T. S. Krishna v. C. I. T. Madras

Judgment

The Judgment of the Court was delivered by }AGANMOHAN REDDY, J. This appeal is by certificate against 'the judgment. of the Madras High Court on a reference under s. 256(1) of the Income-tax Act, 1961, (hereinafter called the 'Aci') answering the question referred to it by the Tribunal .against the assessee. During the relevant accounting period 1962-63 the assessee paid wealth-tax of Rs. 21,963/- in respeot of the shares held by him and claimed to have this amount deducted from the dividend income and interest as an expenditure allowable under s. 57(iii) Qf the Act. The Income-tax Officer rejected the claim on the ground 'th~t there was no direct or immediate connection between the payment of the wealh-tax and the .earning of the dividend income. In the. S!!bsequem appeals against this order, bjoth the Appellate Assistant Commissione!' as well as the Tribunal confirmed the order of the Income-tax Officer.

The High Court on a reference in that case as well as in others raising a similar question, while rejecting tlie contention of the assessee, observed that the wealth-tax was paid by him as the owner and on ilie value of the totality of his assets which has nothing to do with his making or earning income from such assets and that the production of the income from the assets appeared to it to be wholly unconnected with the payment of wealth-tax. The Court drew support from the Kumbakonam Electric Supply Corporation Ltd. v. Commissioner of Income-tax, Madras('') and Travancore Titanium Products Ltd. v. C.l.T. Kerala(2).

The learned advocate who appeared for the assessee and who has also addressed his argument before us had contended before the High Court that the preservation of assets is incidental to the purpose of making or earning income, that these are cases in which the assets themselves automatically produced income and that therefore payment of wealth-tax was virtually a condition for making or earning income because default in payment of such tax will endanger the ownership of the asse1 which in its turn will destroy the very source of income, Several cases were cited in support of that proposition but the High Court after distinguishing them -0bserved :- "We find it difficult to hold that the wealth-tax was paid by each of the assessees in these cases as incidental to making or earning income. In a sense it may be that in order to preserve the total net assets, the assessee has to pay wealth tax and that without such assets there can. be no qur-stion of making or earning the income.

But these facts do not establish the nexus (!) 50 I. T. R 809. (2) 60 I. T. R. 277. T. s. KRISHNA V. CJ.T. (Jaganmohan Reddy, J.) required for the expenditure by way ol wealth tax to be ·a permissible deduction. The connection, if any, of t!ie expenditure by way of wealth tax with the assessee's making or earning the income appears to be too remote. The expenditure in order to be a permissible deduction, should be directly connected with the purpose of making or earning of income for, otherwise it cannot be said that the expenditure is for the purpose of making or earning income." The case of Travancore Titanium Products decided ~· thi, Court was dealing with tl!e deduction o,f excess profits tax on the asset which a trader owned and which was employed in the business. The assessee had in that case sought to claim under s. 10(2) (xv) of the Income-'lax Act, 1922, deduction of the excess profits tax paid on the asset so utilised in earning the business income.

It was observed by this Court: "In determining whether an amount expended by the assessee is deductible under s. 10(2) (xv) of the Indian Income-tax Act, the nature of the expenditure or outgoing must be adjudged in the light of accepted commercial pi:actice and tri!dling prin~ples. The eixpenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and must be laid out by the tax payer in his character as a trader. To be a pennissible deduction, there must be a direct and ,intimate connection bletween the· expenditure and the business i.e. between the expenditure and the character of the assessee as a trader, and not as owner of assets, even ·if they are assets of the business."

