# COMMISSIONER OF INCOME-TAX, KERALA v. MALAYALAM PLANTATION LTD

- **Citation:** [1964] 7 S.C.R. 693
- **Court:** Supreme Court of India
- **Decided:** 1961-01-19
- **Case number:** Civil Appeals Nos. 384 and 385 of 1963
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-kerala-v-malayalam-plantation-ltd-3104
- **Pages:** 13

## Headnote

78.C.R.
SUPREME COURT REPORTS
693
COMMISSIONER OF INCOME-TAX, KERALA
v.
MALAYALAM PLANTATION LTD.
JK. SUBBA RAo, J. c. SHAH AND s. M. Snrn, JJ.]
Income Tax-Assessee treated as agent-Estate duty of
non-resident paid bu assessee-If an allowable deduction-Expression "for the purpose of the bushess"-Meaning ofIndian Income-tax Act, 1922 (11 of 1922), s. 10(2)(xv}-Estate
Duty Act, 1953 (34 of 1953),, s. 34. ·
For the two accounting periods the assessee, a residenf
company, incorporated outside India paid estate duty payable
on the death of its certain share holders not domiciled in
India and debited the said amounts to r€irenue in its accounts
in ascertaining the profits and gains of its business for the
said years. The Income-tax Officer included the said amounts
so paid towards estate d'uty 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 by the assessee to the Appellate Assistant Commissioner were dismissed but on further appeal, the Appellate Tribunal set aside the said orders and held that the assessee was entitled to deduct the said amount in computing its
profits. On an application by the Commissioner of Income-tax,
the Tribunal stated a case under s. 66(1) of the Act to the
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 of the Tribunal and answered the question in the affirmative. On appeal by special leave it was urged on behalf of the
appellants, (i) that the sum paid by the assessee under s. 84 of
the Estate Duty Act wete not expenditure of the assessee company and therefore, they could not be deducted from its profits in computing its assessable income under s. 10(2)(xv) of
the Act; and (2) that even ii it was revenue expenditure, It
was not laid out or expended wholly or exclusiwly for the
purpose of the assessee's business within the meaning of the
said sub-clause.
Held: (i) There was nothing on the record to show whether in England, where the concerned share holders died th<!
resident company could recover the amount representing the
estate duty paid by it in India from the legal representative
of the deceased share holders. Therefore, the assessee who,
as a statutory agent paid to the State the estate duty, could
not recover the same from the legal representative of the deceased non-resident share holders. In that situation the company ·would be out of pocket to the extent it paid the estate
duty of tire said persons. Therefore, it cannot be held that the
amounts paid by the assessee towards estate duty were wot'
expenditur_e incurred by it, but only amounts paid by it on
account with a right to recover the same from the persons on
whose behalf it paid.
(ii) The expression "for the purpose of the business" in
s. 10(2)(xv) of the Act is wider in scope than the expression
"for the purpose of earning profits". Its range is wide: it may
191J4
.April ID
1961
Oommiuiomr of
lftCOmt'-lax, Kuala
v.
Maiaydam
Planlalion J,i,J,.
Bubba Bao, J.
694
SUPREME COURT REPORTS·
[1964}
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

## Text

78.C.R.
SUPREME COURT REPORTS
693
COMMISSIONER OF INCOME-TAX, KERALA
v.
MALAYALAM PLANTATION LTD.
JK. SUBBA RAo, J. c. SHAH AND s. M. Snrn, JJ.]
Income Tax-Assessee treated as agent-Estate duty of
non-resident paid bu assessee-If an allowable deduction-Expression "for the purpose of the bushess"-Meaning ofIndian Income-tax Act, 1922 (11 of 1922), s. 10(2)(xv}-Estate
Duty Act, 1953 (34 of 1953),, s. 34. ·
For the two accounting periods the assessee, a residenf
company, incorporated outside India paid estate duty payable
on the death of its certain share holders not domiciled in
India and debited the said amounts to r€irenue in its accounts
in ascertaining the profits and gains of its business for the
said years. The Income-tax Officer included the said amounts
so paid towards estate d'uty 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 by the assessee to the Appellate Assistant Commissioner were dismissed but on further appeal, the Appellate Tribunal set aside the said orders and held that the assessee was entitled to deduct the said amount in computing its
profits. On an application by the Commissioner of Income-tax,
the Tribunal stated a case under s. 66(1) of the Act to the
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 of the Tribunal and answered the question in the affirmative. On appeal by special leave it was urged on behalf of the
appellants, (i) that the sum paid by the assessee under s. 84 of
the Estate Duty Act wete not expenditure of the assessee company and therefore, they could not be deducted from its profits in computing its assessable income under s. 10(2)(xv) of
the Act; and (2) that even ii it was revenue expenditure, It
was not laid out or expended wholly or exclusiwly for the
purpose of the assessee's business within the meaning of the
said sub-clause.
