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PETITIONER: COMMISSIONER OF INCOME-TAX,WEST BENGAL

       Vs.

RESPONDENT: H. HIRJEE.

DATE OF JUDGMENT: 17/04/1953

BENCH: SASTRI, M. PATANJALI (CJ) BENCH: SASTRI, M. PATANJALI (CJ) MUKHERJEA, B.K. DAS, SUDHI RANJAN HASAN, GHULAM

CITATION:  1953 AIR  324            1953 SCR  714  CITATOR INFO :  RF         1961 SC 663  (14)  RF         1967 SC 444  (5,8)

ACT: Indian Income-tax Act (XI of 1922), s. 10 (2)  (xv)-Business expenditure-Expenses  incurred by businessman  in  defending against criminal prosecution for offence under Hoarding  and Profiteering Act-Finding of fact-When final.

HEADNOTE:    The  respondent  who carried on business  was  prosecuted under  s. 13 of the Hoarding and Profiteering  Ordinance  of 1943 on a charge of selling goods at an unreasonable  price. He was finally acquitted and claimed in his assessment for a subsequent  year  that the sum of Rs. 10,895  which  he  had spent  in  defending himself against the  charge  should  be deducted  from his income under s. 10(2)(xv) of the  Income- tax  Act  as "expenditure laid out or  expended  wholly  and exclusively  for purposes of the business".   The  Appellate Tribunal  held  that  in the absence of  any  evidence  that personal liberty was likely to be jeopardised there was only a  chance  of  his being fined, that the  object  of  saving himself  from fine was so inextricably mixed with  the  main purpose  of the defence which was solely for the purpose  of maintaining the respondent’s name as a good businessman  and also  to save his stock from being undersold, that it  could be  ignored,  and that, therefore, the claim  was  allowable under s. 10(2)(xv).  On a reference the High Court held that the finding of the Tribunal was one of fact and was  binding on it.  On further appeal: Held (i) that the finding of  the Tribunal  was  not one of fact and was not decisive  of  the reference; (ii) the finding of the Tribunal was vitiated  by its  refusal to consider the possibility of the  prosecution ending  in  a sentence of imprisonment and throwing  on  the Income-tax   authorities  the  burden  to  prove  that   the prosecution  might  result  in  his  imprisonment;  and  the finding was not therefore binding on the Court; (iii) in any event,  the expenses could not be said to be  "  expenditure laid out or expended wholly and exclusively for the purposes of the business" within s. 10(2)(xv) of the Act.

