1. This is a reference under Section 66(2) of the Indian Income-tax Act, 1922, The Tribunal has sent to this court a statement of the case on the following question :

"Whether, on the facts and in the circumstances of the case, the property tax paid by the assessee in Japan on its vessels was allowable as deduction under Section 10(2)(xv) of the Income-tax Act, 1922 ?"

2. The assessment years are 1956-57, 1957-58, 1958-59 and 1959-60. The corresponding previous years were the financial years ending on the 31st of March, 1956, 1957, 1958 and 1959, respectively. The respondent is a nonresident shipping company. Its registered office is in Japan. It has been assessed to income-tax for the assessment years aforesaid under the Indian Income-tax Act, 1922, with respect to net Indian earnings. The assessee did not maintain separate accounts for its Indian business ; its net profits on the basis of its world profit and loss account was computed under the Indian Income-tax Act, 1922, and, thereafter under Rule 33 of the Rules, the Indian net profit was worked out in the proportion as between the gross Indian earnings and the gross world earnings. In the matter of computation of its net world profits and incidentally of its net Indian profits, the assessee claimed before the Income-tax Officer that the Real Estate Tax which it had paid on its vessels for each of the four years aforesaid represented municipal tax levied in Japan on the value of the ships and such tax should be allowed as business expenses.

3. It would be convenient at this stage to set out the admitted provisions of the Japanese statute relevant for our purposes in this reference. The provisions are as follows :

"Article 341 :

With respect to municipal property, the terms listed in the following items shall have the definition given to them under the respective items :--

(1) Property : Land, house and depreciable assets;......

Depreciable assets: Assets (excluding the mining right, fishing right, patent right and other depreciable intangible property) other than land and house which can be used for business purpose and the amount of depreciation in which is included in the loss or necessary expenditures in the computation of income as provided for in the corporation tax law or the income tax law,......"

"Article 342 :

(1) The municipal property tax shall be imposed on property by city, town or village in which the property concerned is located.

(2) With respect to vessels, vehicles, and other objects similar in nature which are included in depreciable assets, the city, town and village in which the principal port of anchorage or regular keeping place is located shall be the city, town or village mentioned in Part I except those cases coming under the provisions of Article 389, para. 1, item (1) and when the principal port of anchorage is unknown with respect to vessels, the city, town or village in which the port of anchorage is located and in which the port of registry is located shall be regarded as the city, town or village in which the principal port of anchorage is located."

"Article 349 (b) :

The taxable basis for the municipal property tax to be imposed on depreciable concerned assets as of the date of imposition already registered in the depreciable assets tax ledgers. The taxable basis for the municipal property tax to be imposed on vessels as prescribed by Prime Minister's Agency Ordinance, aiming chiefly at the ocean-going area as their sailing area and conforming to the standard, shall be the amount of one-sixth of the value of the vessels concerned."

" Article 350 :

The standard rate of municipal tax shall be 1.4 per cent. However, even in cases where it is imposed in excess of the standard rate, the rate shall not exceed 2.1 per cent."

4. The Income-tax Officer rejected the assessee's claim for deduction. He held that neither under section 10(2)(ix) nor under Section 10(2)(xv) of the Indian Income-tax Act the payment of such tax could be allowed because the incidence falls on the assessee-company in its capacity as the owner of certain properties and not in its capacity as a trader.

5. The Appellate Assistant Commissioner allowed the assessee's claim. He found that the property tax in Japan was leviable on all assets which were exclusively used for the purpose of the taxpayers' business (except for land and houses) and as such the payment of such tax was an allowable expenditure under Section 10(2)(xv) of the Indian Income-tax Act.

Before the Tribunal the department contended that Japan's property tax was leviable not merely on vessels but also on other properties. Therefore, the tax which the assessee had paid was paid as the owner of properties and not in the assessee's character as a trader. The department submitted further that this property tax was similar to the Indian wealth-tax and, since the payment of wealth-tax was not allowable as a business expenditure, the same principle ought to be applied to the said property tax. The Tribunal took the view that the property tax in Japan was payable, subject to the specified exceptions, on all assets "which can be used for business purpose." In these premises, the Tribunal held that the property tax was attracted whenever there was actual user of depreciable assests in a business and necessarily the carrying on of business with such assests is a pre-condition to the imposition of the tax. The Tribunal upheld the Appellate Assistant Commissioner's order that the Japanese property tax was an allowable deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922.

