1967 (6) TMI 3 - HC - Income Tax

Cess payment not deductible under Indian Income-tax Act

Commissioner of Income-Tax, West Bengal Versus West Bengal Mining Co.

The court concluded that the road and education cesses paid by the assessee were not an allowable expenditure under section 10(2)(xv) of the Indian ... Whether, on the facts and in the circumstances of the case, and in view of section 10(4) of the Indian Income-tax Act, 1922, the sum of Rs. 11,906 paid on account of road and education cesses was an allowable expenditure under section 10(2)(xv) of the said Act - Held, no Issues Involved1. Whether the sum of Rs. 11,906 paid on account of road and education cesses was an allowable expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922, in view of section 10(4).Issue-wise Detailed AnalysisIssue 1: Allowability of Expenditure under Section 10(2)(xv)The assessee, a firm engaged in coal mining, paid road and education cesses amounting to Rs. 11,906 for the year 1954 and claimed this amount as a business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Income-tax Officer disallowed this expenditure, interpreting it as being based on profit, thereby invoking section 10(4) of the Act, which precludes the allowance of any sum paid on account of any cess, rate, or tax levied on the profits or gains of any business.Issue 2: Interpretation of Section 10(4)Section 10(4) of the Indian Income-tax Act, 1922, states: 'Nothing in clause (ix) or clause (xv) of sub-section (2) shall 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, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or gains.'Issue 3: Appellate Tribunal's DecisionThe Appellate Tribunal upheld the assessee's contention, relying on the Allahabad High Court's decision in Simbholi Sugar Mills Ltd. v. Commissioner of Income-tax, which concluded that the income on which tax is payable under the District Boards Act is income arrived at by pure guesswork, not in the nature of profits and gains mentioned in section 10(4).Issue 4: Examination of Cess ActsTo address the question, the court examined the Cess Act, 1880, and the Bengal (Rural) Primary Education Cess Act, 1930. The Cess Act imposes road and public works cesses on the annual net profits from mines, quarries, tramways, railways, and other immovable property. The Bengal (Rural) Primary Education Act levies a primary education cess on similar profits and properties.Issue 5: Privy Council's InterpretationThe Privy Council in Maharaja Manindra Chandra Nandi v. Secretary of State of India held that the term 'net annual profits' in the Cess Act refers to the property and not to the individual, implying that the liability for cess lies on both the occupier and the owner.Issue 6: Comparison with Other ActsThe court compared the cesses under the Cess Act and the Bengal (Rural) Primary Education Act with the rates under the Bengal Village Self-Government Act and the United Provinces District Boards Act. The latter acts impose taxes based on rough estimates without a proper mechanism for determining actual profits, unlike the Cess Act, which provides a structured method for assessing cesses based on actual profits or an average of the last three years' profits.Issue 7: Tribunal's MisinterpretationThe court found that the Tribunal erred in drawing inspiration from the Allahabad decision in Simbholi Sugar Mills Ltd. case, as the cesses under the Cess Act and the Bengal (Rural) Primary Education Act are not levied on a rough guess but on an objective basis.Issue 8: Supreme Court's Decision in Tata Iron and Steel Co. Ltd. v. State of BiharThe court noted that the Supreme Court's decision in Tata Iron and Steel Co. Ltd. v. State of Bihar did not support the assessee's contention. In that case, the cess was applicable even when the mining operation was incidental to the main business of manufacturing iron and steel, as it was still considered a profit from the business of mining.ConclusionThe court concluded that the road and education cesses paid by the assessee were levied on the profits and gains of the business and thus fell within the prohibition of section 10(4) of the Indian Income-tax Act, 1922. Therefore, the sum of Rs. 11,906 was not an allowable expenditure under section 10(2)(xv).JudgmentThe court answered the question referred in the negative and against the assessee, directing the assessee to pay costs to the Commissioner of Income-tax, certified for two counsel.Separate JudgmentK. L. ROY J. concurred with the judgment.Question answered in the negative.