The dichetomy between the trader owning an asset and his utilisation of it in earning a business income therefrom, according to this Cuort,. lac.ked the nexus for holding that the asset was directly and intimately connected with the business and was laid out by the assessee in his character as a trader. A larger Bench of this Court recently in Indian Aluminium Co. Ltd. v. C.l.T. (') has not accepted the test adopted in Travancore Titanium case that: "io l;je a permissible deduction, there must be a direct and intimate connection between the expenditure and the business i.e. betw:een the expenditure and the character of the asses see as a trader, and not as owner of assets, even if they are. assets of the business." (I) 84 I.. T. R. 735. 5:!6 (1973) 2 S,C.R. Th~1t view was qualified by stating that if the expenditure is laid out by the assessee as owner-cum-trader, and the expenditure i> really incidental to the carrying on bf his business, it. must be treated to have been laid out by him as a trader and as incidental to his business.

It further held that in the case of individuals who have boih business assets and debts and non-business assets and deqts, it should not be difficult to evolve a principle or .fran1e st:rtutory rules to find out the proportion oi the wealth-tax which is really incidental ·to the carrying on of the trade. Immediately after the .iudgment was rendered the President issued the Income-tax (Amendment) Ordinance on July 15, 1972 by the ad- .dition of sub-cl. (iia) to cl. (a) of s. 40 and sub-s. (IA) to s.58. This was followed by •the Income-tax (Amendment) Act 41 of 1972, the preamble of which enacted that it was "further to amend ·the Income-tax Act, 1961 and to provide for barring in the computation o.f total income in respect of ci;rtain assessment years prior to the assessment year 1962-63, deduction of amounts paid on account of wealth-tax''.

It may be observed that both the Trnrancore Titanium Products case as well as the Indian Aluminium case dealt with deductions of Excess Profits tax as an Expenditure in respect of business income. They were not dealing with deduction of wealth-tax paid l:iy iildividuals on the assets owned by them from income derived from other sources under 1he Income-tax Act, but even so the ordim1nce and the Act have made provision for disallowing the wealth tax paid as an expenditure in respect of both the above categories of income. It is contended before us by the learned advocate that notwithstanding these amendments, wealth-tax paid on particular assets of the business or profession have been excluded from the disallowance under the amended sub-s. (IA) of s. 58 which by reference incorporates· sub-cl.(iia) of cl. (a) to s. 40 added hly 1he Amending Act. S. 40 of the Act inhibits the deduction of :iny expenditure specified therein notwithstanding anything to :he comraiy in ss.

30 to 39 which permit deductions of certain it~ms of expenditure incurred by the assessee in respect of his business or profession. Similarly, under s. 58 or the Act the expenses categorised therein are not to be deducted in computing the income chargeable under the head ."income from other sources" notwithstanding that under s. 57 certain deductions are permissible in respect of that category of income. It may be specified that in so far as dividend income or interest derived by 1he assessee is concerned sub-s. (i) and sub-s. (iii) of s. 57 pernfrt deductions in computing assessable income as follow~ :- (i) in the case of dividends, any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of rea Jising such dividend on biehalf of the assessee: 8 I T. s. KRISHNA V. C.I.T. (l"agannzohan Reddy,)~) (ii)

(iii) any other expenditure (not bemg in the nature of capital expenditure) laid out or ex~ended wholly and exclusively for the purpose of makmg or earning such incom~." The amendments 'to ss. 40 and 58 as stated earlier do not allow deduction of wealth-tax or tax of similar character etc. where it is levied and paid under ·the law of any country outside India. The following are the relevant ,Provisions of the Amendment Act:- "(2) Jn section 40 of the lncome-'lax Act, 1961 (hereinafter referred to as the principal Act), after subclause (ii) of clause (a), the following sub-clause sh~ll be, and shall be deemed always to have been, inserted, namely:- , (iia) any sum paid on account of wealth-ta.\.

