The Indian Aluminium Co. Ltd. v. the C.I.T., West Bengal, Calcutta
. 1
A THE INDIAN ALUMINIUM CO. LTD.
v.
THE C.I.T., WEST BENGAL, CALCUTTA
March 29, 1972
15
[S. M. SiKRI, C.J., A. N. GROVER, A. N. RAY, D. G. PALBKAll
B · AND M. H. BEG, JJ.J
Income Tax Act, (1.1 of 1922), $. 10(1) and (2)(xv)-AsseSlt'e a
trading company-Payment of weal.~1 tax-If could be deducted in com
puting inconze for purposes of income tax.
The assossee, a trading company, paid wealth tax and sought to cbduct
it as a business expense under s. 10(1) and s. 10(2) (xv) of t'ie Income
Tax Act, l 922, in computing its assessable incom'~ from business for the
puroo es of the Income Tax Act. The High Court held against the as-
sesSee followirig the decision of this Court in Travancore Titanium Pro·
duct Ltd. v. C.I.T., [1966] 3 S.C.R. 321. The test adopted by this Court
in the Travancore Titanium case was that "to b~ a permissible deduction,
there must te a direct and intimate connection between the expenditure
and the business, that is, between the expenditure and the character of the
assessee as a trader, and not as an owner of the assets, even if they _are
the assets of the business".
Allowing the appeal to this Court,
HELD : The Court is unanimous that the t"'t laid down in the de
Cision in: the Travancore Titanhun case should be 1nodified. [20A, 3981
(Per S.M. Sikri, C. 1., A. N. Grover, A. N. Ray and D. G, Palekar,
JJ.) : (I) Cert•1n important a peels of the qcestion were not brought
E to the attention of this Court when· the earlier case was decided. Jf that
decision is modified as erroneous, it is not likely to cause any public in
convenience hard"'hip or mischief; and numerous assessees would be
affected oy the decision. [20A-B]
Ke"hav Mill" Co. Lid. v. C.1.T. [1965] 2 S.C.R. 908, 922, followed.
(2) There 's no doubt that in one sense when rate.s and taxes on
. property are paid by a trader he pays them as owner or occupier, be·
F cause taxes are either on possession of p'roperty or on its ownership.
>< But when a person has the dual capacity of a trader·cum-owner, and he
µays tax in 1•'8p·,ct of property which is used for the purpose of trade,
the payment must be taken to be in. the capacity of a trader according
to ordinary commercial principles, [25A-B; C-D]
j H
Moffatt v. Webb, [,1913] 16 C.L.R., 120 applied (Not cited in the
Travancore Titanium else.
Smith v. Lion Brewery Company, 5 T.C. 568, Usher's Wiltshire Bre
wery Ltd. v. Bruce, 6 T.C. 399, Tlarrods (Buenos Ayres) Ltd. v. Taylor
Goobv, 41 T.C. 450 and observations of Lord Davey in Strong and Co.
Romsey Ltd, case (5 T.C. 215), referred to.
(3) Jn the case <•f " trading comuany all the assets are owned and
the liabilities are. in"urrd for the purpose of trading, as outlined in its
memorandum of assoc;ation. If all the assets are owned and used for the
purpose of trade, the net weal•h would also be owned and used for the
purpose of trade. The net wealth is as much an instrument of trade as
the capital value of assets. Therefore. the test la'd down in the earlier cas:
should bo qualified by stating that, if the expenditure is laid out by the
16 SUPREME COURT REPORTS (1973] 1 S.C.R.
asscssee as owner-cum-trader, and the expenditure is really incidental to A
the carrying on of his business, it must be treated as having be>n laid out
by him as a trader and as incidental to his business. f29F-H, 30A-C]
( 4) It may be difficult for the Revenue to allow the deduction of
wealth tax in respect of individuals who have both business assets and
debts, and non-business assets and debts. But the wealth tax return form
itself requires the assessee to show what are bminess assets and liabilities
ancl what are the non-business assets and liabilities. At any rate, it B
should not ba difficult to evolve a principle or frame statutory rules to
find out the proportion of the tax whin is really incidental to the carry-
ing on of the trade. f30C·E)
(Per M. H. Beg, J.) : (I) One of the tests laid ·down in Keshav
Mills co's case ([1965]/2 S.C.R.908), for decidh1g whether a ·pre\~OUI
erronwus view should be set right by this Court, is whether any R<ni-
ble advantage to public msulting from doing so would be outweighed C"
by the mischief or harm a revision may cause. [38E-F)
The Wealth Tax Act was not intended to strike at or check expan
sion of commercial activities by either individuals or companies. It;
underlying purpo~! is the removal of disparifes of individual Or person3!
wealth and not injury to trade. The interpretation placed in the Travan
core Titanium case (f1966] 3 S.C.R. 321) seems to penalise mere expan-
sion of busineso and trade without serving tt .. o underlying purpose of I)
wealth tax. Therefore, a revision of opinion does not involve a11y such
mischief or such injury to the public interest as would stand in the way
of correcting an erroneous view. [38G-H, 39A-B)
(2) The error which crept into the Travancore Titanium decision
could be traced to an application of the criterion stated by the Lord
Chancellor in Strong and Co. of Romsey v. Woodfield (5 T.C. 215), that
if. the expenses fall on the trader in some charac-'.er other than that E
of a trader, they could not .be deducted in computing proats. But in the
same case, another Law Lord laid down a son1e1,.vhat different test that
the payment to be rl.eductible must '1a\e been made for the purpose of
earning profits. [30G-H, 3 IA-B]
(J) Liahiii'ties incurred by a trader to pay damages for injury to
his customer due to his personal-neglect in maintaining his premises, even
though tb> premis..."1l were used for trade, could be looked upon as out<ide F
the course of trading altogether even if they arise out of commercial
activity or result from something connected with or meant to serve a
commercial purpose. But in Stronf? and co.'s case tt'J.! negligence which
resulted in payment of damages, fclr which the deduction was claimed,
was that of servants emoloyed as an ordinary incident of trading, so that.
the master was only vicariously liable; and the langua~e used bv the
Lorri Ch:incellor in that cas~ covers mor"'; tlian what could be attributed
.to the trademan's own personal wrongs. [3 lB-E] G-
( 4) In later English C'ases the test adopted is ·wh•other the expenses
souiz:l-,t to d<>rlncterl "'"'"e, 'wholly or exclusively laid out for the purpose
Of earning profits. [3 lF]
Smith v. Lion Brewery Company Limited, 5 T.C. 568; Usher's Wilt-
shi•e Brewery Ltd. v. B,,,ce 6 T.C. 399; Atherton v. British Jwulted and
Halsby Cables Ltd., 10 T.C. 155; Margan v. Tate and Lyle Ltd., 35 T.C. H
367, referred to.
Rushden Hell Co. Ltd. v. Commissioner of Inland Revenue. 30 T.C.
298 a)ld Smi;h's Potato Estates Ltd. v. Boll.and, 30 T.C. 267 explained
~· .
. ..,
INDIAN ALUMINIUM CO. LTDi v. C.l.T. (Sikri, C. /.) 17
( 5) Where profits, the net gains of business, d•termlned after making
all permissible deductions, are tru<ed, the disbursements to meet such tax.e<
cannot be deducted. But, when the tax was levied on c~pital. o_r assets
used fer the purpose of earning those profits, it was a permLS1ble de
duction in calculating profits. [32G:H]
Harrods (Buenoi' Ayres) Ltd. v. Taylor-Goohy, 40 T.C. 450, referred
to.
