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Is the payment wholly and exclusively incidental to the carrying on of the business ? Well, it is only by reason of the necessity of land for his business 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 ... |
In view, then, of the particular 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." PRE |
Issaes, J., was impressed by the reasoning of Lord Halsbury and Lord Atkinson in Smith vs Lion Brewery, Co. Ltd.(1). PRE |
He observed : "And Lord Atkinson reasons out the position and shows convincingly, to my mind that, though a tax may in I one sense be paid as owner or lessee, in another it is paid as trader. PRE |
The instance he puts as to licences are undeniable, and I cannot distinguish them from this case. PRE |
To carry the matter further : Suppose the Federal Parliament were to, lay a tax on the owners of motor cars, and carts, and guns, and dogs and sheep. PRE |
so that (1) 27 the tax was payable whether these things were employed in trade or not could it be doubted 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. PRE |
And the fallacy of the contrary doctrine consists in this; it confuses, not so much the meaning, as the application of the word "purpose". PRE |
The land tax is enacted by legislature for its own purpose, that is, to tax the 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. PRE |
He simply pays it because he is obliged to by law. PRE |
But when he uses the property to produce an income 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." PRE |
The unsoundness of the test of the capacity in which payment is 'Made was commented upon in Harrods (Bueonos Aires) Ltd. vs Taylor Gooby(1) by the Court of Appeal. Ratio |
The facts can be conveniently taken from the head note. Ratio |
"The Appellant Company, which was incorporated and resident in the United Kingdom, carried on the business of a large retail store at Buenos Aires. Ratio |
In consequence the Company was liable in Argentina to a tax known as the substitute tax, which was levied on joint stock companies incorporated in Argentine, and on companies incorporated outside, Argentine which carried on business there, as did the Appellant Com pany, through an "empress estable". Ratio |
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. Ratio |
Under Argentine law there were sanctions available to remedy non payment of the tax. Ratio |
On appeal against an assessment to Income 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 business in the Argentine since, if it had not paid it, it would have been unable to carry on its business there... |
For the Crown, it was contended (inter alia) that the Company paid the tax in the capacity of taxpayer rather than trader. Ratio |
" Willmer, L.J., referred to Commissioners of Inland Revenue vs Dowdall O 'Mahoney & Co. (1) and observed: "I can find no sup port whatever in this case for the proposition that the question depends on the capacity in which the taxpayer pays the taxes. PRE |
" After referring to Smith vs Lion Brewery(2) 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 both cases, as stated by Lord Atkinson, i... |
" Dancwerts, L.J. observed "In Rushden Heal Co. Ltd. vs Keens(3), 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. PRE |
He seems to draw a distinction between payments made by a trader in the character of taxpayer and not, or not wholly, as trader. PRE |
I find this idea difficult to, follow and not very helpful in, discussing the subject in issue. PRE |
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. PRE |
Everyone who pays taxes pays because be is taxed and is a taxpayer." PRE |
Diplock, L.J., also criticized the test in these words "it is contended for the Crown that the Company Paid the tax in its capacity as a taxpayer, not in, its capacity as a trader. PRE |
But with great respect to Lord Greene, M.R. 's Judgment in the Rushden Heel Co. 's on which this Convention was mainly based, this is merely playing with words. PRE |
As pointed out by Willmer, L J., this. PRE |
ratio decidendi "was not adopted by the House (1) (3) (2) 29 of Lords in the same case and cannot, in my, view, survive Lord Atkinson 's earlier criticism of a similar argument in the Lion, Brewery case which Willmer L.J., has already cited. PRE |
You can always find some label other than "trader" to describe the capacity in which a trader makes any disbursement for the of his trade. PRE |
He pays rent for his business premises in the capacity of "tenant", rates in the capacity of "Occupier ", wages in the capacity of "employer", the price of goods in the capacity of "buyer". PRE |
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 computing the profits of his trade. PRE |
The learned counsel for the Revenue did not say that these cases had been wrongly decided." PRE |
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 vs Webb(1) or with "tied house in Smith vs Lion Brewery Compnay(2) or with the "Company 's Capital" in Harrods (Bueonos Aires) Ltd. vs Taylor Gooby(3). Ratio |
He said that in all these cases the tax was being levied on the asset of the business which was being used for the purpose of business. Ratio |
In the present case, according to him, the net wealth could not be likened to an asset owned by the trading company. Ratio |
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 incurred for the purposes of trading, as outlined in its Memorandum of Association; if, all the assets are owned and used for the purpose of the trade the net wealth would als... |
