1. In this reference under Section 66 (1) of the Indian Income-tax Act 1922, at the instance of the assessee, the question for decision as propounded by the tribunal is -
'Whether the sum of Rs. 14,000/- spent by the assessee by way of professional fees to the Income-tax adviser for his services during the assessment proceedings before the tax Officer, is an admissible deduction under Section 10 (2) (xv) of the Indian Income-tax Act, 1922?'
2. During the assessment proceedings for the assessment year 1953-54, the assessee, M/s. Binodiram Balchand, Indore, claimed to deduct a sum of Rs. 14,000/- on account of fees paid to an income-tax adviser engaged in connection with and for the conduct of assessment proceedings before the Income-fax Officer. The deduction was disallowed by the Income-tax Officer on the ground that the payment said to have been made related to four accounting years. The assessee then preferred an appeal before the Appellate Assistant Commissioner, who disagreed with the view taken by the Income-tax Officer that the payment related to four accounting years. According to the Appellate Assistant Commissioner, the bill for the services rendered was sent by the income-tax adviser on 1st August 1952 which fell in the material year of account and the liability of the assessee to pay the amount of the bill arose on that date inasmuch as the accounts were maintained by the assessee on mercantile basis. The Appellate Assistant Commissioner, however, rejected the claim for deduction on the view that the amount of fees paid to the adviser was an amount for ascertaining and disputing the tax liability before the income-tax authority and was not any sum expended wholly and exclusively for the purpose of the assessee's business, that is to say, for the purpose of enabling the assessee to carry on, and earn profits in, the business. The Appellate Assistant Commissioner relied on the decision of the House of Lords in Smith's Potato Estates, Ltd. v. Balland, : 17ITR1(Mad) . The assessee then went up in appeal before the Income-tax Tribunal, Bombay. The Tribunal upheld the view taken by the Appellate Assistant Commissioner.
3. The answer to the question depends on a true construction of Clause (xv) of Section 10 (2) of the Act and especially of the expression 'for the purpose of such business, profession or vocation' occurring therein. That clause is as follows-
'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.'
It was argued by Shri Chitale, learned counsel appearing for the assessee, that the amount of Rs. 14,000/- paid by the assessee to the adviser was an expenditure of the assessee for the purpose of determining the correct figure of the profits of his business for assessment and was, therefore, an expenditure for the ascertainment of the profits of the business; and that as the profits could not be distributed or applied until ascertained and could not be earned until they were ascertained, the expenditure incurred for the purpose of ascertaining the profits was an expenditure incurred for earning the profits. Thus it was said that the expenditure of Rs. 14,000/- incurred by the assessee was wholly and exclusively laid out for the purpose of the business. Learned counsel strongly relied on the speeches of Viscount Simon and Lord Oaksey in : 17ITR1(Mad) . Referring to this decision of the House of Lords, he added that though the majority took a view contrary to that expressed by Viscount Simon and Lord Oaksey and ruled that legal and accountancy expenses of prosecuting an appeal against an income-tax or excess-profits tax assessment, incurred by a tax-payer with a view to reducing the assessment was inadmissible as a deduction as it was not laid out wholly and exclusively for the purposeof trade, all the Law Lords were unanimous in the view of that expenditure incurred for the purpose of ascertaining the taxable balance of profits before the Land Revenue Commissioners was justified on grounds of commercial expediency and was an expenditure wholly and exclusively laid out for the purpose of the assessee's trade.
4. In reply, learned Advocate General appearing for the Department contended that the expression 'for the purpose of such business, profession or vocation' used in Clause (xv) of Section 10 (2) connoted that the expenditure sought to be deducted must have been one incurred by the assessee for enabling him to carry on, and earn profits in, his business; and that it was not sufficient to show that the expenditure was incurred in the course of business but that it must also be shown that it was incurred for the purpose of earning the profits. Learned Advocate General commended to us for acceptance the view taken by the majority in : 17ITR1(Mad) . He also drew our attention to the decision of the Bombay High Court in S.D. Sharma v. Commr. of Income-tax : 45ITR107(Bom) , where, following the judgment of the majority in : 17ITR1(Mad) , it has been held that expenses incurred for the preparation of statements and accounts for tax purposes and expenses incurred in the engagement of a consultant for satisfying the tax authorities with regard to the said statements and accounts are expenses incurred for the purpose of ascertaining the tax liability and not for the purpose of carrying on the business or for earning profits, and such expenses cannot be allowed as business expenditure.
