1. This is a reference under section 66(1) of the Indian Income-tax Act, 1922.
2. The assessee is a company incorporated under the Indian Companies Act, 1913, and owns a colliery at Rampur in Sambalpur District in the State of Orissa.
3. The short point for decision is whether the expenses incurred by the assessee in assisting the prosecution of certain persons who were accused of having rioted and caused the death of its manager while he was engaged in the business of the assessee was deductible in the assessment of the assessee under section 10(2) (xv) of the Indian Income-tax Act, 1922 :
The question of law referred is : 'Whether, on the facts and in the circumstances of the case, the sum of Rs. 35,845 incurred in aiding the prosecution in the riot case could be said to be expenditure allowable under section 10(2) (xv) ?'
4. The assessment year under reference is 1961-62, the relevant accounting year being the year ended 30th June, 1960.
5. Under an award of the Industrial Tribunal (Colliery Disputes), given some time in May, 1950, the assessee was liable to pay to its workers at the colliery their wages fortnightly instead of weekly. The assessee implemented the award. Some of the workmen, however, insisted that the assessee should revert to its former practice of making payment of wages weekly. Certain conciliation proceedings followed thereupon and in the course of a meeting before the conciliation officer held on 12th April, 1957, the assessee agreed to make payment of wages and advances weekly, subject to certain just adjustments by way to deduction of excess payments already made. The assessee started making payment according to that agreement. In May, 1957, it was discovered that there were certain excess payments made already and accordingly on the 8th of June, 1957, on which day the advances were to be adjusted and excess payments deducted, the workmen created trouble and refused to accept payment with such deduction. The assessee's manager was absent on that day and the payment was made without deduction, the question of deductions being postponed to the next payment day, being the 15th of June, 1957. On the 15th June, 1957, the workmen did not come to take their payments at the usual time and instead collected around the colliery office demanding from the manager full payment of wages without any deductions. The manager at first declined to concede their demand in view of the conciliation proceedings and the agreement arrived at before the conciliation officer. After some time, however, the manager agreed to pay the wages without making any deductions. During the interval, however, emotions were running high and the workmen did not accept the managers statement that he would make payment without deductions and started throwing stones. Violence broke out. One of the members of the staff was stabbed. The manager was also attacked and he suffered twenty-five stab wounds. He died of his injuries on the 18th of June, 1957.
6. On the 15th of June, 1957, the police authorities recorded a first information report. The police charged twenty-six persons with various offences. The assessee wrote a letter dated 14th July, 1958, to the Superintendent and Remembrancer of Legal Affairs, Government of Orissa, stating that Mr. Gandhi, counsel, who had been engaged by it to appear before the Sessions Court, had consented to appear on behalf of the prosecution at the committal proceedings before the Magistrate and that the assessee believed that it would be a great help if Mr. Gandhi was permitted to appear at the committal proceedings along with the police prosecution inspector, particularly in view of the accuses having obtained the services of a well-known lawyer from Cuttack. The assessee also stated that it agreed to pay Mr. Gandhi's fees in full for the committal proceedings also. The board of directors of the assessee held a meeting on 23rd July, 1958, at which its agents stated that at the committal proceedings in connection with the riot case scheduled to commence in the First Class Magistrate's Court at Sambalpur on 21st August, 1958, it was proposed, subject to the consent of the Orissa Government, to brief Mr. Gandhi to appear together with the prosecuting inspector, at the assessee's expense.
7. The case was heard before the Magistrate from 21st August, 1958, and he made an order on the 30th December, 1958, committing the accused to the Session Court. The trial in the Sessions Court started on 2nd April, 1958, and lasted till 22nd July, 1959. The Sessions Court passed its order on 18th September, 1959, acquitting all the accused.
8. The assessee incurred cost, being legal costs, in connection with giving legal assistance to the State prosecutor. A part of the costs was incurred in the accounting year ended 30th June, 1959, the relevant assessment year being 1960-61 and the rest in the accounting year ended 30th June, 1960, being 1960-61 and the rest in the accounting year ended 30th June, 1960, being the year relevant to this reference. The assessee claimed the amounts of those costs as a deduction under section 10(2) (xv) in respect of each of these two years. In respect of the first year the Income-tax Officer disallowed the assessee's claims for deduction, but the same was allowed in appeal by the Appellate Assistant Commissioner. In respect of the second year, being the year relevant to this reference, the Income-tax Officer disallowed the claim, the Appellate Assistant Commissioner on appeal allowed it, but finally the Tribunal disallowed it on the ground that the expenditure was only remotely connected with the carrying on of the assessee's business and that in incurring the expenditure the assessee had an eye on seeing that the accused were punished.
9. During the assessment proceedings before the Income-tax Officer the assessee wrote a letter to him dated 26th September, 1960. In that letter the assessee has stated, inter alia, that the legal expenses were required to be incurred during the course of the prosecution of the rioters to bring the perpetrators of the crime to book, thereby producing a wholesome and disciplinary effect on labour in general and ensuring an atmosphere conducive to prevent recurrence of riots in future and the smooth and normal running of the colliery. The assessee claimed the expenditure as an allowance on the ground that the expenditure was laid out wholly and exclusively for the purpose and during the course of the assessee's business and out of commercial expediency.
