BANERJEE J. - This reference under section 66 (1) of the Indian Income-tax Act has been made in circumstances here in after stated.
It is well-known that, in the year 1947, the Taxation of Income (Investigation Commission) Act was passed 'for the purpose of ascertaining whether the actual incidence of taxation of income is and has been in recent years in accordance with the provisions of law, and the extent to which the existing law and procedure for the assessment and recovery of such taxation is adequate to prevent the evasion there of, to make provision for an investigation to be made into such matters.' Section 5 (1) of the Act invested the Central Government with power to refer particular cases or points in a case to the commission for investigation and report if the Central Government was of the opinion that there had been substantial evasion of Income-tax payment in such cases. Similarly if the course of an investigation under section 5 (1), the commission had reasons to believe that some person other than the one whose case was being investigated evaded payment of Income-tax or that or that points other than those referred to it required investigation, the commission was authorized, under section 5 (4), to report to the Central Government, so that the latter could refer the case of such other person or such other points to the commission for investigation. The ultimate object of the investigation was collection of material showing evasion of tax, so that the evaded income might be taxed and penalties for evasion imposed. The Supreme Court condemned section 5 (1) of the Act as an unenforceable and discriminatory piece of legislation, after the introduction of sub-section (1A) to section 34 of the Indian Income-tax Act (vide Shree Meenakshi Mills Ltd. v. A. V. Visvanatha Sastri). The Supreme court also condemned section 5 (4) of the Act as a discriminatory piece of legislation, offending against article 14 of the Constitution and therefore void (vide Suraj Mall Mehta Co. v. A. V. Visvanatha Sastri). After the condemnation of the two sub-section by the Supreme Court the Investigation Commission became an in effective body.
When the Investigation Commission was effectively functioning the case of the assessee, a public limited company, was referred to the Commission, under section 5 (4) of the Taxation of Income (Investigation Commission) Act, 1947, as a result of investigation into the affairs of other Birla group of concerns, there being reasons to believe that the assessee had also evaded payment of Income-tax on about Rs. 4 crores during the years 1941-42 to 1947-48. The assessee had properly to represent its case before the Commission by employment of eminent lawyers including Shree G. S. Pathak and others and in the challenging the vires of the Act up to the Supreme Court. For the years previous respectively to the assessment year 1952-53, 1953-54 and 1954-55, the assessee-company had to spend respectively Rs. 3,810, Rs. 1,42,377 and Rs. 2,42,688 for the aforesaid purposes. The aforesaid expenses were termed as 'general expenses' and were claimed by the assessee as deductions, namely, Rs. 3,810 for 1952-53, Rs. 1,42,377 for 1953-54 and Rs. 2,42,688 for 1954-55, under section 10 (2) (xv) or alternatively under section 10 (2) (i) of the Indian Income-tax Act. The Income-tax Officers disallowed the claim. The assessee appealed before the Appellate Assistant Commissioner and contended (i) that the expenditure having been incurred to save the very existence of the assessee was allowable as business expenditure and (ii) that the Taxation on Income (Investigation Commission) Act, 1947, being an ultra vires piece of legislation, the assessee was justified in spending money, so as to protect itself against in roads by an unconstitutional piece of legislation. The Appellate Assistant Commissioner held that there was no threat of seizure of the assets of the assessee but only a proposal to tax a part of the concealed income of the assessee. In as much as money spent by a trader to get taxable profits ascertained by the income-tax authorities was not expenditure incurred for earning profits in the business, the Appellate Assistant Commissioner held that the Income-tax Officer was right in disallowing the deductions as claimed by the assessee.
The assessee preferred a further appeal before the Income-tax Appellate Tribunal. It was argued, on behalf of the assessee, that the expenses were incurred :
(i) to save its fair name;
(ii) to save unnecessary taxation;
(iii) to oppose an illegal governmental action;
(iv) to safeguard its business.
It was further argued on behalf of the assessee that by creating a body known by the name of the Investigation Commission, the government wanted to have a second illegal dig into the assessee profits. If the assessee had not taken the courage of defending itself, it might have been wiped off the business world by being made to pay heavy taxes and penalties. It was also submitted that the assessee name having been mentioned as one of those assessee, who were called by the Investigation Commission to appear before them, there was created a circumstance sufficient to lower its prestige and position in the business words, which might affect its business deals and future profits also. It was, therefore, contended that it became necessary for the assessee to spent money in order to safeguard its business position and as such the expenses should be allowed to be deducted.
