I.T.A NO. 1745/KB OF 1978-79, DECIDED ON 16TH FEBRUARY, 1980. Versus I.T.A NO. 1745/KB OF 1978-79, DECIDED ON 16TH FEBRUARY, 1980.
ORDER
GHULAM MURTAZA KHAN (MEMBER). ‑In this departmental appeal objection has been taken against the order of the learned Appellate Assistant Commissioner who allowed wealth tax liability of Rs. 9,261 as a deduction from the income of the respondent.
2. From the order of the Income‑tax Officer it appears that the respondent derives income from salary alone but the learned Appellate Assistant Commissioner treated it to be income from other but sources. From the submissions made by the learned authorised representative of the respondent and the return of income filed by the respondent, however, it appears that the respondent derived income from dividends, interest etc., also.
3. Out of the taxable income determined by the Income‑tax Officer, the respondent claimed deduction of Rs. 9,261 being the wealth tux liability but this claim was disallowed by the Income‑tax Officer without assigning any reasons. In appeal before the learned Appellate Assistant Commis sioner, the learned authorised representative appearing on behalf of the respondent argued that the claim of a deduction in respect of wealth tax liability was allowable .as an expense under subsection (2) of section 12 of the Income‑tax Act. In support of his contention the learned authorised representative relied on a decision of this Tribunal bearing I. T. A. No. 8389 of 1973‑74 dated 16‑4‑1975, reported as (1977) 35 Taxation 1 (Trib.), which was later on followed in a number of similar cases. Following the decision of this Tribunal, mentioned above, the learned Appellate Assistant Commis sioner ordered that the amount of wealth tax be allowed as a deduction from the income for determining the total income of the respondent. The learned Appellate Assistant Commissioner, however, restricted it to an amount proportionate to the total wealth tax paid by the appellant as the income yielding assets bear to the total net wealth of the appellant. The Department's grievance is that wealth tax liability is not a deductible item under section 12(2) of the Income‑tax Act and the learned Appellate Assistant Commissioner was not justified in allowing this claim. For the sake of convenience we reproduce hereunder the observations of this Tribunal in the case cited above, justifying the allowability of wealth lax liability as an expense. The Tribunal gave its findings, after considering some decisions of the Indian and British Courts.
"In our opinion the scope of the provisions of section 12(2) is wider than those of the provisions of section 10(2)(xvi). For example if property is leased out, the income would be taxable under section 12. The property taxes and the charges on this property levied would certainly be admissible deductions in the hands of the recipient of the lease money under the provisions of section 12(2) because the incidence of these expenses would directly fall on the owner of the property and would be a charge on the recipient of the lease money. Unless, therefore, such a liability is cleared there is likelihood of the assets not remaining intact, the source of income would, therefore, dwindle or extinguish. Applying the same principle to the present case, if the wealth tax is not allowed as an admissible deduction the very income yielding asset may be adversely affected and, therefore, section 12(2) would squarely permit this deduction as well. In a nutshell, therefore, the upshot of the above discussion boils down to this that the wealth tax is something which any holder of assets (wealth) has to pay, and if he (sic) holds the wealth, the tax must be paid, otherwise he cannot hold these assets. It is, a tax different from Income‑tax etc. payable with reference to `profits' earned and has got to be paid, whether the profit or income generating assets yield any return or not. There is no bar against its deduction under any of the provisions of section 12. Like Income‑tax etc., it is not an application of the profits or income earned and is not to be paid out of the incomes or profits earned but' irrespective of these earnings by the mere situation of holding assets that constitute taxable wealth. Its incidence, therefore arises directly from the fact of possessing wealth and is not at all dependent on earnings from this wealth. Liability to this obligation does not depend upon whether profits or incomes are made or not. Its payment is obligatory from the very possession of wealth or income yielding assets. It must, therefore, be treated as an expense which has necessarily to be incurred, in order to carry on trade or hold wealth and the wealth tax must therefore be treated as an amount expended or laid out wholly and exclusively for the purposes of trade or earning income. In case of business or trade it would, therefore, fall to be deducted under section 10(2)(xvi) while in case of other source of income under section 12(2) of the Income‑tax Act."
