Commr. Of Income-Tax v. Janki Kuar Sahiba

Kanhaiya Singh, J.:— This case came before us on a case stated by the Income-tax Appellate Tribunal, Patna Branch, under Section 66(1) of the Income-tax Act, 1922, on the application of the Commissioner of Income-tax, Bihar and Orissa. The assessee was the then owner of the Bettiah estate and submitted a return with respect to the forest produce for the assessment year 1948-1949, corresponding to the accounting year 1947-1948. The assessee owns some forest and derives income from the sale of forest produce.

2. The assessment was made under Section 12 of the Income-tax Act, as income falling under head (v) of S. 6 of the Act, namely, income from other sources. For the assessment year 1948-1949 the assessee returned a net income of Rs. 1,68,675/- from the sale of forest produce. The gross receipt from the sale of forest produce amounted to Rs. 2,59,521/-. The assessee claimed a deduction therefrom of a sum of Rs. 90,846/- as expenditure incurred solely for the purpose of earning the income from forests. It included a sum of Rs. 21,554/- representing I cess paid by the assessee which has been described by the Appellate Tribunal as jungle cess. This jungle cess is levied under Section 6 of the Bengal Cess Act of 1880 (Act 9 of 1880) as applied to the State of Bihar. The assessee claimed a deduction of the amount paid as cess is computation of the income-tax under S. 12 of the Act.

3. The Income-tax Officer and the Appellate Assistant Commissioner refused to make an allowance for this sum in computing the forest income of the assessee, as, according to them, the cess was a tax on the assessee's profits. An appeal from the decision was taken to the Appellate Tribunal. There also the assessee claimed that the deduction amounting to Rs. 21,554/- was permissible under Section 12 of the Income-tax Act in computing the assessee's income from forests.

4. The Tribunal accepted the assessee's contention that the cess was allowable as a deduction in computing the assessee's income from forests under S. 12 of the Act, as, in their opinion, (1) cess is a tax on immovable property, and (2) it does not matter for the purpose of S. 12 of the Act that the amount of the cess had been determined with reference to the assessee's profits. This order of the Appellate Tribunal was made on 13-2-1952. Upon the application of the Commissioner the Appellate Tribunal referred the following question of law for determination:

“Whether the jungle cess of Rs. 21,554/- levied under the Bengal Cess Act of 1880 (9 of 1880), as applied to the State of Bihar, is allowable as a deduction under S. 12(2) of the Act in computing the assessee's income from forests?”

5. The important question for consideration is whether the sum of Rs. 21,554/- paid as cess should be deducted in computing the income-tax payable by the assessee. This cess was assessed under Section 6 of the Bengal Cess Act of 1880, which reads as follows:

“The local cess shall be assessed on the annual value of lands and, until provision to the contrary is made by the Parliament, on the annual net profits from mines, and quarries, other than notified mines, and from tramways, railways and other immovable property ascertained respectively as in this Act prescribed.”

6. The question is whether the cess was levied on the annual value of lands or on the produce from the forests. The Appellate Tribunal proceeded on the basis of the Calcutta decision reported in — ‘Isabella Coat Co v. Commr. of Income-tax, Bengal’, AIR 1926 Cal 396 at pp. 397-398 (A), and held that it was a cess payable, in respect of immovable property. From the returns submitted as well as from the order of the Income-tax Officer it appears that it was a tax not on the annual value of the land but on the annual net profits from the immoveable property, namely, annual net profits from forests in this case.

7. When this was an imposition on the produce from the forests, the question that falls for determination is whether the cess paid on that produce should be deducted in computing the income-tax. There is no dispute that in this case the assessment was made under Section 12 of the Income-tax Act, namely, with respect to income from other sources. Reference has to be made to that section in order to find out what allowances can be made in determining the amount of tax and that we find in sub-s. (2) of S. 12 of the Act which reads as follows:

“Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains.”

