RAJA INDUSTRIES LTD. VS GOVERNMENT OF PUNJAB
1999 P T D 4120
[Lahore High Court]
Before Mian Allah Nawaz and Nasim Sikandar, JJ
COMMISSIONER OF INCOME-TAX
Versus
ARIF LATIF
C.T.R. No. 128 of 1991, heard on 10/06/1999.
(a) Income-tax Act (XI of 1922)---
----Ss.10(2)(xvi) & 66-A---Deductions of wealth tax ---Admissibility-- Assessee claimed deduction of proportionate amount of wealth tax paid in respect of income yielding assets from income---Claimed deduction was rejected by the Assessing Officer---First Appellate Authority and Income-tax Appellate Tribunal allowed the deduction by adopting the view that deductions of wealth tax liability under S.10(2)(xvi) of the Income-tax Act, 1922 was legally justified---Department contended that since the wealth tax paid was not "laid out or expended wholly and exclusively for the purpose of such business, profession or vocation" it could not be allowed as a deduction---Validity---No specific provision existed in the Income-tax Act, 1922 which prohibited the allowance of wealth tax as a deduction in the year it was paid---Non-payment of wealth tax even may endanger the very existence of the asset, and therefore, even the source of income liable to tax- Preservation of an income generating asset in itself is a purpose which cannot be separated from the- conduct or continuation of a business itself---Use of word "purpose" in the sub-clause will have to be seen in the context of the fact that a taxable income generating asset is stock-in-trade---No business income from an asset could possibly be derived if it was under a restraint on account of default in payment of tax or stands attached in recovery-- Revenue had never objected to the deduction on the ground that the wealth tax paid was an expense which was capital in nature-- Deduction allowed by the Appellate Tribunal was affirmed by High Court.
Messrs Zeenat Textile Mills Ltd. v. Income-tax Officer I.T.E. No.737 of 1967-68 rel.
Harmone Laboratories Ltd. v. C.I.T., Karachi 1988 PTD 84; Travancore Titanium Product Ltd. v. C.I.T., Kerala (1966) 60 ITR 277 and Indian Aluminium Co. Ltd. v. C.I.T. (1972) 84 ITR 735 ref.
C.W.T. v. Hoor Bai Ibrahim 1992 PTD 671 distinguished.
(b) Income-tax Act (XI of 1922)
-- --S.10(2)(xvi)---Deduction---Conditions.
Following conditions must be fulfilled for admissible deductions:---
That the expenditure must not be of the nature described in clause (i) (xiv) (of section 10 of the Income-tax Act of 1922) that it must have been incurred in the accounting year;
that it must be in respect of a business which was carried on by the assessee and the profits of which are to be computed and assessed, and must be incurred after the business in set-up;
that it should not be in the nature of personal expenses of the assessee;
that it must have been laid out or expended wholly and exclusively for the purpose of such business; and
that it should not be in the nature of capital expenditure.
Shafqat Mehmood Chohan alongwith Muhammad Ilyas Khan and Mian Subah Sadiq Masson for Appellant.
Nemo for Respondent.
Date of hearing: 10th June, 1999.
JUDGMENT
NASIM SIKANDAR, J.---Through this order we intend to dispose of Tax References Nos. 128, 12, 36, 62, 93, 94, 126, 127, 140 to 145, 161 to 175, 217 to 272, 274, 277, 278, 280 to 291 all of 1991.
2. The Income Tax Appellate Tribunal, Lahore Branch has referred following identical question for our opinion in all the above references made under section 136(1) of the Income Tax Ordinance as it existed before substitution by Finance Act, 1997:--
"Whether on the facts and in the circumstances of the case, the Tribunal was justified in allowing wealth tax liability as an admissible deduction under section 10(2) (xvi) of the Income Tax Act? "
3. The assessee in C.T.R. No. 128 of 1991 is an individual and derives income from dividend etc. For the assessment year, 1973-74, he returned income of Rs.4,69,557 which was arrived at in the following manner:
| Salary: From Beco Agencies Ltd.30,222 Bonus1,25031,472 Dividend: Beco Industries Ltd.2,34,260 Less exemption2,0002,32,260 Interest: Beco Agencies Ltd.46,812 Scheduled Banks15,622 ------- 62,434 Less exemption50061,934 _______ Capital Gains: 48150 shares sold for8,41,228 Cost4, 81,500 3,59,728 Less exempt under section 17 (5)(b)(ii)2,15,837 1,43,891 4,69,557 |
Subsequently she revised her return reducing income by Rs.86,574 1Fdon` the ground that she was entitled to deduction of proportionate amount of wealth tax relatable to the assets comprising of shares and interest on bank deposits and loan to Beco Agencies Ltd. on which she earned dividend under section 12 of the Income Tax Act. In support of the claim for deduction the assessee relied on the decision of the Appellate Tribunal in the case of Messrs Zeenat Textile Mills Ltd. v Income-tax. Officer (I.T.E. No. 737 of 1967-68, assessment year 1964-65) wherein it was held that wealth tax paid was an admissible deduction under section 10(2)(xvi) of the Income-tax Act. 1922.