( 6) The principle, that tax paid by an assessee on property used
by him to earn income is deductible in computing the income for paying
income tax, was also laid down in Moffatt v. Webb [1913] 16 C.L.R. 120,
which was not cited before this Court when tin 'fravancore Tit!anium·
case was argued. [34A-B]
( 7) The test of trading character when incurring an expense for
C which deduction is claimed can be utilised usefully only in cases wtme
the question is whether a payment was gratuitous or unnece sary Qr not
made f0r a bona fide commercial purpose or connected mote with scm'
ulterior obje<~ really falling outside the normal S)lhere or regular courre
of commerc.:o, such as the compounding of an offenc" even if committed
while trading; but this could not be so in cases of payment of tru<es-
[340-F] •
D J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. Commissioner of
Income Ta.,-A.l.R. 1957 All. 513, referred to.
( 8 )· There is no accepted commercial practice or trading pyinciplc
according to whidh wealth tax could not be deducted in the com!4utation .
of profits under s. IO(i) and (ii) of the Income Tax Act. Except the
observation in the Travancore T itaniunt case, all the other cases indicate
that commercial practice and trading princiP.les ;lso warrant such deduc
tions of tax on capital assets used wholly and exclusively for carrying on
trade or fdr earning profits. Dzductions of tru<es on net profits may not
be p•rmited, but those imposed on net assets or wealth, .used exclusively
for making profits, can be deducted in computing income for purposes
of income tax. Ml?reov~r, what~ver commercial practice o'r trai;ting princi
ples may imply or import, they could not alter the meaning of statutory
provisions. All that the lan~uag' elf s.1 10(.2) (xv) requires, for claim-
ing its. benefit, is proof of direct causal <ionnection between an outgoin~
and the comm~rcial purpose--which necessitated it. To lay down that it
is the causal c.onnection between tb' payment of tax and that part of
the r-"t wealth which is used whollv .and exclusively for trade, and not
the mere character or capacity for th-o possession of which the tax is de
manded, which determines whether it is ·an allowa~le deduction or not,
under s. 10(2)(xv); i- nothin2. more than givin2 effedt to tt.e plain and
literal meaning of a provision of a tru<ing statute. [35A-B, 35B·CJ ·
(9) To exclude from the purview of s. 10(2) (xv) wealth-tax simply
because it was a tax on assets or net wealth paid by its owner so as to
reduce his wealth, is to bring .in the misleading test of either of capac;ty
of the owner for the possession of which, or the purpose for whirh, the
wealth t•x mav be demaoded. instead of the inevitab'e need and tt.e pur
pose of the trader in paying the tru<, as relevant matters. [350-F]
(10) Wealth tax is imoosed on ret wealth- of a5'e0 se·s who ar-e ccr
sons both natural and artifidal. Jn the case of an artificial or juristic
oerson like a companv, it is difficult to seoarate me pur~ose of th'
inristic "perSona" which is certainlv commercial, from the dharact~r of
the "persona" Itself. Even as regards. other traders that part of the tax
which falls on assets used exclusively for trade could be reallv ascribed
18 SUPREME COURT REPORTS (1973] l S.C.R.
only to a trading charact2r. To the exteat it is a tax on property UJed
for earning profits it must enror into a computation of profits from tradin&.
Therefore, nothing less than express. statutory provision would jus'tify a
denial of the rignt to a deduction which the language of s. 10(2)(xv)
-confers upon as3essees. [36D-F]
( 11 ) The Court is not con02m:id with any difficulty in separating
that part of the tax whi'h is levied on any part of the net wealth, used
wholly or exclusively for traJe, from the rest of it. The Court is con
cerned only with the interpr,tation of s. 10(2) (xv) and not with any
difficulty which I!lay arise in actually computing the deductible am~unt.
Moreo'ler, since net wealth is an amount by which an aggregation of all
*" assets exceeds all . tbo debts there can be no intractable difficulty in
CJ~ufa1ing what part of the net wealth is used for trade 01· business of
a"· a sc~-ze arid what is not, an aggregation being collection of item'.i
~ can lie separated, and not a mixture whose ingredients became
insoparab:·~. Further, the wealth-tax return fdrm divides wealth under
two heads, one of business assets and another of other assets, showing
that the Wealth Tax Act it&olf mak•s that part of the net wealth separable
which is used wholly and exclusively for trade from the reminder of it.
If this can be done, tbzre is no difficulty in reparating that part cf the
wealth tax "'~lch coula be deducted und" s. 10(2) (xvi of the Income
Tax Act. [37D-G]
,A~,,.,,.,,;.,rr tlu>r~ is S"·me difficnltv. the principle involved or the mean
ing of the relevant provisions will not be affected thereby. [37G]
CIVIL APPELLATE JURISDICTION: C.A. Nos. 1694 and 1730
of 1968.
A.pneals from the judgment and order dated Augi$fll, 1967
of the Calcutta High Court in Income-tax Reference Nos.-'106 and E
215 of 1963.
S. R. Banerjee, N. N. Gnswamy and S. N. Mukherjee, for the
appellant (in both the appeals).
V. S. Desai, R. N. Sachthey and B. D. Sharma, for t)le respon
dent (in both the appeals).
A. K. Sen, T. A. Ramachandran and D. N. Gupta, fJr the
intervener (in both the appeals).
The Judgmen of the Court was delivered by Sikri C.J., Beg
J. gave a concurring but a separate . opinion.
Sikri C.J.-These appeals have been referred by a Division
Bench of this Court ;o a larger Bench as tho~ Division Bench felt
~hat the decision of this Court in Travancore Titanium Product
ltd. v. Com.missioner of Income Tax(') might reauire recon
sideration. The only point involved in these appeals is whether
the Wealth Tax paid by the asses~e. a trading company is deduc
tible as an exc.~nditure under s. 10(1) ands. 10(2) (xv) of the
Income-tax Act, 1922. The fac'.s in both the app~als are simi
lar. They rela,te to two separate accounting and assessment
years and two assessment orders ha'le been challe!J'ged. We may
(I) [1%6] 3 S.C.R. 321.
'·
INDIAN ALUMINIUM.CO. LTD . .V. C.I.T. (Sikri, C.J.) 19
give a few facts in one appeal. The Indian Aluminium Co. Ltd.,
in respect of the year of as&~ssment 1959-60 (accounting period
Calendar year 1958), paid Rs. 1,59(630/- as Wealth Tax and
. claimed to deduct this amount as expense from their assessable
income. Tb.e Income Tax Officer allowed the deduction but the
Appellate Assistant Commissioner held that the Company was
not entitled to ihe deduction of Wealth Tax as an expense. The
Appdlate Tribunal uph,eld the order of the Appellate Assistant
Commissioner. On the application of the assessee, the follow
ing question was referred 1o the High Court :
"Whelher on the facts and circumstances of ca>e,
· .the sum of Rs. 1,59,630/- paid by the assessee as
wealth-tax legally deductible as a business expense in
computing the assessee's income from business ?"
The· High Court, following the decision of this Court in
Travarcore Titanium case(1), answered the queS'lion against the
asseiSee. Having obtained certificate of fitness from the High
Court, the assessee has appealed to us.
Basing himself on Keshav Mills Co. Ltd. v. C.l.T.( 2 ) it was
contended by the learned counsel for the Revenue that WJ should
not review our decision in Travancore Titanium case(").
Gajendragadkar, C.J., speakinl!, for the Court, had observed in
that case !hat "it is not possible or desirable, and in any case it
would be inexped'·~n't to lay down any principles which should
gov.~rn the approach of the Court in dealing \vith the question of
reviewing and revising i1s earlier decisions." He further ob
served :
"It would always depend upon several relevant con
siderations :-What is the nature of the infirmity or
error on which a pl·~a for a review and revision of the
earlier view is based ? On the earlier occasion, did
some patent aspects of the question remain unnoticed,
was the attention of the Court not drawn to any rele
vant and material statutory provision, .or was any pre
vious d~cision of this Court bearing on the point not
noticed ? Is the Court hearing such plea· fairly unani
mous that there is sJch an error in 1he earlier view ?