8. The rest of the sub-section is not relevant for the present purpose. Allowance permissible under sub-s. (2) is the expenditure incurred solely for the purpose of making or earning such income. Can cess levied under the Bengal Cess Act of 1880 be characterised as such an expenditure? It is difficult to see how the payment of the cess in any view helped or aided the assessee in obtaining the forest produce. It is urged on behalf of the assessee that in order to preserve the land on which the forest stood and to ensure regular income from the forest produce the payment of cess was imperative since the consequence of the non-payment of the cess was the deprivation of the source of income itself.

9. It is a far-fetched argument. The expenditure envisaged in sub-s. (2) of Section 12 of the Income-tax Act is the one which is closely connected with the earning of the income. In the case of — “Jyoti Prasad Singh Deo, In re’, AIR 1921 Pat 109 (2) (FB) (B) Mullick J. explained the nature and character of expenditure contemplated in sub-s. (2). Expenditure incurred for the purpose of earning income or profits means, as laid down therein, sums paid or liabilities incurred the purpose of which is to feed the spring from which the income is derived.

10. In order to entitle the assessee to a deduction under sub-s. (2) of Section 12 of the Income-tax Act, it is, therefore, necessary to show that the payment of the cess materially contributed to the earning of the forest produce. There is nothing to shew this. As a matter of fact, there is no relation between this expenditure and the income derived from the forest produce. Again, the expenditure must be incurred as a condition precedent to the production of the income.

11. In this case the cess was assessed after the income from the forest had been already derived. There was assessment of cess on the income from the forest produce, and the income-tax authorities assessed tax upon the said income. It cannot be reasonably urged that in assessing the cess the income-tax payable on that produce would be deducted. Similarly, on the same reasoning, it cannot be reasonably urged that the amount of cess will be deducted from the amount of forest produce in assessing the income-tax. The cess paid in tills case cannot be said to be incidental to the making of the income.

12. The present case falls within the principle of the decision in the case of — ‘Jyoti Prasad Singh Deo, In re’, (FB)(B) above referred to. The question there was whether the amount derived by the assessee from rents and royalties of certain collieries should be deducted in assessing the income-tax. A Full Bench of the Patna High Court held that in assessing the income-tax, road cess and public works cess cannot be deducted as the payment of cess is not an expenditure solely incurred for making the income. Dawson-Miller C.J observed as follows:

“In the present case the only allowance provided for in S. 11 (which now corresponds to S. 12 of the Act) is any expenditure, incurred solely for the purpose of making such income or earning such profits. As a last resort the petitioner contends that the amount levied for cesses is an expenditure incurred solely for the purpose of making the income, but it would, in my opinion, be an undue straining of plain language to say that the payment of road cess is an expenditure incurred solely for that purpose.

13. The liability to pay cesses results from the income having been made and the payment of the cess can hardly be said to form a necessary part in the making of the income which must come into existence before the liability to cess arises. The payment of cess is a necessary expense arising in connection with the ownership of royalties but it is no sense an expenditure incurred for any purpose incidental to the making of the income.” In this case we are concerned not with royalties, road cess or public works cess, but with cess assessed on the annual net profits of forest produce. In principle, however, I find no distinction between that case and the present case. In all cases the material question for consideration will be whether or not a particular cess paid was really an expenditure incurred solely for that purpose. Here there is nothing to show that this cess which the assessee paid was in any way expenditure for the purpose of making that income.

14. The case in AIR 1921 Pat 103 (2) (FB) (B), was later followed by the Patna High Court in the case of — ‘Commr. of Income-tax, B. & O. v. Shiva Prasad Singh’, AIR 1926 Pat 109 (C). The assessee in that case was the Raja of Jharia, who derived a considerable income as the owner of royalties which he received under mining leases, of which he was the lessor in the Jharia coal-fields.

15. The question arose whether in arriving at the taxable income derived from that source the assessee was entitled to deduct certain cesses or rates imposed upon him under the two local Acts, known as the Jharia Water-Supply Act, 1914, and the Bihar and Orissa Mining Settlement Act, 1920. Under the former Act the cess is leviable within the area prescribed both upon the owners of coal mines and upon the holders of royalties from those mines.

