Citation Codes

Equivalent Citations

citation codes

Case Number

Income Tax Reference No. 14 of 1971.

Advocates

Bhagirath Dass, Advocate, With B., K. Jhingan and S. K. Hirajeea Advocates,
D. N. Awasthy and B. S. Gupta, Advocate, for the applicant.

Judges

D. K. Mahajan
H. R. Sodhi, JJ.

Acts

provisions of the Punjab Urban Immovable Property Tax Act, 1940. Section 2(c)
Section 10(2)(ix) of the Income-tax Act, 1922,
Section 256(1) of the Income-tax Act, 1961,

See more information ...

Smart Summary

Structured Summary of the Opinion — Property Tax Deduction (Punjab Urban Immovable Property Tax)

Factual and Procedural Background

The matter arises from a question referred by the Income-tax Appellate Tribunal, Chandigarh Bench:

"On the facts and circumstances of the case, whether the property tax levied by the Punjab Government was admissible as a deduction?"

The assessee is a private limited company deriving income from exhibition of motion pictures. It owned two cinema houses (Gurgaon and Hissar) and paid urban property tax on those buildings: Rs. 3,065 in 1961-62 and Rs. 2,563 in 1962-63. The assessee debited these amounts to its profit and loss account and claimed them as deductions in computing total income.

The Income-tax Officer disallowed the deductions by an order dated 12 February 1964. An appeal to the Appellate Assistant Commissioner failed: the AAC held the payments were not deductible under Section 10(2)(ix) (not covered by "land revenue, local rates or municipal taxes") and could not be allowed under Section 10(2)(xv) because the expenditure was on ownership of property rather than in the character of carrying on business.

On further appeal, the Tribunal set aside the disallowance and allowed the deductions, reasoning that the payment of urban property tax was incidental to carrying on the business of exhibiting films and therefore deductible.

The department applied under Section 256(1) of the Income-tax Act, 1961, for a reference on the question of law stated above; the present opinion answers that reference.

Legal Issues Presented

On the facts and circumstances of the case, whether the property tax levied by the Punjab Government was admissible as a deduction?

Arguments of the Parties

Assessee's Arguments

The payment of property tax for the cinema buildings was incidental to and necessary for carrying on the business of exhibiting films; unless the tax was paid the business could not be carried on.
The Tribunal had already accepted the assessee's contention for later assessment years (1963-64 and 1964-65) and allowed similar claims, which the assessee relied upon.
(As recorded) the assessee's counsel conceded that a claim under Section 10(2)(ix) could not be maintained, implying reliance instead on Section 10(2)(xv).

Revenue's / Respondent's Position

The Income-tax Officer and the Appellate Assistant Commissioner contended that the tax was on ownership of property and therefore not deductible under Section 10(2)(ix) or Section 10(2)(xv).
The department sought the legal question to be referred to the Court under Section 256(1) to determine whether the property tax was admissible as a deduction.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Strong and Company of Romsey Ltd. v. Woodifield, [1906] 5 T.C. 215 (H.L.)	Test for deductibility: deduction only for loss or expenditure "wholly and exclusively" laid out for the purposes of the trade; only losses "really incidental to the trade" are deductible.	The Court invoked this test as a foundational principle: an outgoing must be connected with and incidental to the trade to be deductible; applied to conclude property tax lacked such direct connection.
Travancore Titanium Products Ltd. v. Commissioner of Income-tax, [1966] 60 I.T.R. 277; [1966] 3 S.C.R. 321 (S.C.)	Acceptance of the Strong test: expenditure must be "direct and intimately connected" with the business and laid out by the taxpayer in his character as a trader to qualify under Section 10(2)(xv).	The Court relied on this Supreme Court authority to reinforce that only expenditures directly and intimately connected with business are deductible; used to assess property tax against this standard.
Commissioner of Income-tax v. Kawasaki Risen Kaisha Ltd., [1970] 75 I.T.R. 537 (Cal.)	Property tax (Japan) is a tax on property payable by the owner and not a pre-condition for carrying on business; hence no direct and intimate connection with business.	The Court cited this case to support the proposition that property tax, being a tax on ownership and not a condition precedent to carrying on business, lacks the required direct connection to be deductible.
Commissioner of Income-tax v. Saraswati Industrial Syndicate (I.T. Ref. No. 54 of 1965), [1972] 83 I.T.R. 352 (Punj.)	Principle that only expenditure laid out "wholly and exclusively" for the purpose of business qualifies under Section 10(2)(xv); a tax imposed because a person carries on a particular business is not necessarily an expenditure for the purpose of that business.	The Court used the observations to show that taxation arising merely because a person carries on business does not make that tax an expenditure "for the purpose of the business."
Commissioner of Income-tax v. Gurupada Datta, [1946] 14 I.T.R. 100 (P.C.)	Authority on property-related taxation cited by the assessee's counsel (context: Section 10(2)(ix) case).	The Court held this decision was of no assistance because it was decided under Section 10(2)(ix) (not under Section 10(2)(xv)), and thus differentiated it from the present question.
Commissioner of Income-tax v. Banarsi Dass and Sons, [1966] 61 I.T.R. 414 (Punj.)	Earlier decision of the Court on related taxation/deduction issues (as cited).	The Court noted the decision but indicated it did not aid the assessee's case on the present facts (no elaboration beyond citation in the opinion).
Commissioner of Income-tax v. Malayalam Plantations Ltd., [1964] 53 I.T.R. 140; [1964] 7 S.C.R. 693 (S.C.)	Interpretation of "for the purpose of the business": wide in scope, may include payments necessary as pre-condition to commence or carry on business; limits remain—expenditure must be incurred by the assessee in his capacity as person carrying on business.	The Court considered the reasoning but concluded Malayalam Plantations did not assist the assessee in this case; it reiterated that limits exist despite the wide interpretation.

