1. The following question has been referred to this court under Section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act') by the Income-tax Appellate Tribunal on an application made by the Commissioner of Income-tax :
'Whether, on the facts and in the circumstances of the case, the litigation expenditure of Rs. 6,000 was a permissible allowance under Section 10(2)(xv) of the Indian Income-tax Act, 1922 ?'
2. The assessed-firm is carrying on business of import and export of iron and steel. Chaman Lal, one of the partners of the assessed-firm, was prosecuted in the court of the Chief Presidency Magistrate, Bombay, on a charge of having contravened the provisions of Section 4(3), read with Section 23, of the Foreign Exchange Regulation Act, 1947. According to the prosecution case, Chaman Lal, after having acquired foreign exchange to the extent of 9,841-15-9 as representing the true and correct value of mild steel bars, did not use 840, out of that amount, for the purpose for which the foreign exchange had been acquired. The defense of the accused was that the foreign exchange had been utilised for the very purpose for which it had been acquired, namely, for remittance to Messrs. Ironside Ltd., London, who actually placed the order on a Japanese concern for the supply of the goods. The Chief Presidency Magistrate as per judgment dated December 14, 1957, held that foreign exchange acquired by the assessed-firm had been utilised for the purpose for which it had been acquired and no portion of it had remained unused. He, accordingly, acquitted the accused. The assessed-firm incurred an expenditure of Rs. 6,000 on the defense of Chaman Lal during the previous year ending on March 31, 1958, relevant to the assessment year 1958-59.
3. The assessed-firm claimed that the expenditure of Rs. 6,000 should be deducted in computing its business income. The Income-tax Officer held that the said expenditure of Rs. 6,000 was not incidental to the assessed-firm's business and rejected the firm's claim. The assessed-firm then filed an appeal before the Appellate Assistant Commissioner contesting the disallowance of the sum of Rs. 6,000. The Appellate Assistant Commissioner held that the prosecution launched against the partner was directly connected with one of the consignments of goods imported by the assessed-firm and it could not thereforee, be said that the case against one of the partners of the assessed-firm was not connected with the assessed-firm's business. The Appellate Assistant Commissioner, accordingly, allowed the sum of Rs. 6,000 as deduction. The department then preferred an appeal before the Tribunal objecting to the allowance of the sum of Rs. 6,000 by the Appellate Assistant Commissioner. Reliance was placed by the department on the case of Commissioner of Income-tax v. H. Hirjee, , : 23ITR427(SC) . The Tribunal observed that the Chief Presidency Magistrate had held that even if there was over-invoicing of the goods, the prosecution had failed to prove that it was done at the instance of the assessed-firm. The Tribunal further observed that the judgment of the Chief Presidency Magistrate showed that it was Messrs. Ironside Ltd., London, who had dealt directly with the Japanese firm and had placed orders for the goods to be supplied to the assessed-firm. It was also observed that Hirjee's case did not lay down any universal proposition that legal expenses incurred in criminal litigation could not be allowed under Section 10(2)(xv) of the Income-tax Act. It was held that having regard to the nature and purpose of the legal proceedings, the litigation expenses of Rs. 6,000 arose out of matters incidental to the carrying on of the said business of the firm and, as such, the assessed-firm was entitled to the deduction of Rs. 6,000 on account of litigation expenses. The appeal filed by the department was, accordingly, dismissed. On the application of the Commissioner of Income-tax, the question reproduced above was referred to this court.
4. According to Section 10 of the Act, tax shall be payable by an assessed under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. Sub-section (2) of that section enumerates the allowances which are permissible in computing such profits or gains. We are concerned with Clause (xv) of Sub-section (2) and it reads as under:
'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 assessed) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.'
