The AO says my expenditure did not earn me any income, so it fails s.37(1). Is that the test?
No. 'For the purpose of the business' is wider than 'for the purpose of earning profits', and expenditure does not have to produce income to qualify. But the width has a limit that the same case supplies: the expenditure must be incurred by the assessee in his capacity as a person carrying on the business. Estate duty the company paid on the deaths of its non-resident shareholders failed that limit — it was paid as a statutory agent for someone else — and was not deductible.
Decided by the Supreme Court (Supreme Court of India — K. Subba Rao, J.C. Shah and S.M. Sikri, JJ; the judgment was delivered by Subba Rao J. Civil Appeal Nos. 384 and 385 of 1963, by special leave from the Kerala High Court) on 1964-04-10, reported as [1964] 53 ITR 140 (SC); 1964 AIR 1722; 1964 SCR (7) 693; [1964] INSC 118. It bears on section 37(1), section 10(2)(xv) of the Indian Income-tax Act, 1922, section 84 Estate Duty Act, 1953, section 77 Estate Duty Act, 1953 of the Income Tax Act 1961, in Deductions & Disallowances and How Tax Law Is Read matters.
Practitioners cite the first half of this case and the department cites the second. It is the standing answer to a disallowance made on the ground that a particular outgo produced no revenue: preservation of the business, protection of its assets, rationalisation of administration and payment of statutory dues can all be 'for the purpose of the business'. It is also the answer to over-reaching, because the Court refused the claim on the very facts before it. Read only half of it and you will be surprised in the Tribunal.
Binding on every court and authority in India.
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The assessee was a resident company incorporated outside India, most of whose shareholders were in the United Kingdom. In the accounting period ending 31 March 1955 it paid £1,302-9-4 and £1,303, and in the period ending 31 March 1956 a further £3,809-1-5, towards estate duty payable on the deaths of shareholders not domiciled in India, and debited those amounts to revenue in computing its business profits. Section 84 of the Estate Duty Act 1953 made a company incorporated outside India but treated as resident liable to pay estate duty on the principal value of the shares held by a deceased member. The Income Tax Officer added the amounts back for assessment years 1955-56 and 1956-57; the Appellate Assistant Commissioner dismissed the appeals; the Tribunal allowed them; and on a reference under s.66(1) the Kerala High Court answered in the assessee's favour. The Commissioner appealed by special leave.
The appeals were allowed with costs and the High Court's order set aside; the estate duty was not an allowable deduction under s.10(2)(xv). The Court rejected the Revenue's first point. Section 77 of the Estate Duty Act, which lets a person required to pay duty transfer the property to pay it, cannot operate extra-territorially and the company had no legal interest in a third party's shares, and nothing was placed before the Court to show that the company could recover the duty in England from the deceased shareholders' legal representatives; the Court therefore assumed it could not, so the company was out of pocket and the payments were expenditure incurred by it. It failed on the second point. 'For the purpose of the business' is wider than 'for the purpose of earning profits' and may take in the day to day running of a business, rationalisation of its administration and modernisation of its machinery, measures for the preservation of the business and the protection of its assets and property from expropriation, coercive process or assertion of hostile title, and payment of statutory dues and taxes imposed as a pre-condition to commencing or carrying on a business, among other acts incidental to carrying it on. But its limits are implicit in it: the expenditure must be for carrying on the business and the assessee must incur it in his capacity as a person carrying on the business, and it cannot include sums spent as agent of a third party, whether the agency is voluntary or statutory. Here the company paid as statutory agent of the deceased shareholders, and the payments had nothing to do with the conduct of the business; that the revenue might on default realise the amount from the business assets was a consequence of the company's own default and did not make the payment expenditure in the conduct of the business.
