INDIAN ALUMINIUM CO. LTD. versus COMMISSIONER OF INCOME TAX, WEST BENGAL

Citation: [1971] 3 S.C.R. 351 · Decided: 12-01-1971 · Supreme Court of India · Bench: K.S. HEGDE · Disposal: Dismissed

Judgment (excerpt)

B 
c 
D 
E 
351 
INDIAN ALUMINIUM CO. LTD. 
v. 
COMMISSIONER OF INCOME TAX, WEST B.ENGAL 
January 12, 1971 
(K. S. HEGDE AND A. N. GROVEi\, JJ.J 
Income Tax Act, 1922, s. !0(2)(xi) arrd I0(2)(xv)-Fee paid to 
foreign collabqrator for technical 
know.fio}v-No 
provision in contra.cl 
for payment of tax on fee by Indian Company-Assessee held in default 
and tcu recovered frofn it-If allowable as business expenditu1'e and 
deductible. 
The appellant Company which was engaged in the manufacture of 
aluminium products, entered into a contract with another company in 
Montreal, Canada, for the supply of technical know-how etc. for the 
development of its production. This agreement provided for payment of 
a retainer fee by the appellant on an annual basis and there was no 
condition or stipulation that the fee would be payable by the assessee 
without deduction of income tax. In 1951 the Income Tax Officer treated 
the assessee as being in default under section 18(7) of the Income Tax 
Act, 1922 in respect of a sum of Rs. 1,24,199 which the appellant was 
hable to deduct from the payments made to the Montreal Company under 
the provisions of sections 18(3-A), 18(3-B) and. 18(3-C). The appellant 
was required to pay this amount and the Montreal Company refused to 
accept its claim fdr reimbursement. 
The appellant claimed the amount 
as a deduction from its business income under S. 10( 1) or 10(2) (xi) or 
I0(2)(xv) of the Act. Although this claim was allowed by the Appellate 
Assistant Commissioner. the Tribunal, in appeal. held that the amount in 
que,stion was neither expenditure incidental to the business nor was it 
wnolly and exclusively laid out for that purpose: and nor was it claim-
abie as a ba;I debt in view of the fact that it had not been incurred as a 
trade debt in the course of the business. 
The High Court. upon a reference made to 
it, 
held 
against 
the 
a>i.essee. On appeal to this Court, 
F 
HELD : Dismissing the appeal, 
G 
H 
(i) It is well settled that a business or trading debt should spring 
directly from .the carrying on of a business or trade anu shoulu be inci-
dental to it and it cannot be just any loss sustained by the assessee even 
if it has some Connection with his business. [355 E] 
Although the retamer fees were paid by the assessee to the Montreal 
Company for technical assistance which had a connection with the bu_si-
ness of the assessee it was not possible to regard the amount which the 
assessee was bound to deduct from the payment made to the· Montreal 
Company under s. 18(3-B) of the Act and which it failed to recover from 
that company, as a debt which could be deducted under s. !0(2)(xi). 
The debt was not incidental to the business because it arose out of non-
compliance with the provisions of the Act. 
The payment 
which 
the 
assessee made to the income tax authorities and which it failed to recover 
from the Montreal Company was . more a matter of commercial expedi-
ency and proceeded out of motives of business relationship, because the 
assessee was anxious not to annoy or offend the Montreal Company so 
as to ayail of its continued ·teehni~al assistance and advice. [355 G] 
352 
SUPREME COURT REPORTS, 
[1971]3 S.C.R. 
A. V. Thomas & Co. Ltd. v. Commissioner of Income Tax,. 48 I.T.R. 
67 at. p. 75, referred to. 
(ii) The assessee was presumed to kriow the relevant, provisions of 
lhe Act at the time when it entered -into an agreement with the Montreal 
Company. 
There was no provision in the agreement with the Montreal 
Company which created a contractual obligation on the assessee to make 
payment of the taxes deductible under s. 
18(3,B). A payment made 
under a statutory obligation, because the assessee was in default, could 
not constitute expenditure laid out .for the purpose 
of 
the 
assessee's 
business and was not tlierefore deductible under s. 10(2) (xv). [356 El 
Commissioner of Income Tax, Bombay v. M/s. Pannalal Narotamdas 
& Co, Bombay, 1969 1 J.T.J. 32, distinguished. 
CIVIL APPELLATE JURISDICTION : 
1967. 
Civil Appeal No. 24 of 
Appeal by special leave from the judgment and order dated 
April 27, 1966 of the Calcutta High Court in Income-tax ,Refer-
ence No. 90 of 1962. · 
M. C. Chag/a, S. R. Banerjee, N. N. 'Goswami and S. N. 
Mukherjee, for the appellants. 
Jagad{sh Swarup, Solicitor-General, Ram Panjavani and R. N. 
Sachthey, for the respondent. 
The Judgment of ·the Coun was delivered by 
Grover, J. This is an appeal by special leave from a judgment 
of

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