Explanation.-For the pu~poses of this sub-clause, "wealth-tax" means wealth-tax chargeable under the Wealth-tax Act, 1957 or any tax of a similar character chargeable under any law in force in any country ou1side India or any tax chargeable under such law with reJ'erence to the value of the assets of, or the capital employed in, a business or profession carried on by the assessee, whether or not the debts of the b:Usiness or profession are allowed as deduction in computing the amount with reference to which such tax is charged, but does not include any tax chargeable wiih reference to the value of any particular asset of the business or profession; 3. Section 58, as originally enacted, of the principal Act sh~ll be deemed always to have been renumbered as sub-section ( 1) thereof, and alter subsection, the following sub-section shall be, and shall be deemed always to have been, inserted, namely :- '(IA)

The provisions of sub-clause (iia) of ~lause (al. of secti?n 40 shall. so far as may be, apply In computmg the mcome chargeable under the head '.'income. from other sources" as •they apply in computm~ the mco1~e chargeable under the head "Profits and gams of husmess or profession."' 4. Nothing contained in the Indian Income-tax Act, 1922 shall be deemed to authorise. or shall be deemed e,ver to have authorised, any deduction in the computahon of the income oi. any assessee chargeable (1973j 2 S.C.R. u.nder the head ··profits and gains of busines>, profession or vccation"' or ""Income from other sources" for .. the assessment year commencing on the l~t day of April, 1957 or any subsequem assessment year, of any sum paid on account of wealth-tax. Explanation-For the purpose of this section, ··11eahh-tax·· shall have the same meaning as is assigned to it in the Explanation to sub-clause (iia) of clause (a·) of section 40 of the principal Act. 5.

Where, before 'lhe 15th day of July (being the date en which the Inoome-tax (Amendment) Ordinance, 1972 came into force, the Supreme Court has. on an appeal in respect of the assessment of an assessee for any particular assessment year. held that wealth-tax paid by the assessee is deductible in computing the tO'lal income of that year. then. nothin2 contained in sub-clause (iia) of clause· (a) ·of sec":. tion 40, or sub-section 1 (A) of section 58, of the principal Ac·t. as amended by this Act. or, as the case . may be, section 4 of this Act, shall apply tel the assessment of such assessee for that particular year:· It will be observed from s.

5 of the Amendment Act that the judgment of this Court in •the /11dia11 A/11111i11i11m Co. case in so far as the deduction of the wealth-tax was held to be allowable .in computing the assessee's income in ihat case, was left untouched but any sum paid on account of wealth-tax in respect of assessment years prior to 1962-63 and those under the Income-tax Act, 1922 in respect of assessments commencing on the 1st day of April 1957 or on any subsequent year. the amendment was given retrospective operation. The changes introduced in sections 40 and 58, we should have thought, were clear in disallowing any deduction of the wealth-tax from the computntion oi an assessee"s income.

The learned -advocate for the assessee however has made a valiant attempt which at·tempt we think is totally al:Jortive even if we were inclined to stretch and strain interpretation in favour of the assessee because neither the language nor the diction of the amended provisions permit the construction sought to be placed on the amendments. What 'lhe learned advocate seeks to contend is that the Explanation to sub-clause (iia) of cl. (a) of s. 40 which Explanation mutatfr mlllandis is by reference to be read into sub-s. ( lA) of s. 58 so far ac may be applicable in computing the income chargeable under the income from 'other sources' as they apply in computing: th1:' income chargeable under the head "profits and gains of business an.ct :lifrnfe.ssion"' saves th~" excess profits tax 'C>iri'."! II T. s. KRISHNA V. C.J.T. (Jaganmohan Reddy, /.) chaFe•1ble with reference to the value of any particular asset of the business or profession.

In other words, this contention am0\!ms to saying that the legislature left untouched the decision of this Court in Indian Aluminium Company: Reliance for this sutimis<;ion is based on the words "but does not include any tax chargeable with reference to the value of any particular asset of the bu; \ness or profession" in the last part of the Explanation to the 'aid sub-clause because according to him the prohibition to ded;.ction under s. 2 of the Amending Act is the amount paid on ~~count of wealth-tax which expression has been given an extended meaning to cover the wealth-tax payable under the Wealth-tax Act in this country as well as taxes of similar character and 0!her taxes on assets, of or the capital employed in the business or profession carried on by ·the assessee payable under the law of any country outside Iridia.