Held: (i) There was nothing on the record to show whether in England, where the concerned share holders died th<!
resident company could recover the amount representing the
estate duty paid by it in India from the legal representative
of the deceased share holders. Therefore, the assessee who,
as a statutory agent paid to the State the estate duty, could
not recover the same from the legal representative of the deceased non-resident share holders. In that situation the company ·would be out of pocket to the extent it paid the estate
duty of tire said persons. Therefore, it cannot be held that the
amounts paid by the assessee towards estate duty were wot'
expenditur_e incurred by it, but only amounts paid by it on
account with a right to recover the same from the persons on
whose behalf it paid.
(ii) The expression "for the purpose of the business" in
s. 10(2)(xv) of the Act is wider in scope than the expression
"for the purpose of earning profits". Its range is wide: it may
191J4
.April ID
1961
Oommiuiomr of
lftCOmt'-lax, Kuala
v.
Maiaydam
Planlalion J,i,J,.
Bubba Bao, J.
694
SUPREME COURT REPORTS·
[1964}
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 carrying on the business and the assessee shall incur it in his capacity as a person carrying on the bu9iness. 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.
In the present case, the amounts in question were 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. Therefore, it
must be held that the estate duty paid by the respondent was
not an allowable deduction under s. 10(2) (xv) of the Act.
Case law reviewed.
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos.
384 and 385 of 1963. Appeals by special Jeave from the
judgment and Decree dated January 19, 1961, of tbe Kerala
High Court in Income-tax Referred case No. 20 of 1959.
K. N. Rajagopal Sastri and R. N. Sachthey, for the
appellant
Bishan Narain, G. 8. Pai. T. A. Ramachandran, ]. B.
Dadachanji, 0. C. Mathur and Ravinder Narain, for the respondents.
April 10, 1964. 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 tbe assessee. incorporated
outside India, on behalf of members not domiciled in India
is deductible from its profiis in computing its assessable income under s. 10(2)(xv) of tbe Indian Income-tax Act, 1922,
hereinafter called tbe Act
The material facts are not in dispute and they may be
briefly stated. The assessee is a resident Company i~corpo
rated outside India. Most of its shareholders are m the
United Kingdom. During the accounting period ending
March 31, 1955, it paid £ 1,302-94 and £ 1,303 towards
estate duty which was payable on tbe death of certain shar~
holders who were not domiciled in India. The assessee debited tbe said amounts to revenue in its accounts in ascertain-
7 S.C.R.
'suPREME COURT REPORTS
695
1964
ing 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(i) of the
Act to the Kerala High Court, and referred the following
question of law for its opinion:
OommiBaioner of
lncomt-tax, Kerala
"Whether on the facts and in the circumstances of
the case, the estate duty paid by the Company
under Section 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.
Mr. Ra jagopala Sastri, learned counsel for the Commissioner of Income-tax, raised before us the following two
points; (!) The sums paid by the assessee under s. 84 of the
Estate Duty Act, 1953, are not expenditure of the assesseeCompany 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.
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 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
v.
Malayalam
Plantation Ltd.
Subba Rao, J.
696
SUPREME COURT REPORTS
(1964]
1P64
the said expenditure was wholly and exclusively for the purOommiMi<>mr of pose
of
the
assessee's
business within the meaning of
Incomt·laz, Kerala s. I 0(2)(xv) of the Act inasmuch as it discharged its statuM.Z:;ai.m
tory obligation in order to preserve the assets of the comPlantalitm Lid.
pany.
Subba Roo, J.
· The question raised turns upon the provis.ions of s. 10(2}
(xv) of the Act. It reads:
Section IO. 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, namely: -
•
*
*
*
•
(xv) any expenditure (not being an allowance of
the nature described in any of the clauses (i)
to (xiv) inclusively, and not being in the nature
of capital expenditure or personal expenses
of the assessee) laid out or expended wholly
or exclusively for the purpose of such business, profession or vocation."
