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Modi Sugar Mills Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 652 of 1969
Judge
Reported in[1973]90ITR201(All)
ActsIncome Tax Act, 1922 - Sections 10(2)
AppellantModi Sugar Mills Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateK.C. Agarwal, Adv.
Respondent AdvocateR.R. Misra, Adv.
Excerpt:
- - several payments made in respect of legal proceedings taken on behalf of the former two companies as well as of the assessee-company in respect of their income-tax liabilities were made the subject of a claim by the assessee to deduction against the profits of the business under section 10(2)(xv) of the indian income-tax act, 1922, for the assessment year 1959-60. it was alleged that a total of rs......1956, with the modi sugar mills ltd., the assessee before us. several payments made in respect of legal proceedings taken on behalf of the former two companies as well as of the assessee-company in respect of their income-tax liabilities were made the subject of a claim by the assessee to deduction against the profits of the business under section 10(2)(xv) of the indian income-tax act, 1922, for the assessment year 1959-60. it was alleged that a total of rs. 6,672 was spent by the assessee in connection with the settlement of those income-tax matters. thefigure was ultimately reduced to rs. 6,312. assessments had been made and recovery proceedings had been taken by the income-tax department to the demands created. the legal proceedings taken included appellate proceedings taken before.....
Judgment:

Pathak, J.

1. The Income-tax Appellate Tribunal has referred the following question:

' Whether, on the facts and in the circumstances of the case, the expenses totalling Rs. 6,312 are an admissible charge against the income of the previous year '

2. The Modi Supplies Corporation Ltd. and the Modi Food Products Ltd. were amalgamated in 1956, with the Modi Sugar Mills Ltd., the assessee before us. Several payments made in respect of legal proceedings taken on behalf of the former two companies as well as of the assessee-company in respect of their income-tax liabilities were made the subject of a claim by the assessee to deduction against the profits of the business under Section 10(2)(xv) of the Indian Income-tax Act, 1922, for the assessment year 1959-60. It was alleged that a total of Rs. 6,672 was spent by the assessee in connection with the settlement of those income-tax matters. Thefigure was ultimately reduced to Rs. 6,312. Assessments had been made and recovery proceedings had been taken by the income-tax department to the demands created. The legal proceedings taken included appellate proceedings taken before the authorities, under the Income-tax Act, writ petitions filed in the High Court and legal opinion obtained in connection with those proceedings. The income-tax Officer rejected the claim and his decision was maintained by the Appellate Assistant Commissioner. The Tribunal, following the decision of this court in J.K. Cotton . v. Commissioner of Income-tax, [1962] 46 I.T.R. 970 (All.) also held that the expenditure incurred was not an admissible deduction.

3. We have heard learned counsel for the parties, and in our opinion the claim of the assessee should have been allowed. There is no dispute that the expenditure was incurred on legal proceedings intended to reduce the tax liability of the assessee. The consequence would have been to raise the profits of the assessee. It is not suggested on the basis of any material on the record that the expenditure was not reasonable and honestly incurred. The case falls within the rule laid down by the Supreme Court in Commissioner of Income-tax v. Birla Cotton Spinning and Weaving Mills, [1971] 82 I.T.R. 166(S.C.).The Supreme Court observed I

' 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 and honestly incurred ..... 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.'

4. Learned counsel for the revenue contends that cases involving concealment of income do not fall within the scope of that rule, and it cannot besaid that a proceeding taken by an assessee for escaping tax liabilityconsequent upon the discovery of concealed income is a proceeding honestlytaken. It seems to us that when the Supreme Court spoke of an expenditure reasonably and honestly incurred in taking legal proceedings, it referredto proceedings which were prosecuted bona fide and not with an ulteriormotive. If the object of the proceedings is to reduce the tax liability ofthe assessee, we see no reason why the case should not fall within the rulelaid down by the Supreme Court. The consideration that the case relatesto income alleged to have been concealed is not relevant at all. In the casementioned above, the Supreme Court specifically had in mind cases where income had escaped assessment and cases which attracted penalties. Moreover, no material from the record has been placed before us indicating that the proceedings in respect of which the expenditure was incurred had anything to do with concealed income.

5. In our opinion, the Tribunal erred in, holding that the deduction claimed by the assessee was not admissible. The question referred is answered in the affirmative.

6. The assessee is entitled to its costs, which we assess at Rs. 200. Counsel's fee is assessed in the same figure.


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