S.N. Andley, J.
(1) The Income-tax Appellate Tribunal (Delhi Bench 'B') has referred the following two questions to this Court under section 66(1) of the Indian Income-tax Act, 1922, hereinafter referred to as 'the Act' :-
'1. Whether the sum of Rs. 5,556.00 is an admissible charge against the income of the previous year 2. Whether on the facts and in circumstances of the case the sum of Rs. 24,252.00 is an item taxable in the previous year under the provisions of section 10(2) (vii) ?'
(2) The assessed is a firm which carries on business as forest contractors and has several branches. The business which the assessed is carrying on was previously being carried on by the Hindu undivided family. The Hindu undivided family was disrupted on March 22, 1956 and on this very date the assessed firm came into existence. On such disruption, all the assets and liabilities of the Hindu undivided family had been taken over by the assessed firm as standing in the books of the Hindu undivided family as a running concern. According to the Tribunal 'the business was taken over by the assessed firm as a running concern from the Hindu undivided family.' This reference relates to the assessment year 1958-59.
(3) We will deal with the first question first. The assessed firm claimed legal expenses and professional fees aggregating Rs. 5,556.00 as follows:-
(i) Expenses in connection with the representation to the Central Board of Revenue & other appeal expenses paid to M/s. P. R. Mehta and Co. .. Rs. 2.483.00 (ii) Expenses in connection with the settlement of old asses segment with the Directorate of Inspection (Investigation) paid to M/s. Khanna and Annadhanam. .. Rs. 2,758.00 (iii) Expenses in connection with the above to Sh. K. N. Rajagopal Shastri. .. Rs. 315.00 Total . . Rs. 5.556.00
The Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal disallowed the deduction which was claimed under section 10(2) (xv) of the Act as being expenditure laid out or expended wholly and exclusively for the purpose of the business of the assessed.
(4) On the erroneous ground that the reference in the present case lay to the Allahabad High Court, the Tribunal felt bound to follow the decision of that Court reported in 46 I.T.R. 1970in re: J. K. Cotton . v. Commissioner of Income-tax, U.P. and V.P. ( I ) holding that legal and accountancy expenses incurred with a view to satisfying tax authorities with regard to statements and accounts is not expenditure incurred wholly and exclusively for the purposes of the business. The Tribunal did not follow the decision of the Madhya Pradesh High Court reported in : 48ITR548(MP) in re : Binodiram Bed Chand v. Commissioner of Income-tax, M.P. holding that the sums paid by an assesses 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 are deductible under the aforesaid section.
(5) In our opinion, the controversy is now set at rest by the decision of the Supreme Court reported in : 82ITR166(SC) in re : Commissioner of Income-tax, West Bengal v. Birla Cotton Spinning and Weaving Mills Ltd.. This decision was on appeal from a decision of the Calcutta High Court reported in : 64ITR568(Cal) . In this case, the assessed company had 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 the Taxation on Income (Investigation Commission) Act, 1947, and claimed to deduct these sums as business expenditure. The Supreme Court held,-
''THATthe law charges were expenses incurred for the preservation and protection of the assessed's business from any process or proceedings which might have resulted in the reduction of its income and profits. Even otherwise the expenditure was incidental to the business and was necessary situated or justified by commercial expediency. The expenditure which was incurred by the assessed in opposing a coercive Government action with the object of saving taxation and safeguarding business was justified by commercial expediency and was thereforee allowable under section 10(2) (xv) of the Income-tax Act, 1922.'
In holding this, the Supreme Court observed:-
'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 assessed takes any steps for reducing its liability to tax which resulted in more funds being left for the purpose of carrying on the business there is always the possibility of higher profits. If a trader 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 endeavoring to correct the mistake is a disbursement laid out for the purpose of his trade.'
(6) The Supreme Court further observed that however wrong headed, ill-advised, unduly optimistic or over-confident in his convictions, the assessed might appear in the light of the ultimate decision, expenditure in prosecuting a civil proceeding cannot be denied as a permissible deduction if it is reasonably and honestly incurred to promote the interest of the business. The proposition that emerges from the decision of the Supreme Court is that if the assessed incurs expenditure reasonably and honestly to promote the interest of the business and takes any steps for reducing its liability or in endeavoring to correct a mistake, such expenditure must be held to be laid out the purpose of his trade and, thereforee, admissible as a deduction under section 10(2) (xv) of the Act.
(7) Mr. Sharma for the Revenue has contended that the Supreme Court did not take into consideration the following points:-
( I ) The purpose of the expenditure in question must have a direct connection or nexus with the carrying on of the business. Business would be carried on even if the demand of income-tax was contested. On the other hand, income- tax would be payable whatever be the head of income 'business' or 'salary' or 'property'. thereforee, any expenditure incurred for the purpose of reducing levy of income-tax is not an expenditure incurred for the purpose of carrying on the business. (2) All income after it has been earned becomes capital. Income-tax being the tax levied after income has been earned merely depletes the capital of the subject. This is so with respect to every person whether he is carrying on business or not and, thereforee, income-tax paid is not allowed as a deduction in computing the taxable income. (3) Any expenditure incurred to reduce the levy of income-tax is for the preservation and protection of capital assets and is, thereforee, in the nature of capital expenditure, against the allowance of which there is express, prohibition in section 10(2) (xv) of the Act. (4) The expenditure in question was incurred by the assessed in the capacity of owner of capital and not in his capacity as a trader. (5) Recognition of such expenditure as revenue expenditure only in the case of persons carrying on business in contra-distinction to persons who earn income under other heads, say, 'salary' or 'property', where it cannot be allowed, would lead to discrimination between the tax payers.
