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TMI Blog1982 (10) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... 68 3097 (Bom) of 1972-73, dated 24th February, 1975. Being not satisfied with the delay in raising the additional ground, the AAC refused to admit the same. The assessee appealed to the Appellate Tribunal which decided the issue with the following observation: " We have heard both sides. This is purely a legal contention and, in our opinion, the Appellate Assistant Commissioner should have admitted the appeal and disposed of the same. However, with the approval of the parties before us and considering the nature of the issue, instead of asking the Appellate Assistant Commissioner to admit the point and to decide thereon, we prefer to dispose of the appeal on merits ourselves here in this order. Before us, we have a copy of the order dated 1st December, 1977, in I.T.A. No. 3643 (Bom) of 1974-75, for the assessment year 1970-71 in the case of M/s. Amar Dye Chem Ltd. v. ITO, passed by the Special Bench of the Appellate Tribunal, Bombay Bench 'B'. A similar point which was raised there, was decided by the Special Bench against the assessee and the same was discussed in paragraphs 101 to 131 of the aforesaid order. The disallowance was obviously made under section 40(a)(ii) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was explained by the Privy Council in the celebrated case , of Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135, Lord Macmillan observed at p. 138 of the report: "When the Act by section 3 subjects to charge 'all income' of an individual, it is what reaches the individual as income which it is intended to charge. In the present case the decree of the court by charging the appellant's whole resources with a specific payment to his step-mother has to the extent diverted his income from him and as directed it to his step-mother; to that extent what he receives for her is not his income. It is not a case of the application by the appellant of part of his income in a particular way, it is rather the allocation of a sum out of his revenue before it becomes income in his hands." As its name denotes, the C. (P.) S.T. Act is a tax on profits. It is an additional tax levied on the total income of a company after making various adjustments and deductions in accordance with the provisions of the Act. But the levy of the C. (P.) S.T. Act is only attracted when the income it intends to charge reaches the assessee. Payment of surtax by an assessee cannot be described as an allocation of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. Income or profits on their coming into existence attract tax at that point, but if no profit or income was earned or received by an assessee, there will not be any question of imposition of income-tax or surtax. Charge of surtax presupposes existence of income; it does not prevent accrual of income or receipt of income by diverting a portion of the income to the Revenue at source. The assessee's total income has been computed by the ITO under the provisions of the I.T. Act to be Rs. 66,91,550. The Revenue cannot claim any part of the company's total income of Rs. 66,91,550 as its own even before it reached the assessee. It has not got any overriding title to this income or any portion of it. What the Revenue, however, can do is to levy a tax on this total income under the I.T. Act. The Revenue can also levy an additional tax on this income after some adjustments and deductions under the C. (P.) S.T. Act. But both under the I.T. Act and the C. (P.) S.T. Act, it is the income of the assessee that is brought to the charge of taxation. What is taxed is the entirety of the income. The Revenue cannot be heard to say that any portion of the amount of Rs. 66,91,550 was its own inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a superior title and diverted the income from the main firm before it became the income of the partner. In other words, the partner in the main firm received the income not only on his own behalf but on behalf of the partners of the sub-partnership. This case, in our opinion, does not throw any light on the problem before us. In the case of CIT v. Travancore Sugars and Chemicals Ltd. [1973] 88 ITR 1 (SC), the promoters of the assessee-company entered into an agreement with the Government of Travancore whereby the assets of a sugar company and a distillery and a tincture factory run by the Government were agreed to be sold to a company to be floated for that purpose. Apart from cash consideration it was provided that the Government shall be further entitled to 20% of the annual net profit up to a maximum of Rs. 40,000 after providing for depreciation and remuneration of the secretaries and treasurers. The Supreme Court held that the amount paid was either a revenue expenditure or diverted by an overriding charge or an expenditure laid out wholly or exclusively for the purposes of trading. In the case of Official Trustee of West Bengal v. CIT [1979] 116 ITR 219 (Cal), the princ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit is. I cannot understand how you can make the income-tax part of the expenditure. I share Buckley J.'s difficulty in understanding how so plain a matter has been discussed in all the courts at such extravagant length." In the case before us it is the total income of the company after some adjustment which is being charged with surtax. The thing which is being taxed is the profit that the company has made. On behalf of the assessee strong reliance was placed on the following passage from the Valuation of Company Shares and Business by A. V. Adamson, 5th Edn., p. 105: "Taxes on company income: An English legal interpretation of the nature of these taxes may be found in a decision of the House of Lords in the case of G. B. Ollivant Ltd. [1942] 2 All ER 528 (CA), which dealt with the question as to whether excess profits tax should be deducted in arriving at net profit. Lord Greene stated : 'It is indisputable that for the purpose of drawing up the profit and loss account of a trading company excess profits tax must be deducted if ordinary commercial practice is to be followed ... it is not merely common knowledge but common-sense that the divisible profits of a tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of computation of distributable or divisible profits of a company, the, surtax payable by the company will have to be deducted. In fact, there is specific provision under the C. (P.) S. T. Act, 1964, to that effect. It has been provided under s. 15 that in