5. Having regard to the language of Clause (xv) of Section 10 (2), the question raised for determination is really this: Was the expenditure under consideration laid out or expended wholly and exclusively for the purposes of the assessee's business; for, unless it was so, its deduction cannot be allowed. This question must, we think, be answered in the affirmative. The controversy centres round the meaning of the expression 'for the purpose of such business, profession or vocation'. It must first be noted that Clause (xv) was amended in 1939. Before the amendment, an allowance was given in respect of 'any expenditure ...... incur-red solely for the purposes of earning such profits or gains'. By the amendment the limitation 'incurred solely for the purposes of earning such profits or gains' was deleted and deduction of ' an expenditure was made admissible if laid out 'wholly and exclusively for the purpose of such business .........' There is a vast distinction between the language of Clause (xv) as it stands now, and as it stood before it was amended in 1939, The expression 'Incurred solely for the purposes of earning such profits or grains' and the expression 'laid out or expended wholly and exclusively for the purpose of such business' are not synonymous. The latter expression is much wider in its scope than the former. The difference in the language of the old Clause (xv) was noticed by the Nagpur High Court in the Income-tax Appellate Tribunal, Bombay v. Chhaganmal Mangilal , and it was observed that the aforesaid two expressions werenot synccsaymous. In that case it was held that an expenditure may be for the purpose of business though it may not be incurred for earning the profits of the business. So also in Commr. of Income-tax, v. Jagannath Kissonlal, : 30ITR654(Bom) affirmed in : 41ITR360(SC) the difference betweenexpenditure laid out 'for earning the income' and expenditure laid out 'for the purpose of the business' was emphasized and it was held that anexpenditure may be incurred for the purpose of the business even though it may not help the assesseeto earn the income or increase his income. Inorder, therefore, to see whether a deduction claim-ed under Clause (xv) falls within its terms or not,it would not be legitimate to apply the test whether the expenditure of which deduction is claimed was incurred for the purpose of earning profits inthe business.
6. The tests to be applied in deciding whethera payment of money is a deductible expenditure under Clause (xv) of Section 10 (2) have been indicated by the Supreme Court in Income TaxCommr. v. Chandulal Keshavlal and Co. : 38ITR601(SC) and Income-tax Commr. West Bengal v. R.C. Turf Club : 41ITR414(SC) . In the first case, it has been held that in deciding whether an expenditure is a deductible one under Section 10 (2) (iv) one must take into consideration questions of commercial expediency and the principlesof ordinary commercial trading; and that the expenditure may be voluntary, but so long as it is incurred for the assessee's benefit the deduction would toe claimable. Another test, which was laiddown by the Supreme Court in : 38ITR601(SC) , was that if a transaction is properly entered into as a part of the assessee's legitimatecommercial undertaking in order to facilitate the carrying on of its business, it is immaterial that athird party benefits thereby. In : 38ITR601(SC) , the following observations of Viscount Cave, L.C., in Atherton v. British Insulated and Helsby Cables, Ltd. (1926) 10 Tax Cas 155 were quoted with approval.
'It was made clear in the above cited cases of Usher's Wiltshire Brewery v. Bruce 1915 AC 433 and Smith v. Incorporated Council of Law Reporting for England and Wales 1914 3 KB 674 that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business may yet be expended wholly and exclusively for the purposes of the trade'.
These tests were reiterated in : 41ITR414(SC) where it was held by the Supreme Court that an expenditure incurred by the Goyal Calcutta Turf Club on the training of Indian, boys as jokeys was an expenditure incurred for preventing the extinction of the assessee's business and was, therefore, wholly and exclusively laid out far the purpose of the assessee-Club's business. The Supreme Court referred to the decision in Morgan v. Tate and Lyle Ltd. 1955 AC 21 and to certain observations of Lord Morton of Henryton. That was a case in which the assessee-company was engaged in sugar refining business and itincured expenses in a propaganda campaign op-posing the threatened nationalisation of the industry. The House of Lords held that the object of the expenditure being to preserve the assets of the Company from seizure and so to enable the Company to carry on the business and earning profits, the expense was an admissible deduction being wholly and exclusively laid out for the purpose of the company's trade. The observations of Lord Morton, which the Supreme Court quoted, were thus -
'Looking simply at the words of the rule I would ask : 'If money so spent is not spent for the purpose of the company's trade, for what purpose is it spent?' If the assets are seized, the company can no longer carry on the trade which has been carried on by the use of these assets. Thus the money is spent to preserve the very existence of the company's trade.'
