1971 (8) TMI 9 - SC - Income Tax

Supreme Court allows deduction for legal charges linked to business purposes under Income-tax Act

Commissioner of Income-Tax, West Bengal I Versus Birla Cotton Spinning And Weaving Mills Limited

The Supreme Court ruled that law charges incurred in proceedings before the Investigation Commission were allowable deductions under section 10(2)(xv) of ... Expenditure which was incurred in opposing a coercive Government action with the object of saving taxation and safeguarding business was incurred by commercial expediency and therefore allowable under s. 10(2)(xv) Issues:1. Allowability of law charges incurred in connection with proceedings before the Investigation Commission as a deduction in the computation of business profits.Analysis:The judgment pertains to appeals brought before the Supreme Court concerning the allowability of expenses incurred by the assessee before the Investigation Commission as a deduction in the computation of business profits. The key question was whether the law charges incurred in connection with the proceedings before the Investigation Commission were allowable deductions under section 10(1) or 10(2)(xv) of the Income-tax Act, 1922. The High Court had held that the expenditure incurred by the assessee in opposing an illegal government action to save taxation and safeguard the business was justified by commercial expediency and thus an allowable expenditure.The Supreme Court delved into the purpose and provisions of the Taxation on Income (Investigation Commission) Act 1947, emphasizing the objective of investigating tax evasion. The court highlighted that the expenses incurred by the assessee in conducting proceedings before the Commission and challenging the vires of the Investigation Commission Act were aimed at safeguarding the business from heavy taxation consequences. The court analyzed the relevant sections of the Income-tax Act, particularly section 10(2)(xv), which allows deductions for expenditures laid out wholly and exclusively for the purposes of the business.The court discussed the principles governing the deductibility of expenses under section 10(2)(xv), emphasizing that the expenditure must be necessitated by commercial expediency and directly connected to the business. It cited precedents to establish that expenditure incurred in civil proceedings to resist measures restricting business operations or challenging tax assessments could be deductible under the section. The court also addressed the English court's stance on such expenditures and distinguished it from the Indian legal framework.The Supreme Court rejected the revenue's argument that the expenditure did not have a direct and intimate connection with the character of the assessee as a trader. It emphasized that the expenditure was aimed at preserving and protecting the business from potential income reduction due to heavy taxation. The court concluded that the expenditure incurred by the assessee in opposing coercive government actions to save taxation and safeguard the business was justified by commercial expediency and allowable under section 10(2)(xv) of the Act. The appeals were dismissed, with costs awarded to the respondent in one of the cases.