VEERASWAMI J. - The assessee is private limited company and is a transport operator running a fleet of stage carriages. It runs also an out agency lorry service to certain places. It has been assessed to tax for the accounting years ended September 30, 1955, to September 30, 1958, on its business income. Before the departmental authorities, the assessee unsuccessfully contended that certain sums of money received in each of the years either by the drivers and conductors of the buses or later by its manager and cashier did not constitute business income, that deductions should be allowed of certain amounts in each year as expenditure incurred by payment of mamool and what was described as way side expenses and that disallowance of certain sums out of larger amounts claimed to have been paid as interest on borrowings for business purposes was not justified. The Tribunal on appeal by the assessee found in its favour on all these matters. This reference of the following questions comes before us under section 66(2) of the Income-tax Act, 1922 :
'1. Whether the sums of Rs. 5,813, Rs. 4,415,Rs. 3,011 and Rs. 3,579 do not constitute income of the assessee assessable to tax ?
2. Whether the alleged expenditure of the assessee purporting to be on mamools and way side expenses is an admissible deduction in the computation of the assessees income ?
3. Whether the disallowance of the sums of Rs. 10,139, Rs. 5,311 and Rs. 1,226 out of the interest payable by the assessee on amounts borrowed by it is not justified ?
It is convenient to consider together the first two questions. The assessee got commission or rebate on its purchase of petrol and diesel oil and also received the proceeds of sale of tyres, etc., tubes and empty barrels. The assessee maintained no accounts for these receipts. Actually the amounts were received by its drivers and conductors in the first of the accounting years and until March 31, 1956, who incurred throughout way side expenses and made payment of mamool. The Tribunal describes these expenses as 'greases to run the bus business smoothly.' Apparently they were in the nature of tips or perhaps presents to odd people on the bus routes. On March 31, 1956, the board of directors of the assessee passed a resolution, the substance of which is that the drivers and conductors of the assessees buses had been receiving the rebate on purchases of petrol and diesel oil for its vehicles and met all the wayside expenses and mamools out of such receipts, but as the Income-tax Officer in February, 1956, called upon the assessee to let him know whether it had accounted for such commission receipts and as it was difficult for the assessee to maintain accounts for such receipts, expenses and payments of mamools, it was resolved that drivers and conductors should not receive thereafter commission on purchase of petrol and diesel oil but the manager was authorised to receive all such commission and make payments towards way side expenses and mamools and maintain accounts for such surplus amounts of commission receipts which the manager should share, that is to say, the surplus, with the cashier in the proportion of 60 per cent. and 40 percent. respectively. The resolution also mentioned that this arrangement was in recognition of the faithful services rendered by the particular manager and cashier. But the manager did not maintain accounts for the accounting years subsequent to the date of the resolution. The receipts on account of commission or rebate, sale of tyres, etc., tubes and empty barrels were estimated at Rs. 5,813, Rs. 4,415, Rs. 3,011 and Rs. 3,579 respectively of the years in question. Likewise, the wayside expenses and mamool were also estimated. The view that prevailed with the departmental authorities was that the company having purchased petrol, the commission or rebate should be shown as profits of the assessee and it could not give away part of its profits to its employees by merely passing a resolution, even though a part of the receipts had been utilised for the running of the business. They added, therefore, the sums received on commission or rebate, as estimated by the assessee, and disallowed deduction of the estimated expenditure on account of mamool and wayside expenses. This was on the ground that the assessee failed to prove the expenditure claimed to be deducted. The Tribunal, however, found that in the very nature of the expenditure, there could be any documentary evidence and that, therefore, the expenditure was inevitable if the assessee had to run its business and that, having regard to the large collection and the incomes returned and the normality of other expenses, it did not consider that the amounts claimed to have been expended by the assessee were unreasonable. The Tribunal having said that went on to add :
'In the super-technical sense tips could be characterised as presents and are not connected with the business and that they are illegal, but we greases to run the bus business smoothly.'
For the periods subsequent to March 31, 1956, the Tribunal further said that though the resolution of the board of directors did not give a title to the manager and the cashier to the commission, it would prefer establish good public relation and to run the bus business smoothly and that even otherwise, it would consider that expenses incurred on this account were normal business expenditure in view of the trading results of the assessee. Accordingly, the Tribunal directed deletion of the addition in this regard.
