1. Though several income-tax references under section 66 of the Income-tax Act were before the Division Bench, in the reference made by the Division Bench we are only concerned with the question which arises in Income-tax Reference No. 6 of 1966.
2. This reference raises a rather controversial and important question. The firm, R. B. Bansilal Abrichand, consisted of four partners in 1939. They were, (1) Raja Sir Bisesardas Daga, (2) Seth Narsingdas Daga, (3) Seth Badridas Daga and (4) Seth Ramnath Daga. The firm owned a textile mill at Hinganghat and a sale agency shop attached to that mill. This firm came to be re-constituted several times. On October 20, 1939, Seth Narsingdas Daga and Seth Ramnath Daga Purchased the assets of the firm from the four partners for a sum of Rs. 26,11,042. This partnership of two partners continued till October 18, 1944, when the firm was again dissolved and all its assets were purchased by Seth Narsingdas Daga, one of the erstwhile partners, for a sum of Rs. 50 lakhs. An agreement was signed on October 14, 1945, giving effect to the transaction from October 18, 1944, the date on which the original purchase was made. On the same date that the formal agreement was signed, namely, October 14, 1945, Seth Narsingdas Daga, who had a large family consisting of his wife and several sons, disrupted the Hindu joint family and all members of the Hindu family constituted themselves into a new firm of 7 partners, including therein his wife, Smt. Sodradevi Daga, and his sons. That new partnership deed is dated October 24, 1945, though the new firm was stated to have been constituted from October 18, 1944, for a period of five years.
3. In the present reference we are concerned with two assessment years, namely, 1955-56 and 1956-57, corresponding to the income-tax years ending Diwali of 1954 and 1955. Several questions had arisen in connections with the assessment of the firm from 1946-47 onwards. One of the principal questions was how the valuation of the property which was transferred from hand to hand should be made for ascertaining the written down value of the assets for the purpose of computation of depreciation. That point as been the subject-matter of controversy between the assessee and the department since 1946-47. The firm claimed that depreciation should be allowed on the initial sum of Rs. 50 lakhs, which Seth Narsingdas Daga had paid to the firm, Bansilal Abirchand, when he purchased the entire assets of the firm. On behalf of the department, however, they claimed to value the property at Rs. 27,32,650. It was made up to two amounts, namely, Rs. 21,00,000 for machinery and Rs. 6,32,650 for mill buildings and other assets.
4. Now, in resolving this dispute year after year, the firm incurred considerable expenses. In the years of account with which we are concerned, the expenses consisted of two item; (i) for preparing the return, etc., and representation before the Income-tax Officer, a sum of Rs. 589 was claimed and (2) for expenses connected with appeals to the Tribunal, a sum of Rs. 3,048 was claimed. These represent not merely fees paid to counsel, but also expenses. These are the two items which form the subject-matter of the question which was referred for the decision of the High Court under section 66(1) of the Income-tax Act of 1922. But since the question itself involved a good deal of controversy and there were differing opinions expressed both in India and in the English decisions, the Division Bench has referred the question raised is as follows :
'Whether the expenses for preparing return, etc., and representation before the Income-tax Officer (Rs. 589) and expenses connected with appeals to the Tribunal (Rs. 3,048) are admissible in computing the income of the assessee ?'
5. The Income-tax Officer and the Appellate Assistant Commissioner as well as the Tribunal have turned down this claim of allowance as an expenditure. The expenditure claimed is under section 10(2) (xv) of the Act as being expenses wholly and exclusively incurred for the purposes of business. In negativing the assessee's claim we do not find any particular reasons stated in the orders of the authorities. They have referred to two decisions which in their opinion are conflicting, namely, the decision of the Madhya Pradesh High Court in Binodiram Balchand v. Commissioner of Income-tax, which is in favour of the assessee, and in S. D. Sharma v. Commissioner of Income-tax, which is in favour of the department. Since the latter is a decision of a Division Bench of this court, the department has followed it and founded its decision upon it.
6. Before we turn to the controversy upon the decisions, it is well that we should examine first the statute itself. The relevant portion of section 10 of the Indian Income-tax Act, 1922, runs as follows :
'Business - (1) The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, namely - .....
(xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in 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....'
7. The key words are 'wholly and exclusively for the purpose of such business.' The word 'wholly' in plain English means completely or in its entirety or in full. The word 'exclusively' means excluding all but the purpose specified, i.e., for the business or for the sole or single purpose of the business. The more important word of the two is the word 'exclusively' for it conveys that the am account allowed as expenditure has to be an expenditure only for the purpose of the business and for no other purpose. While we are on this section we may also say that 'for the purpose of the business' is not the same thing as meaning am account expended 'in the business' and as we shall presently show it has been held that it must bear a casual connection with the business and need not be directly utilised for the business and may even by utilised indirectly (see Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax. Now since 'exclusively' means for the purposes of business and for no other purpose, we have to determine if the two amounts in this case were expended for any other purpose than for the business of the assessee and it is on this cardinal point that there is considerable conflict of opinion.
8. The genesis of the controversy is to be found in the leading English case in Smith's Potato Estates Ltd. v. Bolland (H. M. Inspector of Taxes) : Smith's Potato Crisps (1929) Ltd. v. Inland Revenue Commissioners In that case there was a difference of opinion in the House of Lords itself, Visc account Simon and Lord Oaksey being in the minority and Lord Porter, Lord Simonds and Lord Normand delivering the majority judgment. The leading majority view is expressed in the judgment of Lord Porter. The main question which fell for determination in that case was whether the legal and accountancy expenses of prosecuting an appeal to the board of referees against a decision of the Inland Revenue Commissioners under section 32 of the British Finance Act incurred by the assessee-company with a view to reducing the assessment made upon it could be deducted as being disbursements 'wholly and exclusively laid out or expended for the purposes of the trade'. These are the words of rule 3(a) of the Rules applicable to Cases I and II of Schedule D of the British Act. It will be noticed that the words are identical with the words in the Indian statute in section 10(2) (xv) except that instead of the word 'business' the word 'trade' is used there, which, for the purpose of the point arising before us, can hardly make any difference.
9. Now the majority view in the Smith's Potato Estates Ltd. case was taken upon 2 grounds. First that there was distinction between accounts made upon a purely trading basis and those which are prepared and accepted for the purpose of income-tax before the authorities of the Inland Revenue and that the purpose of taxation is quite different from the purpose of business. No doubt the two duties of keeping accounts of a business on the one hand and paying taxes on the other overlap and in practice are almost indivisible, but nonetheless the distinction is clear-cut and decisive. Based upon this distinction, the majority took the view that the expenses for preferring appeals in cases of income-tax impositions are really for the purpose of ascertaining the tax payable by the assessee and not for the purpose of ascertaining the profits. The profits they said were ascertained when the assessee's year of account ended. Once the business profits were ascertained, the task of paying income-tax began and the expenses were incurred for that purpose alone. These two points were brought out with great force in the following passage in the judgment of Lord Porter :
'Regarding the circumstances which your Lordships have to consider from this point of view, I should myself draw a marked distinction between accounts made up on the purely trading basis and those which are prepared for and accepted by the Inland Revenue. If there were no obligation to ascertain and pay either of these taxes, there would be no necessity for making up accounts on income-tax principles, it would suffice to make up the ordinary commercial accounts. The computation of accounts for tax purposes is therefore not directly associated with the carrying on of the business. It is an obligation imposed upon the company for another and extraneous purpose, i.e., for the purpose of ascertaining the tax to be paid out of profits. It is not, at any rate directly, undertaken for trade purposes but to satisfy the revenue authorities.
It is true that, as a matter of convenience, the cost of making up accounts for the Inland Revenue is allowed by the authorities as a deduction from progits, as is the cost of making up the strictly business accounts of the trade, but this is not a matter of principle but of expediency. The two duties overlap and in practice are almost indivisible. Moreover, it is of advantage to the revenue to have the figures required for their purposes carefully and accurately made up. Strictly, however, I think the expenses should be divided, and any additional cost of making up revenue accounts should be disallowed in determining the allowable deduction for income-tax purposes,....'