The Tribunal repelled the contentions raised on behalf of the assessee with the following observations :
'Now the first ground, which has been urged for claiming it as a business expenditure is that it was incurred to save its fair name. Firstly, we are unable to appreciate as to how the directors and shareholders of the company came to feel that going before the Investigation Commission was a matter of shame or disgrace affecting the status and reputation of the company. The feeling, if we may say so, was wholly imaginary. Nobody loses ones reputation or fair name by being called upon to answer whether any further amount of tax was actually due from him. But even conceding that it was an expenditure incurred to save its fair name, firstly, it does not arise out of the assessee-company trade and, secondly, as has been observed by Chief Justice Beaumont in the case of Commissioner of Income-tax v. Sir Homi M. Mehta, The maintenance of business reputation is undoubtedly a capital assets and that it is impossible to say that payment for the maintenance of business reputation is not payment for a capital purpose the expenses incurred by the assessee in protecting its fair name is capital in nature.
The second ground on which the appellant claimed it as an expenditure is that it was to save the assessee from unnecessary taxation. This cannot again be allowed as a business expenditure. The profits had already been earned and by this expenditure they could not be altered. The majority decision in the case of Smith Potato Estates Limited is now an approved principle on this issue. The legal expenses in question are not disbursements wholly and exclusively laid out or expended for the purpose of the trade and as such cannot be excluded out of the traders profits.
The third ground is that this expenditure was incurred in order to stop the Government from illegal acts that they were doing in calling upon the assessee to explain matters regarding settlement of taxes already settled before the Investigation Commission. This, in our opinion, could also not be a business expenditure; firstly, because it has got nothing to do with the commercial expediency to defend itself from paying taxes that might legally be found due again an assessee. The formation of the Investigation Commission it may be mentioned, was mainly with view to find out the actual amount of tax that an assessee should have paid. Subsequently, however, by a decision, their Lordships of the Supreme Court in the case of Suraj Mall Mehta & Co. declared it to be a discriminatory legislation and ultra vires the Constitution of India in respect of particular provisions. This fact, however, does not change the nature of the issue before us. It still means that the expenditure incurred in defending the assessee claim itself from paying legitimate tax to the State or looked at the from another range could be an expenditure for settling taxation liability. We need not say that it is already an established proposition that such expenditure, viz., for settling taxation liability was not allowable expenditure. The principle of Smiths Potato Estates case enunciated above applied to this issue also.
The last ground upon which this claim is based is that it was to safeguard the assets of the company. We are again unable to appreciate this aspect of the matter. The Investigation Commission did not fall upon the assessee to usurp its capital assets so that safeguarding itself against it became an imperative factor. The commission only came to recommend as to correct amount of tax which the assessee should have paid. The was no provision in the scheme of the said commission which could make any one so touchy a to think that the commission had come as an usurper. Clearly, therefore, in its very nature, by this ground the assessee speaks of saving itself from paying the actual taxes that might have been found due from it and as such the expenditure could only be called a non-revenue expenditure having no nexus to the trading aspect of a trader.'
The Tribunal relied on the following observations by Roomer L. J. in Worsley Brewery Co. Ltd. v. Commissioner of Island Revenue :
'I am not prepared to hold that, when all that has been done and the profits have been ascertained after the employment of the accountant in the normal way and a question arises at some subsequent period between the trying concern and some third party, which involves a consideration of the question whether the profits so ascertained were correctly ascertained the expense of further investigating the accounts is an expense incurred for the purpose of earning the profits. It is not incurred for that purpose at all; it is incurred merely for the purpose of settling the dispute which has arisen'
and expressed the opinion that the expenses incurred in the proceeding before the Investigation Commission which the assessee claimed as law charges, were not allowable either under section 10 (1) or under section 10 (2) (xv) of the Indian Income-tax Act.
Thereupon, the assessee-company obtained a reference to this court under section 66 (1) of the Indian Income-tax Act, on the following question :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the law charges incurred in connection with the proceeding before the Investigation Commission were not allowable deductions in the computation of the profit of the business either under section 10 (1) or under section 10 (2) (xv) of the Income-tax Act, 1922 ?'
It is necessary for us, at this stage, to refer to the language of sub- section (1) and (2) (xv) of section 10 of the Indian Income-tax Act in order to appreciate the respective contention of the assessee and the revenue in this matter.
'10 (1) The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation in respect of the profits and gains of any business profession or vocation carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, namely :-......
(xv) 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 assessee, laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.'