10. Now under section 10(2) (xv), in so far as its provision is relevant to this reference, an expenditure would be allowable as a deduction if the money was 'laid out or expended wholly and exclusively for the purpose of such business.' The assessee has not contended that the expenditure was incurred by it directly for the purposes of its business. It is the contention of the assessee, however, that it was incurred indirectly for the purposes of its business, whereas it is the contention of the revenue that the expenditure was only remotely connected with the purpose of carrying on its business. This is the only point in controversy in this case between the parties. The prosecution resulted in an acquittal, which means that it was unsuccessful. The success or otherwise of the prosecution, however, would not in any way be relevant in considering the claim made by the assessee and it may be stated that, as a matter of fact, Mr. Joshi, the learned counsel for the revenue, has not urged any argument on the ground that the prosecution was unsuccessful.
11. Mr. Kolah, the learned counsel for the assessee, has drawn our attention to the judgment of the Supreme Court in Eastern Investments Ltd. v. Commissioner of Income-tax. At page 4 of the judgment the Supreme Court has laid down four principles which, according to us, are relevant when considering a question like the one in dispute before us. That case was a case for a deduction under section 12(2) and not under section 10(2) (xv). But in so far as the case before us is concerned, the principles laid down by the Supreme Court in connection with section 12(2) would equally apply to considerations under section 10(2) (xv). The distinctions which exist between the provisions of the two sections do not make any difference in so far as the case before us is concerned. Only one of the four principles pointed out by the Supreme Court which is relevant to the case before us is :
'It is enough to show that the money was expended 'not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business'.'
12. The principle, therefore, is that in order that the expenditure may be allowable as a deduction, it need not have been incurred with the object of gaining a direct and immediate benefit and that it would suffice even if it was incurred in order indirectly to facilitate the carrying on of the business.
13. Another judgment of the Supreme Court relied upon by Mr. Kolah is the judgment in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax. That judgment related to a claim for deduction under section 10(2) (xv). In that case the assessee incurred expenditure to resist, in a civil proceeding, the enforcement of an order which imposed restrictions on the carrying on of its business and to obtain a declaration that the order was invalid. The Supreme Court held that the claim for deduction would be admissible if other conditions were satisfied and that in order that the expenditure may be admissible as a deduction under section 10(2) (xv), it was not necessary that the primary motive in incurring it must be directly to earn income thereby.
14. Now, it is true, as contended by Mr. Joshi, that in that case the object of incurring the expenditure was to secure directly a benefit, namely, to enable the company to carry on its business in the same way in which it had been carrying in on before the impugned order. We are, however, not concerned with the facts on which the principles have been laid down by the Supreme Court in that case. What is relevant is the principle it lays down and the relevant principle which it has laid down is that expenditure may be allowed as a deduction if incurred, not with a view to secure a direct and immediate benefit, but even out of commercial expediency and in order even to indirectly facilitate the carrying on of the business.
15. Mr. Joshi relied upon a judgment of the English appeal court in Union Cold Storage Co. Ltd. v. Jones. In that case it was held that the object of the expenditure claimed in that case as a deduction was too remotely connected for the purposes of the carrying on of business and it was, therefore, not allowable. Mr. Joshi also relied upon the judgment of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax. It was held in that case that expenses which are permitted as deductions under section 10(2) (xv) are such as are made for the purpose of carrying on the business, i.e., to enable a person to carry on and earn profit in that business and that it is not enough that the disbursements are made in the course of or arise out of or are concerned with or are made out of the profits of the business but they must also be for the purpose of earning the profits of the business.
16. These judgments of the Supreme Court lay down the principle that expenditure may be held to be laid out wholly and exclusively for the purpose of a business even though the object of incurring the expenditure may be indirectly connected with the business, though not directly, but if the connection between the object for which the expenses have been incurred and the purpose of the business, viz., to earn profits, is remote, it would not be permissible deduction under section 10(2) (xv). The distinction between connection which is indirect and one which is remote is clear. The making of such distinction may not always be easy as facts would vary from case to case. No reference of decided cases would be helpful for finding out how the principle was applied to the facts of that case. The principle has to be applied to the facts of every particular case.