The learned advocate further proceeds to submit that the Explanation however excludes from the prohibition to deduct sum wealth-tax under the sub-clause or subrsection the tax chargeable with reference to a ·particular asset whether such charge is either under the laws of this country i.e. the Wealth-tax Act or und~r the laws in force outside India. There is no warrant for this construction because the words upon which reliance has been placed are related to the tax chargeable under a law in force in any country outside India with reference to the value of the assets of/or employed in a business or profession carried on by the assessee. The exclusion contemplated by the exception on which emphasis is placed is wholly unrelated to the scheme of the Wealth-tax Act because wealth-tax under that Act is not chargeable with reference to the value of any parti~ular asset of the business or profession but under s.

3 the charge is in respect of the net wealth on the corresponding valuation date of every individual Hindu undivided family and company at the rate or rates specified in the Schedule. "Net wealth" under s. 2(m) means the amount which the aggregate value computed in accordance with the provisions of the Wealth-tax A ct of all the assets, wherever located, belonging to the asseoiee on the valuation date, including assets required to be included in h1; nee wealth as on that date under hat Act is in excess o.f the aggregate value of all the debts owed bjy the assessee on the v'.1.lmition da•te o.ther than those specified in items (i). (ii) and (" 1) ot that section. S. 4 includes certain assets' in the net wealth wh!le '· 5 provides for exemption in respect of specified assets on 11h1ch wealth-tax is not payable and such assets are not to be ~aken into account in computing the net wealth of the assessee. S. 6 concerns with the exclusion of assets and debts outside India and s.

7 deals with the cietermination of 'the value of the assets which are to be included in the net wealth. [1 is thus clear tlwt under the scheme nf the Wealth-tax Act. tax is leviable not on I 7-l498SupC'I /7.' any separate or particular asset but on the neit wealth as defineli 11nder that Act. The learned advocate wanted us to read "anv particular asset" in Explanation to sub-cl. (iia) of cl. (a) of s. 40 .. as the aggregate of the assets as defined in 'net· wealth'·· under s. 2(m). To accept such an argument would be to give a go by to the scheme of the Wealth-tax Act where though each asset comprised in the net wealth can be separately valued under s. 7, nevertheless net wealth would be the amount by which tlle aggregate value o' all those assets, exceed '111e aggregate value of de~s owed by the assessee on the valuation date.

Even otherwise to read the exception "but does no include any tax chargeable with reference to the value of any particular asset of the business or prcfession" with the first part of the Explanation "wealth-tax" means wealth-tax chargeable under the Wealth-tax Act· "would not grammatically make any sense. These two read together would make the following senter.ce" 'wealth-tax' means wealth-tax chargeable under the Wealth-tax Act, 1957. but does not indude any tax chargeable with reference to the value of any particular asset of the business or profession."

As already pointed out, on the scheme of the Act there is no logical connection between the import of each of the two parts of that sentence, the first definitely indicates the wealth-tax chargea\j)e under the wealth-tax Act while the latter se~ks to except a tax chargeable with reference to the value of any particular business or professivu which is not a tax Jeviable as such under the wealth-tax Act ana hence does not relate to that part of the Explanation where wealth-tax in sub-cl. (iia} means tt,at it is the wealth-tax chargeable under the Wealth-tax Act. In our view, sub-section (IA) of section 58 clearly excludes any deduction as claimed.

Even apart from the amendment disallowing the deduction the very nature of the income from dividend in respect of which deduction of wealth-tax is claimed does not, as pointed out by 1he High Court, bear any relationship direct or incidental to the earning of that income and cannot therefore be said fo be laid cut or expended exclusively for the purpose of making or earning such income within tlle meaning of sub-cl. (iii) of s.57 of the Act or under the corresponding provisions of s.10 (2) (xv) of the Indian Income-tax Act, 1922. In any view of the matter, the answer to the question rendered by tlle High Court is unexceptionable and the appeal is consequently dismissed with costs. s.c. Appeal dismissed.