BANERJEE, J. - (1.) THIS is a reference under s. 66(1) of the Indian IT Act, 1922. The assessment year involved is the year 1955-56, the corresponding previous year being the calendar year ended on December 31, 1954.
(2.) THE assessee is a firm engaged in coal mining. During the assessment year in question, the assessee operated two collieries named Modern Satgram Colliery and Ratibaty Colliery. In respect of pits Nos. 1 and 2 of the latter colliery, the Cess Dy. Collector of Burdwan levied road and education cesses amounting in all to Rs. 11,906, for the year 1954, and the assessee paid the sum. This sum was claimed by the assessee as a business expenditure, allowable under s. 10(2)(xv) of the Indian IT Act. THE ITO disallowed this expenditure with the observation, " not allowable as being based on profit ". Obviously, in disallowing the claim, the ITO had in mind the provisions of s. 10(4) of the Indian IT Act, which reads as follows : "Nothing in cl. (ix) or cl. (xv) of sub-s. (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 ;. . .. " The AAC, before whom the assessee appealed, dismissed the appeal with the observation : "The ITO has disallowed Rs. 11,906 claimed on account of road and education cesses. The former was dependent on the profits earned while the latter had nothing to do with the appellant's business activities. The disallowance on these accounts has therefore been correctly made and as such it will not be interfered with." The assessee preferred a second appeal before the Tribunal. It was contended before the Tribunal that the levy of road and education cesses had been made merely on the estimated net profits and since such estimated profits had no relationship with actual profits earned during the relevant period, it must be held that the provisions of s. 10(4) were not applicable. The Tribunal upheld the contention of the assessee after having examined the demand notices served on the assessee by the said Cess Dy. Collector and relying upon a decision of the Allahabad High Court in Simbholi Sugar Mills Ltd. vs. CIT (1962) ITR 125 (All). We set out herein below an extract from the judgment of the Tribunal : "It is clear from the judgment of the Allahabad High Court that except for the provisions of s. 10(4) the payments made by business concerns on account of local taxes in respect of properties held within the jurisdiction of district boards or similar other local authorities, are expenses laid out wholly and exclusively for the purpose of such business because without payment of such taxes it is not possible for the assessee to carry on such business within the jurisdiction of the local authorities concerned. But the income-tax law puts a bar that if such cess, rate or tax be levied on the profits and gains of any business or assessed at proportion of or otherwise on the basis of such profits and gains nothing in cl. (ix) or cl. (xv) of sub- s. (2) s. 10 would entitle the assessee to claim such expenses as business expenses. We, however, find that the implication of s. 10(4) had been gone into deep by their Lordships of the Allahabad High Court and they observed : 'The income, therefore, on which tax is payable under the District Boards Act is income arrived at by pure guess work without applying any principles for determining that estimated income. Such income cannot be said to be at all in the nature of profits and gains of the business mentioned in sub-s. (4) of the s. 10 of the IT Act.' . . . . the learned Departmental representative objects that in the case before the Allahabad High Court, the learned Judges had an opportunity of not only looking into the District Boards Act but also to the Rules framed thereunder but the appellant before us had not produced anything beyond the demand notices from the Cess Dy. Collector. But on a reading of the copies of these demand notices we have no doubt in our mind that the levy of road and education cesses had been made in exactly the same manner as the District Board had done in the case of Simbholi Sugar Mills (supra) . . . . Following, therefore, the decision of the Allahabad High Court we hold that such estimated income worked out by the Cess Collector for the levy of the road and education cesses as in the case of the appellant cannot be said to be in the nature of the profits and gains of the business mentioned in sub-s. (4) of s. 10 of the IT Act and as such the assessee will be entitled to claim such expenditure as deductible under s. 10(2)(xv)."
(3.) AGGRIEVED by the order of the Tribunal, the CIT obtained reference to this Court on the following question of law : "Whether, on the facts and in the circumstances of the case and in view of s. 10(4) of the Indian IT Act, 1922, the sum of Rs. 11,906 paid on account of road and education cesses was an allowable expenditure under s. 10(2)(xv) of the said Act ?" In order to answer the question referred to us, it is necessary to examine the scheme of the Cess Act, 1880, and the Bengal (Rural) Primary Education Cess Act, 1930. In the first mentioned Act the Preamble reads as follows : "Whereas it is expedient to amend and consolidate the law relating to rating for the construction, charges and maintenance of district roads and other means of communication, and of provincial public works, within the territories administered by the Lieutenant-Governor of Bengal, and to the levy of a road cess and a public works cess on immovable property situated therein, and to the constitution of local committees for the management of proceeds of the said road cess, and also to provide for the construction and maintenance of other works of public utility out of the proceeds of the said road cess; It is hereby enacted as follows : . . . . " ;