K.L.ROY, J. - (1.) BY this reference under s. 66(1) of the Indian IT Act, 1922 (hereinafter referred to as the Act), the Tribunal has referred the following two questions of law to this Court : "1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,05,679 being the wealth-tax paid by the assessee, was an admissible deduction in computing the assessee's income under s. 12 of the Indian IT Act, 1922 ? 2. Whether, on the facts and in the circumstances of the case, the assessee is entitled to rebate in terms of s. 15B of the Indian IT Act, 1922, in respect of the sum of Rs. 97,000 being the value of the shares donated by the assessee to Jaya Shree Charity Trust, a charitable institution to which s. 15B applies ?"
(2.) THE assessment year concerned in this reference is 1960-61, for which the relevant accounting year is the financial year ending on the 31st March, 1960. THE assessee is an HUF. It derives income from dividends and interest on its investments, which is assessed under s. 12 of the Act. THE assessee claimed deduction of Rs. 1,05,679, being the wealth-tax paid by it during the accounting period on the value of its shares and other investments, as admissible expenditure in the computation of its income under s. 12 of the Act. It also claimed a rebate under s. 15B of the Act on the donation, in the form of gift of certain shares valued at Rs. 92,000 to Jaya Shree Charity Trust. THE shares so gifted were admittedly acquired by the assessee out of its saving of the earlier years. THEre was also no dispute that Jaya Shree Charity Trust was an institution, the donations to which attracted the provision of s. 15B. THE ITO rejected both the claims of the assessee. He was of the opinion that wealth-tax was not an admissible deduction in computing the assessee's income under s. 12. He also denied the rebate on the donation to Jaya Shree Charity Trust. THE assessee's appeal to the AAC against the aforesaid order or assessment was infructuous as the AAC upheld the order of assessment. On further appeal to the Tribunal, the assessee claimed that the payment of wealth-tax was incurred solely for the purpose of making or earning the income under s. 12 and was, as such, an allowable deduction under s. 12(2). THE Tribunal rejected its contention on the ground that wealth-tax fell on the assessee as the owner of assets and not as an incidence to the earning of income. It was a liability to which all owners of properties were exposed whether they earned income there-from or not. THE Tribunal also rejected the assessee's claim for rebate under s. 15B relying on the decision of this Court in CIT vs. Samnugger Jute Factory Co. Limited (1953) 24 ITR 265 (Cal), where it had been held that a sum contributed to the Gandhi Memorial Fund, which was an institution to which donations were entitled to rebate under s. 15B, was not entitled to rebate under that section as it was not contributed by the assessee from its earnings in the relevant previous year but was paid out of its savings of a year prior to the previous year. Accordingly, the Tribunal dismissed the assessee's appeal. At the instance of the assessee the aforesaid questions of law have been referred to this Court by the Tribunal. Dr. Pal, the learned counsel for the assessee, attempted to distinguish the decision of the Supreme Court in Travancore Titanium Product Ltd. vs. CIT (1966) 60 ITR 277 (SC) on the ground that there it had been held that wealth-tax paid on the net wealth of an assessee was not a permissible deduction under s. 10(2)(xv) of the Act. Dr. Pal contended that in that case the Supreme Court made a distinction between a person who carried on business and a person who was the owner of assets. He relied on the following passage at page 282 of the report for his contention : "The position may, therefore, be summarised thus : the nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and be laid out by the taxpayer in his character as a trader. To be a permissible deduction there must be a direct and intimate connection between the expenditure and the business, that is, between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business. In the light of the principles the amount of tax paid on the net wealth of an assessee under the WT Act is not a permissible deduction under s. 10(2)(xv) of the Indian IT Act in his assessment to income-tax, for tax is imposed under the WT Act on the owner of assets and not on any commercial activity. The charge of the tax is the same, whether the assets are part of or used in the trading organisation of the owner or are merely owned by him. The assets of the taxpayer, incorporated or not, become chargeable to tax because they are owned by him and not because they are used by him in the business."
(3.) DR. Pal submitted that income-tax is charged under s. 12 on the income from dividends and interest from investments on the owner of the shares and of the investments. There is no question of carrying on any business with such shares or with such investments. There is no question of any expenditure incurred by the assessee in such a case, being an expenditure of the business and not an expenditure which the assessee is liable to meet in his character as the owner of such assets. Sec. 12(2) of the Act is to the following effect : "Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains and further in the case of any income by way of dividend, for any reasonable sum paid by way of commission or remuneration to a banker or any other person realising such dividend on behalf of the assessee. . ." Dr. Pal submitted that under the aforesaid sub-section expenditure incurred solely for the purpose making or earning the income is allowable. Under s. 10 the concept is entirely different. Under the latter section only expenditure incurred solely for carrying on the business is allowable. In the case of income from dividends, for example, the shares are the source of the dividend. If there was a statutory liability on the owner of the shares to pay tax on these shares, the tax paid would be an expenditure incurred for earning the dividends.;