Court's Reasoning and Analysis

The Court proceeded in a structured way: first by examining the relevant local tax statute and then by applying established tests of deductibility under the Income-tax Act.

Statutory character of the tax: The Court cited the Punjab Urban Immovable Property Tax Act, 1940. Section 2(c) defines "owner" to include tenants in perpetuity, mortgagee with possession, and trustees having possession. Section 3(4) provides "The tax shall be paid by the owner of the buildings and lands in respect of which it has been levied." From this language the Court concluded the tax is a tax on ownership of property.
Applicability of the deductibility test: Turning to Section 10(2)(xv) of the Income-tax Act, the Court applied the well-established test (from Strong and accepted by the Supreme Court in Travancore Titanium) that an outgoing must be "wholly and exclusively" for the purposes of the trade and must be directly and intimately connected with the business — i.e., laid out by the taxpayer in his character as a trader.
Comparison of positions of owner and non-owner traders: The Court highlighted that an exhibitor who owns a cinema pays the property tax, while an exhibitor who operates without owning the building does not; this showed the tax was related to ownership rather than the business of exhibiting films itself.
Support from authorities: The Court relied on Kawasaki (Calcutta High Court) where property tax was held to lack a direct and intimate connection with business, and on Saraswati (Punjab) to emphasize that a tax levied because a person carries on a business does not automatically become an expenditure "for the purpose of the business."
Addressing the assessee's central contention: The Court noted that the only circumstance in which such a tax would be deductible is where the business could not be carried on without payment of the tax (i.e., the tax is a pre-condition to carrying on the business). The Court found that was not the situation here: the business of exhibiting films could be carried on irrespective of the ownership-based property tax.
Evaluation of conflicting precedents: The Court considered Malayalam Plantations (wide interpretation of "for the purpose of the business") but concluded it was not helpful to the assessee because the limits of that expression require the expenditure to be incurred in the capacity of a person carrying on business. The Court also explained that Gurupada Datta (Privy Council) was decided under a different sub-section (10(2)(ix)) and thus did not assist on the question under Section 10(2)(xv).
Final analytical conclusion: Applying the statutory character of the tax together with the "direct and intimate connection" test, the Court concluded the urban property tax paid by the assessee was not an expenditure incurred in the character of a trader and therefore not deductible under Section 10(2)(xv). The Tribunal's contrary decision was deemed unsustainable and "superficial."

Holding and Implications

Core Ruling:

Answer to the referred question: In the negative. The Court explicitly stated the result in favour of the department and against the assessee.

Direct effect on the parties:

The Tribunal's allowance of the property-tax deduction for the assessment years in question is set aside — the property tax paid on the cinema buildings cannot be allowed as a permissible deduction under Section 10(2)(xv) of the Income-tax Act.
There will be no order as to costs.