The words 'expenditure laid out wholly and exclusively for the purpose of such business' have occasioned interesting explanations either narrow or wide in their sweeps, when dealing with what expenses are to be allowed in computing taxable profits. We shall first of all refer to certain English authorities on the point. Explaining such words, in the context of a case in which a customers sleeping in an in was injured by the fall of a chimney and recovered damages and costs against the company owning the for the injury, Lord Loreburn L. C. observed in the case of Strong & Co. Ltd. v. Woodifield :
'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. Beyond that the Act is silent.
In my opinion, however, 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 the something else quite 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. They cannot be deducted if they are mainly incidental to some other vocation or fall on the trades in some character other than that of trader. The nature of the trade is to be considered. To give an illustration, losses sustained by a railway company in compensating passengers for accidents in traveling might be deducted. On the other hand, if man kept a grocers shop for keeping which a house is necessary, and one of the window shutters fell upon and injured a man walking in the street, the loss arising there by to the grocer ought not to be deducted. Many cases might be put near the line, and no degree of ingenuity can frame a formula so precise and comprehensive as to solve at sight all the case that may arise. In the present case I think that the loss sustained by the appellant was not really incidental to their trade as in keepers, and fell upon them in their character not of traders, but of house-holders.'
In the same case, Lord Davey agreed with the judgment of Lord Loreburn on a somewhat different ground :
'I think that the payment of these damages was not money expended for the purposes of the trade. These words are used in other rules, and appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade & C. I think the disbursements permitted are such as are made for that purpose. 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 the earning the profits.'
Lord James Hereford also agreed with Lord Loreburn but with note of some doubt :
'.... I concur entirely with the principle laid down by my noble and learned friend the Lord Chancellor. The only question is as to be application of that principle is one small matter to the facts of this case. If the facts were that the accident had occurred to a strangers walking in the street, then I should have no doubt at all. The doubt that did not arise in my mind was as to the rule applicable when the accident occurred to a person who was a customers in the house who would not have been injured unless the business of an in-keeper was being carried on, and when it was in the course of the carrying on of a portion of that business that the customers injured was there; then I think a different principle might arise, and my doubts consequently existed. But, my Lords, my doubts are not strong enough in relation to this application of a principle about which there is no question, to cause me to dissent from the judgment proposed.'
The observations of Lord Loreburn and Lord Davey, quoted above, came up for a consideration in Smith Potato Estates Ltd. v. Bolland before the House of Lords. In that case, the question arose whether legal and accountancy expenses for prosecuting a successful appeal to the Board of Referees against a decision of the Commissioners of Island Revenue incurred by a taxpayer with a view to reducing the assessment made upon him as a trader for excess profit tax, can be deducted as being a disbursement wholly and exclusively laid out or expended for the purpose of trade. In that case, Lord Porter (with whom the majority of the noble Lords concurred) observed :
'My Lords, the case of Strong v. Woodifield may be said to form the starting point for deducting the principles at stake in the present appeal and, though the words of Lord Davey quoted above are the expression most frequently referred to, I think that those of Lord Loreburn L. C. have equal if not greater, importance. He says, 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 quite 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. They cannot be deducted if they are mainly incidental to some other vocation or fall on the trader in some character other than of trader. Further, Lord Davey, after pointing out that Case I relates to trades, manufactures, adventures, or concerns in the nature of trade, goes go to say, at page 453 : 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.
These expressions of opinion, given some forty years ago and accepted even since, are in my view, in consistent with the appellant contention...
So far as income-tax is concerned there is direct authority in the High Court in Allen v. Farquharson Bros. and Co., that the cost of opposing the Inland Revenue in a contest as to what the profits of a business are is not deductible. But it is said that case merely followed Strong v. Woodifield, and in any case excess profits tax differs in as much as it is imposed on a trader only and, therefore, the cost of ascertaining it is part of the trade. I do not accept this contention. It is trade that a trader only is liable to pay it, but it is not payable by him as a trader. He pays as an individual like any other individual tax on the sum which he has earned as a trader.
To my mind, said Lord Selborne L. C. in Mersey Docks and Harbour Board v. Lucas, it is reasonably plain that the gains of trade are that which is gained by the trading, for whatever purposes it is used, and, therefore, what your Lordships have to determine is whether the expense is incurred in order to earn gain or is the application or distribution of that gain when earned. With all respect to the opposing view, expenditure to ascertain the true amount of tax to be paid, whether it be income-tax or excess profits tax, and whether successful or unsuccessful is in my opinion, incurred, at any rate in part, in order to determine the correct amount of income-tax or excess profit tax, as the case may be, and not in order to earn gain, even though that phrase be given a broad significance. The same conclusion might by reached by saying in the words of this statute, that such expense is not wholly or exclusively laid out for the purpose of trade. It is in truth partially if not wholly, laid out in order to discover what sum is to be paid to the Crown out of the profits or gains which have already been earned and computed.
