Commercial expediency test upheld for legal expenses protecting business discipline after riot-related disruption.

Legal expenses incurred to assist the prosecution of persons involved in a riot at the assessee's colliery were treated as deductible because they were made on grounds of commercial expediency and to facilitate the business indirectly. The Court drew a distinction between a merely indirect business connection and a remote connection that would fail the statutory test. As the riot had disrupted labour discipline, threatened managerial safety, and jeopardised the smooth running of the colliery, the expenditure was viewed as protecting the business environment in which income was earned and was allowable as laid out wholly and exclusively for business purposes.

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Issues: Whether legal expenses incurred by the assessee in assisting the prosecution of persons involved in a riot at its colliery were allowable as expenditure laid out wholly and exclusively for the purpose of its business under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The expenditure was not incurred for any direct business gain, but the Court held that deduction depends on whether the outgoing was made on grounds of commercial expediency and to facilitate the carrying on of the business indirectly. The Court distinguished between a merely indirect connection with the business and a remote connection that would not satisfy the statutory test. The riot had seriously affected the colliery, endangered managerial safety, disrupted labour discipline, and threatened the smooth running of the business. Assisting the prosecution was viewed as a measure to create confidence among staff, maintain discipline, deter recurrence of violence, and protect the business environment in which income was earned.

Conclusion: The legal expenses were held to have been incurred wholly and exclusively for the purpose of the assessee's business and were allowable as a deduction.

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