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PETITIONER: SHREE MEENAKSHI MILLS LTD., MADURAI

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, MADRAS

DATE OF JUDGMENT: 19/09/1966

BENCH: SHAH, J.C. BENCH: SHAH, J.C. BHARGAVA, VISHISHTHA

CITATION:  1967 AIR  444            1967 SCR  (1) 392  CITATOR INFO :  RF         1971 SC2129  (7)  R          1972 SC  19  (6)

ACT: Income-tax Act, 1922 (11 of 1922), s.  10(2)(xv)-Expenditure in  curred for proceedings to prevent enforcement  of  order interfering with business-It admissible deduction.

HEADNOTE: The  assessee-mill claimed deduction under s. 10(2) (xv)  of the Indian Income-tax Act of the expenses incurred by it and the  costs awarded to Government in respect of  unsuccessful writ  petition  and appeals therefrom.   The  deduction  was disallowed by the departmental authorities, and the question was  answered against the assessee  by the High  Court.   In appeals to this Court. HELD: The appeal must be allowed. The  proceeding started by the assessee was in  relation  to the business of the assessee. Expenditure  incurred  to resist in a civil  proceeding  the enforcement  of  a measure-legislative or  executive,  which imposes restrictions on the carrying on of a business or  to obtain a declaration that the measure is invalid would..  if other conditions are satisfied, be admissible under s. 10(2) (xv)  as  a  permissible deduction  in  the  computation  of taxable  income,  even  though  the  expenditure  does   not directly  relate to the earning of income.  Expenditure  may not  be  denied  admission as  a  permissible  deduction  in computing  the taxable income merely because the  proceeding has  failed.  Persistence of the assessee in  launching  the proceeding and carrying it from Court to Court and incurring expenditure  for that purpose again cannot be a  ground  for disallowing the claim. (396 B-C; 399 B) Commissioner  of  Income-tax, West Bengal v.  H.  Hirjee  23 I.T.R- 427, Morgan (Inspector of Taxes) v. Tate & Lyle  Ltd. 26 I.T.R. 195 : 35 T.C. 367 and Commissioner of  Income-tax, Kerala v. Malayalam Plantations Ltd., (196 HI 7 S.C.R.  693, referred to.

JUDGMENT:

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CIVIL  APPELLATE JURISDICTION: Civil Appeals Nos. 557 &  558 of 1965, Appeal  by special leave from the judgment and  order  dated September 19, 1962 of the High Court of Judicature at Madras (in Tax Case No. 87 of 1960). R.   Ganapathy lyer, for the appellant. R.   M. Hazarnavis and R. N. Sachthey, for the respondent. The Judgment of the Court was delivered by Shah,  J.-Sree Meenakshi Mills Ltd.-a  company  incorporated under the Indian Companies Act with its registered office at Madurai carries on business of cotton spinning and  weaving. In  the  premises "of the factory of the Company  there  are installed 80 handloorns                             393 These handlooms were found inadequate to weave the yarn pro- duced  by  the factory and a part of the yarn  produced  was distributed to weavers outside the factory who were  engaged by the Company to weave the yarn into cloth.  Under cl. 18-B of the Cotton Cloth and Yarn (Control), Order, 1945,  issued by  the  Government of India, the Textile  Commissioner  was authorized  to  direct ally manufacturer or  dealer  or  any class  of manufacturers or dealers, inter alia, not to  sell or deliver any yarn or cloth of specified description except to such person or persons and subject to such conditions  as the Textile Commissioner may specify.  On February 7,  1946, the  Textile  Commissioner  issued an  order  directing  the Company not to sell or deliver any yarn manufactured by  the Company  except  to such person or persons  as  the  Textile Commissioner may specify.  It was recited in the order  that "nothing  in  this Order shall apply to a sale  or  delivery made, in pursuance of clause 18-A of the said order, to  any dealer  in  yarn not engaged in the production of  cloth  on handlooms or powerless".  The Company addressed a letter  on February  13,  1946 to the Textile  Commissioner  submitting that  the prohibition in general terms was ultra  wires  the authority  conferred by the Cotton Cloth and Yarn  (Control) Order.    The   Company   continued   notwithstanding    the prohibition  to  deliver  yarn to weavers and  did  so  till February 20, 1946.  This yarn was seized under the orders of the   Textile  Commissioner.   On  February   20,1946,   the Provincial  Textile  Commissioner,  purporting  to  act   in exercise  of authority conferred upon him by a  notification issued by the Government of India, issued an order addressed to the Company that:               "You should accordingly confine your  delivery               to the categories of persons notified below:-               (a)   Licensed  yarn  dealers  (in  accordance               with the said 18-A of the Control Order).               (b)   to consumers who purchased yarn directly               from  you during the basic period 1940-42  (in               accordance  with my circular letter dated  4th               January 1946 referred to above).               (c)   your  handloom factory situated  in  the               premises  of  your Mill at Madurai  (just  the               quantity of yam required).               "Note:-Any other delivery of yarn by you which               is   not  covered  by  a  special   order   or               permission of the Textile Control  Authorities               will  accordingly  be a contravention  of  the               Textile Commissioner’s order under clause 18-B               referred to above." After this order was issued, the Company did not deliver any yarn to weavers. On March 4, 1946 the Company filed a petition for a writ  of nandamus  in  the High Court of Madras under s.  45  of  the

