Costello, Ag. C.J.
1. This is a reference under Section 66 (2), Income-tax Act of 1922. The question for the consideration of the Court is set forth in para. 4 of the statement of the case in this form:
Whether in the facts and circumstances of the case, the sum of Rs. 5577 spent by the assessee during the year ended 31st December 1935, to meet the litigation expenses can be said to be 'expenditure incurred solely for the purpose of earning the profits' within the meaning of Section 10 (2) (ix), Income-tax Act (11 of 1922) and consequently allowable as a deduction in computing the profits or gains of the business for the assessment year 1936-37.
2. The facts of the case were these: The assessee is the Limited Company known as the Amrita Bazar Patrika Ltd. and its business is that of editing, publishing and selling a paper called 'The Amrita Bazar Patrika'. On 23rd March 1935, it published in its daily edition in Calcutta a leader with the caption 'Calcutta High Court' and in that leader certain observations were made which reflected upon the independence of the judiciary.
3. On the 29th March 1935 a Rule was issued by this Court calling upon the Editor and the Printer and Publisher of the Patrika to show cause before the Court on the 5th April following, why they should not be committed to jail for contempt of Court in having unlawfully published the article I have mentioned. The matter came before a Special Bench of this Court on 5th April 1935. The judgment of the Court was delivered on 8th April reported in : AIR1935Cal419 . The Editor and the Printer of the newspaper were found guilty of contempt of Court, the former being send to three months' simple imprisonment and the latter to one month's simple imprisonment. Subsequently, there was an application for leave to appeal to the Privy Council which was rejected by this Court see : AIR1935Cal119 and later attempts were made to obtain special leave from the Judicial Committee of the Privy Council to appeal to His Majesty in Council. These attempts were also unsuccessful.
4. It appears that the newspaper or rather the limited company, the Amrita Bazar Patrika Limited met all the expenses in connexion with the proceedings that is to say, the costs of defending the Editor and the Printer before this Court and the various other proceedings in connexion with the matter. Those expenses amounted to the sum of Rs. 5577-7-9 which is the sum mentioned in the question put forward for our consideration. The company claimed that this sum ought to be allowed by the Income tax Officer as a business expenditure; in other words that it was an expenditure of the kind contemplated by Section 10 (2) (ix), Income-tax Act Section 10 (1), Income-tax Act says that 'tax shall be payable by an assessee under the bead 'Business' in respect of the profits or gains of any business carried on by him'. Sub-section (2) says that such profits or gains shall be computed after making certain allowances. Then follow a catalogue of allowances. No. 9 of which is described thus: any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains.
5. The assessee urged before the Commissioner of Income-tax that a newspaper has two functions-one, the conveying of news and the other that of serving as a guide and adviser seeking to form opinion and to influence the action of the public. As regards the second aspect, it is suggested that some privilege is extended to the publication of fair and accurate reports of political, judicial, legislative and other public and official proceedings and that comment on or criticism of the acts of persons before the public should be treated as privileged if they are made in a fair and reasonable spirit and not actuated by malice. It was further contended that a newspaper has to publish materials gathered from all parts of the world and that therefore it cannot be considered or treated as if it were infallible. In publishing news, it is bound to take some risk and the risk attendant to the business of publishing a newspaper must be borne by the business itself. The learned Com missioner of Income-tax took the view however in our opinion rightly that what he was concerned with was the precise language of Section 10 (2) (ix) and that all he had to decide was whether or not the sum of Rs. 5577-7-9 was a deduction of the kind referred to in Sub-clause (ix). The Commissioner points out that the assessment was for the year 1936-37, and it was in respect of the income, profits or gains of the year ending 31st December 1935. The expenditure in respect of the contempt matter was incurred by the limited company during the year 1935 and therefore the whole question to be determined was whether in computing the profits or gains of the business carried on by the assessee during the year 31st December 1935, an allowance could be claimed in respect of that expenditure under the provisions of Section 10(2)(ix).
6. The question which we have to answer is simply this : Can it be said that the expenditure which the limited company chose to incur was an expenditure incurred solely for the purpose of earning profits or gains?