10. Lord Porter also quoted from the decision in Strong and Company of Romsey Ltd. v. Woodifield (Surveyor of Taxes), and particularly the celebrated dictum of Lord Davey in his judgment in that case as under :
'These words (for the purpose of the trade are used in other rules, and appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade, & c. I think the disbursements permitted are such as are made for that purpose. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade or is made out of the profits of the trade. It must be made for the purpose of earning the profits.'
11. Relying upon this dictum of Lord Davey, Lord Porter held
'With all respect to the opposing view, expenditure to ascertain the true am account of tax to be paid whether it be income tax or excess profits tax, and whether successful or unsuccessful is, in my opinion, incurred at any rate in part in order to determine the correct am account of income tax or excess profits tax, as the case may by, and not in order to earn gain even though that phrase be given a broad significance.'
12. Lord Simonds also relied upon the dictum of Lord Davey in Strong and Company v. Woodifield. Lord Simonds approved the following expression of the Master of the Rolls :
'But his obligation to pay it (the tax) is his obligation as a subject and a taxpayer, and in ascertaining the am account of his liability he is putting himself in a position to discharge his duty to the Crown.' and drew the same distinction.
13. The minority view in the Smith's Potato Estates case, is powerfully expressed in the dissenting judgment of Visc account Simon and the reasoning which prevailed with the minority was this : No doubt there may be a distinction between accountability for purpose of the tax and accountancy in business and that the two may be made up upon different considerations. No doubt also that taxation depends upon the business profits which are ascertained by a business man and that when the business man. But a business does not end with a year of business as the majority view regards it. It is one continuous process of earning income or profits and of paying taxes thereon. The prime object of business is profit and, once the profits are ascertained, income-tax is nothing more or less than the share which the State takes out of the profits of a business man, though it is taken in the shape of income-tax. To the extent, therefore, that a business man endeavours to save each rupee of tax, he is endeavouring to increase his own profit and thereby enabling himself to have larger finance to continue his business in the next tax year so that the endeavour to lessen the tax due from him is nothing more or less than an endeavour to increase the profits made by him for that year. That is how this view is expressed in the judgment of Visc account Simon at page :
'It seems to me that it is essential for the proper carrying on of a trade that the trader should know that portion of his profits in a given year is left to him after the Revenue has taken its share by taxation. If therefore he 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 endeavouring to correct this mistake is a disbursement laid out for the purposes of his trade. If he succeeds, he will have more money with which to earn profits next year. It is true that the result of his success is to reduce the tax he has to pay - alternatively, one may say that the result is to show that the profit of the year's trading left to him after paying tax is greater than the Revenue was willing to admit - but to my mind the purpose was a trading purpose and nothing else. the trade is not to be regarded as extending over twelve months and no more; indeed, as I have already pointed out, excess profits tax is liable to be adjusted in the light of subsequent trading results, and assessment for income-tax is arrived at on figures of the previous year.
With all respect to those who think otherwise, I regard it as fallacious to argue that the trader's expenditure in fighting the revenue's assessment is not 'wholly and exclusively' incurred for the purposes of the trade because the expenditure would not be incurred if there was no tax to pay. If there was no tax to pay, the benefit realised by the trader from carrying on the trade would not be reduced by taxation, and it is the purpose of trade (at any rate under private enterprise) to make its legitimate profits. Viewed in this light, I do not see why the expenditure here in question is not wholly and exclusively laid out for the purposes of the trade - if it had not been incurred, the trade would be less profitable.'
14. Taking this view Visc account Simon further pointed out that the view which he had taken did not conflict with Lord Davey's dictum, for even assuming that the purpose of the expenditure must be 'the purpose of enabling a person to carry on and earn profits in the trade', still upon the view which Visc account Simon took that the business man was trying to save himself from taxation he was trying to increase the profits of his business. All the subsequent decisions refer to this pronouncement of the House of Lords in Smith's Potato Estates case.