What would be the impact of the ·~rror on the general
administrnlion of law or on public good ? Has the
earlier decision been followed on subsequent occasions
either by this Court or by ' the High ourts ? And,
would the reversal d 'the earlier d·~cision lead to public
inconvenience, hardship or mischief?"
(1) [1966] 3. S.C.R. 321. (2) [1'6'.] 2. S.C.R. ~08:-922.
20 SUPREME COURT REPORTS [1973) l S.C.R
We are inclined to review our earlier decision in Travancore
Titanium case("), .because, as will presently appear, certain as
pects of the qi:estion were not brought to the attention of the
Court and remained unnoticed, and our decision is pot likely to
cause any public inconvenience, hardship or mischief. We are
all of the opinion that the decision was erroneoqs. The decision
will affect numerous assessees. Tn the circumstances we think we
should review the decision.
Section 10 ( I ) of the Indian Income-tax Act, 1922, reads :
"l 0( 1) The •tax shall be payable by an assessec
unde.r the he id profits and gains of business, profession
or vocation in respect of the profit or gains of any busi•
ness, profession or vocation carried on by him."
Section 10(2) provides :
"Such profits or gains shall be computed after mak
ing the following allowances, namely, ....
(xv) any expenditure not being an allowance of the
nature described in any of the clauses (i) to (xiv) in
clusiv~, and not beinl!. in the nature of capital expendi
ture or personal expenses of 1he assessee laid out or ex-
pended wholly and exclusively for the purpose of sud1
business, profession or vocation."
E.
The language seems to be simple enough but it has en
gendered judicial conflict not onlv in India but also in England.
Emine.nt Judges have striven to fomrnlate correct tests to deter
mine whe·ther an expenditure has been laid out or expended
wholly and exclusively for the purposes of business or not, but F
no one has been able to find a test in the application of which
differences of opinion do ndt arise. It seems to us therefore
essential that in each case, the Courts must always keep in mind
the language of the section.
One of the tests which have been laid down and applied by
some of the Judges in England is whether the expenditure 'has
been made in the capacity of a •trader or an owner. One of the
earliest cases in which this test was suggested was Strong a11d
Company of Ramsey Ltd. v. Woodfie/,d('). In that case the
Brewing Company, which also owned lic·~nsed houses in which
they carried on the business of Innkeepers, incurred damages and
costs on account of injustice caused to a visitor staving at one of
their hornes by the falling in of a chimney. The House of Lords
(I) fl066] 3 S.C.R. 321 (:J 5 T.C. 215.
·'
.H
j
. JNDIAN ALUMINIUM CO. LTD. v. C.I. T. (Sikri, C. /. i 21
held that the dall!aJ!es and costs were not allowable as a deduction
in compll'ling the Company's profits for Income Tax · purposes.
The Lord Chancellor ob_served :
"In my opinion, however, it does not follow that
if a loss is in any sense connected with the trade, it
must always be allowed as a deduction; for it may be
only remotely connected with the trade or it may be
conn.~cted wi'th something else quite as much· as or
eve :i more than with the trade. I think only such
losse; can be deducted as are connected with it in the
sense that they are r>~ally incidental to the rtrade itself.
They cannot be deducted if they are mainly incidental
to some other vocation, or fall on the trader in some
charac er other than that of trader. The nature of the
trade is to be considered. To give an illustration,
losses sustained by a railway company in compensating
passengers for accident in trawlling might be deducted.
on the other hand, if a man kept a grocer's shop, for
keeping which a house is necessary and one of the
window shutters fell ·upon and injured a man walkinJ!
in the -street, the loss arisinJ! thereby to .the groo~r
ought not to be deducted
Lord Davey did not apply this test and put the
matter thus :
"I think that the payment d these damages was not
money expended "for th·~ purpose of the trade". These
words are used in oth·~r rules, and appear to me to
mean for the purpose of enabling a person to carry on
and earn profits in the trade, &c. I think the disburse
mentB permitted are such as are made for that purpose.
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 tb~ trade. It must
be made for the purpose of earning ·:he profits."
Lord Chancellor's observations in .Woodfield's case were not
accepted by Lord Atkinson in Smith v. I.ion Brewery Com
pany (1). The Brewery Company were the own·~rs or lessees of
a number of licensed premises which •:hey had acquired as part
(if their business as brewers and as a necessary incident of its
profitable exploitation. The licensed premises were let to
tenants, who were "tied" to purchas·~ their beers from •the com
pany. Under the Licensing Act, 1904, compensation Fund
Charges were levied in respect of 1he excise "on" licences held
by the tenants who paid the charges and recouped themselves by
(I) 5 T.C. 568.
22 SUPREME COURT REPORTS [19'73] 1 S.<::.R.
dcJuction from the rents which they paid to the company. It
was claimed b,.v the company that in computing their profrts for
assessment to Income Tax they should be allowed to deduct the
sum of the amounts ultimately borne by them in respect of the
Compensation Fund Charges. The Court of King's Bench held
that the deduction claimed was inadmissible. This decision was
reversed in the Court of Appeal (Kennedy, L.J., dissenting),
and opinions in. the House of Lords being equally C:ivided the
judgment of th.e Court of Appeal was sustained. Ea!'! Halsbury,
in holding in favour of the Brewery, observed that "he (trader)
must if he carries on that business or that trade pay this tax; it
is the act of the Legislature which makes him pay it and it is not
a thing that is open to his own will or option." Lord Atkinson
observed :
"Again, it is urged that the landlord pays his con
tribution as landlord and because of his proprietary
interest in the premises and not as trader, since he
would be equally liable to it whether he traded or not.
That, no doubt, is so, but in the present case the Com
pany have become landlords and thus liable to pay 1he
charge, f()r the pul-pose solely and exclusively of setting
up the tied-house system of trading. If the Company
took under lease a plot of land to enlarg.e their brewery
or took similarly premises in which to establish a depot
to sell their beer through an agent,· the same criticism
might be applied with equal force 'to the payment of
the rent reserved by the leas-~. They would pay .it as
lessees, not as brewers. They would pay it whether
they continued to brew or not Yet under the provisions
of th.e very rule relied up0n in this case, they would be
entitled to deduct the/rent from the profits earned. and.
that, too, utterly irrespective of whether the receiver
of the rent used it to pay for his support or for his
pkasure or even to set up a rival brewery.
Indeed, even in a contract made for the purchase of
material such as hops or malt, the Company would
have to pay for the commodity supplied, not b•xause
tr"~v are brewers, but because they were contracting
parties, utterly irrespective of whether they carried on
their trade or had abandoned it. Yet it can hardlv be
suggested that the price paid for the hops or malt und·~r
the contract should not be deducted from the receipts.
There is, therefore, in my opinion, nothing in this ob
jection."
A •
"
" A
i H
INDIAN ALUMINIUM CO. LTD. v. C.I.T. (Sikri, C, J,) 23
In r!shets. Wiltshire Brewery Ltd. v. Bruce(') a brewery
oompany were the owners or les~ees of a number of licensed pre
mis~ which· they had acquired solely in the course of and for
the purpose of their business as brewers and as a necessary inci
dent to the more profitably carrying on of their said business.
