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income-tax Officer Vs. Smt. Vijayalaxmi N. Mafatlal - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1985)12ITD12(Mum.)
Appellantincome-tax Officer
RespondentSmt. Vijayalaxmi N. Mafatlal
Excerpt:
.....is an individual having share income from the firm of textile distributors & agents, dividend income, income by way of interest and director's fees. during the year of account, the assessee claimed a deduction of legal expenses totaling up to rs. 5,219 incurred in connection with gift-tax and wealth-tax proceedings. the break up of the above amount was given as :(a) wealth-tax for 1976-77 200(b) gift-tax for 1976-77 100(c) amount paid to j.b. dadachandji for appeal work for1971-72 1,219(d) amount paid to manilal kher ambalal & co. forgift-tax work of 1975-76 3,700total 5,219 the sum of rs. 1,219 was paid in connection with an appeal to the supreme court, whereas the sum of rs. 3,700 was paid in connection with a writ petition filed in the bombay high court. the ito disallowed.....
Judgment:
1. The assessee is an individual having share income from the firm of Textile Distributors & Agents, dividend income, income by way of interest and director's fees. During the year of account, the assessee claimed a deduction of legal expenses totaling up to Rs. 5,219 incurred in connection with gift-tax and wealth-tax proceedings. The break up of the above amount was given as :(a) Wealth-tax for 1976-77 200(b) Gift-tax for 1976-77 100(c) Amount paid to J.B. Dadachandji for appeal work for1971-72 1,219(d) Amount paid to Manilal Kher Ambalal & Co. forgift-tax work of 1975-76 3,700Total 5,219 The sum of Rs. 1,219 was paid in connection with an appeal to the Supreme Court, whereas the sum of Rs. 3,700 was paid in connection with a writ petition filed in the Bombay High Court. The ITO disallowed the claim on the ground that none of these expenses are relatable to the earning of the assessee's income from dividend.

2. On appeal, the Commissioner (Appeals) allowed the claim. According to him, the expenses incurred in connection with the wealth-tax and gift-tax proceedings were proper deductions having been incurred in preserving and in restricting the revenue's inroads against the income earning assets. The department has come up on appeal against the above order of the Commissioner (Appeals).

3. The learned counsel for the department has pointed out that the assessee does not carry on any business of her own. In the return, the claim was made against the gross dividends. According to the learned counsel, the assessee having no business of her own, the claim cannot be allowed under Section 37 of the Income-tax Act, 1961 ('the Act'), nor can it be deducted in the circumstances of the case under Section 57 of the Act. As regards the share income, the deduction of interest, if at all, can be made only under Section 67 of the Act, which is also not possible in the present case. Any direction under Section 37 has to be of an expenditure laid out wholly and exclusively for the purposes of the business. In the absence of a business the application of Section 37 is straightaway ruled out. Section 57 has a more limited scope than the allowance under Section 37. In the former, allowance is restricted to items spent on 'making or earning income'. In the assessee's case, the expenditure on legal fees is an application of the already earned income from other sources. Granting that, recourse can be had to Section 37, capital and personal expenditure are not allowable under that section. In the present case, the expenditure is purely personal. Section 58(1) of the Act also rules out the allow ability. The question, according to the learned counsel, is whether in the case of an individual not carrying on business but deriving income from other heads of income, any expenditure can be allowed under Section 37. Section 37 comes in only where a business is carried on, prima facie, therefore, that section does not apply. The allow ability of expenditure under Section 57 is also ruled out because it is not for earning the income in the present case. It is also of a personal nature falling under the prohibition of Section 58. It is incurred in the capacity of an individual and not a trader. Reliance is placed in this connection on the decision of the Supreme Court in the case of Haji Aziz & Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350. The principles applicable for the admissibility of an expenditure under Sections 37 and 57 are different. An expenditure incurred indirectly even if allowable under Section 37 cannot be allowed under Section 57 so that the decisions under Section 37 will not apply to a case which comes under Section 57. It is also pointed out that motives for incurring an expenditure such as the preservation of an asset are not relevant. What is relevant is the purpose of incurring the expenditure. A remote connection justifying the expenditure is not, therefore, enough for the allowance. Legal fees in the present case sought to have been incurred for yielding more income is, therefore, according to the learned counsel, not allowable. It is also pointed out that these items of expenditure do not pertain to the year of assessment, viz., 1979-80, but to the other assessment years such as 1971-72, 1975-76 and 1976-77, though paid during the year. The learned counsel has referred to several decisions, all going to show that an expenditure which does not directly relate to the earning of the income cannot be allowed. The Gujarat High Court in the case of Smt. Padmavati Jaykrishna v. CIT [1975] 101 ITR 153, and also Smt. Virmati Ramkrishna v. CIT and Smt.

