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1950 (3) TMI 21 - BOMBAY HIGH COURT

1950 (3) TMI 21 - BOMBAY HIGH COURT - [1950] 18 ITR 557 - Miscellaneous Case No. 21 of 1949 - Dated:- 17-3-1950 - Chagla (CJ) And Tendolkar, JJ. For the Assessees : Sir Jamshedji B. Kanga For the Commissioner : Attorney-General of India JUDGMENT Chagla, CJ. The first question that we have to consider on this reference is whether certain expenditure incurred by the assessee company as legal expenses are permissible deductions as falling within Section 10(2)(xv) of the Income-tax Act. The facts th .....

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e Chief Presidency Magistrate at Madras discharged all the accused. The directors and the salesman were also prosecuted at Karachi under the Defence of India Rules on the ground that the salesman refused to sell paper as he should have done. The City Magistrate also discharged the accused before him. It is in connection with these two prosecutions that the assessees claim to have incurred an expenditure of ₹ 5,247-0- which they claim as permissible deductions under Section 10(2)(xv) of the .....

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y to the law and in the other case having refused to sell. Therefore, both the charges were directly in connection with the business of the company as a trader. The charges against the accused were also in their capacity as agents for a company which was a trading company. A further fact to note is that the expenses for the litigation were not incurred by the persons charged with the offences themselves but they were incurred by the company in order to save those persons from the consequences of .....

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The position would have been very different if the expenditure had been incurred by the directors and the salesman themselves. Then undoubtedly it could have been urged that when a man is served with a summons from a criminal court he is not thinking of his business or the good name and reputation of the business, but, primarily he is thinking of himself, his liberty and of the consequences of the conviction. But when we have facts as we have here of a different entity altogether-the limited com .....

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ferred to in most of the cases which deal with the point similar to the one that has arisen for our determination is Strong v. Woodifield [1906] A.C. 448; 5 Tax Cas. 215. In that case a brewery owned an inn which was carried on by a manager as a part of their business. A customer sleeping in the inn was injured by the fall of a chimney and recovered damages and costs against the company for the injury, which was owing to the negligence of the company's servants. When a claim was made for ded .....

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as much as or even more than with the trade. I think only such losses can be deducted as are connected with it in the sense that they are really incidental to the trade itself. They cannot be deducted if they are mainly incidental to some other vocation or fall on the trader in some character other than that of trader." There are two points emphasized by the Lord Chancellor, viz., that the loss must be incidental to the trade itself and it must fall on the trader in his character as a trade .....

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here can be no doubt that if a trader is charged with an offence which is a breach of the law and he is convicted he cannot claim the legal expenses incurred for defending himself against the prosecution as moneys expended wholly and exclusively for the business, because it can never be said that the breach of the law was incidental to a business. It can never be urged that a business could only be carried on for the purposes of profits by causing infraction of the law, and, therefore, these two .....

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s relating to the requirements of the Board of Customs and Excise and the assessees settled the action by paying mitigated penalty of ? 2,000. Rowlatt, J., held that the mitigated penalty and costs were not a loss connected with and arising out of the company's trade and in deciding this he relied on the passage of Loreburn, L.C., in Strong v. Woodifield [1906] A.C. 448; 5 Tax Cas. 215, to which I have just referred. To the same effect is another decision reported in the same volume at page .....

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sed upon the company personally, as far as a company can be a person, for the breach of the law which they had committed. The learned Lord Justice further went on to say that it was perhaps a little difficult to put the distinction into very exact language, but there seemed to him 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 had committed in that trading. The test that Lord Justice Scrutton applied whi .....

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ported in 10 I.T.R. at page 214. In that case a suit was filed by the assessee in respect of a loan of ten lacs of rupees made to a company and there was also a suit by the company challenging the loan on the ground that the assessee had committed a breach of the contract in not properly financing the company. The cost of the litigation to enforce the payment of the loan was allowed as a permissible deduction but the question arose as to whether the expenses of defending the litigation filed aga .....

