JUDGMENT
BANERJEE J. – This is a reference under section 66 (1) of the Indian Income-tax Act, 1922. The assessment year involved is the year 1955-56, the corresponding previous year being the calendar year ended on December 31, 1954.
The assessee is a firm engaged in coal mining. During the assessment year in question, the assessee operated two collieries named Modern Satgram Colliery and Ratibaty Colliery. In respect of pits Nos. 1 and 2 of the latter colliery, the Cess Deputy Collector of Burdwan levied road and education cesses amounting in all to Rs. 11,906, for the year 1954, and the assessee paid the sum. This sum was claimed by the assessee as a business expenditure, allowable under section 10 (2) (xv) of the Indian Income-tax Act. The Income-tax Officer disallowed this expenditure with the observation, “not allowable as being based on profit.” Obviously, in disallowing the claim, the Income-tax Officer had in mind the provisions of section 10 (4) of the Indian Income-tax Act, which reads as follows :
“Nothing in clause (ix) or clause (xv) of sub-section (2) shall be deemed to authorise the allowance of any sum paid on account of any cess, rate or tax levied on the profits or gains of any business, profession or vocation or assessed at a proportion of or otherwise on the basis of any such profits or grains;….”
The Appellate Assistant Commissioner, before whom the assessee appealed, dismissed the appeal with the observation :
“The Income-tax Officer has disallowed Rs. 11,906 claimed on account of road and education cesses. The former was dependent on the profits earned while the latter had noting to do with the appellants business activities. The disallowance on these accounts has therefore been correctly made and as such it will not be interfered with.”
The assessee preferred a second appeal before the Appellate Tribunal. It was contended before the Tribunal that the levy of road and education cesses had been made merely on the estimated net profits and since such estimated profits had no relationship with actual profits earned during the relevant period, it must be held that the provisions of section 10 (4) were not applicable. The Tribunal upheld the contention of the assessee after having examined the demand notices served on the assessee by the said Cess Deputy Collector and relying upon a decision of the Allahabad High Court in Simbholi Sugar Mills Ltd. v. Commissioner of Income-tax. We set out herein below an extract from the judgment of the Tribunal :
“It is clear from the judgment of the Allahabad High Court that except for the provisions of section 10 (4) the payments made by business concerns on account of local taxes in respect of properties held within the jurisdiction of district boards or similar other local authorities, are expenses laid out wholly and exclusively for the purpose of such business because without payment of such taxes it is not possible for the assessee to carry on such business within the jurisdiction of the local authorities concerned. But the income-tax law puts a bar that if such cess, rate or tax be levied on the profits and gains of any business or assessed at proportion of or otherwise on the basis of such profits and gains nothing in clause (ix) or clause (xv) of sub-section (2) section 10 would entitle the assessee to claim such expenses as business expenses. We, however, find that the implication of section 10 (4) had been gone into deep by their Lordships of the Allahabad High Court and they observed :
The income, therefore, on which tax is payable under the District Boards Act is income arrived at by pure guess work without applying any principles for determining that estimated income. Such income cannot be said to be at all in the nature of profits and gains of the business mentioned in sub-section (4) of the section 10 of the Income-tax Act.
…. the learned departmental representative objects that in the case before the Allahabad High Court, the learned judges had an opportunity of not looking into the District Boards Act but also to the Rules framed thereunder but the appellant before us had not produced anything beyond the demand notices from the Cess Deputy Collector. But on a reading of the copies of these demand notices we have no doubt in our mind that the levy of road and education cesses had been made in exactly the same manner as the District Board had done in the case of Simbholi Sugar Mills….
Following, therefore, the decision of the Allahabad High Court we hold that such estimated income worked out by the Cess Collector for the levy of the road and education cesses as in the case of the appellant cannot be said to be in the nature of the profits and gains of the business mentioned in sub-section (4) of section 10 of the Income-tax Act and as such the assessee will be entitled to claim such expenditure as deductible under section 10 (2) (xv).”
Aggrieved by the order of the Tribunal, the Commissioner of Income-tax obtained reference to this court on the following question of law :
“Whether, on the facts and in the circumstances of the case and in view of section 10 (4) of the Indian Income-tax Act, 1922, the sum of Rs. 11,906 paid on account of road and education cesses was an allowable expenditure under section 10 (2) (xv) of the said Act ?”
