- (1.) THE Indian Aluminium Co. Ltd. is the assessee. It is a public limited company and has its registered office at Calcutta. The relevant previous year ended on December 31, 1954. The principal business of the assessee is manufacture of aluminium ingots, sheets and such other products from aluminium. Under an agreement dated January 31, 1947, between the assessee and one Messrs. Aluminium Laboratories Ltd., Montreal (Canada), the latter agreed to provide the assessee from time to time with technical information, engineering service and advice regarding development for an annual retainer fee. The Montreal Co. provided the assessee -company with technical information and advice on specific problems of production and manufacture of aluminium. In view of the agreement the assessee paid a total sum of Rs. 2,50,808 to the said laboratory between the accounting years ended on September 30, 1944, and on September 30, 1950. In the year 1951, the Income Tax Officer treated the assessee -company as being in default under Sec. 18(7) of the Act in respect of the amount of taxes which the assessee was liable to deduct from the payments made to the said Montreal company under the provisions of Sec. 18(3A), 18(3B) and 18(3C) of the Act. The amount assessed was Rs. 1,24,199. The assessee entered into correspondence with Messrs. Aluminium Laboratories Ltd., Montreal, asking them for reimbursement of the aforesaid sum of Rs. 1,24,199. The latter refused to accept the assessees claim for reimbursement and their repudiation was communicated to the assessee by their letter date August 3, 1954. On obtaining such letter of repudiation, the assessee wrote off the amount during the relevant accounting year and claimed it as a bad debt deductible under Sec. 10(2) (xi) of the Act. The Income Tax Officer, however, disallowed the claim of the assessee and such disallowance gate rise to an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner upheld the contention of the assessee that the amount paid was an allowable deduction in view of the Bombay High Court decision in Commissioner of Income Tax v/s. Abdullabhai Abdulkadar. Against this order of the Appellate Assistant Commissioner, the department preferred an appeal to the Tribunal. It so happened that at the time of the decision by the Tribunal, the aforesaid decision was reversed by the Supreme Court as reported in 41 I. T. R. 545. It was urged before the Tribunal by the assessee that, although under the agreement dated 31st January, 1947, the assessee was not bound to suffer the tax on the payment of the retainer fee to the said Messrs. Aluminium Laboratories Ltd., Montreal, since the assessee had taken the aid in the shape of technical advice for the proper carrying on of the business, the payment of tax was an expense incidental to the business and was allowable either under Sec. 10(1) or Sec. 10(2) (xv) or as a bad debt under Sec. 10(2) (xi) of the Income Tax Act. This contention of the assessee was repelled by the Tribunal mainly relying upon the decision of the Supreme Court in the case of Commissioner of Income Tax v/s. Abdullabhai Abdulkadar. The Tribunal held that the expenditure was neither incidental to the business, much less wholly and exclusively laid out for the purpose, nor was it claimable as a bad debt in view of the fact that it was not a trade debt in the course of the fact that it was not a trade debt in the course of the business.