The licensed premises were let to tenants who were "tied" to pur
chase their beers, etc. from the Company. The Company claimed
that in the computation of their profits for assessment under
Schedule .D. the following expenses incurred in connection with
these tied houses should be allowed
(A) repairs to tied houses;
(B) differences between rents of leasehold houses
or Schedule Assessment of freehold houses on
the one hand and the rents received from the
tied tenants on the other hand;
(C) fire and licence insurance premises;
(D) rates and taxes;
It waJ held by 1the Hou£e of Lords that all the expenses claimed
were admissible as being money wholly and exclusively laid out
or expended1for the purpose of the trade of the Brewery Company.
In this case, Horridge, J. held that "on the facts found the
Fire and Licence insurance Premiums, the Rates and Taxes and
the Gas and Water were all exp;mditure essential to the earning
of the profits, and I think they also are governed by Smith v.
The Brewery Company( 2 ) and are proper deductions." ·
The Court of Appeal, regarding Rates and Taxes, said :
"The next head is "D., Rates and Taxes. £38 7s.
6d." These ar.e sums which the tenants were under a
legal obligation ~o pay pursuant to tr;dr covenant in
the tellJ!ncy a_greement. The Company, however, did
not, for the reasons stated under A in the Case enforce
the tenants' covenants to pay, and consequently paid
the rat!<s and taxes themselves. These ro~asons have
been stated and app.ear in the Case, and need not be re
peated; in brief; they are commercial interest and ex
pediency, and avoidance of inconvenience.
I am of opinion that tkse rates and taxes so paid
are in J!O sense deductions which are allowable from
the Company's profits."
(l) 6 T.C. 3?9. (2) s r.c. 568.
24 SUPREME COURT REPOR'fS [1973] l S.C.R.
The Hoµse of Lords, however, allowed these item•. Lord
Atkinson at page 422 of the report said :
"Stated broadly, I think 'that that doctrine amounts
to this, •hat where a trader bona fide creates in himself
or acquires a particular estate or interest in premises
wholly and exclusively for the purposes of using that
interes1 to secure a better market for the commodities
which it is part of his trade to vend, tire money devoted
by him tc;i discharge a liability imposed by Statute on
that estate or interest, or upon him as the owner of it,
shoµld be taken to liave been expanded by him wholly
and exclusively for the purposes of his trade."
Then reqarding th.~se items he observed :
"The small items were not much cont'.!sted in argu
ments. I concur, however, with Mr. Justic~ Horridge
in thinking they ought to be allowed."
Lord Parker observed :
"My Lords, the Appellants claim deductions under
three other heads : ( 1) Fire and licence insurance.
premiums, (2) Rates and taxes, and (3) Legal and
oth.~r costs. The Attorney-General did not objec·t to
these d·~ductions being allowed, and indeed having rc
J!ard to what I have already said and to thli facts ad
mitted in the Supplementary Statement, p. 7, of the
Appendix, it would be. difficult to contend that they
were not proper and necessary deductions in ascertain
ing the balance of J)rofits and gains of •the Appellants'
•trade, or that they are within any of the prohibitions
contained in the Rules.'.'
Lord Summ.~r observed :
"The 1>~maining items, rates and taxes, premiums
and costs, call for no special observation. In my view,
the case means to find.· •them all ·to be disbursements
and money "wholly and exclusively expanded· for the
purposes of the trade," and that being so in fact, I
think there is no reason why they. may not be so in
law. They are accordingly covered by the d·~cision on
the rent and the repairs."
It may be mentioned •that there was no express statutory. pro
vision for deduction of rates and taxes in the English Ineome
Tax Act and vet 1they were allowed as a n•~cesSilrv deduction for'
the purpose of carrying on trade. There is no -Ooubt that in. o,ne
ll
ll
'
INDIAN ALUMINIUM CO. LTD. V. C.I.T. (Sikri, C. /.) 25
.A sense when rates and taxes Oil property are paid by a trader he
pays them as owner or occupier because taxes are either on
possession of property or on its ownership. But wben the
assessee has a dual capacity, i.e., he is owner-cum-trader, why
should it be not deductible when according to ordinary commer-
8
0
'H
cial principles he would be treated as paying it as trader.
Take the case of taxation on a motor vehicle. The tax is
levied under the Motor Vehicles Act on 1the possession or owner
ship of a motor car. When a owner-cum-trader pays the tax in
respect of a v~hicle used solely for the purpose of trade, nobody
doubts, and the learned counsel for· the Revenue did not contest
the position, that the tax would be deductible as an expense.
Now, why is it deductible? The only rational explanation seems
to us to be that when a person has a dual capacity, of a trader-
cum-owner, and he pays tax in respect of property which is used
for the purpose of trade, the payinent must be taken to be in the
capacity of a trader according to ordinary commercial principles.
This aspect is also clearly brought out in Moffatt v. Webb(i),
which was not cited before this Court then. The·. taxpayer was a
grazier, and. during the year 1911, carried on business and was
still carrying on . business as such iii Victoria upon lands of the
fee simple of which he was during the said year and still was the .
owner. The said lands comprised 17 ,970 acres or thereabouts.
and their unimproved value had for the purposes of the Land Tax
Assessment Act 1910 of the co~onwealth of Australia been
assessed at £44,924. He paid Commonwealth land tax amount
ing to £387 on the unimproved value of the said lands. The
taxpayer claimed to deduct this tax from his income as an out
going incurred by him "as a disbursement" or expenditure being
wholly and exclusively laid out or expanded for the purpose of his
trade. The High Court of Australia held that the tax was pro
perly deductible either as an outgoing actually incurred by him
in production of income or a disbursement of money wholly and
exclusively laid out or expanded for the purpose of trade.
Griffith, C.J., summed up the argument as follows :
''Tiit possession of land is necessarily incident to
carrying on the business of a grazier; the paymenif: of
land tax is a necessary consequence of the oossessiori
of land of taxable value, whether the land is freehold or
leaseh9ld;. the payment of land tax is therefore a neces
sary incident of carrying on the business of grazing.
The case therefore seems to me to come within the exact
words of.the first paragraph of s.ec. 9." (Sec. 9 is sub-·
stantially similar to s. 10(2) (xv) of tbe Indian Income
Tax Act, 1922).
(1) [1913] 16 C.L.R. 120.
:3-L1208SupCT/72
26 SUPREME COURT REPORTS [1973} l S.C.R.
Barten, J., observed :
" . . . . the sole use to which the appellant puts the
land is for the purposes of his business as a grazier.
He needs a large area of land for that purpose, and this
area of about 18,000 acres is applied to his business
needs. It seems too much altogether to say that he
would have to pay the federal tax on this land if he did
not carry on the grazing business. Somebody would be
taxed, no doubt, but would it be the appellant ? It can
not be predicated tha!t he would own the land at all if
he carried on any other business. It is scarcely an in
ference from the case to say that he holds the land
simply as an instrument essential to the proper conduct
of his business : I think it is 'the fair meaning of the
first para2raph at which we can arrive without inserting
anything not imported by the words. H I am rig]rt
there, then is the land tax payment a disbursement or
expense wholly and exclusively laid out or expanded
for the purposes of the business ? It may not be so if
the criterion is whether the business could be carried on
without m1yment of the tax. But I do not think that is
the criterion. Is the payment wholly and exclusively
incidental. 10 the carrying on of the business? Well.
it is only by reason of the necessity of land for his busi:
ness that he holds this land, and it is only because of his
holding it for his business that he necessarily pays the
tax, for without the business it cannot be said that he
would hold the land at all. In view. then, of the parti
cular facts, I think the payment is incidental to the
conduct of his business, and that it is money wholly
and exclusively expended for the purposes of his
trade."