In order to answer the question referred to us, it is necessary to examine the scheme of the Cess Act, 1880, and the Bengal (Rural) Primary Education Cess Act, 1930. In the first mentioned Act the Preamble reads as follows :
“Whereas it is expedient to amend and consolidate the law relating to rating for the construction, charges and maintenance of district roads and other means of communication, and of provincial public works, within the territories administered by the Lieutenant-Governor of Bengal, and to the levy of a road cess and a public works cess on immovable property situated therein, and to the constitution of local committees for the management of proceeds of the said road cess, and also to provide for the construction and maintenance of other works of public utility out of the proceeds of the said road cess;
It is hereby enacted as follows :….”
The word “cess” used in the Preamble merely means a tax or a local rate.
Part I of Chapter I of the Act deals with imposition and application of the cesses. Sections 5 and 6 of the Act read as follows :
“5. From and after the commencement of this Act in any district or part of a district, all immovable property situate therein except as otherwise in section 2 provided shall be liable to the payment of a road cess and a public works cess.
6. The road cess and the public works cess shall be assessed on the annual value of lands and until provision to the contrary is made by Parliament, on the annual net profits from mines, quarries, tramways, railways and other immovable property ascertained respectively as in this Act prescribed, and rates at which such cesses respectively shall be levied for each year be determined for such year in the manner in this Act prescribed :
Provided that the rate at which each such cess shall be levied for any one year shall not exceed the rate of one half anna on each rupee of such annual value and annual net profits respectively.”
Chapter III of the Act deals with rating and levy of the cesses and sections 38 and 39 thereunder are couched in the following language :
“38. The road cess for each year shall be assessed and levied in each district as provided in section 6, and subject to the maximum rate in that section mentioned at such rate as may be determined for such year by District Board.
39. The public works cess for each year shall be assessed and levied in each district as provided in section 6, and subject to the maximum rate in that section mentioned, at such rate as the State Government may determine for such year.”
Chapter V of the Act deals with valuation, assessment and levy of cesses on mines, railways and other immovable property. Sections 72, 75, 76 and 79 thereunder are set out below :
“72. On the commencement of this Act in any district and thereafter before the close of each year, the Collector of the district shall cause a notice to be served upon the owner, chief agent, manager or occupier of every mine quarry, tramway, railway and other immovable property not included within the provisions of Chapter II,…… such notice shall be in the form in Schedule E contained, and shall require such owner, chief agent, manager or occupier to lodge in the office of such Collector within two months a return of the net annual profits of such property calculated on the average of the annual net profits thereof for the last three years for which accounts have been made up….
75. If such return be not furnished within the period of two months from the date on which such notice was served, or within any extended time allowed by the Collector of the district, or if such Collector shall deem that any return made in pursuance of such notice is untrue or incorrect, such Collector shall proceed to ascertain and determine by such ways or means as to him shall seem expedient the annual net profits of such property calculated as aforesaid.
76. If such Collector be unable to ascertain the annual net profits as aforesaid of any property assessable under this Chapter, he may, by such ways or means as to him shall seem expedient, ascertain and determine the value of such property, and shall thereupon determine six per centum on such value to be the annual net profits thereon.
79. New valuations under this Chapter shall be made by the Collector of the district every year, and such Collector may for that purpose cause such notices to be issued and served, and such returns to be made, and shall have such powers and authorities as are in this part mentioned and conferred :
Provided that whenever any return made under section 72 shall be accepted by the Collector for any year, the owner, chief agent, manager or occupier of such property may, if he see fit, declare in writing at the time of such acceptance that the annual net profits set forth in such return may for the purposes of this Act, be deemed to be the annual net profits for each of the five years then next ensuing;
and, if the Collector of the district shall agree to accept such declaration no new valuation shall be made of such property until the said five years shall have expired.”
The notice mentioned in section 72 is in Schedule E and is couched in the following language :
“The owner, chief agent, manager or occupier of the (give the designation of the property), situated in the district of …….., is required to lodge in the office of the Collector of the District of …….. a return in the form hereunto annexed, showing the net profits of the ……. calculated on the average of the profits of the last three years for which accounts have been made up….”