Arundhati Balkrishna v. CIT [1981] 131 ITR 659 (App.) elaborately deals with the cases and justify the non-allowance. Though reference could be made to the decision of the Bombay High Court in the case of Century Spg. & Mfg. Co. Ltd. v. CIT [1979] 116 ITR 301, it is pointed out that this decision was given on the peculiar facts of the case.

4. For the assessee it is pointed out that the question brought up for consideration was unusally restricted in scope. It was not correct to say that the assessee was not carrying on a business. She had substantial income by way of share from a firm. This is assessable under the head 'Profits and gains of business or profession'. The question, therefore, for decision referring to 'an assessee not carrying on business as such' does not bring out the correct factual position. Dealing with the actual disbursement, it is pointed out that the payment made to J.B. Dadachandji is justified by the decision of the Supreme Court in the case of CGT v. Smt. Kusumben D. Mahadevia [1980] 122 ITR 38. The assessee, in the present case, is carrying on a business though along with other persons in partnership. Section 37 clearly applies. The expenditure can be claimed as relating to her share of income in the firm assessable as business income.

Alternatively, the deduction is allowable under Section 57. The decision of the Gujarat High Court in the case of Padmavati Jaykrishna v. CIT [1981] 131 ITR 653 is given in a different context. The decision of the Supreme Court in the case of CIT v. Birla Cotton Spg. & Wvg.

Mills Ltd. [1971] 82 ITR 166 has not been properly appreciated. The other cases referred to for the disbursement, according to the learned counsel, deal with a different situation such as, where the assessee has no business. Thus, the decision of the Supreme Court in the case of T.S. Krishna v. CIT [1973] 87 ITR 429 and the decision of the Gujarat High Court in the case of Smt. Padmavati Jaykrishna {supra) are not applicable to his case at all. On the contrary, the learned counsel has sought to bring his facts within the direct decisions of the Bombay High Court in the cases of Addl. CIT v. India United Mills Ltd. [1983] 141 ITR 399 and Century Spg. & Mfg. Co. Ltd. (supra). The principles enunciated in these cases would apply to Section 57. Unless the source of income is preserved, it cannot earn income. The concept of protection and preservation of the assets, therefore, is the same whether the matter is looked at in the light of Section 37 or Section 5. The facts lie in a limited compass. That the assessee has incurred certain legal expenses and these relate not to the previous year but to the earlier years is also not in dispute. They were, however, paid during the year. The question raised for the consideration of the Special Bench refers to an assessee not carrying on business. The assessee, in the present case, cannot be said to be not carrying on a business. She has been assessed on the share income received from a firm. This is assessable only under the head 'Profits and gains of business or profession'. Entering into a partnership and doing business is only one of the several modes of doing business. It is not absolutely necessary for treating a person as carrying on business that he should do the business by himself and not through others or an agency like the partnership. The decisions, therefore, concentrating on an allowance under Section 57 above, would not in the circumstances of the case apply to the assessee. In India United Mills Ltd.'s case (supra), the expenditure incurred by way of legal fees for conducting income-tax appeals and legal fees paid to solicitors for appearing before the Collector in connection with the threatened attachment of property in the course of recovery of income-tax demands was held by the Bombay High Court to be expenditure incurred for the preservation and protection of the business and incidental to the business. The expenditure was held deductible under Section 10(2)(xv) of the Indian Income-tax Act, 1922 ('the 1922 Act') corresponding to Section 37 of the 1961 Act. Their Lordships relied on their earlier decision in the case of CIT v. Gannon Dunkerley & Co. Ltd. [1979] 119 ITR 595 (Bom.).

In Century Spg. & Mfg. Co. Ltd.'s case (supra) their Lordships of the Bombay High Court had the occasion to consider the allowability as a deduction of professional fees paid with regard to the wealth-tax assessment in arriving at the total income of the assessee. Relying on the decision of the Supreme Court in the case of Indian Aluminum Co.

