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TMI Blog1962 (9) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... by it in connection with a litigation to the details of which we shall refer a little later. In the assessment year 1950-51, relevant to the previous year ending on March 31, 1950, it claimed as deduction the sum of ₹ 5,912 being the costs paid to the Government as a result of the said litigation. The Income-tax Officer disallowed the claim in respect of both the years on the ground that the assessee failed to furnish details of the expenses. The assessee went up on appeal to the Appellate Assistant Commissioner who concurred with the decision of the Income-tax Officer. The Appellate Assistant Commissioner found that the assessee infringed the provisions of a statute and improperly challenged the court proceedings, the validity of lawful orders passed in pursuance of a statute and that the expenses cannot be said to have been laid out wholly and exclusively for the purpose of the business. There was a further appeal to the Income-tax Appellate Tribunal by the assessee. The Tribunal took the view that the expenses incurred by the assessee and sought to be deducted in the computation of profits were not in the course of business and were due to a misapprehension of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er may specify; (c) to furnish such returns or other information relating to his or their undertaking and in such manner as the Textile Commissioner may specify; and may issue such further instruction as he thinks fit regarding the manner in which the direction is to be carried out. (2) Every manufacturer or dealer shall comply with the directions and instructions given under sub-clause (1)." On February 20, 1946, the Provincial Textile Commissioner, Madras, issued a notification under clause 18B, sub-clause (1)(b), of the Control Order directing the assessee to confine its delivery of yarn to three categories of persons, namely: (a) licensed yarn dealers; (b) to consumers who purchased yarn directly from the assessee during the basic years 1940-1942; (c) persons working the appellant's handlooms erected in the appellant's spinning mill at Madurai. In effect this order prohibited the assessee from delivering yarn to weavers outside the mill premises. Despite this prohibition the assessee delivered yarn to operators of handlooms who were not engaged by him in the mill premises. Of course the assessee continued its previous course of business which consisted of conver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... livery to outside weavers who are bailees, as in the present case. The scope of the Control Order is very wide. It relates to both dealers and manufacturers (these terms are defined in clause (c) of the Control Order), in their dealings with themselves or with outside persons, the object of the directions issued under clause 18B, as already stated, being the proper distribution of cloth or yarn of a specified description. Their Lordships do not think that the operation of the clause is limited to dealings with the outside public only, as contended for by the appellant. The object aimed at by the clause will not be secured if the scope of the order is so limited........clause 18B is wider in its scope as its object is to prohibit delivery of cloth or yarn to any person, including delivery to a bailee." The assessee's present claim for deduction only relates to the legal expenses incurred and the costs paid in respect of the civil litigation referred to above. It appears from the record that there were also criminal proceedings taken against the assessee as a result of the violation of the Control Order. The exact nature of these proceedings does not however appear from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioner of Income-tax [1951] 20 I.T.R. 1; [1951] S.C.R. 504. ".........a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade", can be adopted as the best interpretation of the crucial words of section 10(2)(xv). The imprudence of the expenditure and its depressing effect on the taxable profits would not deflect the applicability of the section. The acid test is, "did the expenditure fall on the assessee in his character as trader and was it for the purpose of the business." The meaning of this test cannot be better stated than in the following words of Lord Davey in Strong & Co. v. Woodfield [1906] 5 Tax Cas. 215 : "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." Notwithstanding determined attempts made by the taxpayer to show th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly to be viewed from the standpoint, whether it was necessary for the earning of the profit. Acts of illegality committed by the assessee in the way of his business, however reprehensible they may be from the moral point of view, would not be discountenanced for the limited purpose of investigating the question of taking the expenses of such acts in the computation of the taxable profits of the business. But it should however be borne in mind that violation of laws is neither necessary nor incidental in the normal way of carrying on business, and we suppose, that honest business or trade is not a contradiction in terms. If a trader contravenes the law, let us assume bona fide without a deliberate intent to break the law, and is called upon by the competent authorities not to repeat such contravention and to set right what has been illegally done, the trader is bound to conform himself according to the directions of such authorities. But it may yet be open to him to entertain the view that he has not been guilty of any infraction of law, and he may, imbued with the faith of his own conviction, raise an issue whether or not he is right. But in such cases he takes the risk of being t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been agreed that they did not intend to do anything wrong in the sense that they were willingly and knowingly sending these goods to an enemy destination; but they committed a breach of the law, and for that breach of the law they were fined, and that does not seem to me to be a loss connected with the business, but it is a fine imposed upon the company personally, as far as a company can be a person, for a breach of the law which they had committed. It is perhaps a little difficult to put the distinction into very exact language, but there seems to me to be a difference between a commercial loss in trading and a penalty imposed upon a person or a company for a breach of the law which they have committed in that trading." Warrington L.J. stated the position thus at page 241: "Now it cannot be said that the disbursement in the present case is made in any way for the purpose of the trade or for the purpose of earning the profits of the trade. The disbursement is made, as I have already said--and the same remark applies to this rule as to the other--because the individual who is conducting the trade has, not from any moral obliquity, but has unfortunately, been gui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, contends that in delivering the bales to weavers outside the mills, the assessee acted bona fide in the belief that it was not violating the provisions of the Control Order, that such delivery was effected only for the purpose of earning income, and that the fact that it was ultimately found that the delivery was illegal and in contravention of the Control Order would not in any way affect the question, whether the steps taken by the assessee and the expenses incurred by it were for the purpose of the business. Learned counsel also pointed out that the deductibility of the expenses should not be made to depend upon the success or failure of the assessee in the legal proceedings in respect of which the moneys were spent. It is true that the Supreme Court has pointed out in Commissioner of Income-tax v. Hirjee[1953] 23 I.T.R. 427, 431; [1953] S.C.R. 714 that the distinction between the legal expenses of a successful and unsuccessful defence in an action is not sound: "The deductibility of such expenses under section 10(2)(xv) must depend on the nature and purpose of the legal proceeding in relation to the business whose profits are under computation and cannot be aff ..... X X X X Extracts X X X X X X X X Extracts X X X X
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