We now turn to examine the scheme of the Bengal (Rural) Primary Education Act, 1930. The Preamble of the Act reads as follows :
Whereas it is expedient to make better provision for the progressive expansion and for the management and control of primary education in rural areas in Bengal, so as to make it available to all children and with a view to make it compulsory within ten years;……
It is hereby enacted……”
This Act heavily draws from the provisions of the Cess Act, 1880, and sections 29 and 30, in Chapter IV of the Act, are couched in the following language :
“29. (1) In any district or part of a district in which the provisions of this Chapter are in force, all immovable property on which the road and public works cesses are assessed according to the provisions of the Cess Act, 1880, shall be liable to the payment of a primary education cess.
(2) The primary education cess shall be levied at the rate of three and a half pice on each rupee of annual net profits from mines and quarries and at the rate of five pice of each rupee of annual value of land and of annual net profits from tramways, railways and other immovable property as determined under the Cess Act, 1880.
30 (1) Except as otherwise provided in this Act the primary education cess shall be paid to the same persons in the same manner and at the same time as the road cess and public works cess are paid under the Cess Act, 1880.
(2) Every holder of an estate shall yearly pay to the Collector the entire amount of the primary education cess calculated on the annual value of the lands comprised in such estate at the rate provided in sub-section (2) of section 29 less a deduction to be calculated at one and a half pice for every rupee of the revenue entered in the valuation roll of such estate as payable in respect thereof.”
The provisions of the Cess Act are thus to be read with the provisions of sections 29 and 30 of the Bengal (Rural) Primary Education Act.
Section 6 of the Cess Act came up for consideration before the Privy Council in the case of Maharaja Manindra Chandra Nandi v. Secretary of State of India in the following context. The Maharaja was the owner of extensive coal bearing land, which he leased out to various parties for the working of coal mines. Besides rent for the surface land, he used to receive, under the designation of royalty, a percentage on the coal raised by the lessees or mine owners. He was assessed to cess under the Cess Act, 1880, in respect of royalty received or receivable by him from the coal mines on his estate. According to the Maharaja, the royalty he received from coal mines could not, upon a proper construction of the Act, be included in the term “annual net profit” and, therefore, the assessment of cess on royalty was illegal. He, therefore, brought a suit for the aforesaid declaration. He lost the suit before the trial court and also in appeal before the High Court. On further appeal before the Privy Council, their Lordships construed sections 6 and 72 and also sections 76, 80 and 81 of the Cess Act and observed :
“It is contended on behalf of the plaintiff that the term net annual profits used in this section means the net annual profits of the person actually working the mine, and who or whose agent or manager has to make the return; and that it does not include royalty paid to the proprietor of the land, which stands in the same category as the ordinary expenses and outgoings connected with its working, such as boring, haulage, etc. In their Lordships judgment this contention has no substance. Schedule (E) is referred to as indicating the meaning of the words net annual profits, but it goes no further than the section itself. It is to be observed that both in section 6 and section 72 the net annual profits have reference to the property and not to the individual.”
Their Lordships thereafter examined the provisions of sections 76, 80 and 81 and observed :
“It is clear, however, that the liability for the cess lies on both occupier and owner in the case of mines, etc., as in the case of land it lies on the holders of estates or tenures and ryots, the policy of the Act evidently being that all persons, who benefit by the maintenance and construction of roads and other means of communication or works of public utility out of these cesses should bear the liability of paying the same.”
The interpretation of the provisions of the Cess Act applies with equal force to the interpretation of the provisions of the Bengal (Rural) Primary Education Act, because the latter Act adopts the former Act.
Keeping in view the above provisions of law, we have to see whether road, public works and education cesses are allowable as business expenditure under section 10 (2) (xv) of the Indian Income-tax Act. Under section 10 (1) of the Indian Income-tax Act, income-tax is payable by an assessee under the head “profits and gains of business” in respect of the profits or gains of any business carried on by him. Sub-section (2) of section 10 provides for computation of such profits or gains after allowing certain deductions. Under clause (ix) of sub-section (2), any sum paid on account of land revenue, local rates or municipal taxes in respect of such part of premises as is used for the purpose of business are allowable deductions. Under clause (xv) of sub-section (2) any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purposes of such business is an allowable deduction. Sub-section (4) of section 10, however, precludes allowance of any sum paid on account of any cess, rate of tax levied on the profits or gains of business or assessed at a proportion of or otherwise on the basis of such profits or gains.