He said that it would be possible for a company to mortgage its net assets to a bank and if a company did that, it could not be said that the net wealth or net assets had not been used for the purposes of business. Ratio |
If tax was levied on the capital value of assets without allowing deduction of debts it is clear that the tax would be deductible. Ratio |
What difference does it make if debts are deducted from the capital value of assets. Ratio |
The net wealth is as much an instrument of trade as the capital value of assets. Ratio |
We find it very difficult to distinguish the case of a trading company like the assessee, on principle, from that of the grazier or the brewery company, in the cases referred to above. Ratio |
(1) ; (2) (3) 30 In our view the test adopted by this Court in Travancore Titanium case(1) 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 asset... |
It was pointed out by the learned counsel for the Revenue that it would be difficult to allow the deduction of wealth tax in respect of individuals who have both business assets and debts and non business assets and debts. ARG |
But the Wealth Tax Return form itself requires the assessee to show what are the business assets and liabilities and what are non business assets and liabilities. Ratio |
At any rate it should not be difficult to evolve a principle or frame statutory rules to find out the proportion of the tax which is really incidental to the carrying on of the trade. Ratio |
On the facts of this case it is clear that payment of wealth tax was really incidental to the carrying on, of the assessee company 's trade. Ratio |
Accordingly, we hold that the appellant is entitled to succeed. Ratio |
The appeals are allowed, the judgment of the High Court set aside and the question answered in favour of the assessee. Ratio |
Parties will bear their own costs throughout. RPC |
Beg, J. RPC |
My lord the Chief Justice has quoted certain tests laid down by Gajendragadkar, C.J., speaking for this Court, in Keshav Mills Co. Ltd. vs Commissioner of Income Tax, Bombay North(2), which have to be satisfied before we could properly dissent from a previous decision of this Court. Ratio |
In such a case, I think I should indicate my reasons for reaching a concurring conclusion, with very great respect, that an earlier, opinion of this Court, on the very question before us now, needs revision. Ratio |
The error which crept into the decision of Travancore Titanium Products Ltd. vs Commissioner of Income tax, Kerala(1) could be traced to an application of the rather speciously stated criterion laid down, in the House of Lords in Strong & Co. of Romsey Ltd. vsWoodfield(3), by the Lord Chancellor who said there that exp... |
The nature of the trade is to be considered". Ratio |
But, Lord Davey, looking at the case from (1) ; (2) ; (3) ; 31 a somewhat different angle, "said:, "it was not enough that the bursement is made in the course of, or arises out of, or is connected with, the trade or is made out of the profits of the trade. Ratio |
It must be made for the purpose of earning profits". 'The two tests were not identical. Ratio |
The ratio decidendi 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 tradesman who has to pay damages for injury to his customer due to his personal neglect in maintaining his premises, even though these p... |
It is no part of normal business to commit such wrongs. Ratio |
Liabilities so incurred could very well be looked upon ,is outside the course of trading altogether even if they arise out of commercial activity or result from something connected with or meant to serve any commercial purpose. Ratio |
Their Lordships, however, used language which could cover more than what could be attributed to the tradesman 's own purely personal wrongs. Ratio |
The facts of that case show that the negligence which resulted in payment of damages, for which a deduction was claimed, was that of servants employed as an ordinary incident of trading so that the master was only vicariously liable as an inn keeper and an employer. Ratio |
And, this aspect of the case made Lord James, in Strong 's case, doubt the correctness of the opinion which he, very hesitatingly, decided to accept. Ratio |
In Smith vs Lion Brewery Company, Limited(1), 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. Ratio |
This decision had to be upheld by the House of Lords where opinion was evenly divided when the case was taken up there. Ratio |
Hence, the test laid down there by the Court of Appeal was held by Farl Loreburn to he binding upon him, in Usher 's Wiltshire Brewery Ltd. vs Bruce(2), although lie had himself not accepted it in Lion Brewery 's case. Ratio |
in In Rushden Heel Co. Ltd. vs Commissioner of Inland Revenue (3) Lord Greene, M.R., in disallowing deduction of expenses 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 which the expense was ... |
He held that the disbursment had to be disallowed on the ground "that the expenditure was incurred by the Company primarily in its capacity as a taxpayer and for the purpose of regulating the Position as between itself as a taxpayer and the Crown. PRE |
" The House of Lords upheld the decision, following its slightly earlier pronouncement by a majority, in Smith 's Potato Estates Ltd. vs Bolland(1), 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 pr... |
In Artherton vs British Insulated and Helsby Cables Ltd.(1), 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 ... |