Viscount Simon however, expressed a contrary view but submitted to the weight of a number in the following language :
'...... I do not see why the expenditure here in question is not wholly and exclusively laid out for the purpose of the trade; if it had not been incurred, the trade would be less profitable. Lord Daveys gloss on the words of the statute in Strong and Company of Romsey Ltd. v. Woodifield, is well known, but I think it is better to concern trade on the statutory words, themselves. Rightly understood, however, I do not find Lord Daveys words contradict the view that I am disposed to take. Strong and Co. v. Woodifield was a case in which the taxpayer sought to deduct a loss not connected with or arising out of his trade. Lord Loreburn L. C. said at page 452 : I think only such losses can be deducted as are connected with, in the sense that they are really incidental to, the trade, itself. Lord Daveys test was that the purpose of the expenditure must be the purpose of enabling a person to carry on and earning profits in the trade, for a reduction in the amount of tax does increase the fund in the traders hands after tax is paid and so promotes the carrying on of the trade and the earning of trading profits. The incidental, consequence that the traders not taxed so heavily in respect of his profit from the trade does not, as it seems to me, alter the fact that the litigations was wholly and exclusively undertaken for the purposes of the trade. My own opinion, therefore, would be that the appeal should be allowed, but in view of the opinion of the majority of your Lordships I move that it be dismissed with costs.'
Lord Oaksey concurred with the dissenting view of Viscount Simon in the following language :
'Reliance is placed upon the dictum of Lord Davey in strong and Company of Romsey Ltd. v. Woodifield, which has frequently been cited with approval in other cases, but it is to be observed that Lord Davey did not say earning the profits by the operation of the trade, and in my opinion the words the purposes of the trade ought not to be construed in this way.
A trader does not expend money in an action bought for or against him for negligence or breach of contract in the course of his trade for the purpose of earning the profits of the trade in the sense, for it is not an operation of his trade to engage in litigation. It is, of course, an incident which he may think reasonably necessary for the purpose for his trade to bring or defend actions. But so it is an incident which he may think reasonably necessary for the purposes of his trade to engage in litigation as to the amount of his taxes. if he succeeds in either case he increases the profits arising from his trade, and it appears to me to be no training of language to say that a trader who increases his profit by incurring a certain expense incurs that expense for the purpose of earning the profits.
In my opinion the real question which has to be decided in every case is whether the expense is one which is incurred in order to earn gain or profit from the trade or is the application of the gain or profit when earned (see per Lord Selborne L. C. in Mersey Docks and Harbour Board v. Lucas) and in my opinion it cannot be truly said that the expense of paying accounts or of litigating the question of what is the balance of profits and gains for the purposes of taxation is the application of these profit. Profits cannot properly be applied or divided until they are ascertained, and every expense which is properly incurred for the ascertainment of profit is, in my opinion, an expense of earning the profits and not an application of them. That is not to say that all expenses which are incurred in point of time before the profit are ascertained can be deducted. The point of time is unimportant : some expenses which are clearly the application or distribution of profits may be incurred before the ascertainment of profit, for example, capital investment or payment of interim dividends. But it is the character of the expense which must be considered. The expense in this case was not a capital investment; it was incurred not to distributed but to increase and in that sense to earn the profit. On the other hand, if it is to be held that such expenses are no deductible, what is to be said of the costs of audit which the Companies Act make necessary or of that part of the cost of book-keeping which is used in the preparation of such an audit or of accounts for taxation They are not incurred for the purpose of earning the profit of the trade in the limited sense contended for by the Crown.
It is said that the expense of litigating question of taxation has never been sought to be deducted and it may be so, but it is also true that the expense of paying accountant and auditors has been deducted, and in any event the fact, if it be the fact, throws no legal light upon the construction of the words in question.'