(8) We have not called upon Mr. Karkhanis who appears for the assessed to reply to these points because we must assume that all aspects of the question must have been taken into consideration when the Supreme Court gave its judgment and we do not, thereforee, consider it necessary to discuss any of these points
(9) The answer to the first question must, thereforee, be in the affirmative.
(10) The second question relates to the dispute with regard to the taxability of a sum of Rs. 24.152.00 realised by the assessed by sale of three trucks. These three trucks belonged to the Hindu undivided family and become the property of the assessed when the assessed took over all the assets and liabilities of the Hindu undivided family as standing in its books as a running concern. The amount of Rs. 24.252.00 was computed by the Income-tax Officer as follows :-
1. Sale price of Truck No. Usr 979 Rs.5,500.00 2. Sale price of Truck No. Usr 980 Rs. 6,500.00 3. Sale price of Truck No. Usr 1746 Rs. 12,252.00 Total: Rs. 24,252.00
The written down value of the trucks at items Nos. I and 2 above was exhausted in the assessment year 1952-53 while the written down value of the truck at item No. 3 was exhausted in the assessment year 1956-57 when they belonged to the Hindu undivided family and, thereforee, the whole of the sale price was taken as profit under section 10(2) (vii) of the Act. The Tribunal held that 'since the business was taken over by the assessed firm as a running concern. from the Hindu undivided family, the written down value in the hands. of the assessed firm is to be taken as that in the hands of the Hindu undivided family. The surplus realised on the sale of these assets representing the sale price over the written down value was, thereforee, rightly subjected to tax in the assessed's hands.'
(11) It may be restated that the written down value of all the three trucks had been exhausted while they were still the property of the Hindu undivided family and in the assessment year 1957-58, no depreciation was allowed to the assessed firm with respect to any of these trucks whose written down value in the books of the Hindu undivided family was zero. The question is whether the written down value of these trucks in the hands of the assessed firm is to be taken, as found by the Tribunal, as that in the hands of the Hindu undivided family. The contention of the assessed firm is that the cost of these trucks to it in the assessment year 1957-58 was the same as their written down value in the books of the Hindu undivided family which was zero.
(12) Now, the tax payable by an assessed in respect of the profits or gains of any business, profession or vocation carried on by him under sub-section (1) of section 10 of the Act is to be computed after making the allowances enumerated in sub-section (2). Clause (vii) of sub-section (2) provides for an allowance in respect of building, machinery or plant used for the purposes of the business, profession or vocation which has been sold or discarded or demolished or destroyed which is equal to the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant, as the case may be, is actually sold or its scrap value. The case where the sale price is in excess of the written down value is dealt with by the second proviso to clause (vii). This proviso is in these terms:-
'PROVIDEDfurther that where the amount for which any such building, machinery or plant is sold.......... exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place.'
Written down value has been defined in sub-section (5) of section 10 in the case of assets acquired in the previous year and in the case of assets acquired before the previous year. In the case of assets acquired before the previous year as in the present case, the written down value means the actual cost to the assessed less all depreciation actually allowed to him under the Act or any of the other Acts mentioned in subjection (5).
(13) It is not disputed by the assessed that if the Hindu undivided family had continued the business and had sold these trucks, the entire sale proceeds would have been subjected to tax as revenue income under the aforesaid second proviso as the written down value in its books was zero. It cannot also be disputed that if the Hindu undivided family had sold the trucks to a stranger, the 'original cost' to the stranger would be the price for which he purchased the trucks and on which he, in his turn, would be entitled to claim depreciation.
(14) The contention of the assessed is that since it took over the business of the Hindu undivided family as a running concern, the original cost of the trucks to it would be zero and since the written down value of the trucks is also zero, the excess cannot be brought to tax as only such excess can be brought to tax as does not exceed the difference between the original cost and the written down value. In other words, the original cost being zero and the written down value being zero, the difference between the two must also be zero and, thereforee, there is no question of the difference of the excess between the original cost and the written down value being brought to tax as profits of the previous year in which the sales took place. It is, thereforee, necessary to see whether the original cost to the assessed firm in this case is zero as contended ..by it or it is the original cost as entered in the books of the Hindu undivided family.
(15) It is true that the relation of partnership arises from contract and not from status and that the members of a Hindu undivided family carrying a family business as such are not partners in such business. But it appears to us that in the present case there was merely a change in the style and nature of the Hindu undivided family on March 22, 1956.
(16) It is clear from the order of assessment of the Income-tax Officer for the assessment year 1956-57 (annexure 'D') of the Hindu undivided family that although disruption had taken place on March 22, 1956, 'the accounts for the full year up to 31-3-56 have been examined and on proportionate time basis the income is allocated between the Hindu undivided family and the firm which came into existence as a result of partition of the family.' It, thereforee, follows that the business of the Hindu undivided family continued to be the business of the assessed firm. All that happened on March 22, 1956, was that instead of having undivided shares in the business of the Hindu undivided family, the coparceners defined their shares by forming into a firm. It was, thereforee, a case of the same persons continuing to carry on the same business with merely a change in the name and style of the business and with defined shares. The Tribunal has also found, as stated earlier, that the business of the Hindu undivided family was taken over by the assessed firm as a running concern. In these circumstances, the original cost of the trucks to the assessed firm would be the same as to the Hindu undivided family, It was not disputed that in such a case the entire sale price of the trucks had been rightly subjected to tax deeming it to be profits of the previous year in which the sales took place. We cannot, thereforee, accept the contention that the original cost of the assessed is zero.
(17) In this view of the matter, the answer to the second question must be in the affirmative.
(18) In view of the partial success of the assessed, there will be no order as to costs of this reference.