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Specific 394 Relief  Act  praying for an order directing  the  Provincial Textile Commissioner, Madras to desist from seizing the yarn supplied to the weavers at or around Madurai and Rajapalayam for  the  purpose of converting the yarn  belonging  to  the Company  into cloth; to restore to the Company or to  direct the Provincial Textile Commissioner and his subordinates  to restore the yam already seized; and to forbear from  seizing or  to  direct the subordinates of  the  Provincial  Textile Commissioner  to forbear from seizing the yarn that  may  be entrusted to the weavers by the Company in the -usual course of business according to the practice already obtaining  for conversion into cloth.  This petition was dismissed by Kunhi Raman, J, and the order of dismissal was confirmed in appeal by the High Court.  The matter was then carried in appeal to the  Privy  Council.  The Judicial Committee  dismissed  the appeal  filed by the Company.  They held, agreeing with  the High  Court, that the expression "deliver" in cl. 18-B  sub- cl. 1(b) of the Cotton Cloth and Yarn (Control) Order, 1945, is  used  in  its  ordinary  broad  sense  of  handing  over possession, as distinct from passing of property, and  would include  delivery of possession to a  bailer.   Accordingly, delivery  of  part of its yarn by the Company to  owners  of handlooms  outside the mill premises for conversion  of  the yarn into cloth for the Company was in contravention of  the order  made under cl. 18-B sub. cl. (1) (b).   The  Judicial Committee  also  held  that a petition under S.  45  of  the Specific Relief Act, 1877, directing the Provincial  Textile Commissioner to desist from seizing the yam supplied to  the weavers  and  to  restore to the Company  the  yarn  already seized  was  incompetent  as the acts in  respect  of  which relief  was asked for took place outside the limits  of  the ordinary original civil jurisdiction of the High Court. The  Company spent Rs. 20,035/- in prosecuting the  proceed- ings under s. 45 of the Specific Relief Act and had also  to pay   Rs.  5,912/-  as  costs  to  the  Government  of   the unsuccessful  appeal  to  the Judicial  Committee.   In  its returns  of  income  the Company claimed  deduction  of  the amounts  of Rs. 20,035/- and Rs., 5,9121/for the  assessment years 1949-50 and 1950-51 respectively as being  expenditure wholly  and  exclusively  laid out for the  purpose  of  its business.   The  claims were rejected  by  the  departmental authorities, and by the Income-tax Appellate Tribunal.   The Tribunal  then referred the following question to  the  High Court of Judicature at Madras :               "Whether the expenses of Rs. 20,035/- incurred               in the assessment year 1949-50 and Rs. 5,912/-               (relating  to  the assessment year  1950-5  1)               being the cost paid to Government as  directed               by the Privy Council were expenses incurred in               the ordinary course of business and  allowable               as deductions?" 395 The question as framed is somewhat vague.  But it is  common ground  that  the Company claimed deduction under  s.  10(2) (xv) of the Indian Income-tax.Act, 1.922 on the footing that the two amounts represented expenditure laid out wholly and, exclusively by the Company for the purpose of its  business. The High Court answered the question in the negative.  ’With special leave, the Company has appealed to this Court. The  Tribunal has found that after the order dated  February 20, 1946 was issued, the Company did not deliver yarn to any weaver. it is recited in the judgment of the Tribunal that a "correct  order  by the proper authorities  was  passed"  on