16. In the case of mine-owners who are themselves working the mines, the cess is a cess on the annual despatches of coal and coke from the mine and would be payable apart altogether from whether any profit is derived from the actual working of the mine. Their Lordships of the Patna High Court, following the case in AIR 1921 Pat 103 (2) (FB) (B), held that the taxes payable by the assessee under the Jharia Water-Supply Act as well as the Bihar and Orissa Mining Settlement Act cannot be deducted from the royalty received by him in assessing the tax payable under the Income-tax Act.

17. These two cases of our High Court conclude the matter, and the cess paid upon the forest produce cannot be deducted under sub-s. (2) of Section 12 of the Income-tax Act in determining the income-tax payable by the assessee. The Appellate Tribunal relied on the Calcutta case, AIR 1926 Cal 396 (A). That case is distinguishable from the present case. The assessment in that case was under Section 10 of the Income-tax Act. Apart from this, that view is contrary to the view taken by the Patna High Court, and, therefore, does not constitute a binding authority for us. Anyway, Section 10 of the Income-tax Act has since been amended by inserting sub-s. (4), which prohibits allowance to be made on account of any cess, rent or tax levied on the profits or gains of any business. The Appellate Tribunal, therefore, was wrong in relying upon that case, when there was a decision of the Patna High Court bearing directly upon the question at issue. In my opinion the deduction of the sum of Rs. 21,554/- paid on account of cess in computing the income-tax is not permissible under sub-s. (2) of Section 12 of the Income-tax Act.

18. For the reasons given above, I answer the question in favour of the Department. The reference is disposed of accordingly. The Department will be entitled to costs. Hearing fee Rs. 200/-.

Das, C.J:— I agree with my learned brother that the question should be answered in favour of the Department, namely, that the amount of cess to the extent of Rs. 21,554/- paid by the assessee under the Bengal Cess Act of 1880 cannot be allowed as a deduction in computing the income, profits and gains which the assessee made from her forest produce.

19. In order to determine the question it is necessary first to read the section under which the assessee claimed the deduction. The relevant provision is sub-s. (2) of Section 12 of the Income-tax Act. That sub-section, so far as it is relevant for our purpose, states that such income, profits and gains as are referred to in sub-s. (1) of S. 12 shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains.

20. Therefore, the determining test for answering the question is if the cess which the assessee paid under the Cess Act of 1880 was an expenditure solely for the purpose of making or earning the income, profits or gains from the forest produce. If this determining test is fulfilled, then the answer should be in favour of the assessee. If this determining test is not fulfilled, then the answer should be in favour of the Department.

21. Therefore, the crucial question is whether the determining test has been fulfilled or not. The learned Advocate-General who has appeared for the assessee in this case has put forward his argument in the following way. Firstly, he has submitted that the sum of Rs. 21,554/- which the assessee paid as cess was a payment in respect of immoveable property, that is, in respect of land on which the forest grew. The learned Advocate-General has then submitted that if this cess were not paid by the assessee, the land on which the forest grew would itself have disappeared or would have been taken away in realisation of the cess; therefore, the assessee paid the cess in order to earn the income from the forest.

22. In this way the learned Advocate-General has contended that the test laid down in sub-s. (2) or Section 12 of the Income-tax Act has been fulfilled. In order to appreciate this argument of the learned Advocate-General it is necessary to read Section 6 and Section 72 of the Bengal Cess Act. Section 6 of the Cess Act states ‘inter alia’ that the local cess shall be assessed on the annual value of lands and, until provision to the contrary is made by the Parliament, on the annual net profits from mines and quarries, other than notified mines, and from tramways, railways and other immovable property ascertained respectively as prescribed by the Cess Act.

23. Section 72 states the basis on which the assessment and levy of cess on mines, railways, and other immoveable property is made. It states ‘inter alia’ that the cess is calculated on the average annual net profits of the property for the last three years' for which accounts have been made up. It is I well settled that we have to answer the question of law on the facts found by the Appellate Tribunal. It is not open to us to go behind or re-investigate the facts found by the Appellate Tribunal.

