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PETITIONER: COMMISSIONER OF INCOME TAX, WEST BENGAL

       Vs.

RESPONDENT: BIRLA COTTON SPINNING & WEAVING MILLS LTD.& ORS.

DATE OF JUDGMENT17/08/1971

BENCH: GROVER, A.N. BENCH: GROVER, A.N. HEGDE, K.S.

CITATION:  1972 AIR   19            1972 SCR  (1) 283  1973 SCC  (3) 344  CITATOR INFO :  R          1972 SC  23  (7)  F          1974 SC1366  (7)

ACT: Indian  Income-tax Act (11 of 1922), s. 10(2)(xv)--’For  the purpose  of  business’, scope  of-Expenses  incurred  before Investigation Commission-Whether deductible.

HEADNOTE: The  assessee,  a  public limited  company,  incurred  legal expenses  for  representing its case before  the  Income-tax Investigation   Commission,   ?he  proceeding   before   the Commission  was  a  statutory  proceeding  with  a  view  to collecting  materials for more taxation.  The expenses  were claimed by the assessee as a deduction under s.10(2)(xv)  of the Income tax Act, 1922.  The Income tax Officer, Appellate Assistant  Commissioner  and  the  Tribunal  disallowed  the claim,  but the High Court, on reference, held in favour  of the assessee. Dismissing the appeal to this Court, HELD:     The  expression ’for the purpose of the  business’ in  s.  10(2)(xv)  is wider than  the  expression  ’for  the purpose  of earning profits’.  The former covers,  not  only the  running of the business or its administration but  also measures for the preservation of the business and protection of  its  assets and property.  The test  under  the  section therefore is whether the expenses were actually and honestly incurred   for  the  preservation  and  protection  of   the assessee’s  business from any process or  proceedings  which might  have  resulted  in the reduction of  its  income  and profits. [286 G-H, 288D] The  earning  of profits and the payment of  taxes  are  not isolated  and independent activities of a business, but  are continuous and take place from year to year during the whole period  for which the business continues.  If  the  assessee takes  any  steps for reducing its liability  to  tax  which result in more funds being left for the purpose of  carrying on  the  business there is always a  possibility  of  higher profits.   Therefore, expenditure which was incurred by  the assessee  in opposing a coercive governmental  action,  with the  object of saving taxation and  safeguarding  business,, was  justified  by  commercial expediency  and  was,  hence,

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allowable under s.10(2)(xv) of the Act. [288 E-H., 289A-F] Travancore Titanium Product Ltd., v. Commissioner of Income- tax  Kerala, 60 I.T.R. 277(S.C.) and Smith’s  Potato  Estate Ltd. v. Bolland, 30 T.C. 267, referred to. C.T. Calcutta v. Calcutta Landing and Shipping Co. 77 I.T.R. 575  and  Bansilal Abirchand Spinning and Weaving  Mills  v. C.T. Poona, 81 I.T.R. 34, approved. 28 4

