Mohan Meakin Breweries Ltd. vs Commissioner of Income Tax (No. 1)

T.U. Mehta, C.J.—In this reference, the Income Tax Appellate Tribunal has referred the following question to us for our opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was legally right in upholding the disallowance of Bhumi Bhawan Kar amounting to Rs. 13,338 which is a tax imposed by the U.P. Government under the Uttar Pradesh (Nagar Kshettra) Bhumi Aur Bhawan Kar Adhiniyam, 1962, in respect of land or buildings of the company used in the ordinary course of business for carrying on manufacturing process or for purposes incidental thereto ?"

The facts which gave rise to this reference are that during the financial year 1964-65 relevant to the assessment year 1965-66, the Lucknow Branch of the assessee, which is a public limited company, paid Rs. 13,338 on account of Bhumi Bhawan Kar which is a tax imposed by the U. P. Government under Uttar Pradesh (Nagar Kshettra) Bhumi Aur Bhawan Kar Adhiniyam, 1962, in respect of the land and buildings used for the purposes of its business. The said Adhiniyam is hereafter referred to as "the U.P. Act." Section 3 of the Act provides that there shall be charged, levied and paid for each year a tax on lands or buildings, or both, situate in an urban area at such rate or rates, not exceeding twenty-five per cent. of the taxable value of the land or building, as the State Government may by notification in the Gazette declare in this behalf. According to Section 5 of that Act, the tax payable in any year in respect of any land or building or part thereof, where the owner himself is not the occupier of the same, shall be recoverable by the owner from the occupier of the land or the building, in the same proportion as the number of days during the year for which such land or building or portion thereof, as the case may be, has been in actual occupation or use of such occupier, bears to the figure 365. Sub-section (2) of Section 5 further provides that tax payable under Sub-section (1) may be recovered by the owner from the occupier along with the rent or damages for use and occupation of the land or the building, as the case may be, or otherwise.

These provisions make it abundantly clear that tax under the U.P. Act can be levied either from the owner or from the occupier of the land or the premises in question.

So far as this case is concerned, it is not in dispute that the land and the premises in question have been utilised by the applicant-assessee for the purpose of its business. The assessee carries on the business of manufacture and sale of beer, Indian made foreign liquors, malt, breakfast food articles and soft drinks. It has paid during the accounting year the amount of Rs. 11,962 relating to its factory premises and Rs. 1,376 for its staff quarters as the taxes under the U.P. Act.

The Tribunal has held that since the amount of tax in dispute is not the tax imposed by a local authority, Section 30(b) of the Income Tax Act, 1961, has no application and, therefore, deduction on that account cannot be granted to the assessee. The Tribunal then proceeded to consider the provisions of Section 37(1) of the I.T. Act, 1961, and relied upon the decision given by the Punjab and Haryana High Court in Commissioner of Income Tax Vs. Jai Hind Picture Co. (P.) Ltd., and came to the conclusion that since under the U.P. Act the tax was required to be paid on account of the assessee''s ownership or occupation of the land and premises, it is not possible to say that the expenditure on account of this tax was laid out by the assessee wholly and exclusively for the purpose of its business. According to. the Tribunal, the , assessee was bound to pay the tax in question even if it did not carry on its business activities in the land and premises in question.

We find that the matter should be treated as finally settled on account of the decision given by the Supreme Court in The Indian Aluminium Co. Ltd. Vs. The Commissioner of Income Tax , West Bengal, Calcutta, . Previous to this decision, the Supreme Court had decided in Travancore Titanium Products Ltd. Vs. Commissioner of Income Tax, Kerala, that to be a permissible deduction u/s 37 of the I.T. Act, 1961, there must be a direct and intimate connection between the expenditure and the business, i.e., 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. It was by reliance upon this decision of the Supreme Court that the Punjab and Haryana High Court gave its above referred decision in Commissioner of Income Tax Vs. Jai Hind Picture Co. (P.) Ltd., However, the said decision given by the Supreme Court in Travancore Titanium Products Ltd. Vs. Commissioner of Income Tax, Kerala, was referred to a larger Bench of the Supreme Court for reconsideration, in The Indian Aluminium Co. Ltd. Vs. The Commissioner of Income Tax , West Bengal, Calcutta, . The Supreme Court in the latter case considered the whole English case law on the subject and particularly relied upon some observations made by Lord Atkinson in Smith v. Lion Brewery Company Ltd. [1910] 5 TC 568. These observations were as under (p. 594):