The first facet of the argument turns upon the question
whether the estate duty paid by the assessee is an expenditure incurred by it within the meaning of the said provision.
Under s. S of the Estate Duty Act· the property of every
person dying after the commencement of the said Act shall
be liable to a duty called "estate duty" at the rates fixed
in accordance with s. 35 thereof. Under s. 2'1 of the said Act
there shall not be included in the property passing on the
death of the deceased, inter alia, movable property situated
outside the territories to which the said Act extends at the
time of the death of the person. Under s. 53 of the said Act,
where any property passes on the death of the deceased,
~very legal representative to whom such property so passes
for any. beneficial interest in possession or in whom any interest in the property so passing is at any time vested and
others mentioned in the section shall be accountable for the
whole of the estate duty on the property passing on the
death. Section 84 thereof is aimed to reach the property of
a member of a company dying outside India: the section before amendment read:
Section 84. Company to furnish particulars of deceased
members to the Controller-
.
(i) Where a company incorporated outside India
carried on business in the territories to which
this Act extends and has been. treated ·for the
-
'1 S.0.R.
SUPREME COURT REPORTS
697
purposes of the Indian Income-tax Act, 1922
1964
(XI of 1922), as resident for two out of three Oommls.ioner of
completed
assessments immediately preceding, Int.ome·tall:, K•rala
such company shall, within three months of the
M.;:·
receipt of intimation of the death of a member P1an1a1r.:L:a.
dying after the commencement of this Act, furnish to the Controller such particulars as may
Subba Rao, 1•
be prescribed in respect of the shares of the deceased member in the company, and shall be
liable to pay estate duty at the rates mentioned
in Part III of the Second Schedule, on the princi·
pal value of the shares held by the deceased in
the company except in cases where the deceased
member was a person domiciled in India and
the person accountable has obtained a certificate
from the Controller showing that either the estate
duty in respect thereof has been paid or will be
paid or that none is due, as the case 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 princi·
pal value of the share 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 the 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 authorised 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 tlie
shares or the property of a person domiciled in a country
,
outside India. Nor sub-s. (2) of s. 77, which says that a person having an interest in any property, who pays the estate
duty in respect of that property, shall be entitled to the like
charge, as the estate duty in respect of that property had
been (aised by means of a mortgage to him, has application, for it -cannot be said that the company has any legal
interest in the shares owned by a third party. That apart,
·the said sub-section also cannot have extra-territorial operation. Nothing has been placed before us to enable us to
come to the conclusion whether in England, where the concerned shareholders died, the resident company could re-
<:over the amount representing the estate duty paid by it in
698
SUPREME COURT REPORTS
(1964]
1964
India from the legal representatives of the deceased shareCommissioner of holders. We, therefore, assume that the assessee who, as a
Income-tax, Kera/a statutory agent pays to the State the estate duty, cannot re-
,, 1 v. 1
cover the same from the legal representatives of the deceased
~• ayn am
"d
h
h Id
I
h
·
·
h
Plantation Ltd.
non-rest ent s are o ers.
n t at s1tuat10n t e company
would be out of pocket to the extent it paid the estate duty
Subba Rao, J. of the said persons. We cannot, therefore. accede to the contention of the learned counsel for the appellant that the
amounts paid by the assessee towards estate duty were not
expenditure incurred by it, but only amounts paid by it on
aocount with a right to recover the same from the persons.
on whose behalf it paid.
The next question is whether the said expenditure was.
expended wholly and exclusively for the purpose of the
business of the assessee within the meaning of s. 10(2)(xv) of
the Act. The crucial words of the section relevant to the
present enquiry are "for the purpose of such business." Subsection (2) cl. (xv) is a residuary clause which provides for
allowing the items of business expenditure not covered by
the other clauses of sub-s. (2) of s. 10 of the Act. Before
the Amending Act of 1939, the language of the predecessor
of this clause read thus:
"not being in the nature of capital gains incurred
solely, for the purpose of earnmg such profits or
gains."
The Amending Act of 1939 substituted the present clause
and made it more comprehensive by using the expression
"for the purpose of such business". Some of the decisions
cited at the Bar, both English and Indian, throw some light
on the construction of the said expression and we would,
therfeore, briefly notice them.