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 Legal expenses incurred in civil litigation &rising out of matters incidental to the carrying on of a business stand on a  different  footing as in such a case  no  question  could arise  as to the primary or secondary purpose for which  the expenses could be said to have been incurred.   The  deductibility of such expenses under s. lO  (2)  (xv) must  depend  on  the  nature  and  purpose  of  the   legal proceeding and not                             715 on  the  final  outcome  of  it  and  a  distinction  cannot therefore  be  drawn between expenses of  a  successful  and unsuccessful defence for purposes of s. 10 (2) (xv).    J.   B. Advani v. Commissioner of Income-tax  ([1950]  18 I.T.R.  557)  referred to.  Commissioner  of  Income-tax  v. Maharajadhiraj  of  Darbhanga  ([1942] L.  R.  69  I.A.  15) distinguished.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 75 of 1952.   Appeal  from  the  Judgment  and  Order  dated  the  16th January,  1951, of the High Court of Judicature at  Calcutta (Harries  C.J. and Banerjee J.) in Income-tax Reference  No. 46 of 1950.  C.   K. Daphtary,  Solicitor-General  for  India  (G.   N. Joshi   with hum) for the appellant Joshi with him   N.     C.  Chatterjee (P.  K.  Sen Gupta, with  him)  for the respondent. 1953.  April 17.  The Judgment of the Court was delivered by   PATANJALI  SASTRI C.J.-This is an appeal from a  judgment of  the  High Court of Judicature at  Calcutta  answering  a reference  under section 66-A of the Indian Income-tax  Act, 1922  (hereinafter referred to as the Act) in favour of  the respondent herein.   The  respondent carries on business as selling agents  of the  Bengal  Potteries  Ltd., and he  was  prosecuted  under section  13  of the Hoarding,  and  Profiteering  Ordinance, 1943,  (Ordinance No. XXXV of 1943) on a charge  of  selling goods at prices higher than were reasonable in contravention of  the provisions of section 6 thereof.  It  appears  that, before  the  prosecution  was  launched  in  August,   1944, respondent’s  business premises were searched and a part  of his  stock  was  seized  and  taken  away.   The  respondent defended  the  case, spending a sum of Rs. 10,895,  and  the prosecution ended in an acquittal on February 16, 1945.   In his  assessment  to  income-tax for the  year  1945-46,  the respondent  claimed  the deduction of the Said  sum  of  Rs. 10,895 from the profits of his business under section  10(2) (xv) of the Act.  The Income-tax Officer 93 716 disallowed  the  claim  but  the  Appellate  Assistant   Com missioner allowed it, and his decision was confirmed  by the Income-tax  Appellate Tribunal, Calcutta Bench.   Thereupon, the Commissioner of Income-tax, West Bengal, applied to  the Tribunal  to  state a case for decision by  the  High  Court under section 66-A of the Act, and the Tribunal  accordingly referred  the  following  question to  that  Court  for  its decision   Whether  in the circumstances of this case  the  Tribunal was  right  in holding that the sum of Rs. 10,895  spent  in defending  the criminal,proceeding was an  expenditure  laid out  or expended wholly and exclusively for the ’purpose  of business as contemplated by section 10(2) (xv) of the Indian

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Income-tax Act ?  In  dismissing  the  appeal preferred  by  the  Income-tax Officer, the Tribunal observed:  "It  may  be  stated straight off that  it  has  not  been established  by  any material that the conviction  in  cases like  this  may  end in  imprisonment.   The  question  that personal liberty was likely to be jeopardised therefore will not  be considered by us.................. In any  case,  in the  absence  of any material in this particular  case  that personal  liberty was likely to be jeopardised, all that  we can  say is that there was a chance of conviction  in  which the respondent might have been fined.  No doubt, the element of saving himself from the fine, if any, might be there, but it is so inextricably mixed up with the main purpose for the defence that we are prepared to ignore that little  element. In  our opinion, the defence was solely for the  purpose  of maintaining his name as a good businessman and also to  save his  stock from being undersold if the Court held  that  the prices charged by the respondent were unreasonable."  In  the  order made on the reference Harries C.  J.  (with whom Banerjee J. concurred) remarked:  "In  every  criminal  prosecution  where  the  matter   is defended  to  protect  the good name of  a  business  or  -a professional man, the fear of possible fine or 717 imprisonment  must always be there.  But the  Tribunal  have pointed out that this was so inextricably mixed up with  the protection of the good name of the business that it can well be  found that the -money’ spent in defence in the  criminal prosecution wag spent solely and exclusively for the purpose of  the business.  The finding is a finding of fact  and  is binding upon us."  The  learned Judges proceeded to refer to a ruling of  the Bombay  High Court J.  B. Advani v. Commissioner of  Income- tax(1)-and held that the respondent satisfied both the tests laid down there as applicable in such cases : He was charged with  regard  to  a  transaction which  took  place  in  the ordinary  course  of  business and he  was  charged  in  his capacity  as a trader.  "If these two tests  were  satisfied and the Court came to the conclusion that the primary object of incurring the expenditure was to protect the good name of business,  then  it could be said that the  expenditure  was wholly  and exclusively for the purposes of  the  business". The   learned  Judges  accordingly  answered  the   question referred to them in the affirmative.  They, however, granted a  certificate  under section 66-A (2) of the Act  that  the case is a fit one for appeal to this Court.  We  are unable to agree that the finding of the  Tribunal, to which reference has been made, is binding on the Court as a  finding  of fact and is decisive of the  reference.   The finding  of  the  Tribunal is vitiated  by  its  refusal  to consider   the  possibility  of  the   criminal   proceeding terminating  in  the  conviction  and  imprisonment  of  the respondent.    As  has  been  stated,  the  respondent   was prosecuted   under  section  13  which  provides:   "Whoever contravenes  the  provisions  of  this  Ordinance  shall  be punishable with imprisonment for a term which may extend  to five  years or with fine or with both." The  respondent  was charged  with contravention of section 6, which by  sub-sec- tion  (1) prohibits the sale by a dealer or producer  of  an article for a consideration which is unreasonable (1)  [1950] is I.T.R. 557. 718 and  sub-Section (2) defines  "unreasonable  consideration". The  framers of the Ordinance thus appear to  have  regarded