Ltd. v. CIT [1972] 84 ITR 735, their Lordships held that such expenditure was allowable. The above two cases decided by the Bombay High Court deal with expenses in connection with business. These binding decisions apply to the present case, if it is accepted that the assessee has a business carried on. Since, as a matter of fact, the share income from business is assessed as business income, on the ratio of these Bombay High Court decisions, the legal expenditure relevant to the business has to be allowed.

6. A catena of decisions have held that where expenditure is laid out to preserve the assets of a business, such expenditure is a clear deduction. The lines have been drawn between expenditure in the capacity of an individual unconnected with business and expenditure incurred otherwise. In the case of CIT v. Sri Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC) civil litigation expenditure was held allowable.

In CIT v. Dhanrajgirji Raja Narasingirji [1973] 91 ITR 544 (SC) involving expenses in connection with criminal case, the legal expenses were held to be allowable. In Indian Aluminium Co. Ltd.'s case (supra), the Supreme Court held that the wealth-tax paid by the assessee, a trading company, on assets held by it for the purpose of its business, was deductible as a business expenditure in computing the assessee's income from business. This case came up before the Supreme Court for a reconsideration of the decision of the Supreme Court in Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277. In Indian Aluminium Co.

Ltd.'s case (supra), the judgment of Sikri, CJ. delivered on his own behalf and on behalf of Grover, Ray and Palekar, JJ. held that when a person has a dual capacity, i.e., he is owner-cum-trader, any tax paid in respect of property which is used for the purpose of trade must be taken to be in the capacity of a trader according to ordinary commercial principles. Their Lordships modified and overruled in part the decision in Travancore Titanium's case (supra) by observing of the report : In our view, the test adopted by this Court in Travancore Titanium case [1966] 60 ITR 277 that 'to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business' needs to be qualified by stating that if the expenditure is laid out by the assessee as owner-cum-trader, and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business.

Dealing with a situation where an individual has both business assets and debts and non-business assets and debts, their Lordships observed that it should not be difficult to evolve a principle or statutory rules to find out the proportion of the tax which is really incidental to the carrying on of the assessee's trade. The clear position which arises out of these decisions is : Where the expenditure is personal and unconnected with business, it is not allowable. Where the expenditure is entirely relatable to the business, it is allowable.

Where the person has a dual capacity of a trader-cum-owner and incurs an expenditure in connection with property used for the purpose of trade, the payment must be taken to be in the capacity of a trader according to ordinary commercial principles. Indian Aluminium Co.

Ltd.'s case (supra) was dealing with the payment of wealth-tax on assets. Having in view the several decisions dealing with legal and professional expenses justifying deduction on the ground of protection of assets, claims in respect of these expenses would also be governed by the same principles as in the case of wealth-tax referred to in Indian Aluminium Co. Ltd.'s case (supra). The view earlier held that where an expenditure is incurred as the owner of assets, even if they are assets of the business, should not be allowed has clearly been given a go-by by the liberal interpretation given in Indian Aluminium Co. Ltd.'s case (supra).

7. As far as the items of expenditure claimed in the present case are concerned, they are on account of professional expenses relating to wealth-tax and gift-tax. The exact distribution of assets of the assessee between the several income earning heads 'Income from house property', 'Profits and gains of business or profession', 'Income from other sources', etc., are not clear to us, the information in this regard before us being not complete. We have held that the assessee has income from business. It might be that the business assets are included either as such or as part of the share of a partnership in the net wealth. It is also likely that a valuation made for the purpose of wealth-tax or gift-tax of any assets, if not contested by the assessee, would by the adoption of the same principles or methods of valuation affect other assets of the assessee in business. Any number of situations could arise whereby the professional expenses incurred in settling the wealth-tax and gift-tax liabilities of the assessee would be relevant in respect of some other assets as forming part of the business and other assets. A decision as to the allowability of the professional or legal expenditure can, therefore, be decided by an ascertainment of the exact nature of the expenditure incurred in the background of the business done by the assessee. From the details before us, the purpose for which this expenditure was incurred and the extent to which in the light of the decided cases it would go to preserve or affect the business assets of the assessee can clearly be inferred. To that extent the expenses would certainly be allowable. As stated by their Lordships of the Supreme Court in the case of Indian Aluminium Co. Ltd. (supra), it should not be difficult to evolve a method to find out the exact extent or proportion of the expenses incurred incidental to the carrying on of the trade leaving the balance to be allowed against other sources.