The House of Lords in Strong and Company of Rom·
sey, Limited v. Woodifield(') construed a corresponding provision in the Income-tax Act of the 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 licensed
houses in which it carried on the business of innkeepers. incurred damages and costs to the amount of £ 1,490 on
account of injuries caused to a visitor staying at one of its
houses by faiiing 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
(') (1906) 5 T.C. 215, 219, 220.
7S.C.R
SUPREME COURT REPORTS
699
trader in some character other than that of a
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 profit• 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 the Lord Chancellor, for the former restricts the expression to mean that the expenditure should have .been
made only for the purpose of earning profits. Finlay, J., in
Allen v. Farquharson Brothers Limited('), noticed that the
qualifictaion "for the purpose of earning profits" was a
slight expansion of the words of the statute, though he expressed the view that it brought out the real import of the
relevant section. In Rowntree and Company, Ltd. v. Curtis
(ff.M. Inspector of Taxes)('). in disallowing the deduction
claimed by a company of a sum set aside for the relief of
the invalid employees, Rowlatt. J ., applied the test whether
the said expenditure incurred by the company was for the
purpose of earning profits. In Cooke v. Quick Shoe Repair
Service('), the court allowed a deduction in respect of sums
paid by the respondent-firm in discharging the liabilities of
the business outstanding at the date of the said respondent
purchased the business from a third party on the ground
that the said expenditure, having been incurred for the . purpose of preserving the goodwill and for ensuring the ccntinuity of supply of raw-material and labour, was wholly and
exclusively laid out for the purpose of its business. After
referring to earlier decisions, Croom-Johnson, J., made the
following observation:
"Here is a payment made in the circumstances of this
case in order to ensure a supply of leather for
the business, a payment made in order to ensure
'.I co~tinua~ce of labour willing to be employed
m this business, and payment for rent in order
to ensure that the landlord's consent to assignment of the premises, of the premises in which
the business was carried on. should not be refused. I find it quite impossible to say that there
is no evidence to justify those findings."
(') 17 T.C. 59. 65.
(') (1924) 8 T.C. 678.
(') (1949) 30 T.C. 460, 466.
1964
Com,miasioner of
lncome.tax, Kertzla
v.
Malayalam
Plantatwn IMJ.
Subba Rao, J.
700
SUPREME COURT REPORTS
(I964J:
1964
Here it will be noticed that the learned Judge went beyond
aommis.Joner of the limited scope given by Lord Davey to the expression in
Income-tax,Kerola the statute and did not confine it to the amounts spent only
Mai:· la
for earning profits, but to expenditure incurred in connecPlantatl'::. I::d.
tion with the business. ·where a company incurred an expenditure in defending its title to property, it was held in
Bub/Ja Rao, J. Southern (11.M. Inspector of Taxes) v. Borax Consolidated,
Ltd.(') that the said amount was spent wholly and exclu--
sively for the purpose of the company's trade and was,
therefore, an allowable deduction for the purpose of computing the profits of the company for income-tax purposes.
This decision gives a more liberal meaning to the expression
"for the purpose of the trade" than that given by Lord
Davey. "Purpose" of the trade includes the purpose to pro-·
tect the assets of the company carrying on the trade. The
House of Lords resurveyed the legal position in Morgan ·
(Inspector of Taxes) v. Tate and Lyle Ltd.(') in the context
of the questions 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 evi- ·
dence 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 capacity-whether on the one hand
the expenditure was really incidental to the trade
itself or on the other hand it was mainly incidental to some other vocation or was made by the
trader in some other capacity than that of trader."
This decision also restated the two tests, namely, (i) that
the expenditure should be for carrying on the business to•
earn profits in the trade, and (ii) that the expenditure shall'
be in~urred by the assessee in his capacity of a: person
(') (1942) 10 I.T.R. (Suppl.) 1, 8.
(') (1954) 26 I.T.R. 195, 205, 206, 219.
7 S.C.R.
SUPREME COURT REPORTS
701
carrying on the business. Lord Greene, M.R., in Rushden
1964
Heel Co., Ltd. v. Keene(') reaffirmed the second test in the Commi.,ionero/
following words:
Income-tax, Kerala.
v.
"I find, however, in Strong and Company's case(')
pf!::r::!:~1.1.
what appears to me to be a clear answer to the
present appeal. It is, I think, a matter not of
Subba Bao, J.
dictum but of decision in that case that an expense is not deductible if it falls on a trader in
some character other than that of a trader. This
was the ground of the opinion of Lord Loreburn,
L.C., with which Lords Macnaghten and Atkinson agreed. Their Lordships held that the expense there in question fell upon the appellants
in their character not of traders but of householders."
