TaxTMI 
TaxTMI 
1967 (3) TMI 104
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....the commission for investigation and report, if the Central Government was of the opinion that there had been substantial evasion of income-tax payment in such cases. Similarly, if in the course of an investigation under section 5(1), the commission had reasons to believe that some person other than the one whose case was being investigated evaded payment of income- tax or that points other than those referred to it required investigation, the commission was authorised, under section 5(4), to report to the Central Government, so that the latter could refer the case of such other person or such other points to the commission for investigation. The ultimate object of the investigation was collection of materials showing evasion of tax, so that the evaded income might be taxed and penalties for evasion imposed. The Supreme Court condemned section 5(1) of the Act as an unenforceable and discriminatory piece of legislation, after the introduction of sub-section (1A) to section 34 of the Indian Income-tax Act (vide Shree Meenakshi Mills Ltd. v. A.V. Visvanatha Sastri [1954] 26 I.T.R. 713; [1955] 1 S.C.R. 787). The Supreme Court also condemned section 5(4) of the Act as a discriminatory p....
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....in disallowing the deductions as claimed by the assessee. The assessee preferred a further appeal before the Income-tax Appellate Tribunal. It was argued, on behalf of the assessee, that the expenses were incurred: (i) to save its fair name; (ii) to save unnecessary taxation; (iii) to oppose an illegal governmental action; (iv) to safeguard its business. It was further argued on behalf of the assessee that by creating a body known by the name of Investigation Commission, the Government wanted to have a second illegal dig into the assessee's profits. If the assessee had not taken the courage of defending itself, it might have been wiped off the business world by being made to pay heavy taxes and penalties. It was also submitted that the assessee's name having been mentioned as one of those assessees, who were called by the Investigation Commission to appear before them, there was created a circumstance sufficient to lower its prestige and position in the business world, which might affect its business deals and future profits also. It was, therefore, contended that it became necessary for the assessee to spend money in order to safeguard its business positi....
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.... legally be found due against an assessee. The formation of the Investigation Commission, it may be mentioned, was mainly with a view to find out the actual amount of tax that an assessee should have paid. Subsequently, however, by a decision, their Lordships of the Supreme Court in the case of Suraj Mall Mohta & Co. [1954] 26 I.T.R. 1 (S.C.) declared it to be a discriminatory legislation and ultra vires the Constitution of India in respect of particular provisions. This fact, however, does not change the nature of the issue before us. It still means that the expenditure incurred in defending the assessee's claim before the Investigation Commission was either, as stated above, to defend itself from paying legitimate tax to the State or looked at from another angle could be an expenditure for settling taxation liability. We need not say that it is already an established proposition that such an expenditure, viz., for settling taxation liabilities, was not an allowable expenditure. The principle of Smith's Potato Estates case** enunciated above applied to this issue also. The last ground upon which this claim is based is that it was to safeguard the assets of the company. ....
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....nder section 10(1) or under section 10(2)(xv) of the Income-tax Act, 1922?" It is necessary for us, at this stage, to refer to the language of subsections (1) and (2)(xv) of section 10 of the Indian Income-tax Act in order to appreciate the respective contentions of the assessee and the revenue in this matter. "10. (1) The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits and gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely:--... (xv) any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and (not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purpose of such business, profession or vocation." The words "expenditure laid out wholly and exclusively for the purpose of such business" have occasioned interesting explanation, either narrow or wide in their sweeps, when dealin....
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.... payment of these damages was not money expended 'for the purpose of the trade'. These words are used in other rules, and appear to me to mean for the purpose of enabling a person to carry on and earn profits in the trade, &c. I think the disbursements permitted are such as are made for that purpose. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade, or is made out of the profits of the trade. It must be made for the purpose of earning the profits." Lord James Hereford also agreed with Lord Loreburn but with note of some doubt: "...I concur entirely with the principle laid down by my noble and learned friend the Lord Chancellor. The only question is as to the application of that principle in one small matter to the facts of this case. If the fact were that the accident had occurred to a stranger walking in the street, then I should have no doubt at all. The doubt that did arise in my mind was as to the rule applicable when the accident occurred to a person who was a customer in the house who would not have been injured u....
