1962 (4) TMI 107 - HC - Income Tax

Court rules against taxpayer's deductions for incorrect financial years, disallows Ceylon profits tax deduction under Indian law.

The court ruled in favor of the department on both issues. The claimed deductions for the years 1948-49 to 1952-53 were disallowed as the expenditure was ... - Issues Involved:1. Whether the sums of Rs. 15,200, Rs. 16,050, Rs. 16,650, Rs. 17,250, and Rs. 17,850 were allowable deductions against the income of the assessee for the respective assessment years 1948-49 to 1952-53.2. Whether the Ceylon profits tax amounting to Rs. 11,909 for the assessment year 1951-52 and Rs. 53,348 for the assessment year 1952-53 was an allowable deduction in the computation of the total income of the assessee.Issue-wise Detailed Analysis:1. Allowable Deductions Against Income for Assessment Years 1948-49 to 1952-53:The assessee, Indian Overseas Bank Ltd., Madras, secured the services of an officer from the Imperial Bank of India, Arumugham Subbiah, by agreeing to pay him Rs. 1,00,000 upon joining its service, in addition to a monthly salary. This sum was to become Subbiah's absolute property under certain conditions, such as completing seven years of service or becoming incapacitated. During the assessment years 1948-49 to 1952-53, the assessee claimed sums of Rs. 15,200, Rs. 16,050, Rs. 16,650, Rs. 17,250, and Rs. 17,850 as deductible allowances, arguing these were necessary business expenditures.The Income-tax Officer disallowed the claim, viewing the Rs. 1,00,000 payment as a capital expenditure. The Appellate Assistant Commissioner upheld this view, stating the amount was akin to a purchase price for Subbiah's services and thus a capital expenditure. However, the Appellate Tribunal disagreed, considering the amount as an advance salary, recoverable with interest, and thus deductible as yearly expenditure.Upon review, the court examined the agreement's clauses. It concluded that the Rs. 1,00,000 was an outright payment upon Subbiah taking up service, not a recurring expenditure. The bank's right to recover any amount was contingent on Subbiah's death or resignation, not a present right. Therefore, the court determined that no expenditure was incurred during the years in question, as the payment was made in 1945. Consequently, the sums claimed could not be allowed as deductions.2. Allowable Deduction for Ceylon Profits Tax:The assessee also claimed deductions for profit taxes paid in Ceylon under the Ceylon Profits Tax Act, amounting to Rs. 11,909 for 1951-52 and Rs. 53,348 for 1952-53. The Appellate Assistant Commissioner rejected this claim, noting that business profits tax is not deductible under section 10 of the Indian Income-tax Act. The Tribunal, however, allowed the claim, interpreting section 10(4) as applicable only to taxes levied in India.The court found no authority supporting the assessee's contention that foreign taxes should be deductible under Indian law. Section 10(4) explicitly prohibits deductions for any tax levied on business profits, regardless of whether the tax is imposed in India or abroad. The court referenced Kanga's commentary and the case of Commissioners of Inland Revenue v. Dowdall O'Mahoney and Company Limited, which held that foreign taxes are not deductible as business expenses.The court concluded that the Tribunal's view was legally unsound and ruled in favor of the department, disallowing the claimed deductions for Ceylon profits tax.Conclusion:The court ruled in favor of the department on both issues. The sums claimed as deductible allowances for the years 1948-49 to 1952-53 were not allowable, as the expenditure was deemed to have been incurred in 1945. Additionally, the Ceylon profits tax paid by the assessee was not deductible under Indian income-tax law. The assessee was ordered to pay the department's costs, with a counsel's fee of Rs. 250.