# INDIAN ALUMINIUM CO. LTD v. COMMISSIONER OF INCOME TAX, WEST B.ENGAL

- **Citation:** [1971] 3 S.C.R. 351
- **Court:** Supreme Court of India
- **Decided:** 1971-01-12
- **Bench:** K. S. Hegde, A. N. GROVEi\
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/indian-aluminium-co-ltd-v-commissioner-of-income-tax-west-b-engal-5204
- **Pages:** 6

## Headnote

Income Tax Act, 1922, s. !0(2)(xi) arrd I0(2)(xv)-Fee paid to
foreign collabqrator for technical
know.fio}v-No
provision in contra.cl
for payment of tax on fee by Indian Company-Assessee held in default
and tcu recovered frofn it-If allowable as business expenditu1'e and
deductible.
The appellant Company which was engaged in the manufacture of
aluminium products, entered into a contract with another company in
Montreal, Canada, for the supply of technical know-how etc. for the
development of its production. This agreement provided for payment of
a retainer fee by the appellant on an annual basis and there was no
condition or stipulation that the fee would be payable by the assessee
without deduction of income tax. In 1951 the Income Tax Officer treated
the assessee as being in default under section 18(7) of the Income Tax
Act, 1922 in respect of a sum of Rs. 1,24,199 which the appellant was
hable to deduct from the payments made to the Montreal Company under
the provisions of sections 18(3-A), 18(3-B) and. 18(3-C). The appellant
was required to pay this amount and the Montreal Company refused to
accept its claim fdr reimbursement.
The appellant claimed the amount
as a deduction from its business income under S. 10( 1) or 10(2) (xi) or
I0(2)(xv) of the Act. Although this claim was allowed by the Appellate
Assistant Commissioner. the Tribunal, in appeal. held that the amount in
que,stion was neither expenditure incidental to the business nor was it
wnolly and exclusively laid out for that purpose: and nor was it claimabie as a ba;I debt in view of the fact that it had not been incurred as a
trade debt in the course of the business.
The High Court. upon a reference made to
it,
held
against
the
a>i.essee. On appeal to this Court,
F
HELD : Dismissing the appeal,
G
H
(i) It is well settled that a business or trading debt should spring
directly from .the carrying on of a business or trade anu shoulu be incidental to it and it cannot be just any loss sustained by the assessee even
if it has some Connection with his business. [355 E]
Although the retamer fees were paid by the assessee to the Montreal
Company for technical assistance which had a connection with the bu_siness of the assessee it was not possible to regard the amount which the
assessee was bound to deduct from the payment made to the· Montreal
Company under s. 18(3-B) of the Act and which it failed to recover from
that company, as a debt which could be deducted under s. !0(2)(xi).
The debt was not incidental to the business because it arose out of noncompliance with the provisions of the Act.
The payment
which
the
assessee made to the income tax authorities and which it failed to recover
from the Montreal Company was . more a matter of commercial expediency and proceeded out of motives of business relationship, because the
assessee was anxious not to annoy or offend the Montreal Company so
as to ayail of its continued ·teehni~al assistance and advice. [355 G]
352
SUPREME COURT REPORTS,
[1971]3 S.C.R.
A. V. Thomas & Co. Ltd. v. Commissioner of Income Tax,. 48 I.T.R.
67 at. p. 75, referred to.
(ii) The assessee was presumed to kriow the relevant, provisions of
lhe Act at the time when it entered -into an agreement with the Montreal
Company.
There was no provision in the agreement with the Montreal
Company which created a contractual obligation on the assessee to make
payment of the taxes deductible under s.
18(3,B). A payment made
under a statutory obligation, because the assessee was in default, could
not constitute expenditure laid out .for the purpose
of
the
assessee's
business and was not tlierefore deductible under s. 10(2) (xv). [356 El
Commissioner of Income Tax, Bombay v. M/s. Pannalal Narotamdas
& Co, Bombay, 1969 1 J.T.J. 32, distinguished.

## Text

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351
INDIAN ALUMINIUM CO. LTD.
v.
COMMISSIONER OF INCOME TAX, WEST B.ENGAL
January 12, 1971
(K. S. HEGDE AND A. N. GROVEi\, JJ.J
Income Tax Act, 1922, s. !0(2)(xi) arrd I0(2)(xv)-Fee paid to
foreign collabqrator for technical
know.fio}v-No
provision in contra.cl
for payment of tax on fee by Indian Company-Assessee held in default
and tcu recovered frofn it-If allowable as business expenditu1'e and
deductible.
