Court ruling: Deductibility of internal development expenses, legal costs, and business losses clarified.

The court ruled in favor of the assessee on the allowability of internal development expenditure and entitlement to export profit rebate. Legal expenses incurred in defending employees were deemed allowable deductions, but those for defending directors were not. However, losses on the purchase and sale of securities and bonds were not deductible as business losses. The court's decision favored the assessee on Questions 1 and 3, partially on Question 2, and favored the Revenue on Question 4. No costs were awarded.

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Issues Involved:
1. Allowability of internal development expenditure as revenue expenditure.
2. Admissibility of legal expenses incurred in defending employees and directors.
3. Entitlement to export profit rebate in respect of the kyanite business.
4. Allowability of losses on the purchase and sale of securities and bonds as business losses.

Detailed Analysis:

Issue 1: Allowability of Internal Development Expenditure as Revenue Expenditure

The first issue pertains to whether the internal development expenditure claimed by the assessee-company for the assessment years 1965-66 and 1966-67 can be allowed as revenue expenditure. The court referred to its previous judgment in CIT v. Indian Copper Corporation Ltd. [1986] 161 ITR 327 (Pat), where it was held that internal development expenses were revenue expenditure and thus deductible. Since no new facts were presented to challenge the earlier decision, the court held that the internal development expenditure of Rs. 19,39,205 for the assessment year 1965-66 and Rs. 2,99,089 for the assessment year 1966-67 is allowable as revenue expenditure. Therefore, Question No. 1 was answered in favor of the assessee and against the Revenue.

Issue 2: Admissibility of Legal Expenses Incurred in Defending Employees and Directors

The second issue concerns the admissibility of legal expenses incurred in defending employees and directors in criminal cases. The court distinguished between two categories of expenditures: those incurred for defending employees and those for defending directors.

For employees, the court found that the expenses were incurred wholly and exclusively for the purposes of the business, as the employees were defending the company's property against hooligans and thieves. Hence, these expenses were deemed allowable deductions under Section 37 of the Income-tax Act, 1961.

For directors, the court held that the assessee failed to provide sufficient details about the circumstances of the accident and the directors' roles. Therefore, the expenses incurred in defending the directors under the Mines Act were not allowable deductions. Consequently, Question No. 2 was answered partially in favor of the assessee (for employees) and partially in favor of the Revenue (for directors).

Issue 3: Entitlement to Export Profit Rebate in Respect of the Kyanite Business

The third issue pertains to the assessee's entitlement to export profit rebate for the kyanite business during the assessment years 1965-66 and 1966-67. Referring to its earlier decision, the court reiterated that the method of computation of the export profit rebate should consider the total sales, total export sales, and the corresponding profits. The Tribunal's method of computation was upheld, and thus, Question No. 3 was answered in favor of the assessee.

Issue 4: Allowability of Losses on the Purchase and Sale of Securities and Bonds as Business Losses

The fourth issue involves whether the losses incurred by the assessee on the purchase and sale of Bihar State Development Bonds can be allowed as business losses. The court noted that the purchases and sales were not commercial ventures and were made under pressure from the Government of Bihar. The court found no material evidence to show that these transactions were in the interests of the business or that they were necessary for the company's operations. The court concluded that the losses were not incurred wholly and exclusively for the purposes of the business and thus were not deductible. Therefore, Question No. 4 was answered in favor of the Revenue and against the assessee.

Conclusion:

Questions Nos. 1 and 3 were answered in favor of the assessee. Question No. 2 was answered in favor of the assessee concerning expenses for defending employees but in favor of the Revenue concerning expenses for defending directors. Question No. 4 was answered in favor of the Revenue. There was no order as to costs.

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