A question of somewhat similar nature came up for consideration before the House of Lords again in Morgan v. Tate & Lyle Ltd. In that case the respondent company, which carried on the business of sugar refiners, claimed to deduct, in the computation of its trading profit for income-tax purposes expenses incurred on a propaganda campaign designed to show that nationalisation of the sugar refining industry would be harmful to workers, consumers and stockholders alike. The question arose whether this claim should be allowed. In delivering the majority judgment Lord Morton of Henryton, (with whom Lord Reid and Lord Asquith of Bishopstone agreed-Lord Tucker and Lord Keith of Avanholm dissenting) explained Lord Daveys; tests in Strong & Co. v. Woodifield, and observed :
'My Lords, apart from authority I should have no hesitation in answering the question just posed in the affirmative. Looking simply at the words of the rule, I would ask : If money so spent is not spent for the purposes of the companys trade, for what purpose is it spent ?' If the assets are seized, the company can no longer carry on the trade which has been carried on by the use of these assets. Thus the money is spent to preserve the very existence of the company trade.
The same result follows if I apply to the present case the oft-quoted observation of Lord Davey in Strong & Co. of Romsey, Ltd. v. Woodifield, in regard to the words for the purposes of such trade in the corresponding provisions of the Income Tax Act, 1842. These words said Lord Davey, are used in other rules, and appear to me to mean for the purposes of enabling person to carry on and earn profit in the trade, &C.; I think the disbursements permitted are such as are made for that purpose. It is not enough that the disbursements is made in the course of, or arises out of or is connected with, the trade, or is made out of the profit of the trade. It must be made for the purpose of earning the profits.
The last sentence of this observations has sometimes been quoted in isolation, but it cannot be supposed that in this one short passage Lord Davey intended to ascribe two different meaning to the words in question, and if his observations is read as a whole, I think it is clear that the last sentence in no way qualifies or alters the statement as to the meaning of the words in question which is contained in the first sentence. Applying that the statement to the facts of the present case, the person to whom Lord Davey refers is surely the person who seeks to deduct the sum in question, i.e., the company, and it seems to me that money expended to prevent seizure of the companys assets in accurately described as money expended for the purpose of enabling the company to carry on and earn profits in the trade since without its assets it could not carry on its business'.
Thus in England the trend is towards a wide interpretations of the words 'for the purposes of such trade'.
We now turn to examine a few decisions of the Supreme Court on the point or points allied thereto, in which the English cases above referred to were considered. The first case to which we need refer is the case of Commissioner of Income-tax v. Royal Calcutta Turf Club, in which the question arose whether money spent by the Royal Calcutta Turf Club (an association of person whose business it was to hold race meeting on a commercial basis but did not own any horse and employ jockeys) to establish and run a school for training Indian boys as jockeys, so as to safeguard against the risk of jockeys becoming unavailable and seriously affecting its business was allowable deduction under section 10 (2) (xv). Answering the question in the affirmative, the Supreme Court observed, after considering both the English decisions in Strong & Co. v. Woodifield, and Morgan v. Tate & Lyle Ltd. :
'The question as to whether the expenses of running the school for jockeys is deductible has to be decided taking into consideration the circumstances of this case. The business of the respondent was to run race meeting on a commercial scale for which it is necessary to have races of as high an order as possible. For the popularity of the races run by the respondent and to make its business profitable it was necessary that there were jockeys of requisite skill and experience in sufficient numbers who would be available to the owners and trainers because without such efficient jockeys the running of race meeting would not be commercially profitable. It was for this purpose that the respondent stated the school for training Indian jockeys. If there were not sufficient number of efficient Indian jockeys to ride horses its interest would have suffered, and it might have had to abandon its business if it did not take steps to make jockeys of the necessary calibre available. Therefore, any expenditure which was incurred for preventing the extinction of the respondents; business would, in our opinion, be expenditure wholly and exclusively laid out for the purposes of the business of the assessee and would be an allowable deduction.'
The next case on the point to which reference need be made, is the case of Commissioner of Income-tax v. Malayalam Plantations Ltd. That was a case in which certain amounts were paid by way of estate duty by a resident company incorporated outside India on the death of shareholders not domiciled in India. In that case also the Supreme court considered cases of Strong & Co. and Morgan v. Tate & Lyle, along with other English and Indian cases and observed :
'The aforesaid discussion leads to the following result : The expression for the purposes of the business is wider in scope than the expression for the purpose of earning profits. Its range is wide : it may take in not only the day to day running of a business but also the rationalisation of its administration and modernization of the machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be its limits are implict in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums serpent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business. In the present case, the company, as a statutory agent of the deceased owners of the shares, paid the sums payable by the legal of the deceased owners of the shares, paid the sums payable by the legal representatives of the deceased shareholders. The payment have nothing to do with the conduct of the business. The fact that on his default if any in the payment of the dues and the revenue may realise the amounts from the business assets is a consequence of the default of the assessee in not discharging his statutory obligation, but it does not make the expenditure incurred in the conduct of the business. It is manifest that the amounts in question were paid by the assessee as a statutory agent to discharge a statutory duty unconnected with the business though the occasion for the imposition arose because of the territorial nexus afforded by the accident of its doing business in India. We, therefore, hold that the estate duty paid by the respondent was not in allowable deduction under section 10 (2) (xv) of the Act.'