The wording of the relevant income-tax rules in England with reference to which Lord Morton made the above observation is as follows -
'The tax shall be charged without any other deduction than is by this Act allowed............
(3) In computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of (a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession employment or vocation............'
The expression 'the expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade, profession, employment or vocation' in the rule in England is similar to 'any expenditure.......... laid out or expended whollyand exclusively for the purpose of such business, profession or vocation' used in Section 10 (2) (xv) of our law. In 1955 AC 21 Lord Morton referred to the decision in Ward and Co. Ltd. v. Commissioner of Taxes of New Zealand 1923 AC 415 where the Privy Council considered the language of Section 86 (i) (a) of the New Zealand Land and Income Tax Act 1916, which provides as follows-
'In calculating the assessable income derived by any person front any source no deduction shall be made in respect of............ (a) expenditure orloss of any kind not exclusively incurred in the production of the assessable income derived from that source.'
The Privy Council held that expenditure incurred by the assessee, a brewery company, in financing a campaign to persuade the public to vote against the prohibition of the sale of intoxicating liquors, at a poll which was about to be taken was not a permissible expenditure as it was not incurred for the direct purpose of producing profits. Discussing the distinction between the New Zealand rule and English rule, Lord Morton said -
'The language of the New Zealand statute is much narrower than that of Rule 3 (a) and I think that if the Board had been applying Rule 3 (a) to the facts in the New Zealand case its decision might have been to the opposite effect. It is noteworthy that Lord Cave, in delivering the judgment of the Board, said that in order to take the expense in question out of the prohibition of Section 86(1)(a) of the New Zealand Act, 'it must have been incurred for the direct purpose of producing profits'. With this observation should be contrasted theobservation of Lord Cave, only three years later, in regard to Rule 3 (a) in British Insulated and Helsby Cables Ltd. v. Atherton 1926 AC 205. It was made clear in 1915 AC 433 and 1914 3 KB 674 that a sum of money expended not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade;'
7. It is thus plain that in determining whether the deduction of an expenditure is permissible under Section 10 (2) (xv), the test to be applied is of 'commercial expediency'' and it would be whether the expenditure of which deduction is claimed was necessary on grounds of commercial expediency and in order indirectly to facilitate the carrying on of the business. It is not necessary that the expenditure should be incurred for the direct purpose of earning profits or that there should be any direct co-relation in point of time between expenditure and earning of any profits. An expenditure may not help the assessee to earn or increase the income; but it may be necessary for the business from the point of view of commercial expediency. The 'commercial expediency' has to be determined from the point of view of the businessman and not from the point of view of the outsiders including the taxing authorities. Judged by this test the expenditure of Rs. 14000/- incurred by the assessee in the present case can legitimately be regarded as justified on grounds of commercial expediency for facilitating the carrying on of the assessee's business. The assessee's business is not confined to the twelve months of the relevant accounting period. It is continuous and extends beyond that period. It cannot be denied that profits cannot be distributed or applied for dividend, reserve and other purposes until they are ascertained and they cannot be ascertained till the assessee knows the amount he will have to pay by way of income-tax. The expenditure which the assessee incurs in persuading the taxing authorities in making a reasonable and legitimate assessment is an expenditure laid out wholly and exclusively for the purpose of the business. If the Department proposes to make a higher assessment and if the assessee succeeds in getting it reduced, he will naturally have larger profits to carry forward and thus is promoting the carrying on of the business. A heavy assessment may cripple the assessee's business altogether. Such an expenditure is no doubt for the purpose of ascertaining the tax liability and not for the direct purpose of earning profits. But indirectly it does facilitate the carrying on of the business and is justified on grounds of commercial expediency.