"Again, it is urged that the landlord pays his contribution as landlord and because of his proprietary interest in the premises and not as trader, since he would be equally liable to it whether he traded or not. That, no doubt, is so, but in the present case the company have become landlords and thus liable to pay the charge, for the purpose solely and exclusively of setting up the tied-house system of trading. If the company took under lease a plot of land to enlarge their brewery or took similarly premises in which to establish a depot to sell their beer through an agent, the same criticism might be applied with equal force to the payment of the rent reserved by the lease. They would pay it as lessees, not as brewers. They would pay it whether they continued to brew or not. Yet under the provisions of the very rule relied upon in this case, they would be entitled to deduct the rent from the profits earned, and that, too, utterly irrespective of whether the receiver of the rent used it to pay for his support or for his pleasure, or even to set up a rival brewery.

Indeed, even in a contract made for the purchase of material such as hops or malt, the company would have to pay for the commodity supplied, not because they are brewers, but because they were contracting parties, utterly irrespective of whether they carried on their trade or had abandoned it. Yet it can hardly be suggested that the price paid for the hops or malt under the contract should not be deducted from the receipts. There is, therefore, in my opinion, nothing in this objection."

The Supreme Court also relied upon the decision of the House of Lords in Usher''s Wiltshire Brewery Ltd. v. Bruce [1914] 6 TC 399, and quoted the following observations by Lord Atkinson :

"Stated broadly, I think that that doctrine amounts to this, that where a trader bona fide creates in himself or acquires a particular estate or interest in premises wholly and exclusively for the purposes of using that interest to secure a better market for the commodities which it is part of his trade to vend, the money devoted by him to discharge a liability imposed by statute on that estate or interest, or upon him as the owner of it, should be taken to have been expended by him wholly and exclusively for the purposes of his trade."

After having approved these observations, the Supreme Court has observed as under The Indian Aluminium Co. Ltd. Vs. The Commissioner of Income Tax , West Bengal, Calcutta,

"There is no doubt that in one sense when rates and taxes on property are paid by a trader tie pays them as owner or occupier because taxes are either on possession of property or on its ownership. But, when the assessee has a dual capacity, i.e., he is owner-cum-trader, why should it be not deductible when according to ordinary commercial principles he would be treated as paying it as a trader."

The observations made by the Supreme Court in its previous decision in Travancore Titanium Products Ltd. Vs. Commissioner of Income Tax, Kerala, were explained by saying that they needed to be clarified by stating that if the expenditure was laid out by the assessee as owner-cum-trader, and the expenditure was really incidental to the carrying on of its business, it must be treated to have been laid out by him as a trader and as incidental to his business.

This decision has been subsequently followed in two other Supreme Court cases in Dehradun Tea Co. Ltd. and Another Vs. The Commissioner of Income Tax, U.P., and in Mitsui Steamship Co. Ltd. Vs. Commissioner of Income Tax , West Bengal, II, Calcutta, .

Speaking about the facts of the instant case, it is not in dispute that for the assessment year in question the applicant-assessee has utilised the land and premises which are subject to the tax under the U.P. Act for conducting their business. Since these lands and premises were necessary to be used for the conduct of the assessee''s business and since they were bound to pay the tax in question as occupier of these land and premises, the payment of tax is obviously incidental to the business of the assessee and, therefore, pursuant to the ratio of the Supreme Court decision in The Indian Aluminium Co. Ltd. Vs. The Commissioner of Income Tax , West Bengal, Calcutta, , we find that the decision given by the Punjab and Haryana High Court in Commissioner of Income Tax Vs. Jai Hind Picture Co. (P.) Ltd., would be of no avail to the department. Our answer to the question which is referred to us by the Tribunal is, therefore, in the negative, i.e., in favour of the assessee and against the department.

This reference is accordingly disposed of and the matter is sent back to the Tribunal, there shall be no order as to costs.