15. In India, no doubt, each 'previous year' is a 'separate self-contained period of time' for the purposes of assessment, yet the assessment is made on the income, profits and gains of the 'previous year' (subject to some very minor exceptions) and not as in England on the income earned in the year of assessment itself. In India therefore the assessment of tax of one 'previous year'. In the proportion to which the tax burden is increased or decreased in any year when the assessment is made, the profits or losses of that year would be directly affected and therefore the business. Any expenditure incurred in lessening the tax burden would therefore be laid out wholly and exclusively for the purposes of business. This is the reasoning which prevailed with the minority judges in the Smith's Potato Estates case We confess that in all the authorities which have been brought to our notice we have not been able to find an answer to this counter point in the minority view, and, therefore, it is the minority view which commends itself to us.
16. Before we come to the several decisions in India, which take one or the other of the two views, it necessary to notice two important pronouncements of the Supreme Court, which, in our opinion, support, we say so with the utmost respect, the view which we are inclined to take. They are the decisions of the Supreme Court in commissioner of Income-tax v. Malayalam Plantations Ltd. and Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax. As we have pointed out when discussing the leading English case, the foundation of the majority view was the dictum of Lord Davey in Strong and Company of Romsey Ltd. v. Woodifield : 'It must be made for the purpose of earning the profits' but it is this very dictum, which, we find has not been accepted by the Supreme Court in the Malayalam Plantations' case. No doubt that case was concerned with an am account paid as estate duty under section 84 of the Estate Duty Act, 1953 (prior to its amendment in 1958), by a resident company incorporated outside India on account of the share capital of its shareholders who were not domiciled in India. Section 84 casts a statutory duty on the company to pay the am account on behalf of the non-resident shareholder. The expenditure was claimed by the resident company as legitimate expenditure under section 10(2) (xv) of the Income-tax Act. It was disallowed not on the ground that it did not constitute a business expenditure, but on the ground that the payments were made by the company under its statutory duty as a statutory agent of the non-resident shareholder. Such a statutory duty was unconnected with the business. The occasion for the imposition arose because of the territorial nexus afforded by the accident of its doing business in India. In connection with the question whether the amounts could be said to be expended wholly or exclusively for the purpose of the business of the assessee under section 10(2) (xv) of the Act, however, the Supreme Court was called upon to consider the remarks of Lord Davey in Strong and Company's case and to the decision in Rushden Heel Co. Ltd. v. Keene (His Majesty's Inspector of Taxes) which was decided at the same time as Smith's Potato Estates case to which we have just referred. Chief Justice Subba Rao, who delivered the judgment on behalf of the court, pointed out that even in the majority judgment there was a difference in the interpretation of the words of the English statute 'wholly and exclusively laid out or expended for the purposes of the trade' between the Lord Chan cellar and the dictum of Lord Davey in Strong and Company's case Whereas the Lord Chan cellar had interpreted the words to mean that the expenses would not be deducted if they were 'mainly incidental to some other vocation, or fell on the trader in some character other than that of trader' Lord Davey had interpreted the expression to mean that 'the disbursement must be made for the purpose of earning the profits'. Then the learned Chief Justice went on to say :
'Lord Davey's definition appears to be much narrower than that of the Lord Chancellor, for the former restricts the expression to mean that the expenditure should have been made only for the purpose of earning profits.'
17. The learned Chief Justice discussed several other cases and finally concluded by holding that the expression need not necessarily be construed to mean' for the purposes of earning the profits'.
'The aforesaid discussion leads to the following result : the expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide : it may take in not only the day-to-day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and 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 pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party.....'
18. They held in that case that the amounts were paid by the assessee as an agent of the third party. In out opinion, therefore, the very basis of the decision of the majority in Smith' Potato Estates case namely, the dictum of Lord Davey in Strong and Company's case, has been taken away by this pronouncement of the Supreme Court. The Supreme Court, in terms, has stated that the expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits' but Lord Davey's dictum equates the two, when it says :
'It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade or is made out of the profits of the trade, and it must be made for the purpose of earning the profits.'
19. In view of this decision of the Supreme Court it is at least to be doubted whether the majority view in the English case can prevail in India.
20. The decision in Malayalam Plantations' case, was reaffirmed and followed by the Supreme Court in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, where Mr. Justice Shah Observed :
'The High Court also thought that expenditure to fall within the terms of section 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 section 10(2) (xv) must be directly to earn income thereby, we are with respect unable to agree with that view.' Then the learned judge referred to the decision in Malayalam Plantations Ltd. case and after quoting the very passage from the judgment of chief Justice Subha Rao which we have quoted above proceeded : '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 section 10(2) (xv) as a permissible deduction in the computation of taxable income.'