The other case that we need consider is Travancore Titanium Products Ltd. v. Commissioner of Income-tax, a case in which the question arose whether the amounts of wealth-tax paid by an assessee on his net wealth under the Wealth-tax Act was a permissible deduction in his assessment of income-tax. The Supreme Court answered the question in the negative after the considering the case of Strong & Co. and other English and Indian case on the point, and observed :
'The position may, therefore be summarised thus. The nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and ultimately connected with the business and be laid out by the taxpayer in his character as a trader. To be a permissible deduction, there must be 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 the owner of the assets, even if they are assets of the business.
In the light of the principles the amount of the tax paid the next wealth of an assessee under the Wealth-tax Act is not a permissible deduction under section 10 (2) (xv) of the Indian Income-tax Act in his assessment to income-tax for tax is imposed under the Wealth-tax Act on the owners of assets and not on any commercial activity.'
The last case that needs consideration, in this context, is Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax. In that case, the assessee company, which carried on the business of cotton spinning and weaving, found its own handlooms in its factory inadequate. If, therefore, began to distributed yarns produced by it to weavers outside the factory. The textile Commissioner thereupon made an order, in exercise of his powers under clause 18B of the Cotton Cloth and Yarn (Control) Order, 1945, directing the assessee-company not to sell or deliver yarns manufactured by its except to such person or persons as he might specify. The assessee disputed the validity of this order and continued the sale and delivery to weavers as before. This yarn was seized. The Provincial Textile Commissioner next made an order specifying the deliveries which the assessee-company would be entitled to make. The assessee-company challenged this order before a court of law but failed up to the Privy Council. In so doing the assessee-company incurred costs, which is claimed as deduction under section 10 (2) (xv) of the Indian Income-tax Act. In allowing the claim, the Supreme Court observed :
'(a) 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 assessee for protecting the business is admissible as expenditure under section 10 (2) (xv) provided other conditions are fulfilled, even though the expenditure does not directly related 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, therefore, expenditure laid out wholly and exclusively for the purposes of the trade. In Morgan v. Tate & Lyle Ltd. the House of Lords held that expenditure incurred by a company engaged in sugar refining, in a propaganda campaign to oppose the threatened nationalization of the industry, was a sum wholly and exclusively laid out for the purposes of the companys trade and was an admissible deduction from its profits for income-tax purposes.
(b) The object of the petition filed by the company was to secure a declaration that the orders dated February 20, 1946, in so far as it sought to put restrictions upon the right of the company to carry on its business in the manner in which it was accustomed to do was un-authorised and to prevent enforcement of that order : thereby the company was seeking to obtain an order from the court enabling the business to be carried on without interference. Expenditure incurred in that behalf would without doubt be expenditure laid out wholly and exclusively for the purpose of the business of the company.
(c) The High Court also though that expenditure to fall within the terms of section 10 (2) (xv) must be one for the purpose of earning income, and there was no material on the record to show that the expenditure was so incurred. If it is intended thereby to simply that the primary motive in incurring the expenditure admissible to deductions under section 10 (2) (xv) must be directly to earn income thereby we are with respect unable to agree with that view.
This court in Commissioner of Income-tax v. Malayalam Plantations Ltd. observed :
The expression for the purpose of the business; is a wider in scope than the expression for the purpose of earning profit. Its range is wide : it may take in not only the day to day running of a business, but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business.
Expenditure incurred to resist in a civil proceedings the enforcement of a measure-legislative or executive - which imposes restrictions on the carrying on of a business or to obtain a declaration that the measure is invalid would, if other conditions are satisfied, be admissible, in our judgment under section 10 (2) (xv) as a permissible deductions in the computation of taxable income.'