17. Now, in this case, immediately before the manager was stabbed, the manager had actually conceded the demands of the workmen that the payments should be made to them without any deduction. Nonetheless, as emotions had keyed up to a high pitch, the workmen created a riot and as may as twenty-five stab wounds were inflicted on the manager. It was a serious matter of law and order. But it was more serious for the assessee. It was the manager of the assessee who had been stabbed and stabbed fatally. He was the high, if not the highest, officer of the assessee at the colliery. The number of workmen was large. The actual number, however, is not available on the record. The record does not also show what police arrangements were available at the colliery. Mr. Kolah stated that the nearest police station was eight miles away from the sight of the colliery where the trouble took place. This fact, however, does not appear on the record and has, therefore, to be ignored. Mr. Kolah, however, contended that this court should take judicial notice that collieries are situated at a considerable distance from any city or town and that no police arrangement or at least adequate police arrangement would be available at the colliery. This is not a matter, in out opinion, of which judicial notice can be taken. We presume that conditions may, or at least can, vary from colliery to colliery. But, nonetheless, the fact remains that if riots take place at the colliery, it would be a matter of great concern for the assessee in the way of its business as it would affect the smooth working of the colliery and, therefore, the assessee's capacity to earn profits from its business of the colliery. Riots and disturbances would generate a feeling of indiscipline in its workmen. But what is of grater importance to our mind is that if discontent, whether imaginary or even real, were to lead to the workmen taking the law into their own hands and going to the extant of creating a very serious riot during which the highest officer of the assessee on the spot receives as many as twenty-five stab wounds and is actually murdered, it would be difficult for the assessee to find a person of the managerial or administrative class to go to the colliery for attending to the work of the assessee.
18. Mr. Joshi, however, contended that the object of the assessee in engaging its own lawyer to assist the State prosecutor was only to get the offenders punished out of a sense of revenge. The letter of the assessee referred to above date 14th July, 1958, states that the object of the assessee was to help the prosecutor, particularly in view of the fact that the accused had obtained the services of a well-known lawyer from Cuttack. The assessee's letter dated 26th September, 1960, addressed to the Income-tax Officer states the object to be to bring the perpetrators of the crime to book and thereby produce a wholesome and disciplinary effect on labour in general and an atmosphere conducive to prevent recurrence of riots in future and to bring about a smooth and normal running of the colliery. The letter states that after the riots had broken out the assessee had to declare a lock-out which resulted in a heavy loss in earnings and the assessee would have been put to a greater loss if necessary steps had not been taken to prevent the recurrence of riots. The direct object of the assessee was that the real offenders must be punished. But the very concept behind the law under which the offenders are punished is that the punishment may act as a deterrent against repetition of such crimes for which the punishment is awarded. The punishment would act as a deterrent not only against the offender or offenders who are punished, but also against others against committing such crimes. In the case before us it was not a minor incident or a minor offences. A large number of persons were involved in the riot. Serious injuries were inflicted. The injuries were inflicted by stabbing. The manager of the assessee succumbed to his injuries. In such a case, in our opinion, even apart from the general consideration that punishment is intended to have a deterrent effect the statements contained in the said letters of the assessee expressly state that what the assessee wanted to bring about was a deterrent effect against the repetition of such incidents by showing that the offenders could not go unpunished. The assessee did, as a matter of fact, suffer a serious loss in its income by reason of the riots and the incidents which took place during that period which shows that such incidents would prejudice the assessee's income. In helping the State to prosecute the object of the assessee was to inculcate a sense of discipline in its workers, bring about some sense of security in its managerial staff and thereby help the smooth working of the colliery with a view to ensure that its income did not suffer.
19. Mr. Joshi next argued that the prosecution was by the State. It was the duty of the State to prosecute the persons whom the State believed to be the offenders. The State was in fact represented by its prosecutor. He contended that, therefore, it was not necessary for the assessee to have incurred any expenditure at all by appointing its own lawyer to assist the State's prosecutor. Now in this connection it must be remembered that there were as many as twenty-six persons who were accused in this prosecution. Such a large number of accused persons would require sorting out the case against each of them. Material would have to be gathered and marshaled for cross-examining witnesses which may be brought forward by the accused. It must have been anticipated that it was going to be a heavy trial. That anticipation has been amply proved to be true by the fact that the committal proceedings before the Magistrate lasted from 24th August, till 30th December, 1958, and the hearing at the trial before the Session Court lasted from 2nd April, 1959, to 22nd July, 1959. It is, of course, the duty of the State to prosecute, but in this case it would be the natural anxiety of the assessee that in such a heavy case it should appoint its own lawyer to help the State prosecutor. The anxiety would arise only because of its desire that the correct atmosphere should be brought about where the assessee can carry on its legitimate business and continue to earn its income from that business. In giving legal assistance of its own to the prosecutor the assessee spent Rs. 51,816 in the first year and Rs. 36,700.76 in the second year. These are very large amounts. The very largeness of these amounts shows, in our opinion, the anxiety on the part of the assessee to create a sense of confidence in its administrative employees that the assessee would not merely sit idle, but would actively help the prosecution by the State to bring the offenders to book and protect its employees. Unless such a confidence was created by the assessee, it would be difficult for the assessee to find competent persons to act as its managers at the colliery or even to secure administrative staff. In our opinion, therefore, the legal expenses incurred by the assessee were expended by it wholly and exclusively for the purpose of its business.
20. We, therefore, answer the question in the affirmative.
21. The revenue will pay the costs of the assessee.
22. Question answered in the affirmative.