the business may yet be expended wholly and exclusively for the purposes of the trade". PRE |
In Mogan vs Tata & Lyle Ltd. (3), 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 exclusively for the company 's trade". PRE |
The decision of the Court of Appeal, in Harroda (Buenos Aires) Ltd. vs Taylor Gooby (4), fully exposed the fallacy involved in applying, without close examination, the test of capacity, for the possession of which in a tax may be imposed, to every levy of a tax, by extending the alluringly simple formula of the Lord Ch... |
In Harrods ' case, deduction was claimed, in computing annual profits of a Company, of a 'Substitute Tax which had to be paid on the Company 's capital in Argentina, irrespective of the profits made on it (just like the Wealth Tax before us). PRE |
The Court of Appeal quoted passages from the opinions of the Law Lords, in Rushden Heel Co. 's case (supra) and Smith 's Potato Estates ' case (supra), to show that the ratio decidendi of these two decisions confined the principle applied there to cases where taxes, like the Income Tax and the Excess Profits Tax, had t... |
In other words, where profits, the net gains of business determined after making all permissible deductions, are taxed, the disbursements to meet such taxes cannot be deducted 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 ... |
(1) 30 T.C. p. 267. PRE |
(2) 10 T. C. P. 15 5. PRE |
(3) 35 T.C. p. 367. PRE |
(4) 41 T.C. p. 450. PRE |
33 In Harrods ' case, both Willmer, L.J., and Diplock, L.J. had made use of Lord Davey 's test set out above, from Strong 's case (supra). Ratio |
They held the ratio decidendi of the "tied house" cases and not Lord Loreburn 's test to be applicable to payment of taxes on assets used for trading exclusivelye. Ratio |
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 contribution 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. PRE |
That, no doubt, is so, but in the present case the Company have become landlords and thus liable to pay the charge, for ,the purpose solely and exclusively of setting up the tied house system of trading." PRE |
Lord Atkinson 's view, expressed in the following words in the same case, was also relied upon by the learned Judge (p.466) : "Stated broadly, I think 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 pu... |
In Harrods case, the Court of Appeal, after a comprehensive survey of all the relevant English authorities, considered the proposition accepted by it, that the 'substitute tax ', levied on the company 's capital, was a permissible deduction in calculating the profits of a company for paying income tax, to be so clear a... |
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 vs Webb, (1) where after a discussion of the relevant English authorities, land tax paid by a grazier on land used by him to earn income was held to be deductible in co... |
On the earlier occasion, when Travancore Titanium Co. 's case (supra) was argued in this Court, Moffat vs Webb (supra) was not cited. Ratio |
Although, there are references in the, judgment ,of this Court, in the earlier 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 comput... |
After going through all the relevant authorities, I have no doubt whatsoever left in my mind that it is the ratio decidendi of "tied house" cases and Harrods ' case (supra) which is the same as that of the Australian case, that applies here and not Lord Chancellor Lorebum 's test laid down in a very different context t... |
I do not think that the test of trading character, when incurring an expense for which a deduction is claimed, is without its uses. Ratio |
There are cases where the question has arisen whether a payment was gratuitous or unnecessary or not made for a bona fide commerical purpose or connected more with some ulterior object really falling outside the normal sphere or regular course of commerce, such as the compounding of an offence even if committed while t... |
In J. K. Cotton Spinning & Weaving Mills Co. Ltd. vs Commissioner of Income Tax(1), I had occasion to consider, a case where the test of trading character or capacity in which a payment is made as well of causal connection between, the payment and a legitimately commercial purpose could, it seemed to me, be both simult... |
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. Ratio |
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.section (1) and (2) of the Income tax Ac... |
One of the grounds given by this Court, to support, its view there, was that "the nature of the expenditure of the outgoing must be adjudged in the light of accepted commercial practice and trading principles". Ratio |
Speaking for myself, I was inclined to take the view that, if the earlier decision of this Court could be justified by a reference to some "commercial practice or trading principles" which could be implied by, or, read into, the very process of computation of profits with which provisions of Section (1) A.T.R. 1967 All... |
I find, however that no case, apart from the Observations mentioned above, contained in the Travancore Titanium Co. 's case was cited to support this line of reasoning. Ratio |
All the other cases brought to our notice, which are discussed above, indicate that ,.commercial practice and trading principles" also warrant such deductions of a tax on assets for capital used wholly and exclusively for carrying on trade or earning profits. Ratio |
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