The appellant Company which was engaged in the manufacture of
aluminium products, entered into a contract with another company in
Montreal, Canada, for the supply of technical know-how etc. for the
development of its production. This agreement provided for payment of
a retainer fee by the appellant on an annual basis and there was no
condition or stipulation that the fee would be payable by the assessee
without deduction of income tax. In 1951 the Income Tax Officer treated
the assessee as being in default under section 18(7) of the Income Tax
Act, 1922 in respect of a sum of Rs. 1,24,199 which the appellant was
hable to deduct from the payments made to the Montreal Company under
the provisions of sections 18(3-A), 18(3-B) and. 18(3-C). The appellant
was required to pay this amount and the Montreal Company refused to
accept its claim fdr reimbursement.
The appellant claimed the amount
as a deduction from its business income under S. 10( 1) or 10(2) (xi) or
I0(2)(xv) of the Act. Although this claim was allowed by the Appellate
Assistant Commissioner. the Tribunal, in appeal. held that the amount in
que,stion was neither expenditure incidental to the business nor was it
wnolly and exclusively laid out for that purpose: and nor was it claimabie as a ba;I debt in view of the fact that it had not been incurred as a
trade debt in the course of the business.
The High Court. upon a reference made to
it,
held
against
the
a>i.essee. On appeal to this Court,
F
HELD : Dismissing the appeal,
G
H
(i) It is well settled that a business or trading debt should spring
directly from .the carrying on of a business or trade anu shoulu be incidental to it and it cannot be just any loss sustained by the assessee even
if it has some Connection with his business. [355 E]
Although the retamer fees were paid by the assessee to the Montreal
Company for technical assistance which had a connection with the bu_siness of the assessee it was not possible to regard the amount which the
assessee was bound to deduct from the payment made to the· Montreal
Company under s. 18(3-B) of the Act and which it failed to recover from
that company, as a debt which could be deducted under s. !0(2)(xi).
The debt was not incidental to the business because it arose out of noncompliance with the provisions of the Act.
The payment
which
the
assessee made to the income tax authorities and which it failed to recover
from the Montreal Company was . more a matter of commercial expediency and proceeded out of motives of business relationship, because the
assessee was anxious not to annoy or offend the Montreal Company so
as to ayail of its continued ·teehni~al assistance and advice. [355 G]
352
SUPREME COURT REPORTS,
[1971]3 S.C.R.
A. V. Thomas & Co. Ltd. v. Commissioner of Income Tax,. 48 I.T.R.
67 at. p. 75, referred to.
(ii) The assessee was presumed to kriow the relevant, provisions of
lhe Act at the time when it entered -into an agreement with the Montreal
Company.
There was no provision in the agreement with the Montreal
Company which created a contractual obligation on the assessee to make
payment of the taxes deductible under s.
18(3,B). A payment made
under a statutory obligation, because the assessee was in default, could
not constitute expenditure laid out .for the purpose
of
the
assessee's
business and was not tlierefore deductible under s. 10(2) (xv). [356 El
Commissioner of Income Tax, Bombay v. M/s. Pannalal Narotamdas
& Co, Bombay, 1969 1 J.T.J. 32, distinguished.
CIVIL APPELLATE JURISDICTION :
1967.
Civil Appeal No. 24 of
Appeal by special leave from the judgment and order dated
April 27, 1966 of the Calcutta High Court in Income-tax ,Reference No. 90 of 1962. ·
M. C. Chag/a, S. R. Banerjee, N. N. 'Goswami and S. N.
Mukherjee, for the appellants.
Jagad{sh Swarup, Solicitor-General, Ram Panjavani and R. N.
Sachthey, for the respondent.
The Judgment of ·the Coun was delivered by
Grover, J. This is an appeal by special leave from a judgment
of the Calcutta High Court answering the following
question
referred to it under s. 66 (I) of the Indian Income-tax Act, 1922,
hereinafter called the "Act" in the negative and
agains_t
the
assessee :-
"Whether, on the facts and in the circumstances of
the case, the sum of Rs. 1,24, 1991- was deductible from
the business income of the assessee either under Section 10(1) or 10(2) (xi) or 10(2)(xv) of the Incometax Act?"
The assessee is •a public limited company having its registered
-0ffice at Calcu'lta. Its principal business consists of manufacturing
aluminium ingots, sheets and such other products from aluminium.
There is another company known by the name of Alumi-·
nium Laboratories Limited, Montreal, i;n Canada, hereinafter
called the "Montreal Company", which provided the assessee with
technical kaow-how, engineering services etc. regarding development of a production of the goods: An agreement was entered
into on January 31, 1947 between the-Montreal Company and
the assessee. The agreement provided for payment of a retainer
fee on an annual basis. There was no condition or stipulation
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INDIAN ALUMINIUM co. v. c.I.T. (Grover, J.)