21. In that case Sree Meenakshi Mills was challenging the order of the Textile Commissioner as ultra vires of his authority and the expenditure which was incurred was in the litigation that was undertaken in order to get that order declared ultra vires. The expenditure had nothing to do with the question of earning an income or profits, yet it was held that it was an allowable expenditure. At page 213 the Supreme Court indicated the true construction of section 10(2) (xv) in the following words :
'Under section 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 section 10(2) (xv) provided other conditions are fulfilled, even though the expenditure does not directly relate to the earning of income. Expenditure incurred not with a view to the direct and immediate 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.'
22. Applying these remarks to the present case there can be absolutely no doubt that the expenditure incurred by the assessee to defend its case before the income-tax Officer and to get through its assessment to its advantage as also the expenditure incurred by the assessee in appeals (and in this case successful appeals; appeals which resulted, according to the counsel, in reducing the taxable income by about 9 lakhs of rupees) would certainly be a disbursement laid out 'wholly and exclusively for the purpose of business'. Though it did not earn any income, it was expenditure incurred to facilitate the carrying on of the business and was incurred on grounds of commercial expediency. It is not necessary that the expenditure allowable under section 10(2) (xv) must, as we have stated before, be directly incurred for the purpose of the business. It may also be of indirect benefit to the business. In the light of these important pronouncements of the Supreme Court we think that so far as India is concerned considerable doubt is thrown on the majority view taken in Smith's Potato Estates.
23. The view which was commended itself to us has also been taken in Binodiram Balchand v. Commissioner of Income-tax. The question there involved was the same as the question in the present case so far as the first item is concerned. There also sums paid by an assessee, by way of professional fees to an income-tax adviser for services rendered during and for the conduct of assessment proceedings before the income-tax authorities, were in question. The department disputed that the expenditure was wholly and exclusively for the purpose of business. The Madhy Pradesh High Court laid down that the test to be applied is whether the expenditure was necessary on grounds of 'commercial expediency' and on the principles of 'ordinary commercial trading'. Another test which the Division Bench accepted was whether the expenditure was in order directly or indirectly to facilitate the carrying on of the business. They noticed the majority view in the Smith 's Potato Estate case, but accepted the view expressed by Visc account Simon. With respect, we entirely agree with principle of that case.
24. In Commissioner of Income-tax v. Calcutta Landing and Shipping Co. ltd. the Calcutta High Court was considering a case where the assessee had agreed to pay a firm of chartered accountants a consolidate fee of Rs. 2,000 per year for 12 years for settling each year's income-tax assessment irrespective of whether there was an appeal or not in respect of any particular year. A sum of Rs. 8,000 was paid in the year of account being the fees for 4 years and this am account was allowed, but the balance of Rs. 16,000 was not allowed by the tax authorities distinguishing between what was paid for appearance before the Income-tax Officer and what was paid in conducting appeals. The Tribunal, however, agreed with the assessee's contention and held that it was immaterial whether the fees were paid for attending the proceedings before the Income-tax Officer or before the Appellate Commissioner or before the Tribunal, and, therefore, the Tribunal allowed the a account of Rs. 16,000. On a reference at the instance of the Commissioner, the Calcutta High Court held that, though expenses incurred for conduction proceedings before the income-tax authorities may not be apparently related to the assessee's trading activities, they may be justifiably necessary for increasing the assessee's net profits or for the carrying on of the business with larger funds at the disposal of the assessee and from that point of view such expenses were expenses for the purpose of business'. The Calcutta High Court accepted the view of the minority in Smith's Potato Estates Ltd. case. They also referred to the decision of the Supreme Court in Sree Meenakshi Mills' case to which we have already referred. The view of the Division Bench was succinctly expressed as follows : 'In our view, as income-tax is levied on the am account of profit earned, the expenses incurred for ascertaining the correct am account income-tax payable by an assessee are expenses deductible under section 10(2) (xv) of the Act of 1922.' We are, with respect, in agreement with this view.