8. The case of : 17ITR1(Mad) was relied on by both sides. In that case it was held by the House of Lords that legal and accountancy expenses of prosecuting an appeal to the Board of Referees against a decision of the Inland Revenue Commissioners incurred by a tax-payer with a view to reducing the assessment made upon him as a trader for excess profits tax was not an admissible deduction under Rule 3 (a) of the Rules applicable to cases I and II of Schedule D of theIncome-tax Act, 1918 (8 and 9. Geo. 3, C. 40). In the House of Lords there was a sharp difference of opinion on the question decided in the above case. Viscount Simons, who was of the view that the deduction was permissible, stated his reasoning thus -
'It seems to me that it is essential for the proper carrying on of a trade that the trader should know what portion of his profits is a given you is left to him after the Revenue has taken its share by taxation. If therefore be consider 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 purpose 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 was 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 to 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.....Lord Davey's gloss on the words of the statute in Strong and Co. of Romsey v. Woodifield 1906 AC 448 : 75 LJ KB 864 is well known, but I think it is better to concentrate on the statutory words themselves. Rightly understood, however, I do not find that Lord Davey's words contradict the view I am disposed to take, 1906 AC 448 : 75 LJ KB 864 was a case in which the tax payer sought to deduct a loss not connected with or arising out of his trade. Lord Loreburn said (75 LJ KB 864 : 1906 AC 448: 'I think only such losses can be deducted as are connected with, in trade itself.' Lord Davey's test was that the purpose of the expenditure must be 'the purpose of enabling a person to carry on and earn profits in the trade' (at pp. 867 and 453 of the two reports). Here, the expenditure was in my view, incurred for the purpose of carrying on and earning profits in the trade, for the reduction in the amount of tax does increase the fund in the trader's hands after tax is paid and so promotes the carrying on of the trade and the earning of trading profits.' Lord Porter was inclined to think that the computation of accounts for tax purposes was not directly associated with the carrying on the business. He observed that -
'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 directory, undertaken for trade purposes but to satisfy the Revenue authorities.'
He then proceeded to say that the cool of making up accounts for the Inland Revenue is allowed by the authorities as a deduction from profits as is the cost of making up the strictly business accounts of the trade on grounds of expediency. Land Porter also said that tile deduction claimed was not wholly or exclusively laid out for the purpose ofthe trade; that it was in truth partially, if not wholly laid out in order to discover what sum was to be paid to the Crown out of the profits or gains which had already been earned and computed. Lord Simonds said -
'.........It is, I think, important to emphasizethat the words 'for the purposes of the trade' in their context i.e. where a computation of 'profits' for the ascertainment of the taxable income is being made, must mean 'for the purpose of enabling a person to carry on and earn profits in the trade' These familiar words I cite from Lord Davey's speech in 1906 AC 448 : 75 LJ KB 864 ............either the cost of ascertaining taxable profit nor the cost of disputing it with the Revenue authorities in money spent to enable the trader to earn profit in his trade. What profit he has earned, he has earned before ever the voice of the tax gatherer he is heard. He would have earned no more and no less if there was no such thing as income-tax. His profit is no more affected by the exigibility of tax than is a man's temperature altered by the purchase of a thermometer even though he starts by haggling about the price of it.'
Lord Simonds also felt that the deduction allowed by the Revenue authorities on account of accountancy charges in computing profits was justified 'as a practical matter.' Lord Normand was prepared to assume that the ascertainment of the proper amount of tax payable ought to be regarded as necessary for the proper carrying on of the trade and, therefore, for the earning of profits in the future. But he could not agree to the contention that the money spent in prosecuting an appeal could be said to have been laid out 'wholly and exclusively for the purpose of the trade'. He observed-
'It was laid out, as it appears to me, just as much if not more for the purpose of ensuring that the company, like any other taxpayer, should pay the proper amount of tax, no more and no less'.
Lord Oaksey, who was also one of the minority, said that trader who increases his profits by incurring a certain expense incurs that expense for the purpose of the earning profits; and that profits cannot properly be applied or divided until they are ascertained, and every expense which is properly incurred for the ascertainment of profits is an expense of earning the profits and not an application of them.