computing the distributable income of a company for the purposes of Chap. XI-D of the I.T. Act, the surtax payable by the company for any assessment year shall be deductible from the total income of the company assessable for that assessment year. But in the case before us the problem is not of computation of divisible profits. The question is what are the profits of the assessee-company ? In that context the views of Viscount Simon L.C . and Lord Macmillan will be more helpful for our present purpose. Viscount Simon L. C. and Lord Macmillan were of the view that under the agreement profits did not mean divisible profits of the company. Viscount Simon L. C. observed at p. 26 of 13 ITR (Suppl.): "The word 'divisible' or 'distributable ' does not occur in the agreement from beginning to end, and, to my mind, the profits of a trading company when ascertained in accordance with ordinary commercial practice are the prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to say that the Revenue is entitled to get a portion of this income by an overriding title even before it reaches the company. We shall now Consider the argument that the liability for surtax must be allowed as business expenditure in computing the total income of the assessee under the I.T. Act and the embargo contained in s. 40(a)(ii) of the I.T. Act must be confined to income-tax only. In order to appreciate this argument it is necessary to set out s. 10(4) of the Indian I.T. Act, 1922, and s. 40(a)(ii) and s. 2(43) of the I.T. Act, 1961: Indian Income-tax Act, I922. " 10. (4) Nothing in clause (ix) or clause (xv) of sub-section (2) shall be deemed to authorise the allowance of any sum paid on account of any cess, rate or tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or gains,;......" Income-tax Act, 1961. "40. Amounts not deductible Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of 'business or profession' (a) in the case of any as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t income-tax only. That the section is not confined to income-tax only is made clear by the words " levied on the profits or gains of any business or profession or assessed at a proportion of or otherwise on the basis of any such profits or gains". The Legislature has refrained from using the expression " profits and gains of business or profession " to indicate that the exclusion from deduction in s. 40(a)(ii) was not to be confined to a tax imposed on income computed under s. 28 of the I.T. Act. The expression " profits or gains " must be understood in its ordinary sense. " Profits " in common parlance means excess of income over expenditure. " Gains " is also a word of very wide connotation. A man working for gain is not necessarily engaged in a trade or business. The word " business " has been defined in s. 2(13) of the I.T. Act: "'Business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture." The profits made by a company including its income from dividend, interest and rent will have to be shown in the profit loss account. For the purpose of computation of total income under the I.T. Act the profits ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices that is, of a house divided into several floors and used for commercial purposes, would not be said to carry on a business because he let the offices as such; but suppose a company was formed for the purpose of buying a building, or leasing a house, to be divided into offices, and to be let out, should not we say, if that was the object of the company, that the company was carrying on business for the purpose of letting offices or was an office-letting company, trying it by the use of ordinary colloquial language ? The same observation may be made as regards a single individual buying or selling land, with this addition, that he may make it a business, and then it is a question of continuity. man occasionally buys and sells land, as many land-owners do, and nobody would say he was a land-jobber or dealer in land, but if a man made it his particular business to buy and sell land to obtain profit, he would be designated as a land-jobber or dealer in land. When you come to an association or company formed for a purpose, you say at once that it is a business, because there you have that from which you would infer continuity ...... .." Although the judgment of Jessel M.R. in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axable profits " of the business. " Deductible profit " was defined to mean the amount by which the profits during a chargeable accounting period exceeded the abatement in respect of that period. It was provided in the First Schedule that the profits of a business should be computed in accordance with the provisions of s. 10 of the Indian I.T. Act, 1922. Under s. 10 it was provided that the amount of business profits tax payable by any person for any chargeable accounting period shall, in computing the total income for the purpose of income-tax or I super-tax, be allowed as deduction. It was also provided that if any amount of excess profits tax was refunded I it would be taken into account in computing the profits and gains of a business for the purpose of income-tax as if the amounts were profits accruing in the relevant previous year. The provisions of the C.(P.)S.T. Act are significantly different. Section 2(5) defines chargeable profits.. It means total income of an assessee computed under the I.T. Act, 1961, and adjusted in accordance with the provisions of the First Schedule. Section 4 imposes a charge of tax in respect of so much of chargeable profits as exceed the statut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total income for the purpose of computation of income-tax. The amount of surtax paid by a company has been specifically made deductible from the total income under s. 15 of the Surtax Act. " 15. Surtax deductible in computing distributable income under Income-tax Act. Notwithstanding anything contained in clause (i) of section 109 of the Income-tax Act, in computing the distributable income of a company for the purposes of Chapter XI-D of that Act, the surtax payable by the company for any assessment year shall be deductible from the total income of the company assessable for that assessment year." " Distributable income " has been defined in s. 109 of the I.T. Act the material part of that section is as under : " 109. For the purpose of sections 104, 105 and 107A and this section, (i) 'distributable income ' means the gross total income of a company as reduced by (a) the amount of income-tax payable by the company in respect of its total income, but excluding the amount of any income-tax payable under section 104 ; ........" If we accept the contention made on behalf of the assessee and hold that the surtax payable by the assessee is eligible for deduction under s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee's income from business. The Supreme Court in that case reversed its earlier decision in the case of Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277 (SC), in which it has held that the amount of wealth-tax paid by the assessee was not a permissible deduction as business expenditure because wealth-tax was imposed on the ownership of assets and not on any commercial activity. In the case of Rushden Heel Co. Ltd. v. Keene [1948] 30 TC 298; [1949] 17 ITR (Suppl.) 