1. ' SALEEM AKHTAR J--This judgment will dispose of both the References as the following common question of law has been referred by the Tribunal:- "Whether on the facts and in the circumstances of the case, the wealth tax liability is an allowable expense under sections 10 and 12 of the repealed Income-tax Act 1922?
2. ' In I T R 24/82, the respondent is an individual deriving income from dividend, interest and property.
3. He submitted his return for the assessment year 1977-78 claiming allowance of wealth-tax liability.
4. This claim was rejected by the Income-tax Officer. In appeal the Appellate Assistant Commissioner of Income Tax allowed proportionate wealth tax liability against the income of the respondent. This order was upheld by the Tribunal. The Department then filed application under section 66 (1) of the Income-tax Act whereupon the above question was referred to this Court.
5. ' In I T R 70/82 the respondent claimed proportionate wealth tax on the shareholding against which the dividend income was received and taxed under section 12 of the Iacome-Tax Act. The Income Tax Officer disallowed this claim against which appeal was filed by the respondent. The Appellate Assistant Commissioner allowed the appeal in holding that wealth tax is an allowable expenditure and directed the Income Tax Officer to allow proportionate wealth-tax liability against the income under section 12 of the Income-Tax Act. The Tribunal confirmed this order. On Department's application under section 66 (1) of the Income Tax Act the above-mentioned question has been referred to this Court.
6. ' We have heard Mr. Shaikh Haider and Mr. Iqbal Naim Pasha. Mr. Nasrullah Awan adopted the arguments of Mr. Shaikh Haider.
7. ' The learned counsel for the Department contended that wealth tax is not a tax on property but on the value of the property known as net value of the property, therefore it cannot he allowed as an expenditure while computing the income of the assessee. On the other hand Mr. Lqbal Naim Pasha, the learned counsel for the respondent has contended that the wealth-tax is charged on the property and shares owned and possessed by the assessee which is necessary incidence for carrying business or earning profits therefore Wealth Tax liability should be treated as admissible expense.
8. To appreciate the contentions of the learned counsel for the parties we have to keep this fact in mind that income-tax and wealth tax are two different taxes levied under different statutes, under different circumstances and situations. Under the Income-tax Act income, profits and gains derived from (a) salaries, (b) Interest and securities (c) property, (d) business and (e) other sources are charged to Income-tax. The income-tax is charged on the income, profits and gains.
9. Under the Wealth Tax Act on the aggregate value of the assessee's properties and assets which is calculated in the prescribed manner and termed as net wealth. This tax is levied irrespective of the fact whether any income, profit and gain has been derived from such assets and properties or not.
10. The main ingredient for levy is that the properties and assets be owned and possessed by the assessec or by fiction of law included in his assets. Keeping these distinctions in mind we proceed to consider the question. The relevant provisions of Income-tax Act are reproduced as follows:- "10 (1) ..................................................
(2) Subject to the provisions of this Act such profits or gains shall be computed after making the following allowances namely:-
(xvi) any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation".
12. (1) The tax shall he 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 total income) if not included under any of the preceding heads).
(2) Such income, profits and gains shall he computed after making allowance for the amount of interest paid in respect of money borrowed for the purpose of acquisition of part of the share capital of a company and 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 provided that no allownce shall be made on account of (a)
11. (b)
12. (c)..........................................................
13. ' Mr. Iqbal Naim Pasha has referred to section 9 of the the Income Tax Act to illustrate that in view of Explanation to section 9 (iv) tax which is leviable by the Central/Federal Government in respect of property not being a capital charge is an admissible allowance while assessing the income from property.