In Smith v. Lion Brewery Co., Ltd.('), the question was
whether a brewery company, which was owner and lessee
of a number of licensed premises where business was
carried on on the tide-house basis, was entitled to deduct
for the purposes of income tax its liability in respect of
compensation fund charges under the Licensing Act, 1904.
It was contended by the -Crown that the liability to which
the Company became subject was in its capacity as landlord
of the property and not as trader carrying on the trade of
brewer. When the case ultimately came up before the House
of Lords, the House was equally divided. The view of two
of the members who agreed with the view of the Court of
Appeal prevailed. The basis of the judgment was that the
liability was wholly and exclusively related to the carrying
on of the company's business, because on the facts of that
case the company had assumed the position of landlonl for
the purpose of its trade. If the finding was that the company
paid the tax in its capacity as landlord as opined by the
learned Lords who dissented, the result would have been·
the other way. In Harrods (Buenos Aires) Ltd. v. TaylorGooby <H.M. lnspectc,r of Taxes)('), Buckley, J., covered
th~ entire ground over again in the context of a question·
whether the appellant-company therein which was incorporated a~d resident in the United Kingdom and carrying on
the busmess 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 I Eliz. II, c. 10,
s. 137(a)). The learned Judge held on the facts of that case-
(') (1947) 30 T.C. 298, 316.
(') 11905) 5 T.C. 215.
('l (1910) 5 T.C. 568.
(') Appeal No. 2048 (Ch. D.) decided on 25th March, 1963-
(unreported).
702
SUPREME COURT REPORTS
(I9tH]
1964
that incurring liability for that tax was a pre-condition of
CommiBBiontr of the Company's earning profits in the Argentina, for without
fncome-tax, Kera'a incurring liability for that tax the Company could not carry
JI ,:· 1 _
on business in the Argentina at all. On that finding the
Pl~n~.,fo~ °L7a.
learned Judge came to conclusion that it was a liability
which the Company had undertaken for the purpose of its
Subba Rao, J. 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 section with which
the English Judges were concerned are, in effect, similar to
the terms of s. 10(2J(xv) of the Indian Income-tax Act, 1922.
The test laid down by Lord Davey in Strong and Company
of Ramsey, Ltd. v. Woodifie/d('), namely, the disbursement
must be made for the purpose of earning profits, has been
accepted and followed throughout, though the content. of
that test has been expanded to meet diverse situations.
Broadly, the English courts applied two tests to ascertain
whether a deduction was permissible or not, namely, (i)
whether the expenditure was incurred for th~ purpose of
carrying on of the business and for removing obstacles and
impediments in the conduct of the business, and (ii) whether the assessee paid the amount in his capacity as businessman or in his personal capacity.
Now coming to the Indian decisions, a Division Bench
of the Bombay High Court in Tata Sons Ltd. v. Commissioner of lncome-ta:r:,
Bombay(') held that the share of
bonus voluntarily paid by a company, which held the managing agency of another company, to some of the officers of
the managed company was a permissible deduction under
s. I 0(2)(xv) of the Act. The reason for the conclusion is stated
thus:
"But having considered the whole case and the question submitted to us I am satisfied that looking
purely at it from the point of view of commercial prinoiples what the assessee company has
done is something which had as its object increasing the profits of the Tata Iron and Steel
Co. and thereby increasing its own share of the
commission."
(') (1906) 5 T.C. 215.
(') (1950) 18 I.T.R. 460, 472.
7 S.C.R.
SUPREME COURT REPORTS
703
In Badridas Daga v. Commissioner of Income-tax('), where
1964
the agent of the assessee misappropriated his money and the
Oommi,.ioner of
assessee claimed the part of the amount misappropriated Income-tax. Kerala
and not recovered from the agent as a deduction under
Mal:;aiam
s. 10(2)(xv) of the Act for the purpose of income-tax, this
Plantation Ltd.
·Court held that it was not allowable under 8. 10(2)(xi) or
Subba Rao, J ..
s. 10(2)(xv) of the Act. Venkatarama Ayyar, J., observed:
"The result is that when a claim is made for a deduction for which there is no specific provision in
section 10(2), whether it is admissible or not will
depend, on whether having regard to accepted
commercial practice and trading principles, it
can be said to arise out of the carrying on of
the business and to be incidental to it."