Thus, the position is that cesses would be all allowable deductions under clause (ix) of sub section (2) or under clause (xv) of sub-section (2) of section 10, but if their character be such that they are cesses levied on the profits or gains of any business, then such deductions would not be allowed because of the prohibition contained in sub-section (4). We have, therefore, to ascertain the real character of road cess and public work cess and education cess, namely, whether they are cesses levied on profits or gains of any business.
Before we do so, we have to clear the grounds of two decisions, namely, a decision of the Privy Council in Commissioner of Income-tax v. Gurupada Dutta and an Allahabad decision in Simbholi Sugar Mills Ltd. v. Commissioner of Income-tax. We need remind ourselves that the Tribunal very strongly relied upon the Allahabad decision mentioned above. In the case of Gurupada Dutta the Privy Council had to consider whether the rate imposed under the Bengal Village Self-Government Act (Act V of 1919) was allowable as deduction in computing the profits of a business under section 10 of the Indian Income-tax Act. The Privy Council examined the provisions of sections 37, 38 and 39 and rules 1 to 3, 5, 10, and 11 framed under the Act and observed :
“It is clear that the rate is only imposed on persons who are owners or occupiers or owners and occupiers of buildings within the Union, but, in arriving at the amount to be assessed on any such person, it is provided by section 38 (1) that the assessment is to be according to the circumstances within the Union and the property within the Union, if any, of the assessee, with a maximum limit of Rs. 84 in any one year in the case of any assessee. Under section 39 the assessment for the imposition of the rate is to be made in accordance with the rules prescribed under section 101.
In order to determine under rule 3 the total assessable income of the person concerned, i.e., the income which he derives from business conducted, or from buildings or other property held within the Union, the board have before them the information prepared under rule 2, which shows the buildings occupied or owned in the Union, permanently or temporarily, and also their trade, business, etc., within the Union, and the estimated annual income which they derive from buildings or other property or business within the Union.
It will be noted that, in the absence of the necessary powers and machinery, which are not provided by the Act, the estimate of the annual income from business can only proceed on a rough guess, which is in no way comparable with the ascertainment of profits and gains under the Income-tax Act, and, in the opinion of their Lordships, the inclusion of this element of business income as part of the circumstances of the assessee with a view to the imposition of the Union rate does not fall within sub-section (4) of section 10 of the Income-tax Act. It is conceded that the Union rate is not levied on the profits or gains which clearly implies an ascertainment of such profits and gains, and the words assessed….. on the basis of any such profits or gains in the later part of the sub-section must also be so limited. No such ascertainment of the profits and gains of the business can be undertaken for the purposes of the Union rate. The main argument for the Crown therefore fails.”
For the reasons above quoted their Lordships of the Privy Council did not hold that the rate payable under the Bengal Village Self-Government Act was such as came within the mischief of sub-section (4) of section 10 of the Indian Income-tax Act. Unless, therefore, the cesses leviable under the Cess Act and the Bengal (Rural) Primary Education Cess Act are of the nature of rates leviable under the Bengal Village Self-Government Act, which are not levied on profits or gains, they will not cross the hurdle of sub-section (4) of section 10 and become allowable deductions.
Turning now to the Allahabad decision in Simbholi Sugar Mills Ltd. we find that the question for consideration was deductibility, under section 10 (2) (xv) of the Indian Income-tax Act, of a district board tax imposed under section 108 of the United Provinces District Boards Act (Act X of 1922), which reads as follows :
“…….. A Board
(a) shall, by notification in the Official Gazette impose a local rate under section 3 of the United Provinces Local Rates Act, 1914, as modified by this Act; and
(b) may continue a tax already imposed on persons assessed according to their circumstances and property…. in accordance with section 114.”