Issacs, J., was impmssed by the reasoning of Lord Halsbury
and Lord Atkinson in Smith v. Lion Brewery Co. Ltd.( 1). He
observed :
"And Lord Atkinson reasons out the position and
shows convincingly, to my mind that, though a tax may
in one sense be paid as owner or Jessee, in another it
is paid as trader. The instance he puts as to licences
are undeniable, and I cannot distinguish them from this
case.
To carcy the matter further : Suppose the Federal
Parliament were to lay a tax on the owners of motor
cars, and carts, and gnns. and dogs. and sheep, so ihat
0 I 5 T.C. 568.
H I
E.
r· ·-•
I H
.
INDIAN· ALUMINIUM CO. LTD. v. C.I.T. (Sikri, C. J.) 27
the tax _was payable whether these things were em
ployed in trade or not; could it be doubled that the tax
would be a real outgoing necessary for the production
of the income of a business in which they were all used ?
The land is as necessary to the business as the personal
property ...... .
And the fallacy of the contrary doctrine consists i!l
this; it confuses, not so much the meaning, as the appli
·cation of the word "purpose". The land tax is enacted
by legislature {or its own purpose, that is, to ta:)( th;e
owner; and when he pays it to the Crown, he pays It
as the owner, it is true, but so far, 'not for any purpose
of his. He simply pays it because he is obliged to by
law. But when he uses the property to produce an in
come, that is, for his business purposes, he pays the
tax inseparably connected with the land also for his
business purposes, namely, as an outlay necessary in the
existing state of the law to obtain that income by means
of that land."
The unsoundness of the test of the capacity in which pay
ment is made was commented upon in Harrods (Bueonos Aires)
Ltd. v. Taylor-Gooby(") by 1he Court of Appeal. The facts can
be conveniently taken from the head-note.
''The Appellant Company. which was incorporated
and resident in the United Kingdom, drried on the
busines§ of a large retail store at Buenos Aires. In
consequence the Company was liable in Argentina to a
tax known as the substitute tax. which was levied on
joint s\ock compani'.!s incorporated in Argentine, and
on companies incorporated outside, Argentine which
carried on busineis there, as did the Ap'pellant Com
pany, through an "empress estable". The- tax was
charged annually at the rate of one per cent on the
Company's capital and was payable whether or not
there were profits liable to Argentine income tax. Under
Arg.en'tine law there were sanctions available to remedy
non-payment of the t!Q\.
On appeal against an assessment to In~ome Tax
under Schedule D for the year 1959-60 it was contended
on behalf of the Company that it paid the substitute tax
solely for the purpose of enabling it to carry on busi
ness in the Argen6le Since, if it' had not paid it, it would
hav·~ been unable to ·carry on its business there, and that
the tax was therefore deductible as "money wholly and
(I) 41 T.C. 450.
28 . SUP&nl:B •COURT REPORTS [1973] l S.C.R .
exclusively laid out or expended for the purposes of
(its) ttade", wit)lin the meaninR of Section 137(a),
Ilioom' Tax Act,' 1952. For the Cwwn, it was con
tended (inter alia) that the Company paid the tax in
the capacity of taxpayer rather than trader."
Willmer, L.J., referred to Commissioners of Inland Revenue
v. Dowdall O'Mahoney & Co.( 1 ) and observed:
"I can find no support whatever in this case for the
proposition that the question depends on the capacity in
which the taxpayer pays the taxes."
After referring to Smith v. Lion Brewery(') case he
observed :
"It appears to me that these two decisions of the
House of Lords are not only quite inconsistent with the
principal submission put forward on behalf of the
Crown in the present case, but that the ratio decidendi
of boll:! cases, as stated by Lord Atkinson, is really
decisive in favour of the Company."
Dancwerts, L.J. observed :
"In Rushden Heal Co. Ltd. v. Keens("), to which
I have referred, Lord Greene, M.R., in 30 T.C. page
316-7, introduced a test of a different kind from that
to which I have referred. He seems to draw a distinc
tion bCtween payments made by a trader in the diarac
ter of taxpayer and not, or not wholly, as trader. I
find this idea difficult to follow and not very helpful
in discussinR the subject in issue. It seems to me very
difficult to say where to draw the line between the two
capacities, and not as satisfactory as the test which has
been adopted in the cases to which I have referred.
Everyone who pays taxes pays because he is taxed and
is a taxpayer."
Diplock, L.J., also .criticized the test in these words.
"lt 1s contended for the Crown tha:t the Company
paid tne tax in its capacity as a taxpayer, not in its capa
city as a trader. But with great respect to Lord
Greene. M.R.'s Judgment in the Rushden Heel Co.'s
case on which -this contention was mainly based, this is
merely playing with words. As pointed out by Willmer,
L.J., this ratio decidendi was not adopted by the House
(I) 33 T.C. 259.
(3) 30 T.C. 298.
(2) 5 T.C. 568.
-·
'"
INDLltN ALUMINIUM CO. LTD. V. C.l.T. (Slkri, C._/.) 29
·of Lord$ in the same case and cann<>t, in my view, sur·
vive Lord Atkinson's earlier criticism of a similar argu
ment in ihe Lion Brewery case which Willmer
L.J., has already crted. You can always find sOme
label other than ''ttader" to describe the capacity in
which a trader makes any disbursement for the purposes
of his -trade. He pays rent for his business premises
in the capacity of "tenant'', rates in the capacity of
"Occupier· , wages in 1he capacity of "employer", the
prioe ot goods in the capacity of "buyer". But if he
has-become tenant or occupier of those particular pre
mises, employer of those particular servants or buyer
of those particular goods solely for the purposes of his
trade,_ the money which he has expended in any of the
capacities so labelled is a deductible expense in com
pU'ting the profits of his trade."
The learned counsel for the Revenue did not say that these
cases had l:r...en wrongly decided. What he said was that if the
real nature of wealth tax is appreciated, it is impossible to equate
the "net. wealth" with "land" used by the grazier in Moffatt v.
Webb(') or with "tied houses" in Smith v. Lion Brewery Com
pany(') or with the "Company's Capital" in Harrods (Bueonos
Aires) Ltd. v. Taylor-Gooby( 3 ). He said that in all these cil!;e~
!he taic. was bl)mg levied on the asset of the business which was
being used -for the purpose of business. In the present case,
according 'to him, thoe net wealth could not be likened to an
asset owned b_v the. trading company. To this the learned
. counsel for the appellant retorted that in the case especially of
a trading company all the assets are owned and liabilities in
curred for the purposes of trading, as outlined in its Memoran
dum of Associaiion; if, all the assets are owned and us.ed for the
purpose of 1he 'trade, thoe net wealth would also be owned and
used for the purpose of trade. He said that it would be possible
for a company to mortgage rts net assets to a bank.and if a com
pany did that. 1t could not be said that the net wealth or bet
assets had not been used for the purposes of business. If tax
was levied 0•1 the capital value of assets without allowing deduc
tion of debts it is clear that the tax would be doouctible. What
difference does 1t make if debts are deducted from the capital
value of assets _ _:; '.The net wealth is •as much an instrument of
trade as the capital value of assets. We find it very difficult 10
distinguish tl)e case of a trading company like the assessee, on
principle, from that of the grazier or the brewery company, in the
cases. referr!l(I ,_to above.
(I) [1913] 16 C.L.R. 120. (2) 5 T.C. 568.
(3) 41 T.C. 450.
30 SUPREME· COURT REPORTS [1973) l S.C R.
In our Y!Cl1'1, the test adopted by . this Coqn in Travancore
Titanilllft cal't'(') that "lo be a permissible deduction, there mW>t
be a direct aru1 intimate connection between the expenditure and
the business, i.e., between 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" needs to be qualified by stating that
if the ex:penditure is laid out by the. assessee as OW'...1er-cum
trader, and tne expenditure is really incidental to the carrying on
of hi~ business, it must be treated to have been laid out by him
as a trader and as incidental to his business.