353
that the fee would be payable by the assessee without deduction.
of tax under the provisions of the Act.
The assessee credited
a total fee of Rs. 2,50,808/- in favour of the Montreal Company
for a period of seven years between the accounting year ending
September 30, 1944 and September 30, 1950.
B
In 1951 the Income-tax Officer treated the assessee as being
in default under s. 18(7) of the Act in respect of the amount
of tax wiJich the assessee was liable to deduct from the payments
made to the Montreal Company under the provisions
of
ss,
18(3-A), 18(3-B) and 18(3-C) of the Act. The amount of tax
c
which was found to be payable by the assessee came to a toal sum
of Rs. 1,24, l 991-. The assessec wrote to the Montreal Company
asking for reimburBC111ent of the said amount.
The Montreat
Company, however, refused to accept the assessee's claim for reimbursement by means <)f a letter dated August 3, 1954. The
assessee wrote off the amount of Rs. 1,24,199/- during the releD
vant previous year ending on December 31, 1954. The assessee
appealed to the Appellate Assistant Commissioner who allowed
its claim.
The department preferred an appeal to the Tribunal
which held that the amount in question was neither expenditure
incidental to the business nor was it wholly and exclusively laid'
out for that purpose nor was it claimable as a bad debt in view
of the fact that it had not been incurred as a trade debt in the·
E , course of the business.
The departmental appeal was therefore
allowed and the order of the Income-tax Officer was
restored.
The High Court was of the view that there was a nexus betw~p
payment and the business of the assessee inasmuch as it had an
indirect bearing upon the technical aid which the assessee l):ad
obtained from the Montreal~ompany but was of the opinion
F . that even if the payment had some connection with the business
it could not be said to be incidental to it as the liability could
have been avoided by the assessee if it had deducted at the source
the required amount of income-tax from the retainer fee which
was payable to the Montreal Company.
The High Court also
considered the question whether the amount paid to the Montreal
G
Company could be treated as a bad debt 'within the meaning of
s. 10(2) (xi) but came to the conclusion that as it had not been
advanced as a trading debt in the course of business it was not
deductible as a bad debt. According to the High Court the provisions of s. 18(3-B) had not been complied with and since the
statutory provisions had been disobeyed and as a result thereof
H
the assessee had incurred a liability it could not be construed as
a part of business expense within the meaning of s. 10(2)(xv}
nor could it be said that such an expense was wholly and exclusively laid out for the purpose of the business.
9-L807SuP.Cl/71
,._
/
354
SUPREME COURT REPORTS
[1971) 3 S_.C.R.
In order to decide the contentions raised before us it is neces-
:sary to refer only to ss. 18 ( 3 -B) and 18 ( 7) of the Act as they
.stood at the material time :-
·
S. 18(3-B)-"A,ny person responsible for paying to
a person not resident in the territories any interest not
being "interest on securities" or any other sum chargeable under the provisions of this Act shall, at the time
of payment, unless he is himself liable to pay any
income-tax an._d super-tax thereon as an agent, deduct
income-tax at the maximum rate. and super-tax at the
rate applicable to a company or in accordance with the
provisions of sub-clause (b) of sub section (1) of section 17, as the case may be :
Provided th~t where the person not resident. is. not
a company, the proviso to sub-section (2B) shall apply
to the deduction of ineome-tax and super-tax under this
sub-section as it applies to the <!eduction of income-tax
and super-tax under sub-section (2B) :
'
'
Provided further that notbing in this section shall
apply. to any payment made in the course of transac.
tions in respect of which a person responsible for the
payment is deemed un~r the first proviso to ~ection 43
to be an agent of the payee.''
S. 18(7)-"If any such person does not deduct or
after deducting fails to pay the tax as required by or
under this, section, he, and in the cases specified in sub-
~ection (3D) the company of which he is the principal
9fficer sball, without prejudice. to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax."
Provided that .............. "
Now the Act contains provisions for collecting taxes in two modes;
one is by direct levy and the other by means of deduction at the
source.
SeC't[Qn 18 provides for deduction in cases inter alia
of "Salaries" ".Interest on securities", "Dividends", interest and
other sums chargeable under the Act and paid to non-resid~ts.
There is no dispute that in-the present case the assessee was bound
under sub-section (3-B) to deduct the sum chargea.ble under
the provisions of the Act at the time of payment of the retainer
fees to the Montreal Company.