Mr. A. C. Mitter learned standing counsel, appearing for the assessee-company strongly relied on the meaning given to the word 'property' by the Supreme Court in J. K. Trust v. Commissioner of Income-tax and submitted that the word 'property' was a term of the widest import and, subject to any limitations or qualification which the context might require, it signified every possible interest which a person may acquire, hold and enjoy business would endoubtedly be property, unless there was something indicated to the contrary. He did not, in his fairness, generally submitted that any money spent by an assessee to have the taxable profit of business lawfully computed for assessment would be allowable deduction under section 10 (2) (xv). He made the limited submission that profits were the property of an assessee and if any unlawful attempt was made, on the part of the revenue, to grab more out of the profit, in the name of taxation, any money laid out wholly and exclusively for the purpose of business. He further submitted that the crucial words in section 10 (2) (xv) were 'for the purpose of such business' and not 'for the purpose of earning such profits or gins' in business as the language used to be earlier to the amendment in the section by the Amendment Act of 1939. He, therefore, submitted that Lord Daveys observations in Strong & Co. Ltd. v. Woodified, here in before quoted, were no longer applicable to the interpretation of the language of the Indian statute and must be deemed to have been enlarged by the wide interpretation on section 10 (2) (xv) by the Supreme Court in the case of Commissioner of Income-tax v. Malayalam Plantations Ltd.
Now, 'business without profit is not business, any more than a pickle is candy' (Abbot). The main object of business is to earn profit and business is thus a profit-making concern. But the subject of business must not be confused with its object, and business purposes must always be deemed to be more than profit-earning purposes. Business includes :
(a) day to day running of business,
(b) rationalization of business administration and modernization of machinery of business.
(c) preservation of business and protection of its assets and property from expropriation coercive process or as certain of hostile title,
(d) payment of statutory dues and taxes imposed as precondition for commencement or carriage of business.
(e) things incidental to carriage of business.
Business expediency may not require that all expenses be incurred for earning immediate profits. Such expediency may also require that expenses be incurred to save business from coercive process and unlawful expropriation so that the business may remain on sound footing and may earn better profits in future. The only distinction between what is business purposes and what is not is that business purpose must be for the carriage of business and expenses incurred by an assessee for business purposes must be made in his capacity as a person carrying on the business, so as to be admissible, under section 10 (2) (xv), as deductions. From what is stated above, expenses incurred, even though not directly related to earning of income, may still be admissible ad deduction, if otherwise related to carriage of business.
At this stage, we need consider three decisions by three different High Courts on this point, which were cited before us. In the case of S. D. Sharma v. Commissioner of Income-tax the Maharashtra High Court held that expenses incurred for reparation of statement and accounts for tax expenses and expenses incurred in the engagement of a consultant for satisfying the tax authorities with regard to the said statement and accounts were expenses incurred for the purposes of ascertaining tax liability and not for the purposes of carrying on the business or for earning profits and such expenses cannot be allowed as business expenditure. In the case of J. K. Cotton . v. Commissioner of Income-tax, the Allahabad High Court held that fees paid to chartered accountant and lawyers engaged to appear before the Income-tax Investigation Commission were not allowable deductions under section 10 (2) (xv), being expenses incurred with a view to satisfying the tax authorities with regard to statements and accountant. A contrary view was expressed by the Madhya Pradesh High Court in Binodiram Balchand v. Commissioner of Income-tax, in allowing expenses of professional fees paid to an Income-tax advisers during and for the conduct of assessment proceedings before the Income-tax authorities as deductions under section 10 (2) (xv). We do not purpose to concern ourselves, in this matter, with the academic questions as to whether expenses incurred by an assessee in payment of fees to accountant and lawyers for satisfying revenue authorities in respect of taxable profits, in normal and lawful assessment cases, are allowable deductions. Mr. Mitter did not argue that generally such expenditure should be allowed as deduction under section 10 (2) (xv). His contention was that expenditure incurred to prevent unlawful probes into assessable profit, with a view ultimately to tax the same, should be allowed as deductions under section 10 (2) (xv). We need not therefore, examine, the correctness or otherwise of the views expressed by the Maharashtra and Madhya Pradesh High Courts in the two cases referred to above. So far as the Allahabad High Court decision in J. K. Cotton Mfg. case is concerned that is no doubt a decision on the point but that decision did not take into consideration any of the Supreme court decisions, to which reference has already been made, and, therefore, not of help unless of course, it can survive the explanation of law on the point by the Supreme Court.