This decision, though not direct in point, lays down the
principle that an expenditure can be deducted only if it
arises out of the carrying on of the business and is incidental
to it. In Indian Molasses Co. (Pvt.) Ltd. v. Commissioner
of Income-tax, W.B.('), this Court held that s. 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,
Bombay v. Abdul/abhai Abdulkadar("), though
turns upon the provisions of s. 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 principle 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·
s. I 0(1) of the Act". It is true that this decision did not arise
under s. 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 deductible item equally applies to the
present case. This Court in The Commissioner of Jncometax, W.B. v. Royal Calcutta Turf Club(') had to consider
the question whether an expenditure incurred by a race club
for the purpose of training jockeys of the club was an allowable deduction within the meaning of s. 10(2)(xv) of the Act.
( ') [1959] S.C.R. 600.
(') [1961] 2 S.C.R. 949.
('l (1959) 37 I.T.R. 66.
(') [1961] 2 S.C.R. 729, 735-736.
704
SUPREME COURT REPORTS
[1964}
Kapur, J., speaking for the Court, after considering the releOommissioner of vant decisions, concluded thus:
Jl.ncome.tax. Kerala
•·
"Applying the law, as laid down in those cases, to
.Malayalam
h
1 ·
' h
th
.Plantn6on Ltd.
the present case t e cone us10n 1s t at
e amount
Su'>ba Rao, J,
in dispute was laid out wholly and exclusively
for the purpose of the resp(mdent's business because if the supply of jockeys of efficiency and
skill failed the business of the respondent would
no longer be possible. Thus the money was spent
for the preservation of the respondent's business."
This decision gives a liberal interpretation to the relevant expression. In MI s. Haji Aziz and Abdul Shakoor Bros. v.
The Commissioner of Income-tax, Bombay City 1/('), this
Court disallowed deduction of the amount paid by a firm
as penalty to release the consignment confiscated by the
Customs authorities. In coming to the conclusion, Kapur, J.,
speaking for the Court, observed:
"The words "for the purpose of such business" have
been construed in Inland Revenue v. Anglo
Brewing Co., Ltd.(') to mean "for the purpose
of keeping the trade" going and of making it
pay."
...
After considering the relevant decisions, the learned Judge
proceeded to state thus:
"They cannot be deducted it they fall on the assessee
in some character other than that of a trader.
Therefore, where a penalty is incurred for
the
contravention of any specific statutory provision, it cannot be said to be a commercial loss
falling on the assessee as a trader the test being
that the expenses which are for the purpose of
enabling a person to carry on trade for making
profits in the business are permitted but not if
they are merely connected with the business."
No doubt this judgment is really based upon the fact that an
expense which is paid by way of penalty for breach of law
.cannot be said to be an amount wholly and exclusively laid
out for the purpose of the business; but the observations in
the decision go further and indicate that the expenditure, if
.incurred by the trader in some character other than that of a
trader, is not an allowable deduction.
(') [1961] 2 S.C.R 651. 657, 663.
(') (1925) 12 T.C. 803. 813.
-
7 S.C.R.
SUPREME COURT REPORTS
705
The aforesaid discussion leads to the following result:
1964
The expression "for the purpose of the business" is wider o,,,,,,.;,,;.,,..,. of
in scope than the expression "for the purpose of earning 1,.,,.,,,,.ta•, KerOJa
profits''. Its range is wide: it may take· in not only the day
M 1 'Y.1am
to day running of a business but also the rationalization of
Pin•~:,,.,. Lid.
its administration and modernization O,f its machinery; it
·
may inciude measure for the preservation of the business
Suboa Ba<>, 1•
· and for the protection of its assets and property from expropriation, coercive proc~ss or assertion of hostile titles; 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 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. In the present rose, the company, as a statutory agent of the deceased owners of the
shares, paid the sums payable by the legal representatives
of the deceased shareholders. The payments have nothing
to do with the conduct of the business. The fact that on
his default, if any, in the payment of the dues the Revenue
may realise the amounts from the business assets is a consequence of the default of the assessee in not discharging his
statutory obligation, but it does not make the expenditure
any the more expenditure incurred in the conduct of the
business. It is manifest that the amounts in question were
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.
We, therefore. hold that the estate duty paid by the respondent was not an allowable deduction under s. 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.
·
In the result, the appeals are allowed with costs. One
set of hearing fees.
Appeals allowed.
I.f P(D)ISCI-43