Wider implications: The Court emphasized the governing principle that no uniform rule applies to all taxes; each case depends on the nature of the business and the nature of the tax. Only taxes having an intimate connection with carrying on the business qualify under Section 10(2)(xv). The opinion did not purport to create a new general rule beyond applying these established principles to the facts before it.

Show full summary ...

Commissioner Of Income-Tax v. Jai Hind Picture Co. (P.) Ltd.

1. The Income-tax Appellate Tribunal, Chandigarh Bench, has referred the following question of law for our opinion :

" On the facts and circumstances of the case, whether the property tax levied by the Punjab Government was admissible as a deduction ?"

2. The assessee is a private limited company. It derives its income from exhibition of motion pictures. Two cinema houses, one at Gurgaon and the other at Hissar, are owned by it. During the previous years to the assessment years 1961-62 and 1962-63, the assessee paid property tax on the cinema houses. Rs. 3,065 was paid in the year 1961-62 and Rs. 2,563 in the year 1962-63. The assessee debited these amounts in the profits and loss account and claimed deduction in computing its total income. The Income-tax Officer disallowed this deduction by his order dated 12th February, 1964. An appeal by the assessee to the Appellate Assistant Commissioner also failed. The Appellate Assistant Commissioner held that the property tax was not admissible deduction under Section 10(2)(ix) of the Income-tax Act, 1922, as it was not covered by the expression " land revenue, local rates or municipal taxes". It was further held that these amounts could not be allowed as permissible deduction under Section 10(2)(xv) as the expenditure was not incurred for purposes of business inasmuch as the tax was really on the ownership of property.

3. A further appeal was taken by the assessee to the Tribunal. The Tribunal allowed the appeal. The operative part of the Tribunal's order reads thus:

" The assessee-company derives income from two cinemas. Rs. 3,065 and Rs. 2,563 were claimed by the assessee as deduction as these were the payments towards property tax in respect of the buildings of the cinema halls in which the assessee carries on his business. The revenue authorities disallowed this claim on the ground that they were incidental to the assessee's position as owner of the property. The learned counsel for the assessee has contended that the payment of property tax is incidental to the assessee's business of running cinemas, inasmuch as, unless the assessee pays the property tax, it cannot carry on its business. He has also pointed out that for the assessment years 1963-64 and 1964-65, his contention was considered by the Tribunal and the claim of the assessee was allowed. In our opinion there is force in the assessee's contention that the payment of urban property tax is incidental to the carrying on of the business and, therefore, we hold that the disallowance of these amounts was unjustified and the amount should be allowed as a deduction in both these years."

4. On the application of the department under Section 256(1) of the Income-tax Act, 1961, the question already set out in the opening part of this order has been referred for our opinion.

5. Before we proceed to answer the question, it will be appropriate to refer to the provisions of the Punjab Urban Immovable Property Tax Act, 1940. Section 2(c) defines an owner and is in the following terms:

" ' Owner' includes a tenant in perpetuity, a mortgagee with possession, and a trustee having possession of trust property."

6. Section 3 is the charging section and the relevant part with which we are concerned is Sub-section (4) and is in the following terms :

"The tax shall be paid by the owner of the buildings and lands in respect of which it has been levied."

7. It is clear from the language of the statute that the tax is on the ownership of property.

8. Now, we proceed to determine whether this tax can be allowed as permissible deduction under Section 10(2)(xv). The learned counsel for the assessee conceded that he could not claim it as a deduction under section 10(2)(ix). On first principles, we are of the view th'at the tax has no direct connection with the carrying on of the business of the assessee. An assessee who owns a cinema house and carries on business of exhibiting films pays the tax whereas an assessee who carries on the business of exhibiting films but does not own the cinema house does not pay the tax. This will demonstrate that the tax has no connection whatever with the carrying on of the business of film exhibitors. Lord Loreburne, Lord Chancellor, in Strong and Company of Romsey Ltd. v. Woodifield, [1906] 5 T.C. 215, 219 (H.L.), laid down the test in such matters as follows:

" A deduction cannot be allowed on account of loss not connected with or arising out of such trade. That is one indication. And no sum can be deducted unless it be money wholly and exclusively laid out or expended for the purposes of such trade. That is another indication....

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 connected with something else quite as much as or even more than with the trade. I think only such losses can be deducted as are connected with it in the sense that they are really incidental to the trade itself. They cannot be deducted if they are mainly incidental to some other vocation, or fall on the trader in some character other than that of trader."