(2.) THIS being the decision, a reference was asked for by the assessee to this court under Sec. 66(1) of the Act which was allowed by the Tribunal. Before dealing with the arguments as advanced by Mr. S. R. Banerjee, appearing for the assessee, it is necessary to refer to certain salient facts which are admitted by both parties. The assessee entered into an agreement on the 31st day of January, 1947, with the Aluminium Laboratories Ltd., Montreal. The terms, inter alia, were that the yearly retainer fee shall be payable to Aluminium Laboratories Ltd. at Montreal, P. Q., Canada, on the first day of January, April, July and October of each year, in four equal installments, each of one quarter of the total amount of the retainer fee mutually agreed upon for that year or, at the discretion of the Indian Aluminium Company, the annual retainer fee for any year may be paid as a single lump sum on the first day of January that year, provided that, in the event that the assessee is unable to make payments on the specified date, due to exchange control regulations or to any other cause beyond its control, the said payment shall be made on the earliest possible date thereafter. The terms of the contract do not show that any provision for payment of Income Tax was made by either by the assessee or the Aluminium Laboratories Ltd., Montreal. It is quiet clear that, by reason of the agreement, the assessee credited a total fee of Rs. 2,50,808 in favour of the said Montreal company in a period of 7 years, that is, between the accounting year ended on 30th September, 1945, and on 30th September, 1950, and it may be presumed that, under the statutory provisions of the Income Tax Act, this amount was deducted from the profits and gains of the business of the assessee -company. What followed next was that the assessee was dealt with under Sec. 18(3A), 18(3B) and 18(3C) of the Act and it was also proceeded against under Sec. 18 (7) of the Act for a total sum of Rs. 1,24,199 and this amount was duly credited of the Income Tax Officer. Thereafter, the assessee -company wrote several letters to the Aluminium Laboratories Ltd. asking them for reimbursement of the aforesaid sum of Rs. 1,24,199. After a series of correspondence, ultimately on the 3rd of August, 1954, the Aluminium Laboratories Ltd., Montreal, finally refused to accept the assessee -company's request for reimbursement. The assessee, thereafter, wrote off the aforesaid sum during the relevant accounting year and claimed it is a bad debt deductible under Sec. 10(2) (xi) of the Income Tax Act. Mr. Banerjee has argued that, although the company might have been proceeded against under Sec. 18(3B) and 18(7) of the Act., that matter need not be taken into consideration at this stage as this court is called upon only to decide whether the sum of Rs. 1,24,199 paid as tax liability for the Montreal company should be treated as an expenditure wholly and exclusively laid out for the purpose and that the amount should be treated as a bad debt and liable to be excluded from the profits and gains of the business. This argument we cannot accept in view of the fact that the nature of the payment has to be enquired into and if it is really found that it was made as incidental to the business, in that event only the assessee can claim deduction. For this purpose we are in the first instance called upon to decide as to what should be the scope of Sec. 18 of the Act, especially sub -section (3B) and sub -section (7). The genesis of the liability arose under sub -section (3B). It runs as follows : quot;Any person responsible for a paying to a person not resident in the territories any interest not being interest on securities or any other sum chargeable under the provisions of this Act shall, at the time of payment, unless he is himself liable to pay any Income Tax and super -tax thereon as an agent, deduct Income Tax at the maximum rate and super -tax at the rate applicable to a company or in accordance with the provisions of sub -clause (b) of sub -section (1) of Sec. 17, as the case may be : Provided that where the person not resident is not a company, the proviso to sub -section (2B) shall apply to the deduction of Income Tax and super -tax under this sub -section as it applies to the deduction of Income Tax and super -tax under sub -section (2B)." The other proviso need not be quoted here for the decision of this reference. Now, on an analysis of this Sec. it will appear that (a) the payee should be non -resident in the taxable territories, (b) the amount payable should be interest not being interest on securities or any other sum chargeable under the provisions of this Act, and (c) the person responsible for making the payment should not himself be liable to pay Income Tax and super -tax thereon as an agent.