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the  offence  as one calling for a deterrent  punishment  in view of its antisocial character, and it is idle to  suggest that  it is for the Income-tax authorities to prove in  such cases  that  the conviction might result in  a  sentence  of imprisonment  and that$ in the absence of such proof,  there was, at the most, only a chance of conviction and fine.   We cannot appreciate the remark that "even this chance of  con- viction and fine was so inextricably mixed up with the  main purpose of the defence that it could, be ignored." A finding arrived  at on this line of reasoning is obviously  vitiated by a serious misapprehension regarding the risk involved  in a prosecution under the Ordinance and it cannot be  regarded as binding on the Court in dealing with the reference.   If, as  the High Court realised, in every  criminal  prosecution where  the matter is defended to protect the good name of  a business or a professional man, the fear of possible fine or imprisonment  must  always be there, it must  ordinarily  be difficult  for any Court to say, that the expenses  incurred for the defence, -even if they are not to be regarded as the "personal  expenses"  of  the  person  accused,  constituted "expenditure laid out or expended wholly and exclusively for the  purposes  of the business".  Learned  counsel  for  the respondent  frankly admitted that he was not able to find  a single  case in the books where the expenses incurred by,  a person  exercising  a  trade or profession  in  defending  a criminal  prosecution, which arises out of his  business  or professional activities, were allowed to be deducted in  the assessment of his profits or gains for income-tax purposes.  Reference  was made in the course of argument to  numerous cases  where  legal expenses incurred in  civil  litigation, arising  out, of matters incidental to the carrying on of  a business, were allowed as, a deduction in the computation of its-profits,     e.g.Commissioner    of    Income-tax     v. Maharajadhiraj  of Darbhanga(1), where (1)  (1942) L.R. 69 I.A. 15. 719 the  Privy  Council  held  that  law  charges  incurred   in defending  an  action  brought against  a  money-lender  for damages  for  conspiracy, misrepresentation  and  breach  of contract to advance sufficient funds to finance e a  company were  allowable as business expenditure.  In that  class  of case, no question could arise as to the primary or secondary purpose  for which the legal expenses could be said to  have been incurred as in the case of a criminal prosecution where the defence cannot easily be dissociated from the purpose of saving  the  accused person from a possible  conviction  and imposition of the prescribed penalty.  Nor are we satisfied, -as  at  present advised, that a distinction  drawn  in  the Bombay  case(1) between the legal expenses of  a  successful and  unsuccessful  defence is sound.  The  deductibility  of such  expenses under, section 10(2) (xv) must depend on  the nature  and purpose of the legal proceeding in  relation  to the business whose profits are under computation, and cannot be  affected  by  the  final  outcome  of  that  proceeding. Income-tax  assessments have to be-made for every  year  and cannot  be  held  up  until the  final  result  of  a  legal proceeding,  which  may  pass  through  several  courts,  is announced.  For  the reasons indicated we allow the appeal and  answer the  question referred in the negative.  The appellant  will be entitled to his costs both here and in the Court below.                                    Appeal allowed. ’Agent for the appellant: G. B. Rajadhyaksha. Agent for the respondent: S.     C. Banerjee. (1) [1950] 18 I.T.R. 557.

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