Criminal defence costs are deductible only when incurred wholly and exclusively for business purposes; extra-commercial motives defeat the claim.

Expenditure on defending directors, officers or employees in criminal proceedings is deductible only if it is shown, on the facts and surrounding circumstances, to have been incurred wholly and exclusively for business purposes. Criminal defence costs are not automatically allowable merely because the prosecution arose from business activity. The decisive enquiry is the assessee's motive and intention in incurring the expenditure; where extra-commercial considerations such as protecting relatives or avoiding punishment are present, the claim fails. The fact that the company itself could not be prosecuted, while proceedings were against its personnel, does not by itself make the expense deductible.

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Issues: Whether the amounts spent by the assessee-company in defending its directors, officers and employees in criminal proceedings were deductible as expenditure wholly and exclusively laid out for the purpose of business under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: Deductibility under section 10(2)(xv) depends on whether the expenditure was incurred wholly and exclusively for business purposes, which is a question to be determined from the facts and surrounding circumstances of each case. Expenses incurred in criminal proceedings are not automatically deductible merely because the prosecution arose out of business activity. The decisive enquiry is the assessee's motive and intention in incurring the expenditure. Where the circumstances show extra-commercial considerations, including the protection of relatives or the avoidance of punishment, the expenditure cannot be treated as wholly and exclusively laid out for business. The fact that the company itself could not be prosecuted and the proceedings were against its employees and officers did not by itself make the expenditure deductible.

Conclusion: The expenditure was not allowable as a deduction under section 10(2)(xv); the question was answered in the negative and against the assessee.

Ratio Decidendi: Expenditure incurred on criminal defence is deductible only if, on the facts, it is shown to have been laid out wholly and exclusively for the business, and the presence of extra-commercial motives defeats the claim even where the prosecution is of directors or employees rather than the company itself.

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