5. The controversy between the parties centres round the point as to whether the litigation expense of Rs. 6,000 constitutes an expenditure laid out or expended wholly and exclusively for the purpose of the business of the assessed. In order to bring the expenditure within the ambit of the words 'wholly and exclusively', it would have to be shown that the expenditure in its entirety was laid out and expended for the purpose of the business of the assessed and for no other purpose. If part of the expenditure was laid out or expended for a purpose other than that mentioned in Clause (xv) or if the purpose of the expenditure was not solely and exclusively the business, profession or vocation of the assessed, the expenditure would not attract the above clause. So far as expenses on civil litigation are concerned, the legal expenses incurred by an assessed to protect or safeguard his business interests are permissible deduction: see in this connection Commissioner of Income-tax v. Maharajadhiraja Sir Kameshwar Singh of Darbhanga,  10 I.T.R. 214 . The assessed's father, who had been carrying on a money-lending business, had lent a sum of Rs. 10 lakhs to a company in which he was a shareholder. Some of the shareholders of the company brought a suit against him alleging that he had agreed to take over the management of the mills and to finance it, but in breach of the agreement had failed to furnish the necessary finances with the result that the plaintiffs suffered heavy losses. During the pendency of the suit the assessed's father died and the assessed was substituted in his place. The suit was dismissed and the assessed claimed that a sum of Rs. 2 lakhs and odd, which he had incurred in defending the suit, should be deducted in calculating his income from the business of money-lending. It was held by their Lordships of the Judicial Committee that the expenditure was incurred by the assessed solely for the purpose of earning the profits and gains of the money-lending business and he was, thereforee, entitled to the deduction claimed. The decision in the above case was given in the context of Clause (ix) of Sub-section (2) of Section 10 of the Act before the amendment of the Act by the Indian Income-tax (Amendment) Act, 1939. According to Clause (ix), any expenditure incurred solely for the purpose of earning such profits or gains was permissible deduction. Dealing with the expenditure on civil litigation under Clause (xv) as amended by Act 7 of 1939, Shah J., speaking for the court, observed in the case of Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax,  65 I.T.R. 207:
'The proceeding started by the company was in relation to thebusiness of the company. The company was thereby seeking relief againstinterference by the executive authorities in the conduct of its business inthe manner in which it was being carried on previously. It was also seekingto obtain an order for restoration of its goods which were seized. It maybe granted that the company was, in starting the proceeding, ill-advised.However wrong-headed, ill-advised, unduly optimistic, or over confident inhis conviction the assessed may appear in the light of the ultimate decision,expenditure in starting and prosecuting the proceeding may not be deniedadmission as a permissible deduction in computing the taxable income,merely because the proceeding has failed, if otherwise the expenditure islaid out for the purpose of the business wholly and exclusively, i.e., reasonably and honestly incurred to promote the interest of the business Persistence of the assessed in launching the proceeding and carrying it from court to court and incurring expenditure for that purpose again cannot be a ground for disallowing the claim. '
6. It was further observed :
'Under Section 10(2)(xv) of the Indian Income-tax Act, as amended by Act 7 of 1939, expenditure even though not directly related to the earning of income may still be admissible as a deduction. Expenditure on -civil litigation commenced or carried on by an assessed for protecting the business is admissible as expenditure under Section 10(2)(xv) provided other conditions are fulfillled, even though the expenditure does not directly relate to the earning of income. Expenditure incurred not with a view to the direct and immediate benefit for purposes of commercial expediency and in order indirectly to facilitate the carrying on of the business is, thereforee, expenditure laid out wholly and exclusively for the purposes of the trade. '
7. So far as expenses incurred on defense in a criminal prosecution are concerned, the matter has been dealt with by their Lordships of the Supreme Court in the case of Commissioner of Income-tax v. H. Hirjee. The assessed, who was carrying on business as selling agent of the company, was prosecuted under Section 13 of the Hoarding and Profiteering Ordinance, 1943, on a charge of selling goods at prices higher than were reasonable in contravention of the provisions of Section 6 thereof. A part of the stock of the assessed was seized and taken away. The prosecution ended in an acquittal and the assessed claimed to deduct from the profits of his business under Section 10(2)(xv) of the Act, a certain amount spent in defending the case. The Income-tax Appellate Tribunal found that the expenditure had been incurred solely for the purpose of maintaining the assessed's name as a good business man and also to save his stock from being undersold if the court held that the prices charged by him were unreasonable. The High Court held that this was a finding of fact and allowed the assessed's claim for deduction. On appeal their Lordships of the Supreme Court held that they were unable to agree that the finding of the Tribunal was binding on the court as a finding of fact and was decisive of the reference. The finding of the Tribunal, in the opinion of the court, was vitiated by its refusal to consider the possibility of the criminal proceeding terminating in the conviction and imprisonment of the assessed. Patanjali Sastri C.J., speaking for the court, observed:
'We cannot appreciate the remark that 'even this chance of conviction and fine was so inextricably mixed up with the main purpose of the defense that it could be ignored'. A finding arrived at on this line of reasoning is obviously vitiated by a serious misapprehension regarding the risk involved in a prosecution under the Ordinance and it cannot be regarded as binding on the court in dealing with the reference. If, as the High Court realised, in every criminal prosecution where the matter is defended to protect the good name of a business or a professional man, the fear of possible fine or imprisonment must always be there, it must ordinarily be difficult for any court to say that the expenses incurred for the defense, even if they are not to be regarded as the 'personal expenses' of the person accused, constituted 'expenditure laid out or expended wholly and exclusively for the purposes of the business'. Learned counsel for the respondent frankly admitted that he was not able to find a single case in the books where the expenses incurred by a person exercising a trade or profession in defending a criminal prosecution, which arises out of his business or professional activities, were allowed to be deducted in the assessment of his profits or gains for income-tax purposes.'