9. This test was accepted by the Supreme Court in Travancore Titanium Products Ltd. v. Commissioner of Income-tax, [1966] 60 I.T.R. 277, 282; [1966] 3 S.C.R. 321 (S.C.). While dealing with the question whether estate duty can be claimed as a permissible deduction under Section 10(2)(xv) their Lordships, while dealing with the said provision, summed up the position thus :

" 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."

10. The matter of property tax directly came up for consideration before the Calcutta High Court in Commissioner of Income-tax v. Kawasaki Risen Kaisha Ltd., [1970] 75 I.T.R. 537, 543 (Cal.), and it was held :

" ' 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."

11. In a case relating to the profession tax, the matter came to this court in I.T. Reference No. 54 of 1965 (Commissioner of Income-tax v. Saraswati Industrial Syndicate, [1972] 83 I.T.R. 352, 354 (Punj.)), decided on 16th December, 1970, and the following observations of Pandit and Sandhawalia JJ. are very instructive:

" The first question to be determined is whether the case set up by the assessee itself would come under Section 10(2)(xv) of the Act. It can claim the exemption of this tax only if it can show, as is alleged by it, that this tax was an expenditure laid out or expended wholly and exclusively for the purpose of its business. In other words, can it be said that this was an expenditure which had been incurred by the assessee exclusively for the purpose of it business ? It is quite different to say that the assessee was taxed, because it carried on its business. Only that expenditure will be covered by this clause which the assessee has spent or laid out exclusively for 'the running or betterment of its business. If a tax has been imposed simply because a person was carrying on a particular business, that, in my view, will not be covered by this clause, because the tax is the result of that person's doing the business. If he had not done that business, the tax would not have been levied on him. The tax, in the instant case, was the outcome of the assessee's carrying on the business. That, however, does not mean that the said tax was an expenditure which had been incurred by the assessee for the purpose of its business."

12. It would be another matter if the business of exhibiting cinema films could not be carried on without the payment of tax. In that event, we would have no hesitation in holding that the tax would be a permissible deduction under Section 10(2)(xv). But, that is not the case here. Therefore, the decision of the Privy Council in Commissioner of Income-tax v. Gurupada Datta, [1946] 14 I.T.R. 100 (P.C.) is of no assistance to the learned counsel for the assessee. Incidentally, that case was determined under section 10(2)(ix) and not under Section 10(2)(xv). Same reasoning will apply to the decision of this court in Commissioner of Income-tax v. Banarsi Dass and Sons, [1966] 61 I.T.R. 414 (Punj.).

13. The learned counsel for the assessee also placed his reliance on Commissioner of Income-tax v. Malayalam Plantations Ltd., [1964] 53 I.T.R. 140, 150; [1964]7 S.C.R. 693(S.C.), particularly on the interpretation of the expression " for the purpose of the business " in Section 10(2)(xv). While dealing with this expression, Subba Rao J. (as he then was), observed as follows:

"The expression ' for the purpose of the business' is wider in scope than the expression ' for the purpose of earning profits '. Its range is wide: it may taken in not only the day to day running of a business but also the rationalisation of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory;......"

14. This case is of no assistance to the assessee.

15. The contention of the assessee before us has been that he cannot carry on the business of exhibiting films without payment of this tax. We are unable to agree with this. His further contention that this tax has intimate relation with the carrying on of business of exhibiting films has been demonstrated by us to be futile.

16. In the matter whether a particular tax can be allowed as a permissible deduction under Section 10(2)(xv), no uniform rule can be laid down. In each case it will depend on as to what is the nature of the business and what is the nature of the tax. Only when the tax has intimate connection with the carrying on of the business that it can be claimed as a permissible deduction. So far as the present case is concerned, we have not the least doubt that the property tax cannot be allowed as a permissible deduction under Section 10(2)(xv). In our opinion, the decision of the Tribunal to the contrary cannot be sustained either on principle or authority. The Tribunal seems to have taken a very superficial view of the matter.

17. For the reasons recorded above, we answer the question referred to us in the negative, that is, in favour of the department and against the assessee, but there will be no order as to costs.

Commissioner Of Income-Tax v. Jai Hind Picture Co. (P.) Ltd.

Structured Summary of the Opinion — Property Tax Deduction (Punjab Urban Immovable Property Tax)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Revenue's / Respondent's Position

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax v. Jai Hind Picture Co. (P.) Ltd.

Comments