19 (HL), Lord Greene M.R. held that an expense was not deductible if it fell on a trader in some character other than that of a trader. This test, however, was not applied by the other judges of the House of Lords who agreed with Lord Greene M.R. in that case.: The unsoundness of the test of capacity or character in which the tax was paid was pointed out in the case of Harrods (Buenos Aires) Ltd. v. Taylor-Gooby [1964] 41 TC 450 (CA). In the case of Indian Aluminium Co. Ltd. [1972] 84 ITR 735 the Supreme Court has relied on the ratio of the decision in the case of Harrods (Buenos Aires) Ltd. v. Taylor-Gooby in holding that wealth-tax was an allowable deduction as business expenditure. The Supreme Court ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the tax does not depend upon whether profits are made or not. It is a payment which the company is compelled to make if it has a business establishment in the Argentine at all, and it must have business establishment if it is to carry on its trade. I can see no relevant difference between this tax and rates upon its business premises ......" In the case before us the question of capacity or the character of the taxpayer really does, not arise. The real question is whether a tax which has been imposed on the total income of a company after some adjustments can be allowed as a deduction in computing total income of that company under the I.T. Act. Is it a business expenditure of the company ? In his concurring judgment in the case of Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735 (SC) the distinction between the two types of taxes were brought out by Beg J., in the following words (p. 749): "In other words, where profits, the net gains of business determined after making all permissible deductions, are taxed, the disbursements to meet such, taxes cannot be deducted. But, where the tax was levied, as it was in Harrods' case [1964] 41 TC 450 (CA), on capital or assets used f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mple of a puzzling situation which would arise if the respondents were Tight. It is admitted that tax in Eire is assessable on the same principles as in the United Kingdom. So, if the respondents are right here, they would have been entitled in Eire to a deduction of United Kingdom excess profits tax payable by them. The amount of tax payable in the one country could not be determined until the amount of the deductions allowable there had been determined; but one deduction would be the amount of tax payable in the other country. The amount of tax payable in the other country could not be determined until the deductions allowable there had been determined : but one of those deductions would be the amount of tax payable in the first country. I see no way in which this circle could be broken. " Lord Radcliffe observed at p. 285 as follows: " It is true that both those decisions bore upon the question of deducting excess profits tax paid in this country in a computation of profits, and the question before us relates to a deduction of income and profit taxes paid in another country. But once it is accepted that the criterion is the purpose for which the expenditure is made in relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness through which he earns profits. Strong reliance has been placed on the decisions in Dehra Dun Tea Co. Ltd. v. CIT [1973] 88 ITR 197 (SC) and Mitsui Steamship Co. Ltd. v. CIT [1975] 99 ITR 7 (SC). But these two cases merely reiterate the principles laid down in the case of Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735, which we have noted earlier. In the first of these two cases the Supreme Court allowed the tax levied by the U. P. Large Land Holdings Tax Act, 1957, on the ground that the tax was levied on the business assets by applying the ratio of the decision in the case of Indian Aluminium Co. Ltd. This was done on the basis of the finding that the tax was levied on lands owned by the assessee-company as its business assets. In the case of Mitsui Steamship Co. Ltd. v. CIT [1975] 99 ITR 7 (SC), the question was whether the property tax paid by the assessee in Japan on its vessels was allowable and the Supreme Court held that the expenditure was as owner-cum-trader and incidental to the carrying on of its business. The question in this case is whether a tax imposed on the profits of company is allowable as deduction in computing the total income of the company. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture was incidental to the business and was necessitated or justified by commercial expediency. It must be remembered that the earning of profits and the payment of taxes are not isolated and independent activities of a business. These activities are continuous and take place from year to year during the whole period for which the business continues. If the assessee takes any steps for reducing its liability to tax which result in more funds being left for the purpose of carrying on the business there is always a possibility of higher profits... As was observed by Viscount Simon in Smith's Potato Estates case [1948] 50TC 267; [1949] 17 ITR (Suppl.) 1 (HL), if the trader considers that the revenue seeks to take too large a share and to leave him with too little the expenditure which the trader incurred in endeavouring to correct this mistake is a disbursement laid out for the purposes of his trade. If he succeeds he will have more money with which to earn profits next year." But the problem in this case is quite different. Law charges incurred has been justified as business expenditure on the ground of protection and preservation of assets and also on the ground that a businessma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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