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  1351  to 1353, 1897 and 1241 of 1968. Appeals from the judgments and orders dated March, 3,  1967, February  9,  1968 and June 28, 1967 of  the  Calcutta  High Court in Income-tax Reference Nos. 136 of 1962, 154 of  1964 and 54 of 1963 respectively. Jagdish  Swarup,  Solicitor-General,  S.  T.  Desai,  S.  K. Aiyar,  R. N. Sachthey and B. D. Sharma, for  the  appellant (in C. As.  Nos. 1241 and 1351 to 1353 of 1968) B.   B.  Ahuja,  R.  N. Sachthey and B. D.  Sharma  for  the appellant in C. A. No. 1897 of 1968). B.   Sen, A. C. Mitra, N. R. Khaitan, O. P. Khaitan, B.   P.  Maheshwari and Krishna Sen, for respondent  (in  C. As.  Nos. 1351 to 1353 and 1897 of 1968). Krishna Sen, N. R. Khaitan, O. P. Khaitan and B.  P. Maheshwari, for respondent (in C.A. No. 1241 of   1968.) The Judgment of the Court was delivered by Grover,  J.  These appeals from a judgment of  the  Calcutta High Court have been brought by certificate under S. 66A (2) of  the Indian Income tax Act, 1922, hereinafter called  the ’Act’ and involve a common question, namely, whether the law charges  incurred in connection with the proceedings  before the Investigation Commission were an allowable deduction  in computation of the profits of the business of the assessee. The  facts in the first batch of appeals i.e. C.  As.  1351- 1353/68 may be stated.  During the assessment years 1952-53, 1953-54 and 1954-55 the assessee, which is a public  limited company, spent Rs. 3810/-, 1,42,377/- and Rs. 2,42,688/- for representing  its case before the  Investigation  Commission relating  to the past assessment years 1941-42  to  1947-48. These expenses which were termed as "general expenses"  were claimed by the assessee as deduction under s. 10 (2) (xv) or in  the  alternative under S. 10 (1) of the Income  tax  Act 1922, hereinafter called the ’Act’.  The Income tax  Officer disallowed the claim.  His order was upheld by the Appellate Assistant Commissioner and the  285 Appellate  Tribunal.   Thereupon  the  assessee  moved   the Tribunal  under s. 66 (1) of the Act to state the  case  and refer  the  question of law arising out of its  order.   The Tribunal  submitted  a  common statement  of  the  case  and referred the following question to the High Court :-               "Whether on the facts and in the circumstances               of the case the Tribunal was right in  holding               that  the law charges incurred  in  connection               with the proceedings before the  Investigation               Commission  were not allowable  deductions  in               computation  of  the profits of  the  business               either under s. 10 (1) or under 10 (2) (xv) of               the Income tax Act, 1922?" The  High  Court held that the expenditure incurred  by  the assessee  in  opposing an illegal  and  coercive  government action  with the object of saving taxation and  safeguarding

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the business was justified by commercial expediency and  was an allowable expenditure. It  is necessary at this stage to notice the purpose of  the Taxation  of  Income (Investigation ’Commission)  Act  1947, hereinafter  called  the ’Investigation Commission  Act’  as also some of its relevant provisions.  That Act was  enacted for the purpose of ascertaining whether the actual incidence of  taxation on income was and had been in recent  years  in accordance  with  the provisions of law and  the  extent  to which the existing law and procedure for the assessment  and recovery  of  such  taxation was  adequate  to  prevent  the evasion thereof and to make provision for investigation into such matters.  Section 5 (1) conferred power on the  Central Government  to  refer  particular cases  or  points  to  the Commission  for investigation and report if  the  Government was  of the opinion that there had been substantial  evasion of payment of income tax in such cases.  If in the course of investigation  the  Commission had reasons to  believe  that some  person  other  than  the  one  whose  case  was  being investigated   had  avoided  payment  of  income   tax   the Commission was authorised under sub-s. (4) of s. 5 to report to   the  Central  Government.   The  ultimate   object   of investigation was collection of material showing evasion  of tax  so  that  the  avoided income  could  be  subjected  to taxation and penalties imposed for evasion. 286 Section  5  (1)  ’of the Investigation  Commission  Act  was struck  down  by  this Court as  unconstitutional  in  Shree Meenakshi  Mills  Ltd.,  Madurai  &  Others  v.  Sri  A.  V. Visvanatha  Sastri  & Another(1).  Similarly S.  5  (4)  was declared to be void and unconstitutional in Surajmial  Mohta & Co. v. A. V. Visvanatha & Another.(2) As a result of investigation into the affairs of Birla group of  concerns  the case of the assessee was referred  to  the Commission while it was functioning for investigation.   The assessee  engaged eminent lawyers and incurred the  expenses in question in conducting appropriate proceedings before the Commission  as  also  in  courts  where  the  vires  of  the aforesaid Investigation Commission Act were challenged. Sub-section (1) of S. 1-0 of the Act provides that tax shall be payable by the assessee under the head profits and  gains of  business,  profession  or vocation  in  respect  of  the profits  and gains of any business, profession  or  vocation carried on by him.  Among the allowances which are not to be included in the computation of such profits and gains it  is provided by sub.  S. (2) (xv) of S. 10 as follows S    10 (2) (xv)               "  any expenditure not being an  allowance  of               the nature described in any of the clauses (i)               to  (xiv) inclusive, and not being 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,". The  expression  "for  the  purpose  of  the  business"   is essentially  wider than the expression "for the  purpose  of earning  profits".   It covers not only the running  of  the business  or  its administration but also measures  for  the Preservation  of the business and protection of  its  assets and  property.   It may legitimately comprehend  many  other acts  incidental  to  the carrying on of  the  business.  In Travancore  Titanium Product Ltd. v. Commissioner of  Income Tax, Kerala(3) the position relating to expenditure (1) 26 I.T.R. 713. (2) 26 I.T.R. I

