- (1.) - In computing the total earned income of the appellant Company for the calender year 1959, the Income-tax Officer, Trivandrum, disallowed a claim for deduction of Rs. 80,255 in respect of liability for payment of tax under the Wealth Tax Act 27 of 1957 incurred by the Company for the calender years 1957 and 1958. The order was confirmed by the Appellate Assistant Commissioner and by the Appellate Tribunal. On the following question referred by the Wealth Tax Appellate Tribunal, "Whether on the facts and circumstances of the case, the assessee Company is entitled to a deduction of Rs. 12,873 being the wealth tax paid during the account year ended 29-2-1960, against the profits and gains of its business for the assessment year 1960-61 under Sec. 10(2)(xv) of the Indian Income-tax Act - the High Court of Kerala recorded an answer in the negative. The Company has appealed to this Court with special leave.
(2.) The Company claims that wealth-tax paid by it represented expenditure laid out wholly and exclusively for the purpose of its business, and on that account is a permissible allowance under S. 10 (2)(xv) of the Income-tax Act. In determining the admissibility of this claim, it is necessary to ascertain the true character of the liability for payment of tax under the Wealth Tax Act, Tax is charged under S. 3 of the Wealth Tax Acts, 1957, for every financial year in respect of the net wealth of every individual, Hindu undivided family and Company at the rate or rates specified in the Schedule to the Act; and 'net wealth' under the Act means the amount by which the aggregate value computed in accordance with the provisions of the Act of all the assets belonging to the assessee on the valuation date is in excess of the aggregate value of all the debts owed by the assessee on that date other than the debts specified. The tax under the Act is payable by all individuals, Hindu undivided families and Companies on the value of taxable assets belonging to the tax payer; it is charged on the net value of the assets, and not on the business or trading activity carried on by the tax payer. The rates of tax for companies as well as individuals and Hindu undivided families are prescribed by the Second Schedule. The slabs on which the rate of tax is nil are not uniform in the case of different taxable entities and a special exemption is given to a Company which has incurred in any year loss computed in accordance with Ss. 8, 9, 10 and 12 of the Income-tax Act without referring to depreciation allowances and development rebates and without taking into account the losses brought forward from the earlier years, and which has not declared any dividend on its equity capital in respect of that year. It is also provided by R. 5 of the Schedule that where the profits of a company in respect of any year, before deducting any of the allowances referred to in the second paragraph of Part II, are less than the amount of wealth-tax payable by it in respect of the relevant assessment year, the wealth tax payable by the company for such assessment year shall be limited to the amount of such profits provided that the company has not declared any dividend on its equity capital in respect of that year. But by relating the quantum of liability of a company to wealth-tax in these special cases to the profits earned, the character of the tax is not altered. It is and remains a tax charged upon the net wealth, and it is not made a tax related to or incidental to the carrying on of a business. The rules in the Schedule merely extend the exemption which is primarily declared in favour of a Company of which the net wealth does not exceed Rs. 5 lakhs, to a company which has in the previous year made a loss, and grant a partial exemption if the company has made profits which are inadequate to meet the wealth tax liability at the prescribed rate.
(3.) In computing the profits or gains of an assessee who carries on business, certain allowances are permitted under S. 10(2) from the business profits and one such head is : "(xv) any expenditure not being an allowance of the nature described in any of the Cls. (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation." An allowance permissible under Cl. (xv) in the computation of taxable income is therefore expenditure incurred in the year of account in respect of a business carried on by the assessee; the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee and it must have been laid out or expended wholly and exclusively for the purpose of the business.;