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February  20,  1946  and, thereafter  the  Company  did  not distribute  any yarn to weavers.  The averments made by  the Company  in the petition under s. 45 of the Specific  Relief Act,  are somewhat involved, but in substance the  claim  of the Company was that the Provincial Textile Commissioner was incompetent to pass the order dated February 20, 1946  which placed  restrictions on the business of the Company and  the order  was  "likely to cause irreparable  and  irretrievable injury",  and it was prayed that an order do issue under  s. 45  of  the Specific Relief Act restraining  the  Provincial Textile  Commissioner  from  enforcing  the  order  and  the Textile Commissioner be prohibited by an order from  seizing the yarn delivered to the weavers outside the factory and be further  ordered  to restore the yarn  already  seized.   No clear  averment was made in the petition about the  date  on which  the yarn seized had been delivered by the Company  to the weavers. This  petition  failed,  because  the  High  Court  had   no jurisdiction to entertain the petition, and also because the expression  "deliver" used in cl. 18-B of the Control  Order included  handing  over of yarn to the weavers  outside  the premises  of  the factory for conversion  into  cloth.   But expenditure  incurred  in  prosecuting  a  civil  proceeding relating  to  the business of an assessee is  admissible  as expenditure laid out wholly and exclusively for the  purpose of  the business even if the proceeding is  decided  against the assessee.  It was held by this Court in Commissioner  of Income-Tax,   West   Bengal  v.  H.   Hirjee(1)   that   the deductibility of expenditure under s. 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.   The proceeding started by the Company  was  in relation  to the business of the Company.  The  Company  was thereby seeking relief against interference by the executive authorities in the conduct of its business in the manner  in which  it  was  being carried on previously.   It  was  also seeking  to  obtain an order for restoration  of  its  goods which were seized.  It may be (1) [1953] S.C.R. 714 : 23  I.T.R. 427. M15Sup CI/66 12 396 granted  that the Company was, in starting  the  proceeding, ill-advised.    However  wrongheaded,  ill-advised,   unduly optimistic, or overconfident in his conviction the  assessee may   appear  in  the  light  of  the   ultimate   decision, expenditure  in starting and prosecuting the proceeding  may not  be  denied  admission as  a  permissible  deduction  in computing the taxable income, merely because the  proceeding has failed, if otherwise the expenditure is laid out for the purpose  of  the  business  wholly  and  exclusively,   i.e. reasonably and honestly incurred to promote the interest  of the business.  Persistence of the assessee in launching  the proceeding and carrying it from Court to Court and incurring expenditure  for that purpose again cannot be a  ground  for disallowing the claim. Under  s. 10(2)(xv) of the Indian Income-tax Act as  amended by  Act  7  of 1939 expenditure  even  though  not  directly related to the earning of income may still be admissible  as a  deduction.  Expenditure on civil litigation commenced  or carried  on  by an assessee for protecting the  business  is admissible  as  expenditure under s.  10(2)  ((xv)  provided other conditions are fulfilled, even though the  expenditure does not directly relate to the earning of income.  Expendi- ture  incurred  not  with a view  to  direct  and  immediate

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benefit for -purposes of commercial expediency and in  order indirectly to facilitate the carrying on of the business  is therefore  expenditure laid out wholly and  exclusively  for the  purposes of the trade.  In Morgan (Inspector of  Taxes) v.  Tate  &  Lyle  Ltd.(1) the  House  of  Lords  held  that expenditure   incurred  by  a  Company  engaged  in   :sugar refining, in a propaganda campaign to oppose the  threatened nationalization  of  the  industry  was  a  sum  wholly  and exclusively laid out for the purpose of the Company’s  trade and was an admissible deduction from its profits for income- tax  purposes.   A’.  majority of the House  held  that  the object  of the expenditure being to preserve the  assets  of the  Company from seizure and -so to enable it to  carry  on and   earn  profits,  the  expenditure  was  a   permissible deduction under r. 3(a) of the Rules applicable to cases (1)  & (2) of Sch.  D of the Income-tax Act, 1918. The  object  of  the petition filed by the  Company  was  to secure a declaration that the order dated February 20,  1946 insofar  as it sought to put restrictions upon the right  of the Company to carry on its business in the manner in  which it  was  accustomed to do was unauthorized  and  to  prevent enforcement  of that order: thereby the Company was  seeking to obtain an order from the Court ,enabling the business  to be carried on without interference.  Expenditure incurred in that  behalf  would without doubt be  expenditure  laid  out wholly  and exclusively for the purpose of the  business  of the Company. (1)  26 I.T.R. 195 : 35 T.C. 367. 397 It was argued however that the any delivered by the  Company to  the  weavers  contrary to the  prohibitory  order  dated February  20,  1946  was attached under  the  order  of  the Provincial  Textile  Commissioner,  and  since  the  Company violated  the prohibitory order, the primary object  of  the petition  for  mandamus  instituted by the  Company  was  to secure protection against prosecution of the Company and  an order for return of the goods in respect of which an offence was  committed.   Expenditure incurred,in  prosecuting  that claim was, it was said, not laid out wholly and  exclusively for  the purpose of the business.  Reliance was placed  upon the  judgment of this Court in H. Hirjee’s case(1) in  which it was held that a person who was prosecuted for an  offence under  s.  13 of the Hoarding  and  Profiteering  Ordinance, 1943,  on a charge, of selling goods at prices  higher  than were reasonable, in contravention of the provisions of s.  6 thereof, and a part of his stock was seized and taken  away, was  not entitled to claim deduction under S.  10(2)(xv)  of the  Income-tax  Act  for the sums spent  in  defending  the criminal  proceedings  against him because  the  expenditure could not be said to have been laid out and expended  wholly and  exclusively for the purpose of the business.   But  the assumption  underlying  the  argument  is  not  true.    The Tribunal  has  in  the statement of  the  case  observed  in paragraph-2 :               "Subsequently, on 20th February 1946, a proper               order by the appropriate authority was  passed               and it is common ground that after that  date,               at  any rate no further distribution  of  yarn               was  made  by the assessee.   In  the  interim               (period)  between 7th February 1946  and  20th               February 1946, the yarn which was  distributed               to  the  handloom weavers was the  subject  of               seizure by the provincial Textile Commissioner               and  this  the  assesse sought  to  resist  by               filing an application under section 45 of  the