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(3)  60 I.T.R. 277, 282. 287 which  can be deducted under s. 10 (2) (xv) of the  Act  was summarised thus               "The  nature  of the expenditure  or  outgoing               must  be  adjudged in the  light  of  accepted               commercial  practice and  trading  principles.               The  expenditure  must be incidential  to  the               business and must be necessitated or justified               by commercial expediency.  It must be directly               and intimately connected with the business and               be  laid out by the taxpayer in his  character               as  a trader.  To be a permissible  deduction,               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  is  well settled by now that the  deductibility  of  ex- penditure  incurred in prosecuting the civil proceedings  to resist  the enforcement of a measure, legislative or  execu- tive, which means restriction on the carrying on of a  busi- ness  or  to  obtain  a  declaration  that  the  measure  is invalid,.  would,  if  other conditions  are  satisfied,  be admissible   as   a  deduction  under  s.   10   (2)   (xv). Deductibility  of  such expenditure does not depend  on  the final outcome of those proceedings.  However,  wrong-headed, ill-advised,  unduly  optimistic or over  confident  in  his conviction  the  assessee might appear in the light  of  the ultimate  decision,  expenditure  in  prosecuting  a   civil proceeding cannot be denied as a permissible deduction if it is reasonably and honestly incurred to promote the  interest of   the  business.  (See  Sree  Meenakshi  Mills  Ltd.   v. Commissioner of Income,  Madras. (1) The  point which has presented some difficulty at  least  in the  English courts is whether the expenditure  incurred  by the  trader  in  fighting the Revenue’s  assessment  can  be regarded an allowable expenditure.  In Smith’s Potato Estate Ltd. v. Bolland (2) expenses had been incurred in filling an appeal  against the decision of the Commissioners of  Inland Revenue  to the Board of Referees, in the matter of  certain expenditure  which  had been claimed by the assessee  as  an allowable deduction.  It was. held by the majority (Viscount Simon and Lord Oaksey dissenting (1) 63 I.T.R. 207.                 (2) 30 T.C. 267. 28 8 that  the  expenditure was not an  allowable  deduction  for income  tax and excess profits tax purposes.  The  basis  of the view of the majority was that the expenses on the  liti- gation undertaken for the purpose of reducing the amount  of tax payable was not incurred by a trader for the purpose  of his  trade but partly atleast for the purpose of  his  rela- tionship  to  the  crown  as  a  tax-payer.   Therefore  the expenditure  was not wholly and exclusively for the  purpose of the trade.  Viscount Simon and Lord Oaksey, who took  the contrary   view,   considered  that  attention   should   be concentrated  on the statutory words that litigation  under- taken for the purpose of reducing the amount of tax  payable was  undertaken "wholly and exclusively" for the purpose  of the  trade  in  that  the reduction in  the  amount  of  tax increased  the traders’ monetary resources and  so  promoted the carrying on of the trade and the earning of the  trading profits. (See also Simon’s Income tax, Second Edition,  Vol. 2, pages 216-217).  In Commissioner of Income tax,  Calcutta