24. It is, therefore, necessary to ascertain first what are the facts found by the Appellate Tribunal on which the which Tribunal allowed a deduction of Rs. 21,554/-. The Appellate Tribunal did not give any detailed reasons for the order which they passed in the appear preferred by the assessee; the Tribunal reference, however, to the reasons which it had given in an earlier appeal, namely, ‘Income-tax Apneal” No. 6258 of 1950-1951. That order of the Appellate Tribunal has given printed in the paperbook and will be found at pp. 5 and 6. In that order the Appellate Tribunal referred first to the decision of the Calcutta High Court in AIR 1826 Cal 393 (A), and then observed as follows:

“The payment of cess which is levied on the owner of a jungle is expenditure incurred by the owner of the jungle solely for the purposes of earning the income from such jungle. The authorised representative for the Department contends that the cess on immovable property is determined on the basis of the annual value, i.e on the basis of the profits earned by the assessee from the immovable property. It appears to us that this circumstance is of no consequence for the purpose of determining the admissibility of cess as a deduction under Section 12 of the Income-tax Act. It is significant that in S. 12 there is no provision corresponding to Section 10(4) of the Income-tax Act.”

25. It is manifest from the extract of the order of the Appellate Tribunal quoted above that the Appellate Tribunal proceeded on the footing that even though the cess was imposed on the animal net profits from the forest produce, the ??? was still entitled to claim deduction for the cess so paid. The Appellate Tribunal relied ??? decision of the Calcutta High Court referred to above for this view. In doing so the Appellate Tribunal clearly ignored two decisions of this Court where a contrary view was taken.

26. The earliest decision of the Patna High Court on the point is the decision in AIR 1921 Pat 103 (2) (FB) (B). That was a case in which the owner of coal-mines receiving royalty upon cord asked for deduction of the cess which he had paid. It was observed that the only allowance provided for under the law (S. 11 was the relevant section at that time) was any expenditure, not being in the nature of capital expenditure, incurred solely for the purpose of making such income or earning such profits. His Lordship Dawson-Miller C.J observed:

“It would, in my opinion, be an undue straining of plain language to say that the payment of road cess is an expenditure incurred solely for that purpose. The liability to pay cesses results from the income having been made and the payment of the cess can hardly be said to form a necessary part in the payment of the income which must cornel into existence before the liability to cess arises. The payment of cess is a necessary expense arising in connection with the ownership of royalties, but it is in no sense an ??? incurred for any purpose incidental to the making of the income.” If the argument of the learned Advocate-General that cess is paid for preserving the land where the mine is situated or where the forest is situated is correct, then it must be held that the decision in Jyoti Prasad Singh Deo's case (FB) (B), was incorrect; because there also the owner of the royalty could have said that he paid the cess in order to preserve the land where the mine was situated. His Lordship Dawson-Miller C.J rightly pointed out that was not the basis of the imposition of the cess. The basis of the imposition of cess on royalties was the annual net profits made.

27. Mullick J. pointed our that if more, than one tax or imposition were made on the profits, it would be wrong to deduct one tax in computing the income for the other tax; because if one tax is to be deducted in computing the income, then the other tax must also be deducted in order to compute the income for the second tax. In that way the position will be reduced to an absurdity.

28. The ratio of the decision in ‘Jyoti Prasad Singh Deo's case (FB) (B), so far as I have understood it, is that the cess is imposed after the income comes into existence though the payment of the cess is a necessary expenditure arising in connection with the ownership of the royalties or of the forest, as in this case. If that ratio is applied, then the decision of the learned Appellate Tribunal is clearly wrong. The test is not whether cess is an imposition on immoveable property; the test is whether the imposition is on the profits, in the same way as income-tax is on the income, profits and gains, from forest produce.

29. The learned Appellate Tribunal proceeded on the footing, as I have already stated, that even though the payment of cess was on the basis of annual not profits, the assessee was still entitled to claim a deduction under Section 12(2) of the Income-tax Act. If I may say so with great respect, the very basis of the decision of the learned Appellate Tribunal is incorrect and is in the teeth of the decision in ‘Jyoti Prasad Singh Deo's case (FB) (B). The principle laid down in Jyoti Prasad Singh Deo's case (FB) (B), was re-affirmed in AIR 1926 Pat 109 (C).