It was pointed out by the learned counsel for the Revenue
that it would De difficult to allow the deduction of wealth tax in
respect of indjviduals who have both business assets and debts
and non-business assets and debts. But the Wealth Tax Return
fonn itself reouires the assessee to show what are the busines>
assets and liabilities and what are non-business assets and liabili
ties.
At any rate it should not be difficult to evolve a principle or
frame statutQ11£ rules to find out the proportion of the tax which
is really incidental to the carrying on of the trade. On the facts
of this case it is clear that payment of wealth tax was really inci
dental to 'the carrying on of the assessee company's trade.
Accordingly, we hold that the appellant is entitled to succeed.
The appeals are allowed, the judgment of the High Court set aside
and the ql!"~iqn_pnswered in favour of the assessee. Parties will
bear 'th;:ir own co>.'ls throughout.
Beg, J. My lord the Chief Justice has quoted certain test~
laid down by Gajendragadkar, C.J., speaking for this Court, in
Keshhv Mills Co. Ltd. v. Commissioner of Income-Tax, Bombay
North("), which have to be satisfied before we could ·properly
dissent from a previous decision of this Court. In such a case, I
think I should indicate my reasons for reaching a concurring con
clusion, with very great respect, that an earlier, opinion of this
Court, on the very question before us now, needs revision.
The error which crept into the de.cision of Travancore Titanium
Products Ltd. v. Commissioner of Income-tax, Kerala(1 ) could G
be traced to an application of the rather speciously stated criterior.
laid down, in the House of Lords in Strong & Co. of Ramsey Ltd.
v.Woodfield("), by the Lord Chancellor who said there that
expenses cannot be deducted, in computing profits, "if they are
mainly incidental to some other vocation, or fall on the trader in·
some charac1!er other than that of trader. The nature of the trade H is to be considered". But. Lord Davey. looking at the case from
(!) (1966] 3 S.C.R. 321. (2) (1965] 2 S.C.R. 908.
13) 5 T. G. 215.
INDIAN ALUMINIUM" CO. ,LTD. V. C,LT. (Beg, J.) 31
a somewhat different aligle, said : "It was not enough that the dis
bursement is made in the course or; or arises 011t of, or is connected
with, the trade or is made out of tht: profits" of the' tr;ade. It must
be made for the purpose of earajng' profits". The two tests were
not ideqtical.
11 The ratio deciaendi of Strong's case would not have been open
-to criticism if the noble Lords ,could have held there and had made
it clear that they were holding nothing beyond that a. tradesn13n
who has to pay <lama,gC!i . for injury to his customer due to his
personal neglect in· maintaining his premises, even th!>Ugh these
premises are ui!ed for trade, was not entitled to deduct them in
f H
computing his ptofi~ for the purposes of paying income-tax just
as ·he .could not claim a deductionJor damages he will have to pay
as a wrong-doer for .assaulting or defaming a customer· who comes
into his shop. It Is no part of normal ·business to commit such
wrongs. Liabilities so incurred could very well be looked upon
as outside the course of trading altogether even if fuey arise out
of commercial aetivity or result from ~omething connected with ·
or meant to serve -any commercial purpose. ' Their Lordships,
however, used language which could cover more than what could
be attributed to the tradesman's own purely pen;6nal wrongs. The
facts of that case show that the negligence which n:sulted in pay
ment of damages, for which a deduction was Claimed, was that
of servants employed as an ordinary incident of tading so that
the master was only vicariously liable as an inn-keeper and an
employer. And, this aspect of the case made Lord James, in
Strong's case, doubt the correctness of the opinion wtich he, very
_ hesitatingly, decided to accept.
In Smith v. Lian Brewery Corripan)I Limited(l), compensation
fund charges levied under statutory provisions were held, by the
Court of Appeal, to be permissible deductions in computing profits
on the. ground that they/ were "wholly or exclusively laid out" for
the purpose of earning' profits. This decision had lio be upheld
by the House of Lords where opinion was evenly divided when the
case was taken up, there. -Henr.e, the test laid d1• vn there by
~e C?urt of Appeal was held by Earl Loreburn to k. ;Jinding upon
hlill, m Usher's Wiltshire Brewery Ltd. -v. Brue (°), although
he had himself not accepted it in Lion Brewery's lC 1::e.
In Rushden Heel Co. Ltd. v. Commissioner of In/aM
Revenue(') Lord Greene, M.R., in disallowing deduction of expen
ses incurred in contesting claims for payment of Excess Profits Duty,
from a computation of profits for purposes of paying Income-tax,
applied the test of character or capacity in whi~h t'he expense was
incurred. He held that the disbursement had to be disallowed
(I) 5 T.C. p. 568. (2) 6 T.C. P. 399.
(3 ! 30 T.C. 298.
32 SUPREME COURT REPQll.TS [1973] 1 S.C.R.
on .the ground "that the_ expenditure •was incurred by the Company
primarily in its capacify as a taxpayer and for the purpose · of
regulating the position as between itself as a taxpayer and the
Crov;n." The House of Lords upheld the decision, following its
slightly earlier pronouncement by a majority, in Smith's Potato
Estates Ltd. v. Bolland(!), but it did so on the ground that
the expenses under consideration, incurred on litigation, related
to a computation of Excess Profits Duty which had to take place
after profits had been calculated.
In Artherton v. British Insulated and Helsby Cables Ltd.('),
however, the test in Usher's Wiltshire Brewery case (supra) was
applied to hold that even sums expended "not of necessity with a
view to a direct and immediate benefit to the trade, but voluntarily
and on the grounds of commercial expediency and in order to
directly facilitate the carrying on the business may yet be expended
wholly and exclusively for the purpo~s of the trade".
ln Mogan v. Tata & Lyle Ltd.('), the House of Lords had
used Lord Davey's test in Strong's case (supra) to justify deduction
of sums spent on propaganda to oppose threatened nationalisation
of the Sugar Refinery industry as money spent "wholly and exclu
sively for the company's trade".
The decision of the Court of Appeal, in Harroda (Buenos
Aires) Ltd. v. Taylor-Gooby('), fully exposed the fallacy involved
.in applying, without close examinatioR, the test of capacity, for
the possession of which a tax may be imposed, to eve!) levy of
a tax, by extending ti)e alluringly simple formula . of the Lord
Chancellor, in Strong's case, to cases for which lt eould not have
been meant. In Harrods' case, deduction was claimed, in com
puting annual profits ~f a Company, of a 'Substitute Tax' which
had to be paid on the Com:)any's capital in Argentina, irres,ective
of the profits made on it (ii st like the Wealth Tax before us). The
Court of Appeal quoted 1assages from the opinions of the Law
Lords, in Rushden Heel :o:s case (supra) and Smith's Potato
Estates' case (supra), to 'how that the ratio decidendi of these
two decisions confined 'he principle applied there to cases where
taxes, like the Income ' 'ax and the Excess Profits Tax, had to be
paid upon and after a · :alculation of profits and did not extend to
other cases. In other words, where profits, the net gains of busi
ness determined after making all permissible deductions, are taxed.
the di,bursements to meet such taxes cannot be deducted. But.
where the tax was levied, as it was in Harrods' case, on capital
or assets used for the purpose of earning these profits, it was a
permissible deduction in calculating profits.
(I) 30T.C. p. 267.
35 T.C. p. 367.
(2) to T.C. p.155.
(4) 41 T.C. p.450:
c ....
l[ I
• E
..