The Court traced the expression through the English authorities before stating its own conclusion. It began from Strong and Co. of Romsey Ltd. v. Woodifield, where the Lord Chancellor said an expense cannot be deducted if it falls on the trader in some character other than that of trader, and Lord Davey said the disbursement must be made for the purpose of earning profits — a formula the Court noted was narrower than the Lord Chancellor's. It followed the expansion of that formula through Allen v. Farquharson Brothers, Rowntree and Co. v. Curtis, Cooke v. Quick Shoe Repair Service and Southern v. Borax Consolidated Ltd., where defending title to property was held to be for the purposes of the trade, and through Morgan v. Tate and Lyle Ltd., where Lord Reid's general test was whether the money was spent by the person assessed in his capacity of trader or in some other capacity. It noted Rushden Heel Co. v. Keene, Smith v. Lion Brewery Co. — where the result turned on whether the company paid as landlord or as trader — and Harrods (Buenos Aires) Ltd. v. Taylor Gooby, where a foreign tax was deductible because paying it was a pre-condition of carrying on business at all. From these it recapitulated two English tests: whether the expenditure was incurred for carrying on the business and for removing obstacles and impediments to it, and whether the assessee paid in his capacity as businessman or in his personal capacity. On the Indian side it took Tata Sons Ltd. v. CIT, Badridas Daga v. CIT for the principle that an expenditure is deductible only if it arises out of the carrying on of the business and is incidental to it, Indian Molasses Co. for the proposition that s.10(2)(xv) is substantially in pari materia with the English enactment, CIT v. Abdullabhai Abdulkadar for the principle that expenditure incurred by an assessee in his capacity as agent of another is not deductible, CIT v. Royal Calcutta Turf Club for a liberal reading where the expenditure preserved the business, and Haji Aziz and Abdul Shakoor Bros. for the proposition that expenses falling on the assessee in a character other than that of trader cannot be deducted. It then stated the width of the expression and its implicit limits, and applied the second English test to the facts: the company paid as statutory agent for another, and so paid in a character other than that of a trader.
However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business.
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Handle my notice → Ask a CA on WhatsAppNo. 'For the purpose of the business' is wider than 'for the purpose of earning profits', and expenditure does not have to produce income to qualify. But the width has a limit that the same case supplies: the expenditure must be incurred by the assessee in his capacity as a person carrying on the business. Estate duty the company paid on the deaths of its non-resident shareholders failed that limit — it was paid as a statutory agent for someone else — and was not deductible. This was decided by the Supreme Court (Supreme Court of India — K. Subba Rao, J.C. Shah and S.M. Sikri, JJ; the judgment was delivered by Subba Rao J. Civil Appeal Nos. 384 and 385 of 1963, by special leave from the Kerala High Court) and bears on section 37(1), section 10(2)(xv) of the Indian Income-tax Act, 1922, section 84 Estate Duty Act, 1953, section 77 Estate Duty Act, 1953 of the Income Tax Act 1961. It is reported as [1964] 53 ITR 140 (SC); 1964 AIR 1722; 1964 SCR (7) 693; [1964] INSC 118. Practitioners cite the first half of this case and the department cites the second. It is the standing answer to a disallowance made on the ground that a particular outgo produced no revenue: preservation of the business, protection of its assets, rationalisation of administration and payment of statutory dues can all be 'for the purpose of the business'. It is also the answer to over-reaching, because the Court refused the claim on the very facts before it. Read only half of it and you will be surprised in the Tribunal. If it applies to you, the first step is this: Answer a 'no income was earned' disallowance with the width point, and quote the sentence identifying the categories the expression takes in.
The assessee was a resident company incorporated outside India, most of whose shareholders were in the United Kingdom. In the accounting period ending 31 March 1955 it paid £1,302-9-4 and £1,303, and in the period ending 31 March 1956 a further £3,809-1-5, towards estate duty payable on the deaths of shareholders not domiciled in India, and debited those amounts to revenue in computing its business profits. Section 84 of the Estate Duty Act 1953 made a company incorporated outside India but treated as resident liable to pay estate duty on the principal value of the shares held by a deceased member. The Income Tax Officer added the amounts back for assessment years 1955-56 and 1956-57; the Appellate Assistant Commissioner dismissed the appeals; the Tribunal allowed them; and on a reference under s.66(1) the Kerala High Court answered in the assessee's favour. The Commissioner appealed by special leave. The matter was decided on 1964-04-10 by the Supreme Court (Supreme Court of India — K. Subba Rao, J.C. Shah and S.M. Sikri, JJ; the judgment was delivered by Subba Rao J. Civil Appeal Nos. 384 and 385 of 1963, by special leave from the Kerala High Court). On those facts the Supreme Court held as follows. The appeals were allowed with costs and the High Court's order set aside; the estate duty was not an allowable deduction under s.10(2)(xv). The Court rejected the Revenue's first point. Section 77 of the Estate Duty Act, which lets a person required to pay duty transfer the property to pay it, cannot operate extra-territorially and the company had no legal interest in a third party's shares, and nothing was placed before the Court to show that the company could recover the duty in England from the deceased shareholders' legal representatives; the Court therefore assumed it could not, so the company was out of pocket and the payments were expenditure incurred by it. It failed on the second point. 'For the purpose of the business' is wider than 'for the purpose of earning profits' and may take in the day to day running of a business, rationalisation of its administration and modernisation of its machinery, measures for the preservation of the business and the protection of its assets and property from expropriation, coercive process or assertion of hostile title, and payment of statutory dues and taxes imposed as a pre-condition to commencing or carrying on a business, among other acts incidental to carrying it on. But its limits are implicit in it: the expenditure must be for carrying on the business and the assessee must incur it in his capacity as a person carrying on the business, and it cannot include sums spent as agent of a third party, whether the agency is voluntary or statutory. Here the company paid as statutory agent of the deceased shareholders, and the payments had nothing to do with the conduct of the business; that the revenue might on default realise the amount from the business assets was a consequence of the company's own default and did not make the payment expenditure in the conduct of the business.
