1973 (3) TMI 6 - SC - Income Tax

Legal expenses in criminal proceedings deductible under Income-tax Act for business purposes

The Supreme Court clarified that expenses incurred in connection with criminal proceedings are deductible under section 10(2)(xv) of the Income-tax Act if ... Whether any part of the expenditure incurred by the assessee in connection with the criminal proceedings initiated and conducted by the Government against Shri Ramgopal Ganpatrai was an allowable deduction u/s 10(2)(xv) - whether there is any basis for estimating such allowable part of expenditure at one-third of the total - Questions are answered in favour of the assessee Issues:- Deductibility of expenditure incurred in connection with criminal proceedings under section 10(2)(xv) of the Indian Income-tax Act, 1922.- Justifiability of apportionment of expenditure by the Tribunal.- Jurisdiction of the High Court in advising the Tribunal beyond the referred questions.Analysis:The judgment pertains to appeals arising from a reference under section 66(1) of the Indian Income-tax Act, 1922, focusing on the deductibility of expenditure incurred in connection with criminal proceedings under section 10(2)(xv). The assessee, an individual, had significant income from various sources, including managing a public limited company, leading to financial difficulties and subsequent litigation. The Tribunal found the expenditure incurred for criminal litigation to be bona fide and for business purposes, essential in bringing about a compromise. However, the Tribunal's decision to apportion the expenditure was deemed unjustified, though unchallenged by the assessee.The High Court, while accepting the Tribunal's conclusion on the business purpose of the expenditure, opined that the entire amount should be deductible, advising the Tribunal accordingly. The High Court's decision to go beyond the referred questions was criticized, as the Tribunal's factual findings were not contested, and the High Court's role was to advise on the specific questions posed, not re-examine the case. The Tribunal's apportionment decision was questioned at the instance of the Commissioner of Income-tax, leading to the High Court's advice for full deduction of the expenditure.The Supreme Court clarified that section 10(2)(xv) does not differentiate between civil and criminal litigation expenses, emphasizing the need for expenses to be incurred wholly and exclusively for business purposes. The court highlighted that the assessee's decision to engage lawyers for the criminal case was a business judgment, essential for protecting his interests. The court rejected the argument that the Government's prosecution negated the necessity of the assessee's expenditure, as the assessee had a vested interest in the case's success. Ultimately, the court vacated the High Court's order, affirming the deductibility of the expenditure and the Tribunal's decision, answering the questions in favor of the assessee.In conclusion, the judgment clarifies the deductibility of expenditure incurred in connection with criminal proceedings under section 10(2)(xv) of the Income-tax Act, emphasizing the business purpose and bona fide nature of the expenditure. It underscores the assessee's discretion in managing legal expenses and criticizes attempts to dictate how an assessee should incur such expenses. The court's decision upholds the Tribunal's findings and rejects the High Court's overreach in advising beyond the referred questions, ensuring a fair application of tax laws to business-related expenditures.