(3.) ON a perusal of the entire Sec. 18, it appears to us that it imposes an obligation upon every person responsible for paying any amount coming under the head "salary", interest on securities or dividends or any other sums to a non -resident company, to deduct taxes at the time of making the payment and to pay only the balance to the assessee. It is, therefore, clear that in the instance case, irrespective of the contract between the parties, the assessee was under an obligation to deduct the taxes on the sum payable to the Montreal company at the source and if he does not do so, the provisions of sub -section (7) of Sec. 18 would come into operation. It is clear, therefore, that the assessee at the initial stage was not at all liable to pay the tax due from the non -resident company from its own pocket but was under an obligation to deduct the tax liabilities from the sum payable to the non -resident company. In the next place let us turn to the provisions of sub -section (7), which was applied to the assessee by the tax authorities in due course. Sub -section (7) provides that if any person does not deduct or after deducting fails to pay the tax as required by or under this section, he, and, in the cases specified in sub -section (3D), the company of which he is the principle officer shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax; provided that the Income Tax Officer shall not make a direction under sub -section (1) of Sec. 46 for the recovery of any penalty from such person unless satisfied that such person has wilfully failed to deduct and pay the tax. Analysing, the sub -section, it appears that if the payer, namely, the assessee -company, does not deduct the tax in accordance with provisions of Sec. 18, the terms whereof we have described before, he would be deemed to be an assessee in default in respect of the tax and would also be personally liable to pay the same; further, he may also be subjected to a penalty under Sec. 46(1) of the Act if it is a case of wilful failure to deduct and pay the tax. It is also clear that, in the absence of any reasonable cause or excuse, non -compliance with the provisions of the Sec. would also be an offence punishable with fine under Sec. 51. We have got to consider, in view of the argument advanced by the learned counsel of both the parties, as to whether this sub -section envisages any penal provision for non -compliance with the provisions of sub -section (3B). Before dealing with this aspect of the case, let us now turn to the contentions as raised by Mr. Banerjee. Mr. Banerjee has mainly contended, as he did before the Tribunal, that the payment under Sec. 18 (3B) was made a liability of the assessee and was also incidental to his business because although under an agreement between the assessee -company and the Aluminium Laboratories there was no agreement for the assessee to suffer the tax on the payment of the retainer fee, but all the same the assessee had to bear the burden which it would not have borne but for the fact that the assessee -company had taken aid from that company which was a technical aid and was an aid necessary for the proper acceleration of the assessees business. In support of his contention he has referred us to a number of decisions and has argued that the case comes clearly within the ambit of Sec. 10(1) or 10(2) (xi) or 10(2) (xv). Both the learned counsel appearing for the parties have relied on the observations in Commissioner of Income Tax v/s. Abdullabhai Abdulkadar. In this case, the facts were that the respondent carried on business as commission agent and supplied goods from India to a non -resident principal who, on his part, sent cotton to the respondent and others for sale in India. The tax authorities treated the respondent as an agent of the non -resident principal, under Sec. 43 of the Act, and assessed it in respect of the tax payable by the non -resident principal. The respondent in all paid Rs. 3,78,491 which after adjustment against the amounts payable to the non -resident principal, left a debit balance of Rs. 3,20,162. In the year of account the respondent wrote off the amount and claimed it as a bad debt or a trading loss. On these facts it was held by the Supreme Court that in order that a loss might be deductible, it must be a loss in the business of the assessee and not a payment relating to the business of somebody else which under the provisions of the Act was deemed to be and became the liability of the assessee. Loss is only allowable if it springs directly from was incidental to the business of the assessee. It was not sufficient that it fell on the trader in some other capacity or was merely connected with his business. The loss which was occasioned was not incurred in its own business of the appellant but arose because of the business of another person and, therefore, not a permissible deduction under Sec. 10(1) of the Act. Under clause (xi) of Sec. 10(2) the debt was only allowable when it was a debt and arose out of and as an incident to the trade. Except in money -lending trade, debts could only be so described if they were due from customers for goods supplied or loans to constituents or transactions of similar kind. Therefore, in every case, the test is whether the debt due was incidental to the business. If it was not of the character, it would be a capital loss. Undoubtedly we agree that this transaction of payment formed a nexus to the business of the assessee inasmuch as such payment had an indirect bearing upon the technical aid which the assessee -company had obtained from the Montreal company but we are of opinion on a consideration of another decision of the Supreme Court reported as Badridas Daga v/s. Commissioner of Income Tax that, even if it has some connection with the business, it cannot be said to be incidental to it, inasmuch as we have already discussed that such a liability could be avoided by the assessee if it had deducted at the source the required Income Tax from the money which was payment to the Montreal company. In Badridas Daga's case, it was decided by the Supreme Court that when a claim is made for deduction for which there is no specific provision under Sec. 10(2), whether it is admissible or not will depend on whether, having regard to the accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and be incidental to it. The loss from which a deduction is claimed must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee even if it has some connection with his business. If that is established, then the deduction must be allowed provided that there is no provision against it express or implied in the Act.;