8. Reference was then made in the above case to the decision of the Bombay High Court in the case of J.B. Advani & Co. v. Commissioner of Income-tax, : 18ITR557(Bom) wherein a distinction had been drawn between legal expenses of a successful and unsuccessful defense, in a criminal case. Patanjali Sastri C.J. in this context observed:
'Nor are we satisfied, as at present advised, that a distinction drawn in the Bombay case between the legal expenses of a successful and unsuccessful defense is sound. The deducibility of such expenses under Section 10(2)(xv) must depend on the nature and purpose of the legal proceeding in relation to the business whose profits are under computation, and cannot be affected by the final outcome of that proceeding. Income-tax assessments have to be made for every year and cannot be held up until the final result of a legal proceeding, which may pass through several courts, is announced.'
9. The appeal was, accordingly, accepted and it was held that the amount spent in defending the criminal proceeding was not an expenditure laid out or expended wholly and exclusively for the purpose of the business. The dictum laid down in the above case, in our opinion, fully applies to the facts of the present case and in the face of the above decision there is no escape from the conclusion that the amount spent on the defense of a partner of the assessed-firm in the criminal case for alleged contravention of the provisions of the Foreign Exchange Regulation Act, cannot be deducted under Clause (xv) of Section 10(2).
10. In the case of Spofforth and Prince v. Golder,  26 T.C. 310 the appellants, a firm of two chartered accountants, claimed that, in computing their profits for income-tax purposes, a deduction should be allowed for certain legal costs which they had incurred in connection with the successful defense of one of the partners, in criminal proceedings on a charge of conspiracy to defraud the revenue. The Special Commissioners held that the legal costs incurred in criminal court proceedings were not moneys wholly and exclusively laid out or expended for the purpose of the appellants' profession, and that they were accordingly not allowable as a deduction in computing the firm's profits. Wrottesley J. affirmed the decision of the Commissioners and held that the costs of defending the accused partner were not admissible deduction in computing the profits of the firm for income-tax purposes. During the course of his judgment, the learned judge observed:
'The establishment of Mr. Spofforth's innocence, the saving of him from conviction and punishment, are matters which must have been the purpose of the expenditure, just as it would have been had the charge been one of fraud against Mr. Spofforth in his personal capacity. No doubt Mr. Spofforth was an important member of the firm, and his conviction, and still more his imprisonment, would have been a severe blow to it. That, however, is not the test. It is not every expenditure made by a firm which falls within the definition, however prudent it may be, even though it may tend to benefit the firm.'
11. The above case was referred to with approval by their Lordships of the Supreme Court in the case of Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, : 1983ECR1942D(SC) . The assessed in that case was carrying on the business of importing dates from abroad and selling them in India. He imported dates from Iraq by a steamer at a time when import of dates was prohibited. The dates were confiscated and were released on the assessed paying fine under Section 183 of the Sea Customs Act. The assessed sought to deduct the amount paid as fine as an allowable expenditure under Section 10(2)(xv) of the Act. It was held that expenses paid by way of penalty for a breach of the law, even though it might involve no personal liability, was not an allowable deduction. Mr. Keshav Dayal, on behalf of the assessed, has tried to distinguish the above case on the ground that the breach of the law by the assessed in the above case was admitted, while in the present case the finding in the criminal case against Chaman Lal was that there had been no contravention of law. We agree with the learned counsel in this respect and our object in referring to the above case is only with a view to show to at the decision in the case of Spofforth and Prince was referred to with approval by their Lordships of the Supreme Court.