“The High Court answered the question in the affirmative and in favour of the assessee, on the following line of reasoning :
“In section 114 of the District Boards Act under which this tax was levied on the assessee-company, taxable income is defined as estimated income with some clause indicating what it not to be included in the taxable income. The word income used by the Tribunal in the appellate order must, therefore, be interpreted as meaning estimated income, which estimated income must have been worked out by the District Board in accordance with the provisions of the District Boards Act in order to assess the tax payable by the assessee company. We have looked at the District Boards Act and the rules framed thereunder and we have not been able to find any rules or provisions laid down for determining the estimated income. In fact, the rules are silent altogether as to how the income is to be estimated. There is a provision that a list of assessees with the amount of tax assessed under section 114 of the District Boards Act is to be prepared and objections are to be invited against such list before finalising the amount of tax payable but is nowhere laid down in the Act or the rules that, when such objections are filed, it would be necessary for the assessing authority to determine the actual income of the taxpayer. The income, therefore, on which tax is payable under the District Boards Act is income arrived at by pure guess-work without applying any principles for determining that estimated income. Such income cannot be said to be at all in the nature of profits and gains of the business mentioned in sub-section (4) of section 10 of the Income-tax Act.”
Unless, therefore, cesses leviable under the Cess Act and the Bengal (Rural) Primary Education Act are of the nature of District Board rates In U. P., they will not become allowable deductions and cross the prohibition in sub-section (4) of section 10.
What is then the real nature of the cesses that we have to consider ? Under section 5 of the Cess Act, all immovable properties, except those mentioned in section 2 of the Cess Act, are liable to the payment of cesses. In cases of mines, section 6 of the Cess Act provides that cesses shall be assessed on the net profits from mines, ascertained in the manner prescribed by the Act. Sections 38 and 39, read with section 6, speak of a rate annually to be determined by the State Government at which cesses may be levied. That rate is applied on the average of annual net profits for the last three years for which accounts have been made up and included in the return to be filed under section 72. Where no return has been filed or the return filed is incorrect or untrue, section 75 authorises the Collector to ascertain the net annual profit by such ways and means as to him shall be expedient. If the Collector is unable to determine under section 75, he may, by such ways and means as to him shall seem expedient, ascertain and determine the value of such property and shall determine 6% of such value to be the annual net profit. The provisions of section 6, read with section 72 and Schedule E, provided a sort of machinery for assessment of cess. The provisions in sections 75 and 76 are analogous to the provisions of best judgment assessment under the Income-tax Act. Thus cesses under the Cess Act and the Bengal (Rural) Primary Education Act, are levied on an objective basis and are not the type of ratings as under the Bengal Village Self-Government Act, 1919, or under the United Provinces District Boards Act, 1922, which merely proceed on a rough guess, in the absence of any machinery for ascertainment of profit. We are, thus, of the opinion that the Tribunal was not right in drawing inspiration from the Allahabad decision in Simbholi Sugar Mills Ltd.s case.
Dr. Pal, learned counsel for the assessee, however, contended that even if the Allahabad decision be out of the way, being distinguishable on facts, there were goods reasons why we should hold that the imposition of cess under the Cess Act or the Bengal (Rural) Primary Education Act would not fall within the mischief of section 10 (4) of the Indian Income-tax Act. His reasons are : (1) cess is a property tax and not a personal tax like income-tax levied on the total income, (2) computation of such tax is made on the annual net profit from property, calculated not on the basis of actualities but on the basis of average of three years annual profit, which was as bad as a rough guess, (3) what section 10 (4) of the Income-tax Act excepted was cess levied on profits or gains of business calculated on the basis of actual profits of gains, say, as under the Indian Income-tax Act, and not the type of profit as ascertained under the Cess Act. We are unable to uphold the reasonings of Dr. Pal. The main fallacy in his argument lies in minimising the value of average. An average is obtained by adding all the items together and dividing the sum by the number of items, as contrasted to the expression “mean”, which is the figure midway between two extremes (vide United Dairies (Wholesale) Ltd. v. Lemon per Lord Wright). An average when arrived at has a good representative value or a typical value. It is true, that under the Cess Act the annual net profit, on which cess is assessed, is not the annual net profit for the year of assessment but the average of the last three years annual profit. But, nevertheless, that is the representative annual net profit, typical of the annual net profit. That is not a rough guess. Where, however, the average even is not available, the Collector is to proceed under sections 75 and 76, according to his best judgment, which, however, is not subjective or arbitrary but has to be objectively arrived at. The words “by such ways and means as to him shall seem expedient”, mean the suitable ways and means and are controlled by the words “ascertain and determine”, used in the sections, which do not give to the Collector the liberty to proceed as he likes. Thus, the fact that the cess is levied on profits and gains of business arrived at on an average basis does not make the profits and gains a total stranger to actualities or make them notional. Such profits or gains are still the representative type of profits and gains. Then again, the fact that cess is a property tax is not a matter of consequence, so long as such tax is levied on profits and gains of business. Further, sub-section (4) of section 10 speaks of the levy of cess not only on profits or gains of business but on a proportion of or otherwise on the basis of such profits or gains. The word “otherwise”, in our opinion, is wide enough to include an average profit or gain for three years.