25. In our opinion, therefore, the expenses reasonable incurred by an assessee for preparation and conduct of income-tax proceedings before the Income-tax Officer or laid out in conducting appeals, including fees paid to the accountants and lawyers would be expenditure incurred wholly and exclusively for the purpose of business and would be allowable under section 10(2) (xv). The allowance contemplated in section 10(2) (xv) is not necessarily an allowance for amount expended to increase profits only so long as it is for the purpose of the business. It is not also necessary that profits should be earned by such expenditure, nor is it necessary that it should be expended directly for the purposes of business so long as the business indirectly profits.
26. While upon the provision of law and the authorities we have taken this view, we may immediately point out the limits of the principle also. We should not be understood to lay down any proposition wider than the one we intend to lay down in this case. The present case is one where an expenditure for preparation and settlement of tax liability before the Income-tax Officer and expenditure incurred in appeals preferred by the assessee simpliciter is concerned. In this case there is no finding or allegation that the expenditure was unreasonable or not upon consideration of commercial expediency or in any way excessive, nor in the present case is there any suggestion that the expenditure was mala fide or incurred with a view to evade tax, or as has happened in many of the cases that were referred to us, incurred by the assessee to escape the consequences of his own wrong doing, such as concealment, fraud or other dishonest conduct on its part. In all such cases it may be that different considerations may previal. But as to such cases we decide nothing here. We distinguish the present case from all such cases where some finding or allegation is made against the legality or the propriety of the reasonableness of the expenditure. In the present case there is no such finding and that is why we have referred to this as a case of 'expenditure simpliciter' for conducting proceedings before the Income-tax Officer or in appeals to the Tribunal.
27. One of the cases cited before us in Birla Cotton Spinning and Weaving Mills Ltd. v. Commissioner of Income-tax is a case of that type. In that case the assessee-company had in the years of account expended considerable sums of money in engaging lawyers for making representations before the Income-tax Investigation Commission to whom its case had been referred and also for challenging the validity of sections 5(1) and 5(4) of the Taxation on Income (Investigation Commission) Act, 1947, as unconstitutional. Those sections, as is well known, came to be declared unconstitutional by the Supreme Court, and the assessee subsequently claimed to deduct the amounts expended by it in engaging counsel as a business expenditure. A Division Bench of the Calcutta High Court held that the expenditure was incurred by the assessee-company upon grounds of commercial expediency and was wholly and exclusively for the purpose of business, upon considerations similar to those which have prevailed with us in the present case. But in that case there was something more than in the present case which may set apart that case from the king of case which we are dealing with in the present reference. In that case one of the charges which the Investigation Commission had found against the assessee-company, and on the basis of which it claimed to proceed under section 5(4) of the Taxation of Income (Investigation Commission) Act, 1947, was that they had reason to believe that the assessee had evaded payment of income-tax of about 4 crores of rupees during the years 1941-42 to 1947-48 (see page 570). In that case, therefore, it could will have been argued that part of the motive or purpose in expending large amounts of money towards fees of counsel was not wholly and exclusively for the purpose of the assessee's business, but partly in order to escape the consequences of the assessee's own previous evasion of tax. Indeed, it appear that the counsel for the assesse distinguished that case from other cases of 'expenses simpliciter', i.e., where no such allegation is made against the assessee. When the decision of this court in S. D. Sharma v. Commissioner of Income-tax, and the decision of the Allahabad High Court in J. K. Cotton . v. Commissioner of Income-tax were referred to and the contrary view of the Madhya Pradesh High Court in Binodiram Balchand v. Commissioner of Income-tax were pointed out to the Division Bench, the counsel for the assessee distinguished those cased on that very ground. At page 585 this was that the Division Bench observed :
'Mr Gauri Mitter, learned counsel for the revenue, contended that none of the decisions of the Supreme Court, above referred, were relevant, because the aforesaid decisions had no occasion to consider the question whether expenses incurred by an assessee to represent its case before the income-tax investigation commission were allowable deductions. Mr Mitter is right in his contention to this extent that the cases before the Supreme Court had to consider different types of expenditure but not expenses incurred to represent a case before the income-tax investigation commission... But although that is so, we are not prepared to hold that the Supreme Court decisions above referred to are of irrelevant consideration in the present context.'