The Court traced the expression through the English authorities before stating its own conclusion. It began from Strong and Co. of Romsey Ltd. v. Woodifield, where the Lord Chancellor said an expense cannot be deducted if it falls on the trader in some character other than that of trader, and Lord Davey said the disbursement must be made for the purpose of earning profits — a formula the Court noted was narrower than the Lord Chancellor's. It followed the expansion of that formula through Allen v. Farquharson Brothers, Rowntree and Co. v. Curtis, Cooke v. Quick Shoe Repair Service and Southern v. Borax Consolidated Ltd., where defending title to property was held to be for the purposes of the trade, and through Morgan v. Tate and Lyle Ltd., where Lord Reid's general test was whether the money was spent by the person assessed in his capacity of trader or in some other capacity. It noted Rushden Heel Co. v. Keene, Smith v. Lion Brewery Co. — where the result turned on whether the company paid as landlord or as trader — and Harrods (Buenos Aires) Ltd. v. Taylor Gooby, where a foreign tax was deductible because paying it was a pre-condition of carrying on business at all. From these it recapitulated two English tests: whether the expenditure was incurred for carrying on the business and for removing obstacles and impediments to it, and whether the assessee paid in his capacity as businessman or in his personal capacity. On the Indian side it took Tata Sons Ltd. v. CIT, Badridas Daga v. CIT for the principle that an expenditure is deductible only if it arises out of the carrying on of the business and is incidental to it, Indian Molasses Co. for the proposition that s.10(2)(xv) is substantially in pari materia with the English enactment, CIT v. Abdullabhai Abdulkadar for the principle that expenditure incurred by an assessee in his capacity as agent of another is not deductible, CIT v. Royal Calcutta Turf Club for a liberal reading where the expenditure preserved the business, and Haji Aziz and Abdul Shakoor Bros. for the proposition that expenses falling on the assessee in a character other than that of trader cannot be deducted. It then stated the width of the expression and its implicit limits, and applied the second English test to the facts: the company paid as statutory agent for another, and so paid in a character other than that of a trader. In the words reproduced by the source cited on this page: "However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business." The decision followed or applied Badridas Daga v. CIT [1958] 34 ITR 10 (SC); CIT v. Abdullabhai Abdulkadar [1961] 41 ITR 545 (SC); Haji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 (SC); Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 (SC); Morgan v. Tate and Lyle Ltd. [1954] 26 ITR 195 (HL); Strong and Co. of Romsey Ltd. v. Woodifield [1906] 5 Tax Cas. 215 (HL).
It was decided by the Supreme Court on 1964-04-10 and is reported as [1964] 53 ITR 140 (SC); 1964 AIR 1722; 1964 SCR (7) 693; [1964] INSC 118. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 37(1), section 10(2)(xv) of the Indian Income-tax Act, 1922, section 84 Estate Duty Act, 1953, section 77 Estate Duty Act, 1953, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals were allowed with costs and the High Court's order set aside; the estate duty was not an allowable deduction under s.10(2)(xv). The Court rejected the Revenue's first point. Section 77 of the Estate Duty Act, which lets a person required to pay duty transfer the property to pay it, cannot operate extra-territorially and the company had no legal interest in a third party's shares, and nothing was placed before the Court to show that the company could recover the duty in England from the deceased shareholders' legal representatives; the Court therefore assumed it could not, so the company was out of pocket and the payments were expenditure incurred by it. It failed on the second point. 'For the purpose of the business' is wider than 'for the purpose of earning profits' and may take in the day to day running of a business, rationalisation of its administration and modernisation of its machinery, measures for the preservation of the business and the protection of its assets and property from expropriation, coercive process or assertion of hostile title, and payment of statutory dues and taxes imposed as a pre-condition to commencing or carrying on a business, among other acts incidental to carrying it on. But its limits are implicit in it: the expenditure must be for carrying on the business and the assessee must incur it in his capacity as a person carrying on the business, and it cannot include sums spent as agent of a third party, whether the agency is voluntary or statutory. Here the company paid as statutory agent of the deceased shareholders, and the payments had nothing to do with the conduct of the business; that the revenue might on default realise the amount from the business assets was a consequence of the company's own default and did not make the payment expenditure in the conduct of the business. It arises in Deductions & Disallowances and How Tax Law Is Read matters, on section 37(1), section 10(2)(xv) of the Indian Income-tax Act, 1922, section 84 Estate Duty Act, 1953, section 77 Estate Duty Act, 1953 of the Income Tax Act 1961, and was decided by Supreme Court of India — K. Subba Rao, J.C. Shah and S.M. Sikri, JJ; the judgment was delivered by Subba Rao J. Civil Appeal Nos. 384 and 385 of 1963, by special leave from the Kerala High Court. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Then satisfy the limit yourself before the officer does: show that the payment was made by you in your capacity as the person carrying on the business, and not on behalf of a third party. Watch for outgoings borne under a statutory obligation that attaches to someone else — shareholders, directors, a group company — because that is the fact pattern on which this assessee lost. Do not use this case to get past a specific bar; it is about the width of the purpose test in s.37(1), not about expenditure that another provision prohibits.