A case like the present one came up, in reference, before this court in Samla Collieries Ltd. v. Commissioner of Income-tax. The assessee, in that case, carried on business of coal mining, namely, working a mine and raising the coal and was assessed to road cess, public works cess and education cess. The assessee claimed deduction of the amounts paid as cesses from the computation of its income but this was disallowed because of the provisions of sub-section (4) of section 10. The question that was referred to this court was whether the cesses were allowable as deduction under section 10 (2) (ix) or section 10 (2) (xv) read with section 10 (4) of the Indian Income-tax Act. In giving a negative answer to the question Sinha J. (as he then was) observed :
“…. the assessee in this case caries on a mining business which consists of raising coal from mines and selling the same. I do not see how it can be argued that the profit which is gained by raising the coal and selling the same does not come within the provisions of the Cess Act or the Education Cess Act or is not within the ambit of sub-section (4) of section 10.
Mr. Mitter appearing on behalf of the assessee has argued that there is a subtle distinction between the profit that is gained by the process of extracting coal from a mine, which according to him, is different from the profits of the business which the mining company might carry on. I am unable to understand the distinction…..
Naturally, the computation of the profit will depend on the facts of each case. Mr. Mitters argument was, in brief that we should make a distinction between profit made by raising the coal and the profit made in the business of mining. In our opinion, there is no ground or basis for making this distinction in the facts and circumstances of this case. That being so, it seems to be clear that the profit enjoyed by the assessee as a result of the mining business was liable for the payment of cess under both the Acts mentioned above….. It is quite clear to me that the cess under the Acts has to be paid because the assessee-company carried on mining operations and enjoyed the profit. Such payments, however, are not allowable under section 10 (2) because of the provisions of sub-section (4) of section 10. If it was a kind of cess that is contemplated under clause (ix) of sub-section (2) then it would have been allowed. But since it is a cess payable on the profits or gains of any business or calculated at a proportion on the basis thereof, it is excluded by the provisions of sub-section (4) of section 10.”
It was not contended before us that the coal mining business of the assessee was making no profit. Therefore, the authority of Samla Collieries Ltd. is attracted to this case also and calls for a negative answer to the question referred to us.
Dr. Pal relied on a Supreme Court decision in Tata Iron and Steel Co. Ltd. v. State of Bihar in support of his contention that the road cess and education cess do not fall within the mischief of sub-section (4) section 10. We do not understand how the decision in any way helps him. In that case the assessee carried on mining operation by raising ores. But the operation of mining was only incidental to their main business, namely, the manufacture of iron and steel. It was argued that in such operation the Cess Act would not be applicable because no profit was gained by mere operation of mining. This contention was over ruled. It was held that although the assessee-company did not operate the mine and the ore for direct sale thereof and although the goods brought up from mines were not sold but used in the manufacture, it could not be said that there was no profit arising out of the business of mining. That profit was included in the profit otherwise enjoyed by the sale of what has been termed the “end product”. The facts involved in the case of Tata Iron and Steel Co. Ltd. are quite dissimilar to the present one. We have already observed that the assessee was not carrying on any integrated business and was not using the coal raised by it in any other business of itself. The profit that it was making was by raising coal and marketing the same. In our opinion, there is no reason to consider the complications that arose in Tata Iron and Steel Cos case, in the context of the present case.
In the view that we take, we answer the question referred to us in the negative and against the assessee.
The case was expansively argued before us, on behalf of the assessee with the ability of a finished dialectician. In view of the time consumed, we direct that the assessee shall pay costs to the Commissioner of Income-tax, which we certify for two counsel.
K. L. ROY J. – I agree.
Question answered in the negative.