The assessee in other references also derived income from various sources and claimed wealth tax paid as deduction on the basis of the aforesaid order of the Tribunal. The Assessing Officer, however refused to accept the claimed deduction on the ground that revenue had already filed reference against the said decision. The Income Tax Tribunal in that case had held that the wealth tax paid was admissible deduction under section 10(2) (xvi) of the late Income-tax Act, 1922. The assessees, however, succeeded before the Appellate Assistant Commissioner who proceeded to follow the said order of the Tribunal on the ground that in absence of a decision to the contrary from any superior Court the order of the Tribunal had to be followed. Aggrieved from such order, the Department unsuccessfully filed appeals before the Tribunal, which were decided against it. While confirming their earlier view the learned Members of The Tribunal remained firm that wealth tax paid in respect of the income yielding assets was an admissible deduction under section 10(2)(xvi) of the late Act. Thereafter, the Department made applications seeking reference under section 66 of the late Act, which was duly allowed as the Tribunal drew up statement of cases and referred the above question for an opinion of this Court under section 66-A of the late Act, 1922.
4. After hearing the learned counsel for the appellant we are of the view that the findings earlier recorded by the Tribunal are supported by the provision of late Act, 1922 as referred to in the proposed question. According to the scheme of the late Act section 6 provided for heads of income including business. Section 10 of the Act said that profits and gains of business, profession or vocation should be charged to tax under head 'profits and gains of business, profession or vocation". Subsection (2) of section 10 detailed the allowances to be made while computing the income under that head. Subsection (xvi) which is relevant before us read as under:--
"Section 10(2)(xvi).---Any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. "
5. It is the case of the Department that since the wealth tax paid was not "laid out or expended wholly and exclusively for the purpose of such business, profession or vocation", it could not be allowed as a deduction. It is also claimed that in cases of income from other sources such payment was also not an admissible deduction under subsection (2) of section 12 either. The reason according to the Department again being that wealth tax was not incurred solely for the purpose of making or earning such income, profits or gains.
6. The Tribunal, however, adopted the view that deduction of wealth tax liability under the aforesaid provision of the late Act was legally possible. It was held that the said provision not only presumed holding of income generating assets but also the fact that income from these assets was liable to tax. Further that since payment of wealth tax was obligatory for the very possession of the wealth or income yielding assets it was to be treated as an expense which was necessarily to be incurred in order to carry on the trade or to hold that assets; that allowance for the wealth tax paid was available only in cases following under section 10 (income from business) and under section 12 (income from other source) of the late Act. According to the Tribunal if Wealth Tax in both the above cases was not allowed as deduction these assets in all likelihood would not remain intact and therefore, the source of income liable to tax, may dwindle or even extinguish.
7. As observed earlier the view adopted by the Tribunal appears correct as there was no specific provision in the late Act, which prohibited the allowance of wealth tax as a deduction in the year it was paid. The Tribunal also appears right in saying that non-payment of wealth tax even may endanger the very existence of the asset and therefore, even the source of income liable to tax. Preservation of an income generating assets in itself is a purpose which cannot be separated from the conduct of continuation of a business itself. The use of word "purpose" in the sub-clause will have to be seen in the context of the fact that a taxable income generating asset is stock in trade. No business income from an asset can possibly be derived if it is under a restraint on account of default in payment of tax or stands attached in recovery. 1t may further be noted that the Revenue has never objected to the deduction on the ground that the wealth tax paid is an expense, which is capital in nature.
8. To be an admissible deduction a number of conditions are required to be satisfied. In the famous treatise the Law and Practice of Income Tax by N.A. Palkhiwala and B. A. Palkhiwala at page 369 of the 4th Edition Volume I following conditions with reference to the provisions in question have been mentioned:---
(1) The expenditure must not be of the nature described in clause (i) (xiv) (of section 10 of the late Act of 1922).
(2) It must have been incurred in the accounting year.
(3) It must be in respect of a business which was carried on by the assessee and the profits of which are to be computed and assessed, and must be incurred after business in set-up.