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....be made for the purpose of earning the profits.' These expressions of opinion, given some forty years ago and accepted ever since, are, in my view, inconsistent with the appellants' contention. So far as income tax is concerned, there is direct authority in the High Court in Allen v. Farquharson Bros. and Co. [1932] 17 Tax Cas. 59, that the cost of opposing the Inland Revenue in a contest as to what the profits of a business are, is not deductible. But it is said that case merely followed Strong v. Woodifield [1906] A.C. 448; 5 Tax Cas. 215, and in any case excess profits tax differs inasmuch as it is imposed on a trader only and, therefore, the cost of ascertaining it is part of the trade. I do not accept this contention. It is true that a trader only is liable to pay it, but it is not payable by him as a trader. He pays as an individual, like any other individual, tax on the sum which he has earned as a trader. 'To my mind', said Lord Selborne L.C. in Mersey Docks and Harbour Board v. Lucas [1883] 8 App. Cas. 891, 905; 2 Tax Cas. 25, 29, 'it is reasonably plain that the gains of a trade are that which is gained by the trading, for whatever purposes it....
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.... The incidental consequence that the trader is not taxed so heavily in respect of his profits from trade does not, as it seems to me, alter the fact that the litigation was wholly and exclusively undertaken for the purposes of the trade. My own opinion, therefore, would be that the appeal should be allowed, but in view of the opinion of the majority of your Lordships I move that it be dismissed with costs." Lord Oaksey concurred with the dissenting view of Viscount Simon in the following language: "Reliance is placed upon the dictum of Lord Davey in Strong and Company of Romsey Ltd. v. Woodifield*, which has frequently been cited with approval in other cases, but it is to be observed that Lord Davey did not say 'earning the profits by the operations of the trade', and in my opinion the words' the purposes of the trade' ought not to be construed in this way. A trader does not expend money in an action brought for or against him for negligence or breach of contract in the course of his trade for the purpose of earning the profits of the trade in this sense, for it is not an o....
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....igating questions of taxation has never been sought to be deducted, and it may be so, but it is also true that the expense of paying accountants and auditors has been deducted, and in any event the fact, if it be the fact, throws no legal light upon the construction of the words in question." A question of somewhat similar nature came up for consideration before the House of Lords again in Morgan v. Tate & Lyle Ltd. [1954] 26 I.T.R. 1 95; 35 Tax Cas. 367 In that case the respondent company, which carried on the business of sugar refiners, claimed to deduct, in the computation of its trading profits for income-tax purposes, expenses incurred on a propaganda campaign designed to show that nationalization of the sugar refining industry would be harmful to workers, consumers and stockholders alike. The question arose whether this claim should be allowed. In delivering the majority judgment Lord Morton of Henryton, (with whom Lord Reid and Lord Asquith of Bishopstone agreed--Lord Tucker and Lord Keith of Avonholm dissenting) explained Lord Davey's tests in Strong & Co. v. Woodifield [1906] A.C. 448; 5 Tax Cas. 215, and observed: ....
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....rred to were considered. The first case to which we need refer is the case of Commissioner of Income-tax v. Royal Calcutta Turf Club [1961] 41 I.T.R. 414, 418; [1961] 2 S.C.R. 729, in which the question arose whether money spent by the Royal Calcutta Turf Club (an association of persons whose business it was to hold race meetings on a commercial basis but did not own any horse and employ jockeys) to establish and run a school for training Indian boys as jockeys, so as to safeguard against the risk of jockeys becoming unavailable and seriously affecting its business was allowable deduction under section 10(2)(xv). Answering the question in the affirmative, the Supreme Court observed, after considering both the English decisions in Strong & Co. v. Woodifield [1906] A.C. 448, 453, and Morgan v. Tate & Lyle Ltd. [1954] 26 I.T.R. 1 95; 35 Tax Cas. 367. "The question as to whether the expenses of running the school for jockeys is deductible has to be decided taking into consideration the circumstances of this case. The business of the respondent was to run race meetings on a commercial scale for which it is neces....
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....ng of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business. In the present case, the company, as a statutory agent of the deceased owners of the shares, paid the sums payable by the legal representatives of the deceased shareholders. The payments have nothing to do with the conduct of the business. The fact that on his default, if any, in the payment of the dues the revenue may realise the amounts from the business assets is a consequence of the default of the assessee in not discharging his statutory obligation, but it does not make the expenditure any the more expenditure incurred in the conduct of the business. It is manifest that the amounts in question were paid by the assessee as a statutory agent to discharge a statutory ....