8. The other claim is that of the deduction under Section 57. For the department reliance was placed on the decision of the Gujarat High Court in Padmavati Jaykrishna's case (supra) where their Lordships followed their earlier decision in the case of Smt. Virmati Ramkrishna (supra). This case considered elaborately the allowability of the legal expenses in the context of Section 57 and came to the conclusion that such expenditure was not allowable. Their Lordships analysing the statutory language and the principles laid down in the decided cases made out 12 propositions [see page 672 of Smt. Virmati Ramkrishna's case (supra)]. In the light of the above propositions, the Court proceeded to examine whether the fees paid in connection with the income-tax and wealth-tax matters were proper deductions. In that case the assessee claimed deduction on account of interest deficit of a sum of Rs. 33,516. The interest was paid in respect of certain borrowings made by the assessee, which were utilised partly for investment in shares, etc., and partly for meeting personal liabilities like payment of income-tax and household expenses. Considering the withdrawals made during the year, the 1TO allotted Rs. 24,491 as pertaining to investment and the balance for personal purposes. On this basis he disallowed a sum of Rs. 8,666. The disallowance was upheld by the Gujarat High Court. Their Lordships stated that to decide the question whether an expenditure was a permissible deduction under Section 57(iii), the nature of the expenditure must be examined. They held that the expenditure relating to the investment part was allowable (having been allowed by the 1TO and the balance was not allowable. This decision clearly supports a claim of deduction of an expenditure under Section 57(iii) in appropriate circumstances. Legal expenses may not be personal expenses or represent any capital expenditure of the assessee.

By incurring such expenditure the assessee could successfully resist and protect assets like shares yielding dividend income from the arbitrary valuations and assessments made by the department both under the gift-tax and under wealth-tax enactments. In the present case, the assessee was obliged to take the matter both before the Supreme Court and also in the High Court in order to get rid of such arbitrary assessments. The assessee's claim for deduction of such expenditure under Section 57(iii) would get support from the decisions in D.Mohideen Sahib & Co. v. CIT [1950] 18 ITR 200 (Mad.), Bai Bhuriben Lallubhai v. CIT [1956] 29 ITR 543 (Bom.), Seth Shiv Prasad v. CIT [1972] 84 ITR 15 (All.) and Smt. Padmavati Jaykrishna's case {supra).

The principle deducible from these decisions is that unless the source from which the income is derived exists, income cannot be earned and the expenditure for the purpose of making or earning the income from that source must be deducted. To protect a source of income such as the shares in the present case, the assessee has necessarily to take all steps including proceedings before the High Court and the Supreme Court to preserve and protect the asset against the onslaught of arbitrary assessments and valuations.

9. In the case of Bai Bhuriben Lallubhai {supra), the Bombay High Court held that if an assessee has no option except to incur an expenditure in order to make the earning of an income possible, then undoubtedly the exercise of that option is compulsory and any expenditure incurred by reason of exercise of such option would come within the ambit of Section 12(2) of the 1922 Act. The only limitation imposed is that where the option has no connection with the carrying on of the business or earning of the income but depends upon personal considerations or upon motives of the assessee the expenditure cannot be allowed.

10. The Bombay High Court decision has been followed by the Gujarat High Court in Smt. Padmavati Jaykrishna's case {supra). Their Lordships considered the distinction between the incurring of an expenditure in the capacity of an individual and a trader on the one hand and also the scope of the expenditure allowed under Section 57 in the context of the distinction between 'motive' and 'purpose'. The immediate purpose of incurring the expenditure was a dual one, viz., to discharge tax liability and to save the source of income. The first does not qualify for the deduction. It is pointed out for the assessee that the concept of protection and preservation of the assets considered and justified for deduction under Section 37 is the same as that under Section 57.

The above decisions support the claim. If the allowance of the disputed expenditure can be made against dividends and other income from other sources, the assessee's claim has to be accepted.

11. Thus, there can hardly be any doubt that the expenditure claimed by the assessee in the present case would qualify for deduction either under Section 57(iii) or under Section 37(1). In fact, a major portion of the expenditure claimed by the assessee has been incurred in prosecuting the proceedings before the Supreme Court and the Bombay High Court in connection with the settlement of the wealth-tax assessments and gift-tax assessments involving proper basis of valuation of shares held by the assessee or gifted by the assessee, as the case may be.


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