1964 (4) TMI 9 - SC - Income Tax

Estate duty not deductible for non-domiciled shareholders.

Commissioner Of Income-Tax, Kerala Versus Malayalam Plantations Limited

The court held that the estate duty paid by the respondent was not an allowable deduction under section 10(2)(xv) of the Indian Income-tax Act. The High ... Whether the estate duty paid by the resident company, hereinafter called the assessee, incorporated outside India, on behalf of members not domiciled in India is deductible from its profits in computing its assessable income under section 10(2)(xv) of the Indian Income-tax Act, 1922, hereinafter called the Act? Held that:- In the present case, the company, as a statutory agent of the deceased owners of the shares, paid the sums payable by the legal representatives of the deceased shareholders. The payments have nothing to do with the conduct of the business. The fact that on his default, if any, in the payment of the dues the revenue may realise the amounts from the business assets is a consequence of the default of the assessee in not discharging his statutory obligation, but it does not make the expenditure any the more expenditure incurred in the conduct of the business. It is manifest that the amounts in question were paid by the assessee as a statutory agent to discharge a statutory duty unconnected with the business, though the occasion for the imposition arose because of the territorial nexus afforded by the accident of its doing business in India. We, therefore, hold that the estate duty paid by the respondent was not an allowable deduction under section 10(2)(xv) of the Act. We answer the question in the negative. The order of the High Court is wrong and is set aside. Appeal allowed. Issues Involved:1. Whether the estate duty paid by the resident company on behalf of non-domiciled members is deductible from its profits in computing its assessable income under section 10(2)(xv) of the Indian Income-tax Act, 1922.Issue-wise Detailed Analysis:1. Deductibility of Estate Duty under Section 10(2)(xv):The primary issue in this case is whether the estate duty paid by the assessee, a resident company incorporated outside India, on behalf of shareholders not domiciled in India, can be deducted from its profits when computing its assessable income under section 10(2)(xv) of the Indian Income-tax Act, 1922. The assessee paid sums towards estate duty on the death of certain shareholders and debited these amounts to revenue in its accounts for the relevant accounting periods. The Income-tax Officer included these amounts in the profits and gains of the company and assessed the company to income-tax on that basis. The Appellate Tribunal allowed the deduction, but the High Court affirmed this decision. The Commissioner of Income-tax raised two points against this deduction: (1) the sums paid are not expenditure of the assessee-company, and (2) even if it is revenue expenditure, it is not laid out wholly or exclusively for the purpose of the assessee's business.2. Interpretation of Section 10(2)(xv):Section 10(2)(xv) allows for the deduction of any expenditure laid out or expended wholly or exclusively for the purpose of such business, provided it is not in the nature of capital expenditure or personal expenses. The court examined whether the estate duty paid by the assessee qualifies as an expenditure incurred by it within the meaning of this provision. The Estate Duty Act imposes a statutory obligation on the company to pay estate duty on the shares of a deceased non-resident member. The court assumed that the assessee, as a statutory agent, could not recover the estate duty from the legal representatives of the deceased shareholders, thus making the company out of pocket to that extent.3. Purpose of the Business:The court then analyzed whether the expenditure was expended wholly and exclusively for the purpose of the business of the assessee. The expression 'for the purpose of such business' is broader than 'for the purpose of earning profits' and includes measures for the preservation of the business and protection of its assets. However, the expenditure must be incurred in the capacity of a person carrying on the business and not as an agent of a third party. The court concluded that the amounts paid by the assessee towards estate duty were not incurred in the conduct of the business but as a statutory agent to discharge a statutory duty unconnected with the business.Conclusion:The court held that the estate duty paid by the respondent was not an allowable deduction under section 10(2)(xv) of the Act. The High Court's order was set aside, and the appeals were allowed with costs. The question was answered in the negative, confirming that the estate duty paid by the company on behalf of non-domiciled shareholders is not deductible from its profits for the purpose of computing its assessable income.