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.... Cloth and Yarn (Control) Order, 1945, directing the assessee-company not to sell or deliver yarns manufactured by it except to such person or persons as he might specify. The assessee disputed the validity of this order and continued the sale and delivery to weavers as before. This yarn was seized. The Provincial Textile Commissioner next made an order specifying the deliveries which the assessee-company would be entitled to make. The assessee-company challenged this order before a court of law but failed up to the Privy Council. In so doing the assessee-company incurred costs, which it claimed as deduction under section 10(2)(xv) of the Indian Income-tax Act. In allowing the claim, the Supreme Court observed: "(a) Under section 10(2)(xv) of the Indian Income-tax Act, as amended by Act 7 of 1939, expenditure even though not directly related to the earning of income may still be admissible as a deduction. Expenditure on civil litigation commenced or carried on by an assessee for protecting the business is admissible as expenditure under section 10(2)(xv) provided other conditions are....
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....n of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. Expenditure incurred to resist in a civil proceeding the enforcement of a measure--legislative or executive--which imposes restrictions on the carrying on of a business or to obtain a declaration that the measure is invalid would, if other conditions are satisfied, be admissible, in our judgment, under section 10(2)(xv) as a permissible deduction in the computation of taxable income." Mr. A.C. Mitter, learned standing counsel, appearing for the assessee- company, strongly relied on the meaning given to the word "property" by the Supreme Court in J.K. Trust v. Commissioner of Income-tax [1957] 32 I.T.R. 535 (S.C.) and submitted that the word "property" was a term of the widest import and, subject to any limitation or qualification which the context might require, it signified every possible interest which a person may acquire, hold and e....
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....may remain on sound footing and may earn better profits in future. The only distinction between what is business purpose and what is not is that business purpose must be for the carriage of business and expenses incurred by an assessee for business purposes must be made in his capacity as a person carrying on the business, so as to be admissible, under section 10(2)(xv), as deductions. From what is stated above, expenses incurred, even though not directly related to earning of income, may still be admissible as deduction, if otherwise related to carriage of business. At this stage, we need consider three decisions by three different High Courts on this point, which were cited before us. In the case of S.D. Sharma v. Commissioner of Income-tax [1962] 45 I.T.R. 107 the Maharashtra High Court held that expenses incurred for preparation of statements and accounts for tax purposes and expenses incurred in the engagement of a consultant for satisfying the tax authorities with regard to the said statements and accounts were expenses incurred for the purpose of ascertaining tax liability and not for the purpose of carrying on the business or for earning profits and such expenses cannot ....
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....ferent types of expenditure but not expenses incurred to represent a case before the Income-tax Investigation Commission. The Royal Calcutta Turf Club's case*** had to consider expenditure incurred in establishing and running a school for jockey-training. The Malayalam Plantations' case# had to consider expenses by way of estate duty paid as agent of a third party. The Travancore Titanium Products Ltd.'s case## had to consider if wealth-tax paid was a deductible expenditure. The Meenakshi Mills Ltd.'s case### had to consider if litigation expenses to challenge the validity of an order made under the Cotton Cloth and Yarn (Control) Order, 1945, were allowable deductions. But although that is so, we are not prepared to hold that the Supreme Court decisions above referred to are of irrelevant consideration in the present context. The principles of law on which business expenses are to be allowed, under section 10(2)(xv), were laid down in the above decisions and we are to be guided thereby. Mr. Mitter next contended that the test laid down by Lord Davey in Strong & Co. of Romsey Ltd.* was still good law and if an expense was not incurred for earning profit, the same....
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....ind out what amount had escaped assessment, with the ultimate object of taxing such escaped income, and commercial expediency required that such an effort should be opposed. The profits that the assessee earned and which might have escaped assessment, in the years 1941-42 to 1947-48, may have been, at the time the investigation was ordered, ploughed back into the business or otherwise distributed. In all probabilities, the assessee no longer had such profits for payment of tax. An assessment on about rupees four crores of suspectedly escaped income and realisation of tax thereon with penalties may be too heavy for the business of the assessee and may cripple the assessee's business, if not annihilate it. To preserve the business from such an unlawful probe and the adverse consequences thereof, an assessee is justified in taking proper steps and in spending money therefor. Such an expenditure was no doubt not for earning profits but was aimed at preservation of business from the inroads of an unconstitutional piece of legislation, which might ultimately result in consumption of the present profits, in additional taxation on income escaped in the past, and cripple its business ac....