Judicial Analysis Court Copy Headnote Facts Arguments Court observation

1964 Supreme(SC) 131

SUPREME COURT OF INDIA
10th April, 1964
K. SUBBA RAO, J.C. SHAH AND S.M. SIKRI, JJ.
Commissioner of Income-tax, Kerala, Appellant
Versus
M/s. Malayalam Plantation Ltd., Quilon, Respondent.
Civil Appeals Nos. 384 and 385 of 1963.
Advocates Appeared
Mr. K. N. Rajagopal Sastri, Senior Advocate, (M/s R. N. Sachthey, Advocate, with him), for Appellant; Mr. Bishan Narain, Senior Advocate, (M/s. G. B. Pai and T. A. Ramachandran, Advocates, and M/s. J. B. Dadachanji, O. C. Mathur and Ravinder Narain. Advocates of M/s. J. B. Dadachanji and Co., with him), for Respondents.

Advocates:
BISHAN NARAIN, G.B.PAI, J.B.DADACHAN, K.N.RAJAGOPAL SASTRI, O.C.MATHUR, R.N.SACH, Ravindra Narayan

The estate duty paid by the assessee was not an allowable deduction under S. 10(2)(xv) of the Indian Income-tax Act, 1922, as it was paid by the assessee as a statutory agent to discharge a statutory duty unconnected with the business.

Headnote:
INCOME TAX - Deduction - Estate duty paid by resident company on behalf of non-domiciled members - Whether deductible from profits - S. 10(2)(xv) of the Indian Income-tax Act, 1922.
Fact of the Case:

The assessee, a resident company incorporated outside India, paid estate duty on behalf of non-domiciled shareholders. The assessee claimed the said amount as a deduction from its profits under S. 10(2)(xv) of the Indian Income-tax Act, 1922.
Finding of the Court:

The Court held that the estate duty paid by the assessee was not an allowable deduction under S. 10(2)(xv) of the Act. The Court reasoned that the estate duty was paid by the assessee as a statutory agent to discharge a statutory duty unconnected 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.
Issues: Whether the estate duty paid by the assessee was an allowable deduction under S. 10(2)(xv) of the Indian Income-tax Act, 1922.
Ratio Decidendi: 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 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 unconnected with the business.
Final Decision: The appeals were allowed and the order of the High Court was set aside.

Judgement

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 S. 10(2) (xv) of the Indian Income-tax Act, 1922, hereinafter called the Act.

2. 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 31, 1955, it paid £1, 302-9-4 and £1, 303 towards estate duty which was payable on the death of certain shareholders who were not domiciled in India. The assessee debited the said amounts to revenue is its accounts in ascertaining the profits and gains of its business for the said year. Similarly, for the accounting year ending March 31, 1956, it paid a sum of £ 3, 809-1-5 towards estate duty payable on the death of certain shareholders and debited the said amount to revenue in its accounts in ascertaining the profits and gains of its business for that year. The Income- tax Officer included the said amounts so paid towards estate duty in the profits and gains of the company for the said two accounting periods and assessed the company to income-tax for 1955-56 and 1956-57 on that basis. The appeals preferred by the assessee to the Appellate Assistant Commissioner were dismissed. On further appeal to the Appellate Tribunal it held that the assessee was entitled to deduct the said amount in computing its profits; and on that finding it set aside the orders of the Appellate Assistant Commissioner. On an application made by the Commissioner of Income-tax, the Appellate Tribunal stated a case under S. 66(1) of the Act to the Kerala High Court, and referred the following question of law for its opinion :

"Whether on the facts and in the circumstances of the case, the estate duty paid by the Company under S. 84 of the Estate Duty Act, 1953, is a revenue expenditure deductible in computing the assessee s business income for the assessment years in question?"

The High Court agreed with the view expressed by the Appellate Tribunal and answered the question referred to it in the affirmative. The present appeals by special leave have been filed against the said order of the High Court.

3. Mr. Rajagopal Sastri, learned counsel for the Commissioner of Income-tax, raised before us the following two points : (1) The sums paid by the assessee under S. 84 of the Estate Duty Act, 1953, are not expenditure of the Assessee-Company and, therefore, they cannot be deducted from its profits in computing its assessable income under S. 10(2)(xv) of the Act; and (2) even if it is revenue expenditure, it is not laid out or expended wholly or exclusively for the purpose of the assessee s business within the meaning of the said sub-clause.

4. Mr. Bishan 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 assesses 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 S. 10(2) (xv) of the Act inasmuch as it discharged its statutory obligation in order to preserve the assets of the company.

5. The question raised turns upon the provisions of S. 10(2)(xv) of the Act. It reads :

"Section 10. Business - 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 n

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1964 Supreme(SC) 131

The estate duty paid by the assessee was not an allowable deduction under S. 10(2)(xv) of the Indian Income-tax Act, 1922, as it was paid by the assessee as a statutory agent to discharge a statutory duty unconnected with the business.

Cases Referred (5)