For the revenue, it is pressed before us that the Tribunal overlook that the onus was on the was the assessee to prove the expenditure claimed as deduction and misdirected itself on that question and in assuming that, in the very nature of the expenditure, there could not be any documentary evidence about it. It is also stated that though illegal expenditure, so to speak, for earning income in an illegal business is a permissible deduction, such expenditure in earning income in an illegal business cannot be properly allowed as a deduction.
As to the onus, it is undoubtedly on the assessee where it claims an expenditure as allowable deduction. It has to prove that the expenditure has been actually incurred and that it has been incurred for and in the course of the business and for earning the business income. The onus is never on the revenue on that matter. But we are not satisfied that the Tribunal was in error on this question. It is one thin to say that onus of proof is on a particular party and it is quite another what will, in a particular circumstance, constitute such proof. The Tribunal was perhaps not far wrong in its observation that, having regard to the very nature of the expenditure, there could not be any documentary evidence to prove it. Documentary evidence may not be an impossibility but what the Tribunal apparently meant by its observation was that it was impracticable in the circumstances to have documentary evidence. The Tribunal was inclined to believe the statement of the assessee as to the expenditure incurred in each of the years and felt justified in taking that view. The department accepted the income as estimated and returned by the assessee. The Tribunal had referred to the large collection and the expenses returned as wail as the expenses in relation to them and formed its opinion that the claim of the assessee to have spent the sums it claimed was not unreasonable. We think that the Tribunal also could, with justification, interpret the resolution of the board of directors in the manner it did, that is to say, the effect of it was the enhancing of the salary of the manager and the cashier. We do not see why the board of directors could not from a business point of view pass such a resolution. Further, as we consider, it is not a case where the Tribunal could be said to have acted on to no evidence.
On the other aspect of the argument for the revenue, there is of course authority for the view that expenses on legitimate or illegitimate acts in order to earn income in any illegal business are eligible for deduction : Mann v. Nash (H. M. Inspector of Taxes) and Master of National Revenue v. Olva Diana Eldridge Rowlatt J. in the former case was of opinion that trade or business for purpose of levy of income-tax is not confined to lawful trade or business but the charge attaches to income from what may be described as illegal trade or business. Counsel for the assessee in that case asked whether the State kept its revenue eye open and its eye of justice closed but the learned judge did not feel the force of the observation, for it would have made no difference if the State kept both its eyes open and prosecuted the man for the lottery there and taxed him for the profits at the same time. He was inclined to the view that this sort of consideration was misconceived and the revenue representing the State was looking at an accomplished fact, namely, that the trade has made such profits and the law says that such profit is chargeable to tax, and that was all about it. In the Canadian case, the taxpayer who had been engaged in carrying on a call-girl operation, which was illegal, was allowed deduction of expenditure incurred in the carrying on of such business and earning profits. The learned judge there said :
'At this point I would mention it is abundantly clear from the decided cases that earnings from illegal operations or illicit businesses are subject to tax.'
He considered that expenditure in making such profits would be a permissible deduction if such expenditure was proved by the taxpayer on whom the burden lay. Reference was made to certain other cases where penalty or fine paid by an assessee in the course of his business for contravention of law could be permitted as deduction. In one of the cases, Raj Woollen Industries v. Commissioner of Income-tax, the Punjab High Court held that as the amount sought to be deducted as an expenditure was incurred to achieve what was prohibited by law and to carry out the business unlawfully, the assessee there was not entitled to deduction of the amount under section 10(2)(xv) of the Act. The court observed :
'The true position appears to be that where the expenses which are claimed as deductions have a direct and proximate connection with an act which is an infringement of law or is a contravention of it, they have not been allowed or regarded as deductions which can be granted under the income-tax law. With respect, the opinion expressed by Chagla C.J. in Commissioner of Income-tax v. Haji Aziz and Abdul Shakoor Brothers, that if an assessee spends money in order to carry out the business unlawfully, he cannot be held entitled to deduction under section 10(2)(xv), represents the correct statement of law on the point.'
