Criminal litigation costs can qualify as business expenditure when incurred bona fide to protect a trader's business interests.

Expenditure incurred by a trader on criminal proceedings is deductible as business expenditure if it is laid out wholly and exclusively for the business and the proceedings arise out of a transaction incidental to that business. The distinction between civil and criminal litigation is not decisive; bona fide legal costs incurred to protect business interests may fall within the allowance provision. Where the Tribunal found the expenditure to have been actually incurred for business purposes, the one-third apportionment did not justify denial of the deduction on the reference. The business deduction was therefore sustained, and the challenge to the apportionment failed.

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Issues: (i) Whether expenditure incurred in connection with criminal proceedings undertaken to protect a trader's business interests was deductible as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922; (ii) Whether the Tribunal was justified in allowing only one-third of the expenditure by way of apportionment.

Issue (i): Whether expenditure incurred in connection with criminal proceedings undertaken to protect a trader's business interests was deductible as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The statutory test is whether the expenditure was laid out wholly and exclusively for the purpose of the business and whether the transaction out of which the proceedings arose was incidental to that business. Section 10(2)(xv) does not distinguish between civil and criminal litigation. Where the Tribunal finds that the expenditure was actually incurred, was bona fide, and was incurred for the purpose of the business, such expenditure falls within the allowance provision. The circumstance that the prosecution was conducted by the Government did not deprive the assessee of the right to engage his own lawyers for protection of his business interests.

Conclusion: The expenditure was allowable under section 10(2)(xv) and the issue was decided in favour of the assessee.

Issue (ii): Whether the Tribunal was justified in allowing only one-third of the expenditure by way of apportionment.

Analysis: The finding that the expenditure had been incurred for business purposes was not displaced. In that situation, the apportionment on a one-third basis was not supported on the record as a matter requiring interference in the reference. The High Court could not reassess the matter as if in appeal, and the Tribunal's estimate stood within the reference questions as framed.

Conclusion: The apportionment was not a ground for denying the allowance, and the issue was decided in favour of the assessee.

Final Conclusion: The reference was answered by holding that the criminal litigation expenditure was deductible as business expenditure and that the revenue's challenge to the apportionment failed; the assessee succeeded in the appeal.

Ratio Decidendi: Expenditure incurred bona fide by a trader in litigation arising out of and incidental to the business, including criminal proceedings, is deductible if it is wholly and exclusively laid out for the purpose of the business.

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