INDIAN ALUMINIUM CO, LTD •. V. C.l.T~ (Beg, /.) 33
IIY Harrods' case, both Willmer, L.J., and Pip lock, L.J. had
made use of· Lord Pavey's test set .out above, from Strong's case
(supra). They held the ratio decidendi of the "tied-house" cases.
al).d not Lord Loreburn's test to be applicable to payment of taxes
on assets used for tradinl! exclusivelv. Willmer, L.J., quoted the
following passage from Lord Halsbury's opinion in Lion Brewery.
case ( p.466) :
"Again, it is urged that the landlord pays his contri
bution as landlord and because of his proprietary interest
in the premises and not as trader, since he would be·
equally liable to it whether he traded or not ·That, no
doubt, is so, but in the present case the Company have
become landlords and thus liable to pay the charge, for
1the purp0se solely and exclusively of setting up the tied
house syste.m of trading."
Lord Atkinson's view, expressed in the following words in the
sume case, was also relied upon by the learned Judge (p.466) :
"'Stated broadly, I 1hink that doctrine amounts
to this, that where a trader bona fide creates in himself
or acquires a particular estate or interest in premises
wholly and exclusively for the purposes of using that
interest to secure a better market for the commodities
which it is part of his trade to vend, the money devoted
by him to dischaq;:e a liability imposed by Statute on that
estate or interest, or upon him as the owner of it, sho•1ld
be taken to have been expended by him wholly and exclu
sively for the pu112qses of his trade".
In Harrods case, the Court of Appeal. after a comprehensive
survey of all the relevant English authorities, considered the pro
poi;ition accepted by it, that the 'substitute tax', levied on the
company's c.apital, was a permissible deduction in. calculating the
profits of a company for paying income tax, to be so clear and free
from doubt, on the authorities then existing and applied, tJuit it
refused even leave to appeal to the House of Lords.
If there could be any doubt about the correct position of a
tax like the one before us, a perusal of the opinions given by
Australian Judges, in Moffat v. Webb, (1) where after a discus
siµn of the relevan~ English authorities, land-tax paid by a grazier
on land used by him to earn income was held to be deductible in
computing it for payin_g income tax, would fay to rest, if I may
so put it, the disembodied ghost of ·a tradesman's non-trading
character, a pure abstraction, which is sought to be used before
us, by the learned Counsel for the Income-tax Department, . to
prevent wealth tax paid on even tl'le wholly commercial assets,
(1) 16 Commonwealth Law Reports p. 120.
constituting a part or whole of the taxable "net wealth", used
exclusively for purposes of trade,Jrom being deducted as allowable
expense, under Sec. 10(2)(xv) of the Income-tax Act, 1922.
On the earlier occasion, when Travancore Titanium Co.'s
case (supra) was argued in this Court, Moffat v. Webb (supra)
\Vas not cited. Although, there are references in the judgment
.of this Court, in the earii.er case, to the "tied-house" cases and to
Harrods' case (supra), these were held to be distinguishable on
facts, but, the test propounded by Lord Chancellor Loreburn, in
Strong's case, was applied to disallow deduction of wealth tax
in computing profits. After going througr1 all the relellant autho
rities, I have no doubt whatsoever left in my mind that it is the
ratio decidendi of "tied-house" cases and Harrods' case (supra l
which is the same as that of the Australian case, that applies here
and not Lord Chanceilor Loreburn's test laid down in . a very
different context than that of payment of a tax as a necessary p•·c
condition of earning more profits.
I do not think that the test of trading character, when incurring
an expense for which a deduction is claimed, is without its uses.
There are cases where the question has arisen whether a payment
wa~ gratuitous or unnecess".T)' or not made for a bona fide com
merical purpose or connected more with some ulterior ol}~t really
falling outside the nornrnl sphere or regular course of commerce,
such as the compounding· of an offence even if committed while
trading. In J. K. Cotton Spinning & Weaving Mills Co. Ltd. v.
Commissioner of Income Tax(1), I had occasion t" ..;onsider a
case where the test of trading character or capacity in which a
Jtayment is made as well of causal connection between the payment
and a legitimately commercial purpose could, it seemed to me, be
both simultaneously eJ)1.ployed. But, in cases of payment of taxes.
a concentration on the test of capacity for which payment becomes
necessary is certainly liable; to mislead us.
A question which did trouble my mind was whether, in view
what this Court had held in Travancore Titanium case (supra); it
could be said that any "accepted commercial practice and trading
principles" could exclude wealth tax from the computation of profits
with which Sec. 10 sub. s. (1) and'(2) of the Income-tax Act are
concerned. One of the grounds given by this Court, to support.
its view there, was that "the nature of the expenditure of the out·
going must be adjudged in the light of accepted commercial prac
tice and tradipg principles". Speaking for myself, I was inclined
to ·ake the view that, if the earlier decision of this Court could
be justified by a .refer_ence to some "commercial practice or trad
k,.. ·'rincipies" which could be implied by, or, read into, the very
i,, • ...ess of computation of profits with which provisions of Section
fl) A.T.R. 1967 All. p. 513.
\
INDIAN ALUMIN!UM cci. LTD. v. C.l.T. (Beg,!.) 35
A 10(1) & (2) of the Income-tax Act, 1922, are concerned, it must
stand. I find, however, that no case, apart from the observations
.nentioned above, contained in the Travancore Titanium Co.'s case,
was cited to support this line of reasoning. All the other cases
brought to our nQtice, which are discussed above, indicate that
··commercial practice and trading principles" also warrant such de-
B ductions of a ta.-i: on assets for capital used wholly and exclusively
for carrying on trade or earning profits. They may preclude deduc
tions of taxes on net _prQfits bl!t not those imposed on net assets.
or wealth used exclusively for making profits.
t
''Commerciai practice and trading principles" could vary. These
terms appear to be rather vague and indefinit£. The meanings of
the relevant statutory provisicins seem much more fixed and de- ·.
finite. All that the language of Sec. IO ( 2)(xv) apparently require>.
for claiming its benefit, is proof of a direct causal connection bet
ween an outgoing and the commercial purpose which necessitates
it. Whatever "commercial practice or trading principles" may _im-
ply or import, they could not alter the meaning of statutory pro- ·
visions or travel beyon!l it.
Another question which engaged my atten~ion was whether
Wealth Tax could be excluded from the purview of of Sec. 10(2Xxv)
simply because it was a tax on assets or "net-wealth" paid by its
owner so as to reduce his wealth. This line of thinking, however,
seemed to me to bring in, through die backdoor, the misleading
test of either the capacity as owner for the possession of which or
the .. purpose for which the wealth tax may be demanded, instead of
the inevit@le need and the purpose of the trader in paying the
tax, as relevant matters. In Lion Brewery '.1 case (supra), Lord
Halsbury had declared the unavoidable need to satisfy a statutory
demand for the purpose of making profits as the really relevant
questiOn for consideration in such cases. He said, about "the pur
pose for which the Government have exacted the :ax"; "whatever
that purpose may lie it is in1ffiaterial''. '
It may be that the· purpose of the tax before us could be consi
dered in order to. determine whether its nature is such as to
Ilel;eSSarily imply that it cannot be taken into account in calculat
ing profits or gains of business under Sec. 10.sub. s. (l) & (2) of
.G · the Income-tax Act. The nature of the Wealth Tax was examined
by this Court in Union of India v. Harbhaian Singh Dhillon(').
where the following passage was quoted from "Readings on Taxa
tion in Developing Countries", by Bird & 'Oldman dealinu with
the concept of Wealth~tax :- ' "
I H. "The term 'net wealth tax' is ·usuallv defined as a tax
annually imposed on the nee value of all assets less liabi
lities of particular tax-payers-especially individuals.