30. It is no doubt true that in the Calcutta decision it was held that the imposition of cess was an imposition on immoveable property, and a reference was made to Section 5 of the Cess Act. It is worthy of note, however, that the Calcutta decision proceeded on the wording of S. 10(2), cls. (viii) and (ix), as they stood then. The case of ‘Jyoti Prasad Singh Deo (FB) (B)’, was noticed by their Lordships of the Calcutta High Court, and the decision was distinguished on the ground that ‘Jyoti Prasad Singh Deo's case (FB) (B), dealt with Section 11 of the Income-tax Act.

31. I may state here that Section 11 of the Income-tax Act as it stood then corresponds to present Section 12 of the Income-tax Act. The way in which their Lordships of the Calcutta High Court distinguished ‘Jyoti Prasad Singh Deo's case (FB) (B)’ may be used also for distinguishing the Calcutta decision in this case; because the Calcutta decision in AIR 1926 Cal 396 (A) related to Section 10 of the Income-tax Act and not to Section 11 or Section 12 of the Income-tax Act.

32. Therefore, the Calcutta decision is no authority for holding that an assessee is entitled to claim an allowance by way of deduction under S. 12(2) of the Act for the cess which he or she has paid in respect of the property in question, though the cess which the assessee had paid was on the average annual net profits for the last three years. As my learned brother has pointed out. Section 10 of the Income-tax Act was amended soon after the Calcutta decision.

33. Sub-section (4) of S. 10 which was inserted sometime later now makes it quite clear that nothing in ci. (ix) or cl. (xv) of sub-s. (2) of S. 10 shall be deemed to authorise the allowance of any sum paid on account of cess. In a recent decision, a Division Bench of this Court held in — ‘Kali Prasad Singh v. Commr. of Income-tax, B. & O.’, 1955-28 ITR 294 (Pat) (D), that sub-s. (2) of S. 12 should be read along with S. 10(4). If was observed:

“Section 10(2)(xv) is enacted in the same language as S. 12(2). Section 10(2)(xv) also permits the assessee to deduct any expenditure laid out or expended wholly and exclusively for the purpose of the business. But there is an exception contained in S. 10(4) which states that nothing in cl. (xv) of sub-s. (2) should be deemed to authorise the allowance of any sum paid on account of any cess, rate or tax levied on the profits or gains of any business. If we read S. 12(2) in the context of S. 10(2)(xv) and S. 10(4) of the Act, it is clear enough that the assessee in this case is not entitled to claim any deduction of the amount of cess which he had paid to Government as a legitimate deduction under any of the provisions of the Act.”

34. Their Lordships were dealing with a case in which the assessee was claiming deduction on account of cess which he had paid, though the entire road cess was received from the tenants by reason of a stipulation that the tenants should pay the entire road cess to the landlord. It was held that the amount of cess recovered by the landlord in excess of one-half was income and was liable to be assessed to income-tax under the Income-tax Act.

35. One of the reasons given by the learned Appellate Tribunal is that there is no provision corresponding to S. 10(4) in Section 12 of the Income-tax Act. That reason is disposed of by the aforesaid decision in 1955-28 ITR 294 (Pat) (D).

36. I am of the view, however, that it is unnecessary to call in aid the decision in ‘Kali Prasad Singh's case (D)’, in the present reference. The present reference can be disposed of on the principle laid down in AIR 1921 Pat 103 (2) (FB) (B), a decision which the learned Appellate Tribunal completely ignored. I am of the view that the decision in ‘Jyoti Prasad Singh Deo's case (B), lays down the correct principle, and the present reference is covered by the principle laid down in that decision.

37. For these reasons I have reached the conclusion that the cess which the assessee paid under the provisions of the Cess Act, 1880, does not fulfil the test laid down in sub-s. (2) of Section 12 of the Income-tax Act, namely, the payment of such cess was not an expenditure incurred solely for the purposes of making or earning the income, profits or gains from forest produce. The cess was an imposition on the annual net profits from forest produce; so is the income-tax assessed on the income, profits and gains from the said forest produce. It cannot be said that either of these two taxes or impositions are paid for the purpose of earning the income from the forest produce. I would accordingly answer the question in favour of the Department, and also agree to the order proposed by my learned brother as to costs.

D.H.Z

38. Answer in the negative.