Under sub-section (7) if the
assessee did not deduct the amount of tax as required under the
section· it was to be deefiled to be in d~ault in reSpect of 'he
tax. The argument raised on Oeh!llf of the apoell;mt is that th~
Montreal Company refused to reimburse it for the payment of the.
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INDIAN ALUMINIUM co. v. c.I.T. (Grover, J.)
355
amount in questio11 for the reasons stated in the letter · dated
August 3, 1954.
It was stated in this letter that the Montreal
Company was not contractually bound to meet the obJlgation
of Indian tax liability. The concluding partion· of the letter was
as follows :-
"Again, this invqlves a question of principle for us.
If every State to whi~h we have to render technical
assistance, based on the researches carried on by us in
our plant and laboratories, starts demanding incometax and super-tax on our charges, no such State could
ever receive any technical assistance at all and we ourselyes could hardly affprd to render such technical assistance and the expensive taxes involved. We have given
this matter our serious consideration and cannot bring
ourselves on any score, equitable, legal contractual, or
moral to reimburse to you any monies you may have to
pay to the Indian-taxing Authorities."
o
The claim of the assessee principally is two fold. It is maintained firstly that after the refusal of the Montreal Company in
the matter of reimbursement the amount of Rs. 1,24, 1991- was
written off as a bad and irrecoverable debt. It was, therefore,
deductible under s. 10(2) (xi) of the Act.
In the section· the
debt certainly means something more than a mere advance. ·It
E
is something which is related to business or re!ul.ts from it. To
be. claimable as a bad and irrecoverable debt it must first
be
shown as aproper debt.
(vide A. V. Thomas & Co. ~td. v.
Commissioner of lncome-tax( 1). It is well settled that a busi1ness or trading debt should spring directly from the carrying on
of a business or trads and should be incidental to it and it cannot be just any loss sustained by the assessee even if it has some
F
connection with his business.
G
Although it is true that the retainer fees were paid by the
assessee to the Montreal Company for technical assis•tance which ·
had a connection with the business of the assessee but it is not
possible to regard the ·amount which the assessee was bound to
deduct from the total payment made to the Montreal Company
under s. l S ( 3-B) of the Act and which it failed to recover from
that company as a debt which could be deducted ooder s. 10 ( 2)
(xi). The debt was not incidental to the businesLJiecause it
arose out of non-compliance with the provisions ~
Act. The .
payment which the assessee made to the income-tair authorities
and which it failed to recover frQm the Montreal Company was
H
more a matter of commercial expediency and proceeded out of
motives of business relation-ship because the assessee was anxious
'
(I) 48T.T.R.67atp.75.
356
SUPREME COURT REPORTS
[1971 ]3 s.c.Ji.
not to annoy or offend the Montreal Company so as to avail of
its continued technical assistance and advice.
Indeed the argument on behalf of the appellant has rested a great deal <ill this
aspect of the matter and it has been urged strenuously that the
assessee could not afford to displease the Montreal Company as
it stood greatly in need of the latter's technical assistance.
Secondly tht; question is whether the assessee could claim
deduction under s. 10(2) (xv) of the Act. For that purpose the
assessee had to establish that the amount in question had been
w~olly and exclusively laid out for the purpose of its business.
01.<r attention has been invited to a decision of the· B.:>mbay High
Court in Commissioner of Income-tax, Bombay v. M/s. Pamrplμ/
Narotamdas & Co. Bombay('') in which it was @Id that the amount
of penalty imposed not for the fault of the assessee but because
he had to pay the same for the purpose of getting the goods released from the Customs Aut!lorities could be regarded as wholly
and exclusively incurred for the purpose of hise business.
We
consider it umlecessary to prnnolljllce on the correctness of this
decision. The point which came up for consideration there was
altogether different and it can afford no assistance to us in determining whether B!Il amount which an assessee had to pay by virtue
of the provisions of the Ast could be regarded as an expense
incurred wholly and exclusively for the purpose of the business.
The assessee was presumed to know the relevant provisions of
the Act at the time when it entered into an agreement with the
Montreal Company. There was no provision in the agreement
with the Montreal Company which created a contractual obligation on the assessP.e to make payment of the 1axes deductible
under s. 18(3-B). At any rate it is difficult to understand how
a payment made under a statutory obligation because the assessee
was in default, could constitute expenditure laid out for the purpose of the assessee's business.
We find no reason or justification to interfere with the answer
returned by the High Court with the result that the ·appeal fails
and it is dismissed with costs.
R.K.P.S.
Appeal dismissed.
(I) [1969] 1 L.T.J. 3~.
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