14. Under section 10, profit and gain from business, profession or vocation is charged to tax. Such profits or gains chargeable to tax arc calculated in the prescribed manner after giving allowances as enumerated in this section. One of them is mentioned in section 10 (2) (xvi) as any expenditure made wholly or exclusively for the purposes of business, profession or vocation. This expenditure should not be a capital or personal expenditure. If it falls under this category of expenditure the allowance will be inadmissible. Section 12 relates to levy of tax on profits and gains on income from other sources. The Income-tax Act categorises heads of income as stated above. If income is not derived from salaries, business, profession or vocation or properties then it shall be classified as income from other sources. Section 12(2) prescribes the mode of computing the income, profit and gain by making allowance as provided under it. An expenditure, which is not in the nature of capital or personal expenditure, incurred exclusively for the purpose of earning profit and gain shall be an admissible allowance. The assessee can claim deduction of wealth tax if he succeeds to establish that it is an expenditure made solely for the purpose of buisness, profession or vocation or incurred wholly for the purpose of making or earning income, profit or gain, ' As stated earlier wealh tax is charged on value of assets and properties which is calculated in a prescribed manner. Unless an assessee owns properties and assets which are brought in the net of his wealth tax cannot be charged. The incidence of ownership of properties is that all taxes, rates and charges levied on the property are to be paid by the owner. In case of non-payment penal provisions are attracted which inter alia include attachment and sale of the property. Therefore, in order to keep the property and assets safe, free and clear it is necessary that all such taxes, charges and rates should be paid by the owner. Unless such payments are made the owner will not be in a position to make income, profit or gain. It will therefore, be a necessary expenditure made solely and exclusively for the purpose of business, profession or vocation or incurred wholly and exclusively for purpose of making income profit and gain as the case may be. In this regard Mr. Iqbal Naim Pasha has referred to Indian Aluminium Co. Ltd. v. Commissioner of Income Tax 1972
(84) I T R 733 which supports the aforestated observation. In this judgment reliance has been placed on Moffatt v. Webb (1913) 16 C.L.R. 120 where Griffith, C.J. Of the High Court of Australia observed as follows:- "The possession of land is necessary incident to carrying on the business of grazier; the payment of land tax is a necessary consequence of the possession of land of taxable value, whether the land is freehold or leasehold; the payment of land tax is therefore a necessary incident of carrying on the business of grazing. The case therefore seems to me to come within the exact words of the first paragraph of section 9".
15. ' Section 9 is substantially similar to section 10(2) (xvi) of the Income-tax Act, 1922 and section 10(2)
(xv) of the Indian Income-Tax Act.
16. ' In the Indian Aluminium Co.'s rase Sikri, C.J. Exhaustively quoted from the judgments of English Courts viz. Strong and Company of Romsey Ltd. v. Woodifield (1906) 5 TC 215 (HL); Smith v. Lion Brewery Company (1910) 5 T.C. 568 (HL), Usher's Wiltshire Brewery Ltd. v. Bruce (1914) 6 T.C. 339 (HL), Harrods (Buenos' Aires) Ltd. v. Taylor Goodby (1964) 41 T.C. 450 (CA), Commissioner of Inland Revenue v. Dowdell O'Mahoney & Co. (1951) 33 X.C. 259 (H.L.), and Moffatt's case and observed as follows:- "It may be mentioned that there was no express statutory provision for deduction of rates and taxes in the English Income-tax Act and yet they were allowed as a necessary deduction for the purpose of carrying on trade. There is no doubt that in one sense when rates and taxes on property are paid by a trader he 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-Com- trader, why should it be not deductable when according to ordinary commercial principles he would be treated as paying it as a trader.
17. ' Take the case of taxation on a motor vehicle. The tax is levied under the Motor Vehicles Act on the possession or ownership of a motor car. When a owner-cum-trader pays the tax in respect of a vehicle used solely for the purpose of trade, nobody doubts, and the learned counsel for the revenue did not contest the position, that the tax would be deductable as an expense. Now, why is it deductable? The only rational explanation seems to us to be that when a person has a dual capacity, of a tradercum-owner, and he pays tax in respect of property which is used for the purpose of trade, the payment must be taken to be in the capacity of a trader according to ordinary commercial principles."
18. ' Repelling the same contention as raised by Mr. Shaikh Haider it was observed:- "The learned counsel for the revenue did not say that these cases had been wrongly decided. What he said was that if the real nature of wealth tax is appreciated, it is impossible to equate the "net wealth" with "land" used by the grazier in Moffat v. Webb or with "tied houses" in Smith v. Lion Brewery Company or with the "company's capital" in Harrods (Buenos Aires) Ltd. v. Taylor Gooby. He said that in all these cases the tax was being levied on the asset of the business which was being used for the purpose of business. In the present case, according to him, the net wealth could not be linked to an asset owned by the trading company. To this the learned counsel for the appellant retorted that in the case especially of a trading company all the assets are owned and liabilities incurred for the purposes of trading, as outlined in its memorandum of association, if, all the assets are owned and used for the purpose of trade. He said that it would be possible for a company to mortgage its net assets to a bank and if a company did that, it could not be said that the net wealth or net assets had not been used for the purposes of business. If tax was levied on the capital value of assets without allowing deduction of debts it is clear that the tax would be deductable. What difference does it make if debts are deducted from the capital of assets? The net wealth is as much an instrument of trade as the capital value of assets. We find it very difficult to distinguish the case of a trading company like the assessee, on principle, from that of the grazier or the Brewery Company, in the cases referred to above."
