Business expenditure on criminal defence costs for a partner is not deductible when aimed at avoiding penal consequences.

Litigation expenditure incurred in defending a partner in a criminal prosecution was not deductible as business expenditure because it was not laid out wholly and exclusively for the firm's business. The controlling test was the nature and purpose of the legal proceeding, not the fact that the prosecution ended in acquittal. As the prosecution concerned an alleged personal statutory contravention and the partner was one of the proprietors, the defence costs were directed to protecting him from penal consequences rather than advancing the assessee-firm's business. The claimed amount was therefore not an allowable deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.

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Issues: Whether litigation expenditure incurred in defending a partner in a criminal prosecution was an allowable deduction as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The allowance under section 10(2)(xv) requires the expenditure to be laid out wholly and exclusively for the purpose of the business. Expenditure on civil litigation may be deductible where it is honestly and reasonably incurred to protect business interests, but defence costs in a criminal prosecution stand on a different footing. The controlling principle applied was that the nature and purpose of the legal proceeding in relation to the business determines deductibility, and not the fact that the prosecution ended in acquittal. The prosecution here was for an alleged personal contravention under the Foreign Exchange Regulation Act, 1947, and the partner was not an employee but one of the proprietors of the firm. The object of the expenditure was to save him from penal consequences, so the expense could not be treated as wholly and exclusively incurred for the assessee-firm's business.

Conclusion: The litigation expenditure of Rs. 6,000 was not a permissible allowance under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Final Conclusion: Defence expenses incurred for a partner's criminal prosecution for an alleged personal statutory contravention are not deductible as business expenditure merely because the prosecution arose in a business context or ended in acquittal.

Ratio Decidendi: Expenses incurred in defending a criminal prosecution are deductible only if, on their nature and purpose, they are laid out wholly and exclusively for the assessee's business; expenditure primarily directed to protecting an accused proprietor from penal consequences is not allowable, even if the proceedings arise out of business activities.

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