9. It will thus be seen that the ground of the majority judgment in the case of Smith's Potato Estates Ltd. : 17ITR1(Mad) was that the expenditure incurred by a trader in prosecuting an appeal before the Board of Referees was not incurred by the trader in earning profits, but by a tax-payer in settling his liability and was not wholly or exclusively laid out for the purpose of the trade. So far as the deduction of the cost and charges incurred in making up accounts of the Inland Revenue was concerned, all the Law Lords agreed that the expenditure was justified on the ground of commercial expediency. The question of the permissibility of deduction of expenses incurred in prosecuting an appeal before the Board of Referees was decided on the wording of Rule 3 (a) and not solely on the meaning put by Lord Davey in 1906 AC 448 : 73 LJ KB 864 on the words 'for the purposes of the trade' as connoting 'for thepurpose of enabling a person to carry on and earn profits in the trade'. It must be noted that the Law Lords, who expressed the majority view, have nowhere said that a deduction under Rule 3 (a) of the English rule cannot be allowed unless the expenditure has been incurred for the direct purpose of producing profits. Lord Davey did not say in 1906 AC 448 : 75 LJ KB 864 that the earning of the profits must be by the operations of the trade, and the reference by the majority in (1949) 17 ITR to Lord Davey's explanation of the words 'for the purposes of the trade' was not for emphasizing the fact that expenditure must be for earning profits in the trade but that it must be for the purpose of carrying on the trade and earning profits in it. If, as held in 1954 26 ITR 195, for the purpose of Rule 3 (a) it is not necessary that the expenditure must have been incurred for the direct purpose of producing profits, then it follows that an expenditure incurred on grounds of commercial expediency and for the purpose of indirectly facilitating the carrying on of the business would be an expenditure laid out 'wholly and exclusively for the purpose of the trade'. The fact that when a trader pays income-tax he pays as an individual like any other individual does not alter the position that the tax he pays is on the sum which he has earned as a trader and the expenditure incurred by him in determining his tax liability on the profits of his trade is an expenditure incurred by him, not as an individual but as a trader, and is one wholly and exclusively laid out for the purpose of his business. The view expressed by Viscount Simon and Lord Oaksey in : 17ITR1(Mad) , with which we are in respectful agreement, undoubtedly supports the contention of the assessee in the present case. But the observations of other Law Lords on the permissibility of deduction of the cost of making up accounts for the Inland Revenue on the ground of commercial expediency also help of assessee.
10. Learned Advocate General also called in aid the decision of the Bombay High Court in : 45ITR107(Bom) . In that case the question raised for consideration of the Court was whether an amount paid by the assessee to an income-tax consultant as fees in connection with proceedings pending before the Income-tax Officer with regard to concealment of income by the assessee could be deducted under Section 10 (2) (xv) of the Act. The question was answered in the negative by the learned Judges of the Bombay High Court. The decision in the case of Smith's Potato Estates Ltd. : 17ITR1(Mad) was referred to and the learned Judges expressed their agreement with the majority view expressed therein. A careful perusal of the judgment in S. D. Sharma's case : 45ITR107(Bom) 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. : 17ITR1(Mad) . The learned Judges of the Bombay High Court said that even if it be assumed 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 regardedas expenses laid out for the purpose of the trade still the expenses incurred by an assessee for the purpose of getting out of the difficulty, which he had created by concealment of income and avoiding the penal consequences of his action, could not be said to have been incurred for the purpose of the trade or business, inasmuch as neither the concealment of income nor the attempt to get out of the penal consequences of concealment could be said to have any connection with the carrying on of the trade or earning profits of the trade. The Bombay case is thus distinguishable by the fact that therein the expense incurred was in connection with the proceedings for infraction of law and for avoiding the consequent penalties. The payment had nothing to do with the trade. It was not incurred by the assessee is his character as a trader.
11. Our attention had also been drawn to the decision 'of the Madras High Court in Board of Revenue v. Muniswarm Chatti and Sons, ILR 47 Mad 653 : AIR 1924 Mad 205, in which it was held that the charges and costs incurred by an assessee in employing accountants and lawyers in connection with a dispute between him and the Government as to the amount of excess profits duty payable by him could not be deducted from the gross income since such charges and costs were not expenditure within the meaning of Section 9 (2) (ix) of the Income-tax Act, 1918, incurred solely for the purpose of earning such profits but were charges incurred after the profits were earned. This decision is not of any assistance in determining whether an expenditure is allowable under Section 10 (2) (xv) of the Indian Income-tax Act, 1922, for the simple reason that Section 9 (2) (ix) of the Act of 1918 allowed a deduction of only that expenditure which was 'incurred solely for the purpose of earning such profits''. The difference between the language c f Section 10 (2) (xv) and the expression 'any expenditure ..... incurred solely for the purpose ofearning such profits' has already been pointed nut earlier in this Judgment. It may be noted that the circular issued by the Central Board of Revenue on 24th August 1928 (see Income-Tax Circulars --Vol. II -- page in) saying that the cost of audit and similar operations conducted specially for income-tax purposes, whether in connection with assessments, either appeals or with revision petitions, cannot legally be allowed as a deduction from taxable profits, is based on the above decision of the Madras High Court. This circular is clearly not in accord with the view we have expressed on the question of permissibility of deductions under Section 10 (2) (xv) of the Indian Income-tax Act, 1922.
12. For the foregoing reasons, our answer to the question referred to us is that the sum of Rs. 14,000/- paid by the assessee to the income-tax adviser for his services during the assessment proceedings before the Income-tax Officer is a permissible deduction under Section 10 (2) (xv). The Assessee shall have costs of this reference. Counsel's fee is fixed at Rs. 150/-.