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TMI Blog1964 (4) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... cted with the business, though the occasion for the imposition arose because of the territorial nexus afforded by the accident of its doing business in India. We, therefore, hold that the estate duty paid by the respondent was not an allowable deduction under section 10(2)(xv) of the Act. We answer the question in the negative. The order of the High Court is wrong and is set aside. Appeal allowed. - Civil Appeals Nos. 384 and 385 of 1963 - - - Dated:- 10-4-1964 - Judge(s) : K. SUBBA RAO., J. C. SHAH., S. M. SIKRI JUDGMENT The judgment of the court was delivered by SUBBA RAO J.--These two appeals by special leave raise the question whether the estate duty paid by the resident company, hereinafter called the assessee, incorporated outside India, on behalf of members not domiciled in India is deductible from its profits in computing its assessable income under section 10(2)(xv) of the Indian Income-tax Act, 1922, hereinafter called the Act. The material facts are not in dispute and they may be briefly stated. The assessee is a resident company incorporated outside India. Most of its shareholders are in the United Kingdom. During the accounting period ending March ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han Narain, learned counsel for the respondent, supported the judgment of the High Court and contended that the said estate duty was revenue expenditure incurred by the assessee as it was put out of pocket to that extent and that it had not been proved that the assessee could legally recover the said amounts from the legal representatives of the deceased shareholders. He further argued that the said expenditure was wholly and exclusively for the purpose of the assessee's business within the meaning of section 10(2)(xv) of the Act inasmuch as it discharged its statutory obligation in order to preserve the assets of the company. The question raised turns upon the provisions of section 10(2)(xv) of the Act. It reads : " 10. Business.--(i) The tax shall be payable by an assessee under the head ' Profits and gains of business, profession or vocation ' in respect of the profits and 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se may be. " Under this section in the circumstances mentioned therein a company is liable to pay estate duty in respect of the shares of the deceased member of the company on the principal value of the shares held by the deceased in the company : under this section a statutory obligation is imposed on the company to pay the estate duty on the shares of a deceased non-resident member. If such a member of a company had died in India, subject to the conditions mentioned in the section, the company would not be liable to pay the estate duty payable on the shares held by the deceased. In substance the company is made a statutory agent to pay the said duty payable in respect of property belonging to another. Section 77 of the Estate Duty Act enables a person authorized or required to pay estate duty in respect of any property to transfer the said property for the purpose of paying the duty. This section cannot have extra-territorial operation. Prima facie the company cannot transfer the shares or the property of a person domiciled in a country outside India. Nor sub-section (2) of section 77, which says that a person having an interest in any property, who pays the estate duty in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... United Kingdom, the relevant part whereof read : " money wholly and exclusively laid out or expended for the purposes of such concern ". There, a brewing company, which also owned licenced houses in which it carried on the business of inn keepers, incurred damages and costs to the amount of pound 1,490 on account of injuries caused to a visitor staying at one of its houses by falling in of a chimney. The House of Lords held that the damages and costs were not allowable as a deduction in computing the company's profits for income-tax purposes. The learned Lord Chancellor said : " They cannot be deducted if they are mainly incidental to some other vocation, or fall on the trader in some character other than that of trader. Lord Davey, whose dictum was the basis for some of the subsequent decisions in that country, referring to the expression " for the purpose of trade ", observed as follows : " 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. " Lord Davey's definition appears to be much narrower than that of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l meaning to the expression " for the purpose of the trade " than that given by Lord Davey. " Purpose " of the trade includes the purpose to protect the assets of the company carrying on the trade. The House of Lords resurveyed the legal position in Morgan v. Tate and Lyle Ltd., in the context of the question whether the expenditure incurred by a company engaged in sugar refining in a propaganda campaign to oppose the threatened nationalization of the industry was an admissible deduction. Lord Morton, after referring to the relevant case law and to Lord Davey's formula, made the following observations : " . . . this seems to me to be an assumption wholly unwarranted by the evidence. There is no evidence that a transfer of the assets to a national body or authority would not destroy or adversely affect the company's business ... It is clear on the authorities that Lord Davey's formula includes expenditure for the purpose of preventing a person from being disabled from carrying on and earning profits in the trade. Lord Reid laid down the relevant test thus : " A general test is whether the money was spent by the person assessed in his capacity of trader or in some other capa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch was incorporated and resident in the United Kingdom and carrying on the business of a large general stores in Buenos Aires, having paid in Argentina a tax known as the " substitute tax " to which it was liable, could claim deduction under the Income-tax Act, 1952 (15 and 16 Geo. VI and 1 Eliz. II, c. 10), section 137(a). The learned judge held on the facts of that case that incurring liability for that tax was a pre-condition of the company's earning profits in Argentina, for without incurring liability for that tax the company could not carry on business in Argentina at all. On that finding the learned judge came to the conclusion that it was a liability which the company had undertaken for the purpose of its trade, and was, therefore, a payment made wholly and exclusively for the purpose of the company's trade. It will be seen that in that case the tax was paid by the company in its capacity as company doing business and unless that tax was paid the company could not carry on its business. The two tests laid down are satisfied. Pausing here, we shall briefly recapitulate the legal position in England. The relevant wordings of the section with which the English judges were c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the business and is incidental to it. In Indian Molasses Co. (Pvt.) Ltd. v. Commissioner of Income-tax this court held that section 10(2)(xv) of the Act enacted affirmatively what was stated in the negative form in the English statute and was substantially in pari materia with the English enactment and the courts might consider the English authorities as aids to the interpretation thereof. The decision of this court in Commissioner of Income-tax v. Abdullabhai Abdulkadar , though it turns upon the provisions of section 10(1) of the Act, gives some assistance in deciding the question raised. One of the questions raised was whether the tax paid by the assessee-firm as an agent of the non-resident principal could be claimed as a bad debt or a trading loss. In the words of Kapur J. " the loss which the appellant has incurred is not in its own business but the liability arose because of the business of another person and that is not permissible deduction within section 10(1) of the Act." It is true that this decision did not arise under section 10(2)(xv) of the Act but the principle that the expenditure incurred by the assessee in his capacity as agent of another is not a deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ult : The expression " for the purpose of the business " is wider in scope than the expression " for the purpose of earning profits ". Its range is wide : it may take in not only the day to day running of a business but also the rationalization 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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