Foreign profits tax not deductible unless incurred wholly and exclusively for earning trading profits.

Business profits tax paid in Burma was treated as non-deductible in computing Indian taxable income because a tax on profits is ordinarily a payment out of profits after they are earned, not an outgoing laid out wholly and exclusively for the purposes of the trade. The text also states that foreign law must be proved as a fact, and no material was available to establish the incidence or effect of the Burma statute. The principle of diversion at source did not apply, since the assessee remained assessable on world income and the foreign tax was not a pre-receipt diversion of income.

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Issues: Whether business profits tax paid in Burma was deductible in computing the assessee's total income for the purposes of section 4(1)(b)(ii) of the Indian Income-tax Act, 1922, either as a business deduction under section 10 or on the principle of real income and diversion at source.

Analysis: The assessee's Burma profits were sought to be reduced by the amount of business profits tax paid in Burma. The governing principle applied was that deduction is allowable only if the outgoing is incurred for the purpose of earning trading profits under the Indian Income-tax Act, 1922. Foreign law had to be proved as a fact, and no material was available to establish the incidence or effect of the Burma statute. The reasoning in the English authorities was accepted to the extent that taxes levied on profits are payments out of profits after they are earned and are not expenditure laid out wholly and exclusively for the purposes of the trade. The principle of diversion at source did not apply, because the assessee remained assessable on world income and the foreign tax was not a pre-receipt diversion of income.

Conclusion: Business profits tax paid in Burma was not deductible under the Indian Income-tax Act, 1922, either as a business expense or by analogy with the Indian Business Profits Tax Act. The question was answered in the affirmative, against the assessee and in favour of the Revenue.

Ratio Decidendi: Foreign taxes levied on business profits are not deductible in computing trading profits unless the statute governing the assessment expressly permits the deduction or the outgoing is shown to have been incurred wholly and exclusively for the purpose of earning the trade profits.

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