(1) [1971] (2)SupremcCourtCasesP. 779@806.
., ..
36 SUPREME COURT REPORTS. [ 1973]1 S.C.R
This definition distinguished the net wealth tax from
other types of t;axation of net wealth, such as death
duties and a capital levy; the former are imposed only
at infrequent intervals--once a generation-while the
latter is a one-time charge, usually with the primary
purpose of redeeming a war-time national debt. The
net wealth tax is really intended to tax the ,annual yields
of capital rather than the principal itself as do death
duties or a capital levy, even though it is levied on the
value of the principal. Since it taxes net wealth, it also
differs from property taxes imposed on the gross value
of property-primarily real· property-in a number of
countries. The net wealth tax gives consideration to
the tax-payer's taxable capacity through the deduction
of all outstanding liabilities and personal exemptions
as well as through other devices, while the property tax
generally does not take these factors into account. The
net wealth tax is th~refore deemed to be imposed on the
person of _the taxpayer, while the property tax often
deemed to be imposed on an object-the property itself'.
It is true that wealth tax is imposed on "net.iwealth" of asses
"~es, as defined by Sec. 2 sub-s. ( c), who are all "persons". These
persons are both natural and artificial. In the case of an artifi
cilli or juristic person like the Company before us, it seems very
difficult to separate. the purpose of the juristic "persooa", which
is certainly commercial, from the character of the "persona" itself.
Even as regards other traders, that part of tax which falls on what
is used exclusively for trade could be really ascribed only to a
trading character. To the extent it· is a tax on proper11Y used
for earninit profits; it must enter into a computation of profits
from trading.
On going through the provisions of Wealth•Tax Act as well
as the Income-tax Act it was not possible for me to infer that the ...
payment of Wealth-tax must be excluded from the computation
of profits under Sec. 10 sub. s. (I) & (2) of the Income-tax Act. It
~ppears to me that nothing less than express statutory provisipn
would justify a denial of the right to a deduction which the langu- G
a~e. of Sec. 10 sub. s. (2) (xv) confers upon an assessee.
On looking at the position of law in America on this subject,
I find that there are statutory provisions which deny deductions
c}f certain taxes.only, such as income-tax, and taxes on war profits
and excess profits, gifts, inheritance. legacies, and succession (See H
U.S. Code 1958, ed. Titles 22-26 "Internal Revenue Code", p.
4287 paragraph 164). A general statement -of the law oh this.
wbject there is that it :
! H
INDIAN ALUMINIUM. CO. LTD. V. C.I.T. ~Beg, /.) 37
"does not prevent (a) a deduction therefor under
Sec. 23(a) provided it represents an ordinary and neces
sary expense paid or incurred during the taxable year,
by a corporation or an individual in carrying on any
trade or business, or, in the case of an individual, for
the production or collection of income, or for the mana
gement, conservation, or maintenance of property held
for the production of income, or (b) the inclusion of
such tax paid or incurred during the taxable year by a
corporation or an individual as a part of the cost of ac
quisition or production in the trade or business, or, in
the case of an individual, as a part of the cost of pro
perty held for the production of income with respect
to which such tax is paid or incurred". (See Jacob Mer
tens Law of Federal Income Taxation: Vol 5, 1954
Cumulative Pocket Supplement, Chapter 27, paragraph
27.01).
Learned Counsel for the Department relied upon the difii
culty in separating that part of the tax which is levied on any part
of the net wealth, used wholly and exclusively for trade, from
the rest of it. We are, slrictly speaking, concerned only with
the correct interpretation of Sec. 10 sub. s. (2) (xv) of the Act and
with the definition of "net-wealth" given in Sec. 2(m) of the
Wealth Tax Act on which incidence of the tax levied under Sec.
3 falls. In order to determine wheliher, as a matter of principle,
a tax so defined and imposed would be covered by Sec. 10 sub.s.
(2)(xv) of the relevant Income.tax .(\ct, the difficulty which may
arise in actually computing the deductible amount does not seem
to be a material consideration. Moreover, the fact that "net
wealth" is an amount· by which an aggregation of all the assets
exceeds all the debts does not seem to impose any intractable
difficulty in the way of .calculating what part of the net-iwealth is
used for trade or business of an assessee and what is not. An ag
gregation· means a collection of items added up which can be
separated and not a mjxture the ingredients of which . become in
separable. Assuming, however, that there is some difficulty in
separating that part of the tax which is payable in respect of net
wealth used only for trade from that part of it which is imposed
on a portion of net-wealth not so used, I fail to see how the prin
ciple involved or meaning of the relevant provisions, with which
we are concerned here, will be affected. Mr. Chagla, appearing
for an assessee, drew our attention to the division into two heads.
one of business assets and another of the "other assets", which
is found in form 'A' prescribed by the rules for rile Wealth Tax
return. This means that the Wealth Tax Act itself makes that
part of the net wealth separable which can be utilised wholly and
exclusively for trade from the remainder of it. If this can be
done. it is difficult to see how that part of Wealth Tax could escape
38 SUPREME COURT REPORTS [197J] 1 S.C.R.
deduction, under Sec. 10(2)(xv) of the Income-tax Act, which is
attribut'ab!e to such portion of the net wealth as is used wholly
and exclusively for earning profits.
To Jay down, as we are doing in this case, that it is the causal
c:onnection between payment of tax and that part of ne~. wealth
which is used wholly and exclusively for 1irade and not the mere
character or capacity for the possession of which the tax is de
mrttded, which determines whether it is an allowable dcluction
or .aot, under Sec. 10(2)(xv) of the Act, seems to me to amount
to nothing more than to give effect to the plain and literal mean
ing of a provision of a taxing statute. There seems no need, jn
such a clear case, to invoke the aid of the well established cannon
of construction that, where a taxing provision is reasonably cap
able of two equally possible construcliions, the one which favours
the assessee must be 12referred. Of course, the burden of proving
whether the whole or a part of the Wealth tax paid by an assessee
is attributable wholly and exclusively to the carrying on of a
trade, and, therefore, is. an allowable deduction, must rest "Upon
the assessee in each case. The argument on behalf of the assessees.
as I understand it, j?oes no further.
One of the tests laid down in Keshav Mills Company's case
(Supra) for deciding whether a previoui erroneous view should be
set right by this Com:t, ·was whether any possible advantage to
the public resulting from doing so would be outweighed by the
mischief or harm a revision may cause. Of course, the ultimate
determination of what public good requires the law to be must
take place elsewhere. But, in d"lciding whether a previous inter
JJretation of the law, as it exists, by this Court, even if it be errone
ous in some respect, needs revision by it, a consideration of what
public good demands undoubiedly lies within the province of our
powers.
· It seems to me ,that the Wealth Tax Act was not intended to
strike at or check expansion of <;,gmmercial activites by eitilter in
dividuals or companies. Its underlying purpose was the removal
of disparities of individual or personal wealth and not in_jury to
trade. It could be said to be a tax aimed at individuals whose
wealth exceeds certain limits. In so far as the particular inter
pretation which we are abandoning, because of the infinnities
found in it, seemed to penalise mere expansion of business ·and
c .,·
0
,•
I
INDIAN ALUMINIUM CO. LTD. V. C.I.T. (Beg, /.) 39
trade without serving the assumed underlying purpose of Wealth
tax, a revision of opinion does not appear to involve any such
mischief or injury to the public as could stand in the way of
correcting an erroneous view.
I have, therefore, no hesitation left in my mind in holding
that the view expressed by this Court in Travancore Titanium
case (Supra) must be modified as indicated by My lord the Chief
Justice.
V.P.S. Appeal allowed.