28. We may add here that consistently with the distinction which Mr. Mitter, the counsel for the assessee, drew in that case it could also have been argued on behalf of the department in that case that the expenditure was incurred by the assessee only or primarily to escape the consequences of evasion of income-tax and, therefore, rely on the Birla Cotton Spinning and Weaving Mills' case. The present case, as we have stated, is not a case where any charge whatsoever is made against the expenditure on any ground. It was a pure and simple expenditure incurred for the purposes mentioned and the question is whether it was wholly and exclusively for the purpose of the business. We merely refer to the Birla Cotton Mills' case to emphasise the limit of the principle which we have adopted in the present case.
29. Then we turn to consider cases which have taken a contrary view. The first is a decision of a Division Bench of this court in S. D. Sharma v. Commissioner of Income-tax. The Division Bench, after referring to the Smith's Potato Estates case, no doubt, accepted the view taken by the majority in that case (see pages 113 and 114). But it seems to us that was not the ratio decidendi of that case. The facts of that case were quite different from the facts of the present case. From the statement of the case printed at the head of the judgment (see page 109) it is clear that the fees of Rs. 6,250 which were paid in that case to an income-tax consultant during the relevant year of account and which were claimed as expenditure allowable under section 10(2) (xv) of the Act were paid to the consultant who was engaged in respect of assess ment years 1944-45 and 1945-46 for which the assessments had already been concluded as also in respect of the assessment year 1946-47, 1947-78 and 1948-49 which were than pending before the Income-tax Officer 'in order to straighten out matters in respect of income concealed from the assessments which had already concluded and which were about to be reopened, as well as from the return original submitted in respect of the pending assessment'. The purpose of the expenditure was, therefore, at least partly to save the assessee from the consequence of own concealment. The expenditure was, therefore, not wholly and exclusively for the purpose of business. It also appears that in the meanwhile there came into force the 'voluntary disclosure scheme' and the assessee attempting to take advantage of that scheme and for that purpose had engaged a consultant. It is clear from the statement of the case that income-tax authorities took the view that, since the income-tax consultant's services were required by the assessee in connection with the offer of settlement made by him to the department under what is known as the 'voluntary disclosure scheme', which is not a general feature in completing income-tax assessment in the normal course, the fees could not be claimed as an allowable expenditure. Thus, in that case there was once again something alleged against the previous conduct of the assessee. He was suspected to have concealed income and wanted to take advantage of the 'voluntary disclosure scheme' and it was in that connection that the expenditure in that case had been incurred. It was on that basis that the Division Bench also decided that case, as will appear from the following passage in their judgment at page 116 :
'Assuming, however, that not only the usual accountancy expenses for ascertaining the commercial profits on a trade basis but also the expenses incurred by the trader in preparing the statements and accounts for income-tax purposes and for the purpose of satisfying the tax authorities with regard to the correctness thereof could be regarded as expenses laid out for the purpose of the trade, even then, on the facts and circumstances of the present case, the expenses claimed by the assessee could not be allowed to him. What we have in the present case is that is respect of the assessment for the assessment years 1944-45 and 1945-46 for which the assessments had been already concluded and in respect of the assessments for the assessment years 1946-47, 1947-48 and 1948-49, which were than pending before the Income-tax Officer, the assessee had concealed his income. In the year 1950, he applied to the income-tax authorities and made an offer that he was prepared to have a just and fair settlement of his income-tax liability on the income which he was prepared to admit as concealed from the assessments already made and also concealed from the returns submitted in respect of the assessments which were then pending before the Income-tax Officer. It was in connection with the settlement so proposed that the services of the consultant were engaged by him and the expenses incurred. These were, in our opinion, not expenses incurred by any stretch of imagination for the purpose of ascertaining his taxable profits so as to constitute them as expenses incurred for the purpose of earning the profits'.