6. To us, it seems, the principles which the Supreme Court has laid down in Travancore Titanium Products Ltd. v. Commissioner of Income-tax, [1959] 60 I.T.R. 277 (S.C.).

apply to the property tax in Japan. In the Supreme Court case the question arose whether wealth-tax under the Wealth-tax Act, 1957, paid by an assessee was a permissible deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922. At pages 282 and 283 of its judgment, the Supreme Court observes :

. . . the nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and be laid out by the taxpayer in his character as a trader. 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 they are assets of the business. In the light of the printiples the amount of tax paid on the net wealth of assessee under the Wealth-tax Act is not a permissible deduction under Section 10(2)(xv) of the Indian Income-tax Act in his assessment to income-tax, for tax is imposed under the Wealth-tax Act on the owner of assets and not on any commercial activity. The charge of the tax is the same, whether ths assets are part of or used in the trading organisation of the owner or are merely owned by him. The assets of the taxpayer, incorporated or not, become chargeable to tax because they are owned by him and not because they are used by him in the business,

7. We have quoted above the relevant provisions of the Japanese statute. Now, Section 3 of our Wealth-tax Act of 1957 provides :

"Subject to to the other provisions contained in this Act, there shall be charged for every financial year commencing on and from the first day of April, 1957, a tax (hereinafter referred to as 'wealth-tax') in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in the Schedule,"

8. The tax, therefore, that is levied under this Act is on the "net wealth" of an assessee on a particular valuation date. "Net wealth" has been defined in Section 2(m) which prescribes, inter alia :

"Net wealth" means the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the assessee on the valuation date, including assets required to be included in his 'net wealth' as on that date under this Act, is in excess of the aggregate value of all the debts owed by the assessee on the valuation date other than..."

9. The Supreme Court in the above cited case was construing the provisions of the Wealth-tax Act, 1957. The Supreme Court's conclusion is that an assessee pays wealth-tax on assets owned by him. And when a tax is paid by an assessee in his capacity as the owner of the asset and not in his capacity as a trader the tax is not deductible under Section 10(2)(xv) of the Indian Income-tax Act, 1922. In other words, according to their Lordships of the Supreme Court, in order to be a deductible expenditure under Section 10(2)(xv), there must be a direct and intimate connection between the expenditure and the business itself.

10. Bearing these principles in mind we have to analyse the relevant provisions of the Japanese statute before us. Article 341(4) of the Japanese Act defines depreciable assets. These are assets other than, inter alia, land and house which can be used for business purpose. This definition suggests that an Assets which is capable of being used for business purpose is subjected to this property tax in Japan. In other words, it is the ownership of the assets that is material and not its actual user in business. The charging provision is in Article 342(1). This sub-article clearly provides that the municipal property tax is imposed "on property". The location of this property has been specified both in this sub-article and Sub-article(2). To attract the charging section, therefore, there are two requirements. (1) "Property" (within the meaning of the statute) of which the assessee is the owner and (2) location of that property in places specified in Sub-articles (1) and (2) of Article 342. The definition of this property, as we have already said is in Article 341. Article 349(b) prescribes the basis of this municipal property tax. And as "vessels" come within the definition of property in this statute the taxable basis for vessels has also been laid down. The value of the depreciable asset is to be ascertained, however, with reference to " the depreciable assets tax ledgers ".

11. From these provisions the conclusion is that the municipal property tax in Japan is a tax levied on " property" which is to be paid by its owner and the payment of this tax is not a condition precedent to the actual carrying on of any business. There is no direct and intimate connection between the payment of the tax and the business of the assessee. In this view of the matter, we are of the opinion that the principles which the Supreme Court has enunciated in the passage quoted above apply to the facts of the instant reference.

12. The department's counsel wanted to argue before us that the Tribunal should not have accepted the correctness of the provisions of the Japanese statute as these were not proved before the Tribunal according to law. In our opinion, such an argument is no longer open to counsel for the revenue. Proof of foreign law is a pure question of fact and the department never raised any objection to the correctness of these provisions before the tax authorities. In this reference, therefore, we decline to go into this matter.

13. For reasons aforesaid our answer to the question herein is in the negative and in favour of the revenue.

14. The assessee will pay to the Commissioner the costs of this reference.

Sabyasachi Mukharji, J.

15. I agree.