HARRIES, C.J. - This is a reference made by the Income-tax Appellate Tribunal, Calcutta Bench, under Section 66(1) of the Indian Income-tax Act at the instance of the Commissioner of Income-tax in which the following question has been framed for the opinion of this Court :-
'Whether in the circumstances of this case the Tribunal was right in holding that the sum of Rs. 10,895 spent in defending the criminal proceedings was an expenditure laid out or expended wholly and exclusively for the purpose of business as contemplated by Section 10(2)(xv) of the Indian Income-tax Act.'
The assessee was the sole distributor of the products of Bengal Potteries. He was prosecuted by the Enforcement Authorities on a charge of selling the goods at prices higher than were reasonable. A part of his stock was seizes and taken away. He defended himself and eventually he was acquitted by a Magistrate. He spent a sum of Rs. 10,895 on his defence and he claimed that sum as an allowance in arriving at the taxable income of his business.
Under Section 10(2)(xv) allowance is made in respect of any expenditure, not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of any business, profession or vocation.
The Income-tax Officer disallowed this amount as an allowance, but his decision was reversed by the Appellate Assistant Commissioner and the latters view was upheld by the Appellate Tribunal on appeal.
It was argued before the Appellate Tribunal that the amount expended could not be said to have been expended wholly or exclusively for the purposes of the assessees business. The contention was that he defended these criminal proceedings to avoid possible imprisonment or the imposition of a fine. The Appellate Tribunal were not satisfied that any imprisonment was likely and they eventually came to the conclusion that the expenditure was solely for the purpose of maintaining his good name and protecting the value of his stock-in-trade. The Tribunal summed up their finding in these words :-
'No doubt the element of saving himself from the fine, if any, might be there, but it is so inextricably mixed up with the main purpose for the defence that we are prepared to ignore that little element. In our opinion the defence was solely for the purpose of maintaining his name as a good business man and also to save his stock from being undersold if the Court held that the prices charged by the respondent were unreasonable.'
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. But the Tribunal have pointed out that this was so inextricably mixed up with the protection of the good name of the business that it can well be found that the money spent in defence in the criminal prosecution was spent solely and exclusively for the purposes of the business. The finding is a finding of fact and is binding upon us.
This matter was expressly considered recently by a Bench of the Bombay High Court in the case of J. B. Advani v. Commissioner of Income-tax. In that case it was claimed that certain expenses incurred in defending a criminal prosecution was permissible deduction under Section 10(2)(xv) of the Indian Income-tax Act. The Bench pointed out that where the prosecution had been unsuccessful such expenses could be properly allowed. But in such a case two tests had to be applied before the assessee could be allowed the deduction. The first test would be whether the assessee was charged with regard to a transaction which took place in the ordinary course of business, and the other test would be whether he was charged in his capacity as a trader. If these two tests were satisfied and the Court came to the conclusion that the primary object of incurring the expenditure was to protect the good name of the business then it could be said that the expenditure was wholly and exclusively for the purposes of the business.
As I have said, the Appellate Tribunal have held in this case that the primary and indeed the sole object of incurring these expenses was the protection of the good name of the business and the stock-in-trade thereof. In my view the Appellate Tribunal were right in allowing this amount as a deduction and that being so the question submitted must be answered in the affirmative.
The assessee is entitled to the costs of this reference. Certified for two counsel.
BANERJEE, J. - I agree.
Reference answered accordingly.