30. It is thus clear that S. D. Sharma's case fell in the second category of cases, namely, where there is some allegation or finding against the assessee as to the nature of his expenditure to which we have already referred above, whereas the present case is a case which falls within the first category of expenditure simpliciter where no such allegation or finding is made S. D. Sharma's case, therefore, need not detain us here. No doubt, they have in discussing the law referred to the diversity of opinion in the English courts and in India on the interpretation of the expression 'wholly and exclusively for the purpose of business' in section 10(2) (xv) of the Act and no doubt also they have expressed a preference for the majority view in the smith's Potato Estates Ltd. case but really these remarks must be treated as obiter remarks in view of the passage which we have quoted above. Even after referring to the majority decision they have said that we will for the purposes of that case assume that usual accountancy expenses for ascertaining the commercial profits on a trade basis would be allowable. Unfortunately S. D. Sharma's case has been taken as a decision on that point in many of the subsequent case in the High Courts. It is on this very point that Chief Justice Dixit distinguished it in Binodiram Balchand's case when we remarked that 'a careful perusal of the judgment in S. D. Sharma's case shows that the judgment in that case did not really turn on the majority view expressed in the case of Smith's Potato Estates Ltd.' (see page 561 and the subsequent passage on the page).
31. Next there is a decision of the Allahabad High Court in J. K. Cotton . v. Commissioner of Income-tax. This case simply and very briefly referred to Smith's Potato Estates Ltd case which was followed without any discussion and to the decision in S. D. Sharma's case. For reasons which we have already indicated, we are not in agreement with this decision. We may also say that J. K. Cotton . and Sree Meenakshi Mills Ltd.
32. Another case referred to was the decision of the Kerala High Court in Commissioner of Agricultural Income-tax v. Nilambur Rubber Co. Ltd. That was a case where expenses were claimed for preparation of agricultural income-tax returns under the Kerala Agricultural Income-tax Act, 1950. As the language of that Act and the Indian Income-tax Act is not the same, the words which fell to be construed in the Kerala case were 'for the purpose of deriving the agricultural income' and counsel for the department no doubt did suggest that there was a difference between 'for the purpose of business' and 'for the purpose of deriving the agricultural income'. But upon the view which the Kerala High Court took they felt that this difference did not make much difference and the effect is the same. In this case neither the decision of the Supreme Court in Sree Meenakshi Mills' case not Malayalam Plantations' case was referred to. As we have pointed out, the Meenakshi Mills' case expressly ruled that the expenditure contemplated by section 10(2) (xv) is not necessarily limited to an expenditure where a profit is earned thereby and that appears to be the vital distinction between section 10(2) (xv) of the Act and the wording in the Kerala Act, where the words are 'for purpose of deriving the agricultural income'. In this respect we may also say that in the Income-tax Act, 1922, the equivalent clause was clause (ix) of section 10(2) and it was worded as follows :
'10. (2) (ix) any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains.'
33. The latter words were substituted by the words 'for the purpose of such business'. This amendment in the Act itself was not brought to the notice of the Kerala High Court, otherwise the sharp distinction drawn between the words used before and after the amendment would have been dealt with. In any case the ratio decidendi of Sree Meenakshi Mills' case was not adverted to. Apart from that, we may say that the Kerala High Court having followed the decisions of the Allahabad High Court and the Bombay High Court on the basis of the majority view in the Smith's Potato Estates Ltd.'s case, we are unable to agree with that decision for reasons which we have indicated above.
34. A reference was also made on behalf of the department of Rushden Heel Co. Ltd.' v. Keene (H. M. Inspector of Taxes), a case which was decided along with Smith's Potato Estate Ltd.'s case. A report to be found in Smith's Potato Estates Ltd.'s case gives a statement of the case stated by the Commissioners and it does appear from that statement of the case that even in Rushden Heel's case some finding of misconduct on the part of the company was given; vide paragraph 5 where the finding given by the Commissioners of Inland Revenue is stated as under :
'..... that the main purpose for which the transactions were effected was the avoidance or reduction of liability to excess profits tax.....'
35. So far as that case is concerned, therefore, that would be an additional distinction from the present case.
36. We therefore, answer the question referred to us (and referred to in paragraph 3 of the reference made by the Tribunal) in the affirmative. The Commissioner shall bear the costs of this reference to the Full Bench.
37. Question answered in the affirmative.