Full Judgment Text
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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.
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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.
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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.
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