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v.  Calcutta  Landing & Shipping Co. Ltd. (1)  the  Calcutta High  Court has sought to distinguish the language of S.  10 (2)  (xv) from that of the provisions in the English  Income tax  law  and has given weighty reasons  for  accepting  the opinion  of  Viscount Simon and Lord  Oaksey,  particularly, because  of the observations of this Court in the  decisions which we have already noticed.  The above case was  followed by  a Full Bench of the Bombay High Court in R. B.  Bansilal Abirchand Spinning & Weaving Mills v. Commissioner of Income tax, Poona(1). Learned  counsel  for  the  Revenue  has  relied  upon   the observations extracted at an earlier stage from the case  of Travancore  Titanium  Products Ltd(1) and  has  argued  that there  must be a direct and intimate connection between  the expenditure  of the business, i.e. between  the  expenditure and the character of the assessee as a trader and not as  an owner  of  assets.  We are unable to  appreciate  how  these observations which were made in the light of different facts in  any way militate against the view of Viscount Simon  and Lord  Oaksey  in  Smith Potato Estate case(4)  as  also  the decision of the Calcutta High Court- in Calcuutta Landing  & Shipping Co.. case(1).  It may be pointed out that in the ,(1) 77 I.T.R. 575.             (2) 81 I.T.R. 34. (3) 60 I.T.R. 277.              (4) 30 T.C. 267.  289 decision relied upon by the Revenue the question was whether the  tax  imposed under the Wealth Tax Act on the  owner  of assets was a permissible deduction under S. 1.0 (2) (xv)  of the Act.  It was emphasised by this Court that the charge of the tax was the same whether the assets were part of or used in  the  trading Organisation of the owner  or  were  merely owned  by  him.   The  assets  of  the  bay  payer   whether incorporated  or not became chargeable to tax  because  they were  owned by him and not because they were used by him  in the  business.  The position is quite different when it  has to be decided whether an allowance contemplated in s. 10 (2) (xv) is deductible. The  essential test which has to be applied is  whether  the expenses  were incurred for the preservation and  protection of  the  assessee’s  business  from  any  such  process   or proceedings  which might have resulted in the  reduction  of its income and profits and whether the same were actually an honestly incurred.  It is not possible to understand how the expenditure  on the proceedings in respect of  the  Investi- gation  Commission by the assessee will not fall within  the above rule.  Even otherwise the expenditure was  incidential to  the  business  and  was  necessitated  or  justified  by commercial  expediency.   It  must be  remembered  that  the earning of profits and the payment of taxes are not isolated and independent activities of a business.  These  activities are  continuous and take place from year to year during  the whole  period  for  which the business  continues.   If  the assessee  takes any steps for reducing its liability to  tax which  result  in more funds being left for the  purpose  of carrying  on the business there is always a  possibility  of higher  profits.   To give an illustration, if  an  assessee can,  by an appropriate proceedings, succeed in getting  its tax liability for gains and profits reduced by a sum of  Rs. 1,00,000/- that amount will essentially become available for the  purpose  of business with a reasonable  expectation  of more  profits.  As was observed by Viscount Simon  in  Smith Potato  Estate  case(1)  if the trader  considers  that  the Revenue  seeks  to take too large a share and to  leave  him with  too little the expenditure which the trader incurs  in endeavoring  to correct this mistake is a disbursement  laid

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out  for the purposes of his trade.  If he succeeds he  will have more money with which to earn profits next year. (1)  30 T. C. 267. 290 The  High  Court  in  the judgment  under  appeal,  after  a discussion  of the relevant case law, approached the  matter in  this  way.   The  proceeding  before  the  Investigation Commission is not a civil proceeding; but it is a  statutory proceeding  with  a view to collecting  materials  for  more taxation.  Therefore if the proceeding touched the  business of  assessee  the expenditure incurred by  the  assessee  in safeguarding its interest before the Commission would be  an allowable deduction.  It was pointed out-and this was  based on  the  material  on the  record-that  the  Commission  was holding an investigation on a suspected escapement of income to  the  tune of about Rs. 4 cores.  Taxes  levied  on  that income  and the penalties imposed would naturally have  been very  heavy for the business of the assessee and might  have either crippled or annihilated it.  To preserve the business from an investigation which, according to the assessee,  was unlawful  the assessee was justified in taking proper  steps and spending monies therefor.  Such an expenditure ’was  not for  earning  profits  but  was  aimed  at  preservation  of business  from the inroads of a piece of legislation  which, it  was maintained, was unconstitutional and was so held  by this Court later in certain decisions that have already been mentioned.   The  expenditure  which  was  incurred  by  the assessee in opposing a coercive governmental action with the object  of  saving taxation and  safeguarding  business  was justified  by  commercial  expediency  and  was,  therefore, allowable  under S. 10 (2) (xv) of the Act.We have no  doubt that  the above approach of the High Court and its  ultimate decision were fully justified on principle and authority. In the result all these appeals fail and are dismissed.  But the respondent will be entitled to costs only in C. As.  135 1-1353/68.  One hearing fee. V.P.S.            Appeals  dismissed. 29 1