Here the transport business of the assessee is entirely a lawful one. It does not become illegal by reason only that the assessee paid out moneys by way of tips to certain people on the route. There is no evidence as to what exactly was the nature of the tips and as to whether they were legal or improper. All tips in one sense may be improper but not necessarily so always or are illegal. In the absence of evidence on this matter, we have to go by the factual observations of the Tribunal. As we said, the Tribunal has remarked that such expenditures as are sought to be deducted in this case are inevitable if the assessee has to carry on its business. Learned counsel for the revenue addressed arguments to us on the assumptions that the expenditures sought to be deducted constituted improper or illegal acts and that expenditures incurred even in a lawful business are not eligible for deduction. One view may be that if profits derived from an illegal business are chargeable to tax, by the same logic the expenditure, be it illegal or improper, incurred in order to make such profits may legitimately be allowed as deduction. If the acts involved in the expenditure are in contravention of law, even so it may be a matter for consideration whether for purposes of revenue, it should really matter in considerating and allowing deductions as business expenditure. But in the circumstances of this case, we are of the view that we are not called upon to decide this question. Assuming without deciding that expenditure incurred in illegible acts in the course of making profits in a lawful business is not a permissible deduction, neither the statement of the case not the Tribunals order proceeds on the basis that the expenditure claimed to be deducted pertained to anything illegal or improper. The Tribunal is right in that.
We hold that the receipts of the assessee by way of commission or rebate on purchase of petrol and diesel oil and sale of tyres, etc., tubes and empty barrels constituted income and that the expenditure in each of the years is entitled to deduction.
On the third question the facts are these. The assessee made advances to some of its directors but charged no interest on the dues. From the assessee certain sums were due in each of the years to certain other concerns in some of which some of the board of directors of the assessee happened to be directors and the assessee was not charged interest on such dues. It had borrowed moneys in the accounting years for purposes of its trade on which it paid interest of which it claimed deduction. This claim was disallowed in proportion to the interest which the directors could have been charged by the assessee on the amounts due from them. The Tribunal reversed that view and granted full deduction. It took note of the fact that the total of the unsecured loans increased from Rs. 2,99,714 as on September 30, 1954, to Rs. 4,02,732 as on September 30, 1955, and that the fixed assets also increased from Rs. 1,62,192 as on September 30, 1954, to Rs. 3,23,532 as on September 30, 1955, but that the net debit balances in the directors account remained almost stationary at Rs. 1,13,536 as on September 30, 1955. On this factual position, the Tribunal concluded :
'... Therefore, the diversion, if any, of the borrowed money for advancing to the directors should have taken place in the years earlier to September 30, 1955. But in company finances it is difficult to specifically say that borrowed money had been so diverted, unless the position is analysed from the beginning. When there are two funds as in this case, one, in which the assessee does not pay interest and the company is also making profit and the other, on which it pays interest, it becomes difficult to say from which fund such advances had been made. The worst that can be said is that if such advances had not been given, the assessee could have reduced its indebtedness and thereby its interest charges. But that would be venturing into realms that are not open to the department. It is a matter of business prudence. Theres nothing illegal for a private company to advance moneys to its directors. In the absence of any positive materials that the moneys borrowed had been utilised for some non-business purposes we consider that the department is not justified in disallowing any portion of the interest paid in all these years.'
The contention of the revenue before us is that the concluding part of the observation of the Tribunal just extracted shows that it failed to realise that the burden was on the assessee to prove that the moneys borrowed had not been utilised for the non-business purposes. We do not think that the Tribunal made any such mistake. The Tribunal, on the figures before it of borrowings by the assessee in each accounting year, of the advances made to the directors without interest as well as figures of amounts due from the assessees to certain other concerns in which some of the directors had interest and on which no interest was paid, found that the diversion of the borrowed money for advancing to the directors should have taken place in the years earlier to September 30, 1955. There is no question of the Tribunal misplacing the onus of proof. Its finding in this regard is a factual one and we are of the view that it is justified on the materials on record.
The first question is answered against the assessee but questions Nos. 2 and 3 are answered in favour of the assessee. As the assessee has substantially succeeded, it is entitled to its costs. Counsels fee Rs. 250.