19. ' Beg, J, who delivered a separate judgment observed as follows:- "In Altherton v. British Insulated and Helsby Cables Ltd., however, the test in Uaher's Wiltahire Brewery case was applied to hold that sums expended "not of necessity with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency and in order to indirectly facilitate the carrying on of the business may yet be expended wholly and exclusively for the purposes of the trade."
20. ' While referring to various judgments it was observed:- "All the other cases brought to our notice, which are discussed above, indicate that "commercial practice and trading principles" also warrant such deductions of taxes on assets or capital used wholly and exclusively for carrying on trade or earning profits. They may preclude deduction of taxes on net profits but not those imposed on net assets or wealth used exclusively for making profits."
21. The wealth tax is levied under a statute and is not paid voluntarily by the assessee. He is bound to pay it. It is a necessary consequence of owning and possessing property and assets of a value beyond a certain limit. For deriving income, profit or gains from the properties and assets it is necessary that wealth tax if levied be paid. It therefore follows that the payment of wealth tax is necessary for proper maintenance and existence of assets and properties from which income, profit or gain accrues. It can thus be concluded that it is "wholly or c exclusively laid out for purposes of earning profits". Any amount spent to accomplish or facilitate the running of business or on ground of commercial! Expediency which directly benefits the business is the money spent wholly and exclusively for earning profit and gain. Such expenses will cover tax which is statutorily levied on income yielding assets of the assessee non-payment of which may result in depletion or diminution of assets and properties or cause danger on risk which may diminish or reduce their value and utility.
22. ' Mr.Shaikh Haider referred to Commissioner of Income Tax v. Elphinstone Spinning and Weaving Mills Co. Ltd. (1975) 100 I T R 139 (SC) where Wealth Tax paid was not allowed to be deducted as a business expense. But this judgment was pronounced after Income-tax Act 1922 had been amended with retrospective effect specifically prohibiting the deduction of any sum paid as wealth tax while computing the income of an assessee under sections 10 and 12 of the Income Tax Act.
23. Similar amendment was made in Income-tax Act 1961 of India. The relevant observation is reproduced below:- "The third question relates to a claim for deduction in respect of a sum of Rs, 46,641 paid on account of wealth tax debited to the profit and loss account of the year ending December 31, 1957.
24. In more than one decision the Supreme Court took the view that the wealth-tax paid by a trading company on its assets held for the purpose of its business was deductable as a business expense in computing the assessee's income from business. Such a view was taken by the Supreme Court in Indian Aluminium Co. Ltd. v. Commissioner of Income-tax and in Commissioner of Income-tax v.
25. Standard Vacuum Oil Co. Ltd. Normally, if the legislature had not intervened, the decision of the Supreme Court would have been clearly applicable. But the provisions of the Income-tax Act were amended by the Income-tax (Amendment) Act, 1972 (No,41 of 1971)
26. ' Section 4 of the Amending Act provides that: "Nothing contained in the Indian Income-tax Act, 1922, shall be deemed to authorise, or shall be deemed ever to have authorised, any deduction in the computation of the income of any assessee chargeable under the head 'profits and gains of business, profession or vocation' or 'Income from other sources' for the assessm ent year commencing on the first day of April, 1957, or any subsequent assessm ent year, of any sum paid on account of wealth-tax " In view of this provision the law has been altered and question No,3 has to be answered in the negative."
27. In Pakistan no such amendment has been made. In fact the Income-tax Ordinance 1979 retains the same provisions as contained in the Income-tax Act 1922. This fact is indicative of the intention of legislature and can be an aid to interpretation of sections 10 (2) (xvi) and 12 (2) of the Income-tax Act. It is a well recognised principle of interpretation that if a fiscal statute is capabe of two reasonable interpretations then the one which is favourable to the subject should be adopted.
28. We are therefore, of the considered view that the Wealth Tax paid on any income yielding asset or property owned by the assessee or held for the purpose of his business, is deductable as expenses in computing the assessee's income, profit or gain under section 10 or 12 of the Income-tax Act, 1922.
29. ' For the aforestated reasons our answer to the question is in affirmative.