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             Specific Relief Act 1, of 1877 In  the  view of the Tribunal the Company did  -not  act  in violation of the terms of the order dated February 20, 1946; it cannot there fore be said that the Company was seeking to protect  itself  against  a  criminal  prosecution  and  the consequences  arising from infringement of the  order  dated February 20, 1946. It  is  true that in the judgment in appeal from  the  order refusing  mandamus,  Leach,  C.J.  speaking  for  the  Court observed:  (see Sree Meenakshi Mills v.  Provincial  Textile Commissioner, Madras(2):               "In  spite  of  the fact that  this  order  in               effect  prohibited  the  appellant  delivering               yarn  to owners of handlooms  situate  outside               the mill premises, the appellant continued  to               deliver yarn to such weavers.", and               (1)   [1953] S.C.R. 714 23 I.T.R. 427.               (2) A.I.R. 1947 Mad. 82,               398               the Judicial Committee observed:               "Despite.   the  prohibition   the   appellant               continued  to deliver yarn to such  owners  in               order  (as already mentioned) that they  might               turn  the  yarn  into.  cloth  and  bring  the               article back to the mills." (See  Sree  Meenakshi  Mills  Ltd.  v.  Provincial   Textile Commissioner; Madras(1). But  the Tribunal has observed in its order  dismissing  the appeal  filed  by  the Company that  it  was  "not  disputed before"  them that, after February 20, 1946 the Company  did not distribute any yam. The  question referred in this case must be decided  not  on what was found or observed by the High Court in appeal  from order, in the proceedings under s. 45 of the Specific Relief Act or by the Judicial Committee, but upon findings of  fact recorded by. the Tribunal.  It is unfortunate that the  High Court  took the facts, not from the statement of  the  case, but apparently from the judgment. of the Judicial Committee. The High Court assumed that the Company had contravened  the law because it delivered yarn to weavers in contravention of the  order dated February 20, 1946.  But the  assumption  on which the discussion is founded is erroneous. The High Court also thought that expenditure to fall  within the  terms  of s. 10(2)(xv) must be one for the  purpose  of earning  income, and there was no material on the record  to show  that  the  expenditure  was so  incurred.   If  it  is intended  thereby  to  imply  that  the  primary  motive  in incurring  the expenditure admissible to deduction under  s. 10(2)(xv)  must be directly to earn income thereby,  we  are with respect unable to agree with that view. This Court in Commissioner of Income-tax, Kerala v.  Malaya- lam, Plantations Ltd.(2) observed:               "The  expression  "for  the  purpose  of   the               business"   is   wider  in  scope   than   the               expression   "for  the  purpose   of   earning               profits".  It’s range is wide: it may take  in               not only the    day   to  day  running  of   a               business, but also the rationalizationof               administration   and  modernization   of   its               machinery:  it  may include measures  for  the               preservation  of  the  business  or  for   the               protection  of  its assets and  property  from               expropriation coercive process or assertion of               hostile title: it may also comprehend  payment               of  statutory  dues  and taxes  imposed  as  a

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             precondition  to  commence  or  for   carrying               (1)L.R. 76, I.A. 191, 195.               (2)[1964] 7 S.C.R. 693,705:53 I.T.R. 140, 150.               399               on of a business; it may comprehend many other               acts  incidental  to  the  carrying  on  of  a               business." Expenditure  incurred  to resist in a civil  proceeding  the enforcement  of  a measure-legislative or  executive,  which imposes restrictions on the carrying on of a business, or to obtain  a declaration that the measure is invalid would,  if other  conditions  are  satisfied,  be  admissible,  in  our judgment,  under s. 10(2)(xv) as a permissible deduction  in the computation of taxable income. The appeals are therefore allowed.  The question referred is answered in the affirmative.- The appellant-Company will  be entitled to its costs in this Court and the High Court.  One hearing fee. y. P.                                   Appeals allowed. 400