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costs of the litigation. Then we have a case of a criminal prosecution but which ended in a conviction, viz., the case of The Amrita Bazar Patrika, reported in 5 I.T.R. at page 648. The Amrita Bazar Patrika published an article which was a comment on the judiciary. The printer and the publisher were prosecuted and convicted for contempt of Court in respect of that article. The costs of the contempt proceedings were sought to be deducted from the income as a permissible deduction and with respect .....

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of that case the decision arrived at by Grille, C.J., and Sen, J., is clearly understandable. There the assessee was carrying on a business in cloth and he was using a certain trade-mark on the cloth, and a textile mill filed a suit for injunction restraining the assessee from making use of the trade-mark. The litigation was ultimately compromised and the assessee claimed the expenses of the litigation as an expenditure falling under Section 10(2)(xi) of the Act as it then stood. The Court held .....

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rm had been importing for a considerable number of years a certain brand of whisky and brandy from a company at Calcutta. Criminal charges were levelled against the partners of conspiracy of committing offences against the Excise Act and the prosecution resulted in an acquittal of all the partners and the partners claimed that the expenditure incurred was a permissible deduction. Roberts, C.J., held that the assessees were not entitled to this deduction. Now this case has been strongly relied up .....

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hief Justice in fighting the prosecution the main purpose was no more than securing the acquittal of each of the partners. The learned Chief Justice relied on the language used in Section 10(2)(ix) which corresponds with the present Section 10(2)(xv) where the language used is different from the language used in the present sub-section. The language there used was that expenditure must be solely for the purpose of earning profits or gains in a business carried on by the assessee and the view of .....

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related to a transaction which took place in the ordinary course of their business. In the Nagpur case to which I have referred the learned Chief Justice referred to this case and expressed an opinion that the case was of doubtful authority and the reason why they thought that that decision would not be applicable to the Income-tax Act after it was amended with respect to Section 10(2)(xv) was that the limitation for the purpose of earning such profits had been removed from the amended section .....

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dment makes no difference to the law and even to-day if an expenditure has to be considered wholly and exclusively for the purposes of business it must be shown to have been incurred for the purposes of earning profits of the business. The English case on which the Attorney-General relied is Spofforth and Prince v. Golder [1945] 26 Tax Cas. 310. There one Spofforth, who was a chartered accountant, was charged with having supplied a scheme to one White to avoid payment of sur-tax and also having .....

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nal charge. In every thing that he did he acted not as a chartered accountant but he acted purely in his personal capacity. Spofforth was a partner with one Prince in this business of chartered accountants and the assessees were the partnership firm of Spofforth and Prince and it was this partnership firm that was claiming the deduction. Wrottesley, J., expressed a grave doubt in his judgment whether the firm ever incurred the expenditure. According to the learned Judge the documents appeared to .....

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lies is, "Is the disbursement one made not merely in the course of, or arising out of or connected with, or made out of the profits of the profession, but also for the purpose of earning the profits of the profession?" Now it is important to note that this test was applied to a provision of the English Income Tax Act which in terms corresponds to our Section 10(2)(xv). Therefore it is clear that the Judges in England read the expression "expended wholly and exclusively for busines .....

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conviction there is no difficulty because the assessee who is guilty of a breach of the law cannot be heard to say that the costs of the litigation against him was a permissible deduction because the commission of an offence was not necessary for the purposes of his trade. The real difficulty only arises when you have a case where the prosecution terminates in acquittal. Then the two tests to be applied as I suggested would be whether the assessee was charged with regard to a transaction which t .....

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account of quarters provided free for residence of the directors could be considered to be remuneration within the meaning of Rule 7(1) of the Rules in Schedule I to the Excess Profits Tax Act. The Tribunal held that it was directors' remuneration and the assessees before us contend that it is not. Prima facie I should have said that money or equivalent of money paid by an employer to an employee must always be remuneration. Sir Jamshedji concedes that if the company had paid rent to the dir .....

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