12. In the case of Commissioner of Income-tax v. Gasper and Co., 8 I.T.R, 100 a firm of partners, who had for a number of years been importing brands of whisky and brandy from a company in Calcutta, claimed to deduct for the purpose of income-tax the expenses incurred in successfully defending the individual partners and the manager of their liquor department against criminal charges of conspiracy to commit offences against the Excise Act brought against them in Calcutta. It was held that the sum could not be deducted as business expenditure.
13. In J.N. Singh & Co. Private Ltd. v. Commissioner of Income-tax, expenses were incurred in defending an employee in a criminal prosecution with regard to a transaction carried out in the ordinary course of business of the assessed. It was held by the Punjab High Court (D. K. Mahajan and S.K. Kapur JJ.) that it was a permissible deduction. The learned judges observed :
'It, thereforee; follows from what has been stated above that the expenses incurred in defending a criminal prosecution arising in the course of business can only be allowed as a permissible deduction, where they are incurred in defending an employee of the business, not the owner. In the case of an employee, such an expenditure is incurred to protect the good name of the business, the prosecution having emanated with regard to an act which took place in the ordinary course of business.'
14. The above observations go to show that it is only the expenses incurred in defending an employee which are admissible and not those incurred in defending the owner. Mr. Keshav Dayal has argued that the position of Chaman Lal, who was a partner of the assessed-firm in the present case, was similar to that of an employee and not that of an owner. We are unable to agree with the learned counsel in this respect, because, in our opinion, a partner, though he acts as the agent of the firm, cannot be deemed to be an employee. A partner is one of the proprietors of the business concern and his position is somewhat similar to that of a joint owner and cannot be relegated to that of an employee.
15. Reference on behalf of the assessed has been made to the case of Rohtas Industries Ltd. v. Commissioner of Income-tax,  67 I.T.R. 361. The assessed-company's officers were prosecuted under the Essential Supplies Temporary Powers Act, on the allegation that the vegetable oil produced by the company did not contain 5% til oil as required by the order made under that Act. The company incurred an expenditure in defending the case and the officers were acquitted. On a claim made by the company to deduct the expenses under Section 10(2)(xv) of the Act, it was held by a Division Bench of the Patna High Court that it was a permissible deduction. The learned judge dealt with the matter in the following words :
'The prosecution was on the ground that those goods were below thestandard and the company had to defend the quality of their product bydefending themselves and their officers, in that criminal case. Ultimately,they succeeded. In those circumstances, the only means of defending andprotecting the goodwill and the quality of their goods was to defend themselves in the criminal proceeding. In that view of the matter, it cannot be said that one of the primary purposes for incurring the expenditure in that criminal case was not the protection of the quality of their manufactured goods from the assailment charge against them. thereforee, the expenses incurred will be deductible under Section I0(2)(xv) of the Act.'
16. In our opinion, the assessed cannot derive much help from the above authority because the defense expenditure in that case was with a view to establish that the goods manufactured by the assessed-company were not of sub-standard quality. The expenditure was thus held to be wholly and exclusively for the purpose of the business of the company. The same cannot, however, be said of the expenditure for defending a partner of the assessed-firm who is being prosecuted for alleged contravention of the Foreign Exchange Regulation Act. An accused charged with an offence under Section 4(3), read with Section 23 of the Foreign Exchange Regulation Act, can be sentenced to undergo imprisonment which may extend to two years. The nature of charge in the criminal case against Chaman Lal was of a contravention alleged to have been personally committed by him and the object of spending money on his defense in that case was to save him from being sent to jail. It, cannot consequently, be said that the expenditure of Rs. 6,000 was wholly and exclusively for the purpose of the business of the assessed-firm. The fact that the acquittal of Chaman Lal was important for the reputation of the assessed-firm would not detract from the above conclusion. We, thereforee, are of the view that the expenditure of Rs. 6,000 is not a permissible allowance under Section 10(2)(xv) of the Act. The question referred to this court is consequently answered in the negative. Looking to all the facts, we leave the parties to bear their own costs of the reference.