Mr. Gouri Mitter, learned counsel for the revenue, contended that none of the decisions of the Supreme Court above referred were relevant, because the aforesaid decisions had no occasion to consider the question whether expenses incurred by an assessee to represent its case before the Income-tax Investigation Commission were allowable deductions. Mr. Mitter is right in his contention to this extent that the cases before the Supreme Court had to consider different types of expenditure but not expenses incurred to represent a case before the Income-tax Investigation Commission. The Royal Calcutta Turf Clubs case had to consider expenditure incurred in establishing and running a school for jockey-training. The Malayalam Plantations case had to consider expenses by way of estate duty paid as agent of a third party. The Travancore Titanium Products Ltd.s case had to consider if wealth-tax paid was a deductible expenditure. The Meenakshi Mills Ltd.s case had to consider if litigations expenses to challenge the validity of an order made under the Cotton Cloth and Yarn (Control) Order, 1945, were allowable deductions. But although that is so, we are not prepared to hold that the Supreme Court decisions above referred to are of irrelevant consideration in the present context. The principles of law on which business expenses are to be allowed, under section 10 (2) (xv), were laid down in the above decisions and we are to be guided thereby.
Mr. Mitter next contended that the test laid down by Lord Davey in Strong & Co. of Romsey Ltd. was still good law and if an expense was not incurred for earning profit, the same should not be allowed as a deductions. In this contention he is certainly wrong, because in the case of Malayalam Plantations Ltd. the Supreme Court expressly laid down that the expression 'for the purpose of the business' was wide in scope than the expression 'for the purpose of earning profits.'
It is now settled by the decision of the Supreme Court (vide Sree Meenakshi Mills Ltd.) that :
(i) litigation expenses to secure an order from the court for enabling an assessee to carry on its business without interference is allowable deductions under section 10 (2) (xv),
(ii) expenditure incurred to resist, in a civil proceeding, the enforcement of a measure, legislative or executive, which imposes restrictions on the carriage of a business or to obtain a declaration that the measure was invalid, would, if other conditions are satisfied, be admissible as deductions under section 10 (2) (xv),
(iii) the deductibility of expenditure incurred in prosecuting a civil proceeding depends upon the nature and purpose of the civil proceeding in relation to the assessee business and cannot be affected by the final outcome of that business.
The proceeding before the Investigation Commission is not a civil proceeding. But that is not a matter of great difference, because it is a statutory proceeding commenced as an unlawful attempt to collect material for more taxation. Therefore, if the proceedings touched the business of the assessee, then if other conditions were satisfied, the expenditure incurred by the assessee in safeguarding its interest before the Commission would be allowable deductions. The question that remain for decision are : (i) did the investigation touch the business of the assessee and (ii) was the expenditure laid wholly or exclusively for the purposes of protecting such business from an unlawful executive action imposed by unconstitutional legislation.
The assessee-company in its business, had made certain profits and paid some income-tax on the profits that may have escaped payment of tax on a portion thereof. If a lawful effort had been made to find out what amount of profit if any, had escaped payment of tax, we might not have been called upon to decide whether expenses incurred to save itself from such an effort would have been allowable expenditure. The grievance made before us was that an unlawful effort was being made to find out what amount had escaped assessment, with the ultimate object of taxing such escaped income, and commercial expediency required that such an effort should be opposed. The profits that the assessee earned and which might have escaped assessment, in the year 1941-42 to 1947-48, may have been, at the time the investigation was ordered, ploughed back into the business or otherwise distributed. In all probabilities, the assessee no longer had such profits for payment of tax. An assessment on about rupees four crores of suspectedly escaped income and realization of tax thereupon with penalties may be too heavy for the business of the assessee and may cripple the assessee business if not an accurate it. To preserve thereof, an assessee is justified in talking proper steps and in spending money therefore. Such an expenditure was no doubt not for earning profits but was aimed at preservations of business from the in roads of an unconstitutional piece of legislation, which might ultimately result in consumption of the present profits, in additional taxation on income escaped in the past, and cripple its business activities either wholly or in part. Such an expenditure comes within the wide meaning given to the expression 'for the purposes of the business' by the Supreme Court in Malayalam Plantations Ltd.s case, which we have herein before quoted. Sub-section (1) and (4) of section 5 of the Supreme Court as discriminatory piece of legislation and therefore void. The purpose of those provisions was to start a probe into the past income of the same. The effort being unlawful, the attempt was a sort of a coercive process and the assessee was justified in opposing such a process. To spend money against a coercive process would be money laid out wholly or exclusively for the business purposes, particularly when it was to result in saving of business profits, which was the property, of the assessee-company, from belated efforts at taxation. Thus, although the Tribunal might have been right in assessee business they were not right in negativing other justification pleaded by the assessee, to which reference has already been made. The expenditure incurred by the assessee-company in opposing an illegal and coercive Government action with the object of saving taxation and safeguarding business were justified by commercial expediency and were allowable expenditure.
In the result, we answer the question referred to this court in the negative.
The assessee is entitled to costs. Certified for two counsel.
MASUD J. - I agree.
Question answered in the negative.