Still good law. Followed and relied upon by the Supreme Court in S.A. Builders Ltd. v. Commissioner of Income-tax (Appeals), Chandigarh [2007] 158 Taxman 74 / [2007] 288 ITR 1 (SC), decided 14 December 2006, which records at its para 29 that it has been repeatedly held by that Court, citing this decision and CIT v. Birla Cotton Spg. & Wvg. Mills Ltd. [1971] 82 ITR 166 (SC), that 'for the purpose of business' is wider in scope than 'for the purpose of earning profits'. Note what S.A. Builders adds rather than takes away: the expression includes expenditure voluntarily incurred on grounds of commercial expediency, and it is immaterial that a third party also benefits — so a payment that benefits another is not outside the section merely because of that, provided the assessee incurs it as a businessman and for its own business purpose. What this decision excludes is the different case where the assessee pays as agent for another's liability. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment was read in full. The entry previously carried no ITR citation; the decision is reported at [1964] 53 ITR 140 (SC), which is how the Supreme Court itself cites it. The judgment was on s.10(2)(xv) of the Indian Income-tax Act, 1922; s.37(1) of the 1961 Act is in materially the same terms, but the Court did not construe s.37(1) itself. Two points on the reasoning. The Court decided the first question in the assessee's favour — the estate duty was expenditure incurred by the company — but did so on an assumption, there being nothing before it to show whether the company could have recovered the duty in England from the deceased shareholders' representatives; the point would be open on evidence. And the report carries no numbered paragraphs, so the quotation is identified by its opening words. It does not tell you how the limit works where the payment discharges someone else's liability but also protects the assessee's own business — an indemnity, a guarantee invoked, a group cross-charge — which is where most modern disputes on this point sit. The nearest later guidance is S.A. Builders Ltd. v. CIT [2007] 288 ITR 1 (SC), which holds that expenditure voluntarily incurred on grounds of commercial expediency qualifies even though a third party also benefits, and that the enquiry is into the purpose for which the money was laid out; but that case was decided under s.36(1)(iii) and was remitted to the Tribunal on the facts, so it settles the principle and not its application. This decision also leaves open, because there was no evidence on it, whether the answer would differ if the statutory agent had a right of recovery against the person whose liability it discharged. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed with costs and the High Court's order set aside; the estate duty was not an allowable deduction under s.10(2)(xv). The Court rejected the Revenue's first point. Section 77 of the Estate Duty Act, which lets a person required to pay duty transfer the property to pay it, cannot operate extra-territorially and the company had no legal interest in a third party's shares, and nothing was placed before the Court to show that the company could recover the duty in England from the deceased shareholders' legal representatives; the Court therefore assumed it could not, so the company was out of pocket and the payments were expenditure incurred by it. It failed on the second point. 'For the purpose of the business' is wider than 'for the purpose of earning profits' and may take in the day to day running of a business, rationalisation of its administration and modernisation of its machinery, measures for the preservation of the business and the protection of its assets and property from expropriation, coercive process or assertion of hostile title, and payment of statutory dues and taxes imposed as a pre-condition to commencing or carrying on a business, among other acts incidental to carrying it on. But its limits are implicit in it: the expenditure must be for carrying on the business and the assessee must incur it in his capacity as a person carrying on the business, and it cannot include sums spent as agent of a third party, whether the agency is voluntary or statutory. Here the company paid as statutory agent of the deceased shareholders, and the payments had nothing to do with the conduct of the business; that the revenue might on default realise the amount from the business assets was a consequence of the company's own default and did not make the payment expenditure in the conduct of the business.
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