10(2)(xv) would depend on whether having regard to accepted comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome accruing or arising within the taxable territories and where the person entitled to the income, profits or gains was not resident in the taxable territories, he was to be chargeable to income-tax either in his own name or in the name of his agent and in the latter case such agent was to be deemed to be, for all the purposes of the Act, the assessee in respect of such tax. The assessee paid the amount which was payable by the non-resident principal and claimed to have it deducted as a loss to be set off against his profits. Relying on the provision of section 42(2) it was argued that the assessee's business was foreign trade which was inter-connected with the business of the non-resident principal and therefore the nature of the business was such as to attract the imposition of liability on the respondent under section 42(2) and the loss incurred must be taken to be incidental to and arising out of the business of the assessee. The court held that the liability was imposed on the assessee because it was treated as an agent within the meaning of section 42(1) of the Act and because of the deeming provisions of sub-section (2) of section 42. According to the court it did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the trade'. These words are used in other rules, and appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade, c. I think the disbursements permitted are such as are made for that purpose. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade or is made out of the profits of the trade. It must be made for the purpose of earning the profits. In Smith v. Lion Brewery Co. Ltd. [1909] 2 K.B. 912, 921, 923 , the Court of Appeal by a majority upset the judgment of Channell J. holding that the sum which the assessees were compelled to pay for the compensation charge was a payment necessary to enable them to earn profits as a brewery company and might properly be deducted from the profits with a view to ascertaining the balance on which income-tax had to be paid. The business of the assessee was that of brewers and sellers of beer. The assessee acquired a number of tied houses in order to enable it to sell its beer in larger quantities and to greater advantage. The Licensing Act of 1904 compelled a licenceholder to pay the levy. That levy formed a fund out of which compensa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each set of profits the Crown claims a share and must allow proper deductions accordingly. The argument put forward on behalf of the revenue was that inasmuch as a private owner of a public house could not deduct the compensation levy from his rent the fact that the owner happened to be a brewer should make no difference. This was rejected by Farwell L.J., who said that it was because the brewer put the house to a profitable use that the question arose at all. Kennedy L.J. took a different view. The House of Lords in Smith v. Lion Brewery Co. Ltd. [1911] A.C. 150 were equally divided in their opinion at the hearing of the appeal with the result that the majority view of the Court of Appeal prevailed. In Morgan v. Tate Lyle Ltd. [1955] A.C. 21; [1954] 26 I.T.R. 195 the question was whether a company engaged in sugar refining could deduct expenses incurred in a propaganda campaign to oppose the threatened nationalisation of the industry. In other words, whether the sum in question was money wholly and exclusively laid out for the purpose of the company's trade. By a majority the House of Lords held that the object of the expenditure being to preserve the assets of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been carried on by the use of these assets. Thus the money is spent to preserve the very existence of the company's trade. The case of Moffatt v. Webb [1913] 16 C.L.R. 120 is instructive. There section 9 of the Income Tax Act (1895) of Victoria (Australia) provided: (1) All losses and outgoings actually incurred in Victoria by any taxpayer in production of income shall be deducted from the gross amount of each taxpayer's income, and (2) that in estimating the balance of income liable to tax any disbursements or expenses whatever not being money wholly and exclusively laid out or expended for the purposes of the trade were not to be deductible. The taxpayer was a grazier, and during the year in question carried on business as such in Victoria upon lands of the fee simple of which he was during the said year the owner. The lands comprised 18,000 acres and their unimproved value for the purposes of the Land Tax Assessment Act, 1910, was ? 44,924 on which tax for the financial year ending on June 30, 1911, amounted to ? 387. This was paid by the taxpayer and sought to be deducted from the gross income derived from his business as a grazier. On behalf of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... production of the particular income for the year; with other land, the amount would probably be different; and as the actual gross return could not be received without the use of that land, and the use of the land means the use of an instrument to which is attached by law a compulsive payment, it seems to me to follow naturally that the payment made under compulsion of law in respect of that necessary element of the business income is an outgoing made in the production of the income, and in the circumstances here it was made wholly and exclusively for the taxpayer's business. Gavan-Duffy J. said: It is admitted that the land in question is used by the taxpayer wholly and exclusively for the purposes of his trade as a grazier. In these circumstances the Commonwealth land tax paid in respect of that land on which he carries on that trade is, in my opinion, an outgoing actually incurred in Victoria in the production of income. All these cases excepting the last one were noted by the Supreme Court in the case of Commissioner of Income-tax v. Malayalam Plantations Ltd. [1964] 53 I.T.R. 140, 144, 150, 151 (S.C.). The court there had to consider whether estate duty paid by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose of the business was wider in scope than the expression for the purpose of earning profits . According to the court the former expression may take in not only the day to day running of a business but also the rationalisation of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p in the conduct of such business. With great respect I find myself unable to concur in the above opinion. It may be that wealth-tax is payable merely because of ownership of wealth and has to be paid whether or not that wealth is used for a business purpose. A businessman who owns and holds the assets has to own and hold the same for his business and even if the mere holding of it makes him liable to pay a tax the outgoing must be considered to be necessary for his business when he pursues the same and be considered to be a payment wholly and exclusively incidental to the carrying on of the business. Nor, in my opinion, is there anything in the observations of the Supreme Court in the case of Malayalam Plantations Ltd. [1964] 53 I.T.R. 140 (S.C.) quoted above which justifies arriving at a different conclusion. It was argued on the strength of the said observations that the payment of statutory dues (i.e., wealth-tax) was not a pre-condition of the carrying on of the business and the fact that in default of payment of wealth-tax the assets might be put up to sale and cause loss to the businessman was not a circumstance to be taken into consideration. The observations of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4] 53 I.T.R. 140 (S.C.) , it was observed that it was [1964] 53 I.T.R. 186, 194 impossible to dissociate the character of the assessee as the owner of the plantation and as a person working the plantation. The assessee had bought the plantation for working it as a plantation, i.e., for growing tea, coffee and rubber. The payment of interest on the amount borrowed for the purchase of the plantation when the whole transaction of purchase and the working of the plantation is viewed as an integrated whole, is so closely related to the plantation that the expenditure can be said to be laid out or expended wholly and exclusively for the purpose of the plantation....From the agricultural receipts must be deducted all expenses which in ordinary commercial accounting must be debited against the receipts. In the result the admissibility of the expenditure under section 5(e) was upheld. The judgment of the Kerala High Court in Southern India Tea Estates Co. Ltd. v. Commissioner of Income-tax [1964] 51 I.T.R. 47 , which follows the judgment of the Madras High Court in Kumbakonam Electric Supply Corporation Ltd. v. Commissioner of Income-tax [1963] 50 I.T.R. 809 need not be sep ..... X X X X Extracts X X X X X X X X Extracts X X X X
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