MAKESH K Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THESE tax cases raise a common question as to whether, on the facts and in the circumstances, the claim for deduction of wealth -tax paid by the assessee as an admissible expenditure is lawful. The Revenue as well as the Tribunal negatived the claim and the references have come before us under s. 66(1) of the IT Act, 1922, or under S. 256(1) of the IT Act, 1961. Each of assessees as an individual received dividend income and interest in the relative previous year and paid wealth -tax in a certain sum on his holding of the stock. The sum paid as wealth -tax was sought to be deducted from the income that comprised of dividends and interest, as an allowable expenditure under S. 57(iii) of the IT Act, 1961, but unsuccessfully before the Revenue. The Tribunal relied on Kumbakonam Electric Supply Corporation Ltd. vs. CIT (1963) 50 ITR 809 and dismissed the assessee's appeal in each case. That was of course a case under S. 10(2)(xv) in which a Division Bench of this Court was of opinion that wealth -tax paid on net wealth of the company there was not an allowable expenditure in computing its taxable income.

(2.) THE assessee in each case as an individual was charged to income - tax under the head "other sources". In computing his net income chargeable to tax, he will be entitled to allowance of any expenditure not being in the nature of capital expenditure, laid out or expended wholly and exclusively for the purpose of making or earning such income. The point is whether the wealth -tax paid by each of the assessees on the net value of the stock held by him is such expenditure. Though the question is by no means capable of an easy answer, we have come to the conclusion that the wealth -tax paid is not an expenditure of that character. In order an expenditure to come within the ambit of S. 57(iii), it must satisfy the tests which obviously suggest themselves from the language employed by that provision. The expenditure should be laid out or incurred wholly and exclusively and should be for the purpose of making or earning such income. It should be connected with, in the sense it must be incidental to, the making or earning of the income. In other words, there must be a nexus between the character of the expenditure and making or earning of income. If the sum laid out is in a capacity different from that in making or earning income, that will clearly be outside the scope of S. 57(iii).

(3.) THE Supreme Court repelled an argument on behalf of the assessee in that case that for the purpose of its business, it held assets and by the use of these assets, profits were earned and, therefore, tax paid in respect of those assets was expenditure laid out for the purpose of the business. The deduction sought for was disallowed because the nexus required was not established and the wealth -tax paid by the assessee there was as an owner on its net worth and not as a trader and for the purpose of carrying on its business. It is true that the concluding words of S. 10 (2)(xv) are wider in their scope than those of S. 57(iii). But, for purposes of answering the references before us, that can make no difference : because, in the case of both the provisions, the question of deductibility of an expenditure depends on the scope of the words "purpose of" which provide the link between the expenditure and the carrying on of business in the one case or making or earning income in the other.