(4) It should not be in the nature of personal expenses of the assessee.
(5) It must have been laid out or expended wholly and exclusively for the purpose of such business.
(6) It should not be in the nature of capital expenditure.
9. The wealth tax paid it will be seen answers all the above requirements where assets are generating taxable income, which is assessed under the head business. In that case payment of wealth tax is not merely incidental but a direct expense to keep the business afloat. It may not bring an immediate result for the business still its incurring is necessary. The wealth tax said for a commercial asset may not be Oxygen to breath but it is certainly like water to a living body. In re: Harmone Laboratories Ltd. v. C.I.T., Karachi (1988 PTD 84) the requirements of an admissible expense under section 10(2) (xvi) were examined by the Karachi High Court. It was held that the claimed expense should be for the benefit of the business as a whole in broad sense and in that event it may not bring any immediate benefit or profit to the assessee's business. The burden to prove that expense was laid out wholly and exclusively for the purpose of business in the view of the Court remained on the assessee.
10. The Supreme Court of India while interpreting the above provisions of the late Act returned a negative answer In re: Travancore Titanium Product Ltd. v. C.I.T., Kerala (1966) 60 ITR 277. The amount of wealth tax paid by the assessee on his net wealth under the Wealth Tax Act, 1957 was found not a permissible deduction under section 10(2) (xv) (subsequently numbered as sub-clause (xvi) as reproduced above) of the Income Tax Act. The claim was found against accepted commercial practice. Also that the deduction claimed was a tax charged upon the net wealth and was not made a tax related to or incidental to the carrying on of a business. Further that the expense was not directly and intimately connected with business.
11. Subsequently the Court changed its view on reference of that decision to a larger Bench. That occasion came In re: Indian Aluminium Co. Ltd. v. C.I.T. (1972) 84 ITR 735 While reversing the earlier view the Bench comprising of five learned Judges held that wealth tax paid by the assessee, a trading company of assets held by it for the purpose of its business was deductible as a business expense in computing the assessee s income from business. The Court went on to give guideline to proportionate the deduction where the assets were held merely as an owner and where these were used wholly and exclusively for trade. According to the Court the burden of proving whether whole or part of the wealth tax paid by the assessee was expanded wholly and exclusively to carry on the trade rested upon the assessee in each case. The Court, therefore; amended the rule earlier laid down In re: Travancore Titanium (1966) 60 ITR 277 (supra). The phrase that "to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business. i.e., between the expenditure and the character of the assessee as a trader and not as owner of assets, even if these, are assets of the business", was qualified by stating that if the expenditure was laid out by the assessee as owner-cum-trader and the expenditure was really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business. M. H. Beg, J. while adding a concurring not to judgment written by Sikri, C. J. opined that "to the extent it is a tax on property used for earning profits it must enter into a computation of profits from trading".
12. A judgment of the Supreme Court in re: C.W.T. v. Hoor Bai Ibrahim 1992 PTD 671 has been referred at the bar. The issue decided in that case by the apex Court was, however, different. Their Lordships were considering the phrase "debt owed" as used in section 2(m) of the Wealth Tax Act, 1963. It was finally held that Wealth Tax liability for the current year could be deducted to reach net wealth chargeable to wealth tax. The above question referred for our opinion, however, relates to a different provisions of a different law namely Income Tax Act and therefore, no help from the ratio settled in that case can possibly be received.
13. Before concluding it needs to be stated that the above question is only of an academic interest. After the repeal of Income-tax Act, 1922 the substituted legislation namely the Income Tax Ordinance enforced from 1-7-1979 provided for a parallel provision as contained in section 23(1)(xviii). Also the Ordinance expressly provided for deduction of 'wealth tax paid by an assessee from his total income. The concession so provided under clause (129) of the Second Schedule to the Ordinance was available to all and sundry assessees irrespective of the nature and source of their income. C.B.R. Circular No. 1, dated September 15, 1979 explained the same. However, that clause was omitted from the Ordinance by Finance Act, 1994. C.B.R. Circular No. 6 of 1994, dated July 10, 1994 issued to explain the amendments/changes made by the Act still agreed that wealth tax paid shall continue to be allowed as specific deduction against relevant head of income if otherwise admissible under the law e.g. in computing income from house property. Thus, the Revenue has accepted the above view adopted by the Tribunal and has rather gone a step further by allowing the deduction in not only cases of income from business but also from other, sources including income from property.
14. Be that as it may, for the reasons discussed above, our reply to they question is in the affirmative.
C.M.A./M.A.K./C-30/L Question answered.