7. In our opinion, the question almost answers itself. It is difficult, indeed, to see by what process of reasoning it could really be argued that this particular expenditure was incurred for the purpose of earning profits or gains. It is to be remembered that the proceedings in con-tempt were against the Editor and the Printer. The expenditure primarily was incurred by them. As far as we know, there was no sort of obligation on the limited company to reimburse either the Editor or the Printer for the expenses they had incurred. In any event, it seems quite obvious that the payment of this sum of Rs. 5577-7-9 in no way assisted the limited company in earning profits or acquiring gains in the year of assessment. The question, in our opinion, is really one of fact. Analogous points have been dealt with in England upon that footing. In our view, the matter is covered by the judgment of the House of Lords in Strong & Co. of Ramsey Ltd. v. Woodflaid (1906) AC 448 and in particular by the opinions expressed in the speech of the Lord Chancellor at page 452 and that of Lord Davey at p. 453. The Lord Chancellor said this : In my opinion it does not follow that if a loss is in any sense connected with the trade, it must always be allowed as a deduction; for, it may be only remotely connected with the trade, or it may be connected with something else quits as much as or even more than with the trade. I think only such losses can be deducted as are connected with in the sense that they are really incidental to the trade itself.
In the previous paragraph he said : A deduction cannot be allowed on account of loss not connected with or arising out of such trade. That is one indication. And no sum can be deducted unless it be money wholly and exclusively laid out or expended for the purposes of such trade. That is another indication.
8. Lord Davey said:
It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade, or is made out of the profits of the trade. It must be made for the purpose of earning the profits. In short I agree with the judgment of the Master of the Rolls.
9. The learned Commissioner has referred to the case in Commissioner of Inland Revenue v. Alexander Von Glehn & Co. Ltd. (1928) 12 Tax Cases 232. In that case, the respondent company had carried on business as general produce merchants and exported goods to Ruasia and Scandinavia. It was sued for penalties under the Customs Act 1915 in respect of alleged infringements of that Act in the course of its trade. The actions were settled by consent on the company agreeing to pay a compromise penalty of 3000 without costs upon terms that the record was withdrawn. The company incurred legal costs amounting to 1074-12-7, in respect of the proceedings. It was held by the Court of Appeal that the mitigated penalty and costs were not admissible deductions in arriving at the profits of the company's trade for excess profits duty purposes. The Master of the Bolls, Lord Sterndale said this (at the top of p. 236):
The money which is paid is money paid as a penalty, and it does not matter in the least that the Attorney-General has elected to take treble the value of the goods, nor does it matter that it may be called in the information a forfeiture. It is in fact under the section a penalty.
10. At page 238 ha said:
Now what is the position here? This business could perfectly well be carried on without any infraction of the law at all. This penalty was imposed because of an infraction of the law and that does not seem to me to be any more than the expense which had to be paid in Strong & Co. of Ramsey Ltd. v. Woodflaid (1906) AC 448 appeared to Lord Davey to be a disbursement or expense which was laid out or expended for the purpose of such trade, manufacture, adventure or concern; nor does it seem to me, though this is rather more questionable, to be a sum paid on account of a loss connected with or arising out of such trade, manufacture, adventure or concern.
11. In the present instance however we are not concerned with the question as to whether the expanses incurred by the company might have been treated as a business loss. We are concerned only with the question whether the expenditure was one properly incurred for the purpose of earning profits or gains. We are clearly and definitely of opinion that it was not. The question propounded for our consideration must therefore be answered in the negative. The assessees will pay the costs of this reference on the usual scale, including the fees of two advocates appearing on behalf of the Com-missioner of Income-tax.
12. I only desire to add a few words to the judgment which has just been delivered. I agree that in the circumstances the question propounded by the Commissioner is a question of fact and we are not entitled to go behind his finding.
13. Moreover, in my judgment, there were no materials before the Commissioner upon which he could possibly come to the conclusion that the expenditure was in fact incurred solely for the purpose of earning profits or gains. I must assume that the expenditure was sanctioned by some resolution of the Directors but no extract from the Diractors' Minute Book is before us, nor is there any statement by a Director of the assessee company.
14. In the grounds of appeal filed before the Assistant Commissioner it is stated that the expenditure was incidental to the earning of the assessee's profits as a journalist. In a petition filed by the principal officer of the assessee Company, it is stated that the expanses incurred were incidental to the profession of journalism and were legitimate business expenses allowable under Section 10 (2) (ix) of the Act. There is therefore no direct statement by anyone who is in a position to speak with authority on the subject that the purpose for which the expenditure was sanctioned was in order that the profits and gains of the assessee Company might be augmented thereby. It appears to me that this could not have been the purpose which the Directors entertained when they sanctioned the expenditure. I have no doubt that the Directors considered it a moral obligation to indemnify their editor against the expenses to which he was put in defending the contempt proceedings because the contempt with which he was charged was committed in his capacity as editor of the newspaper owned by the assessee company. Their motive is a perfectly intelligible one but it has not the effect of making the expenditure a permissible deduction under Section 10 and it is totally inconsistent with such expenditures being expenditure incurred solely for the purpose of earning profits and gains within the meaning of Section 10 (2) (ix).
15. I agree with my Lord the Acting Chief Justice.