It will be noted that in its decision the tribunal inter alia, highlighted the proposition that wealth tax was different from Income‑tax etc. which is payable with reference to profits earned whereas wealth‑tax has got to be paid whether the profits or income generating assets yield any return or not. Since this payment is obligatory from the very possession of wealth or income yielding assets, it is to be treated as an expense which has necessarily to be incurred in order to carry on the trade or hold the asset. In the reported decision of the tribunal one thing which has been clearly exphasised is that the wealth tax liability pertaining only to the income generating assets is to be allowed. Wealth tax on other assets which do not generate any income cannot be allowed as a deduction from the income either under the provisions of section 10(2)(xvi) in the case of business income or under the provisions of section 12(2) in the case of income from other sources. Evidently, the deduction of expenses including the wealth lax liability under provisions of section 10(2)(xvi) and 12(2) does not presuppose the mere holding of income generating assets but such income generating assets whose income is liable to Income‑tax. This proposition is a necessary corollary flowing from the general scheme of the Act as also the very provisions of law contained in sections 10(1) and 12(1) of the Income‑tax Act. The question of allowability of expenses arises only in determining the total income which is liable to tax. To clarify the position, the provisions of sections 10(1) and 12(1) are reproduced hereunder:‑---
"Section 10(1).‑Subject to the provisions of this Act, the tax shall be payable by an assessee under the head `profits and gains' of business, profession or vocation in respect of profits gains of any business profession or vocation carried on by him.
Section 10(2).‑Subject to the provisions of this Act such profits and gains shall be computed after making the following allowances.
Section 12(1).‑The tax shall be payable by an assessee under the head "Income from other sources" in respect of income or profits and gains of every kind which may be included in his income if not included under any of the preceding heads.
Subsection (2).‑Such income profits and gains shall be computed after making allowances for . . . . ."
A plain reading of subsection (1) of sections 10 and 12 respectively very clearly indicate that the allowances or deductions are admitted only while determining the total income which is to be subjected to tax. Messrs Kang and Palkhiwala in their book Law and Practice of income‑tax, 4th Edition, on page 369 have also tried to explain this very proposition of law. While explaining conditions of allowances under section 10 of the Income‑tax Act they have `inter alia' stated clearly at Serial No. 3 that the allowances "must be to respect of a business which was carried on by the assessee and the profits of which are to be computed and assessed, and must be incurred after the business is set up". The view adopted by us also finds support from the above‑mentioned observations of Messrs Kanga and Palkhiwala that a deduction in respect of an expense can be allowed only if the profits of the business are to be assessed. It., therefore, follows that no deduction of, any expenditure can be allowed out of income which is not liable to tax.
4. From the appellant's claim of exemption allowed by the Income‑tax Officer in his order under section 15‑AA etc. it is evident that the appellant made investments during the year under consideration for claiming investment allowance. From the discussion with the learned authorised representative also it appears that the net wealth also includes investments made in the purchase of Defence Savings Certificates etc. Although a statement showing total investment etc. has been filed but a break up of items of investment which are tax free (like Defence Savings Certificate) and other investments is not available. Neither is the learned authorised representative in a position to bifurcate these figures. It is also noted that the issue regarding such exempt investment has not been discussed by the Departmental officers in their orders. No doubt, the Defence Saving Certificates are an income yielding asset but the income from these certificates (being interest) is tax free. The Central Board of Revenue's Circulars No. 12 of 1978 (income‑tax) reproduced in (1978)38 Taxation 138 clarifies the position that the income from such certificates and some similar other sources is tax free. This exemption appears to have been allowed by the Govern ment through a Notification S. R. O. 1076(K)/66. Profit earned on these certificates is neither liable to income‑tax nor is it taken into account for determining the rate of income‑tax on total income. Evidently, therefore, the proportionate amount of wealth tax liability on the value of D. S. Certificates or similar investments whose income is not liable to tax, if included in the net wealth of the appellant will fall beyond the purview of allowable expenses under section 10 of Income tax Act and for the same reasons under similar provision contained in section 12 of the Income‑tax Act, wealth tax liability on such assets cannot be allowed. In consequence, we must set aside the orders of the Departmental Officer and send them back to the Income‑tax Officer with the direction that the break up of all sources of income should be obtained and similarly details of all investments shown in the wealth tax return should also be obtained. The Income‑tax Officer then will be in a position to find out the value of investments whose income has not been offered for purposes of levy of Income‑tax. For the reasons discussed in our order (supra) the propor tionate amount of wealth tax levied on such investments/assets whose income being tax free, has not been declared for Income‑tax purposes, shall not be allowed as a deduction.
5. In the result, the appeal is disposed as indicated above.
Appeal disposed of accordingly.