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S.D. Sharma Versus Commissioner of Income-Tax, Bombay

1961 (9) TMI 79 - BOMBAY HIGH COURT

Income-Tax Reference No. 37 of 1959 - Dated:- 25-9-1961 - Y. S. Tambe And V. S. Desai, JJ. For the Assessee : M. B. Samarth, S. J. Mhaispurkar, C. K. Jaisinghani For the Commissioner : G. N. Joshi and P. G. Gokhale JUDGMENT V. S. Desai, J. This is a reference under section 66(1) of the Indian Income-tax Act, 1922, at the instance of the assessee and the question which it raises for our consideration is as follows: "Whether on the facts and in the circumstances of the case the assessee was e .....

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wable under section 10(2)(xv) of the Act. It appears that the services of the income-tax consultant to whom the said sum of ₹ 8,250 was paid as fees, were engaged by the assessee in the year 1950 in respect of the assessment years 1944-45 and 1945-46 for which the assessments had already been concluded as also in respect of the assessment years 1946-47, 1947-48 and 1948-49, assessment proceedings in respect of which was then pending before the Income-tax Officer for the preparation of acco .....

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department under what was known as the "voluntary disclosure scheme" which was not a general feature in completing income-tax assessments in the normal course, and the fees, therefore, could not be claimed as an allowable expenditure. It was pointed out before the Tribunal by the assessee that the fees were not paid in connection with the offer of settlement under the voluntary disclosure scheme but in connection with the application which the assessee had made to the department very .....

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ncome-tax returns and higher liability than already admitted by him had to be properly settled. The Tribunal was not in agreement with the view taken by the income-tax authorities that because the services of the consultant were engaged not in the ordinary course of settling income- tax matters but in the extraordinary circumstances of settlement of a higher liability on the admission of the concealed income, the fees that could have been otherwise allowable in the first type of cases could not .....

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could not be claimed as a deduction under the said provision, because since the tax liability arose after the income had been earned, the income-tax consultant's fees in respect of the assessment proceedings could not be treated as an expenditure laid out or expended wholly and exclusively for the purpose of the business. Inasmuch as it took the view that the deduction was not capable of being claimed under section 10(2)(xv), it held that the circumstance that the departmental practice was t .....

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he Income-tax Act, must be an expenditure, which is laid out or expended wholly and exclusively for the purposes of the assessee's business, profession or vocation. The question to be considered, therefore, is whether the fees paid by the assessee to the income-tax consultant in the present case can be regarded as expenditure laid out or expended by him wholly and exclusively for the purposes of his business. Now, the expression "for the purpose of business" has been judicially int .....

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racter other than that of a trader (see Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax [1961] 41 I.T.R. 350 (S.C.)). Moreover, the item of expenditure must also be such that it is wholly and exclusively laid out for the purpose of the business and not only partially so Mr. Samarth, learned counsel appearing for the assessee, has argued that the expenditure incurred by the assessee was for the purpose of arriving at the true figure of the profits of his business for assessments a .....

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In support of his submission he has invited our attention to the observations of Viscount Simon and Lord Oaksey in a decision of the House of Lords in the case of Smith's Potato Estates Ltd. v. Bolland (H.M. Inspector of Taxes): Smith's Potato Crisps (1929) Ltd. v. Inland Revenue Commissioners [1949] 17 I.T.R. (Suppl.) 1 and the observations of this court in Commissioner of Income-tax v. Raipur Manufacturing Co. Ltd. [1946] 14 I.T.R. 725. The House of Lords decision, to which our attent .....

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x or excess profits tax purposes, not being disbursements "wholly and exclusively laid out or expended for the purposes of the trade." The decision, however, was a majority decision: Lord Oaksey, one of the Law Lords, who heard the appeal dissented and Viscount Simon, though he agreed with the view of the majority that the appeal should be dismissed, expressed that his own view was that the expenses should be permitted as an allowable deduction. Now, the view which Viscount Simon was i .....

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s an expenditure incurred for the purpose of carrying on and earning profits in the trade, for a reduction in the amount of tax increased the fund in the trader's hands after tax was paid and so promoted the carrying on of the trade and the earning of trading profits. In the event of the assessee's success before the revenue authority, the assessee's tax liability was reduced, but that was only an incidental consequence of the expenses incurred by them. The purpose of the expenditure .....

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t was an expense which was laid out for the purposes of the trade. The view of the majority, however, was that the legal expenditure was not wholly and exclusively laid out for the purposes of the trade. In the view of Lord Porter, there was a distinction between the accounts made up on the purely trading basis and those, which were prepared for and accepted by the inland revenue. The computation of accounts for tax purposes was not directly associated with the carrying on of the business. It wa .....

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lso pointed out that the ascertainment of the tax liability was not a purpose of trade. The tax paid by the trader assessee was as an individual like any other individual on the sum which he had earned as a trader. Lord Simonds in his speech observed [1949] 17 I.T.R. (Suppl.) 1, 13: ".............neither the cost of ascertaining taxable profit nor the cost of disputing it with the Revenue authorities is money spent to enable the trader to earn profit in his trade." The learned Law Lord .....

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he tax was his obligation as a subject and a taxpayer, and in ascertaining the amount of his liability he was putting himself in a position to discharge his duty to the Crown. As a trader his job was to make profits: as a taxpayer it was his duty like that of any other subject to pay taxes. It was as little a part of his trade to find out how much tax be must pay as it was a part to pay it when he had found out. The view expressed by Lord Normand was on the same lines as Lord Porter and Lord Sim .....

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atements and accounts are expenses incurred for the purpose of ascertaining the tax liability and not for the purpose of carrying on the business or for earning profits. The payment of income- tax is not a purpose of the trade and expenses incurred in connection with the ascertainment of the liability so far as the payment of income- tax is concerned cannot, therefore, be an expenditure laid out for the purpose of the business. We are in agreement with the view taken by the majority in the House .....

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trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. That seems to me to be the meaning of the word 'profits' in relation to any trade or business. Unless and until you have ascertained that there is such a balance, nothing exists to which the name 'profits' can be properly applied." We are, with respect, in agreement with what has been expressed in the above observation .....

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puted that the expenses incurred in the present case were wholly for the purpose of settling the tax liability. In our opinion such expenses do not fall under section 10(2)(xv) as expenditure laid out or expended wholly and exclusively for the purpose of business. Assuming, however, that not only the usual accountancy expenses for ascertaining the commercial profits on a trade basis but also the expenses incurred by the trader in preparing the statements and accounts for income-tax purposes and .....

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ssment years 1946-47, 1947-48 and 1948-49, which were then pending before the Income-tax Officer, the assessee had concealed his income. In the year 1950, he applied to the income-tax authorities and made an offer that he was prepared to have a just and fair settlement of his income-tax liability on the income which he was prepared to admit as concealed from the assessments already made and also concealed from the returns submitted in respect of the assessments which were then pending before the .....

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the income and avoiding the penal consequences of his action. The expenses incurred under these circumstances could not be said to have been incurred for the purpose of trade or business because neither concealment of the income nor an attempt to get out of the penal consequences of the concealment of the income could be said to have any connection with the carrying on of the trade or earning profits of the trade. It will also be seen that the liability, which was likely to fall on the assessee .....

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which has rendered him liable to penalty for an infraction of the law, it cannot be claimed as a deductible expenses, as it cannot be called a commercial loss incurred in carrying on his business." In the same way, in our opinion, if an expense is incurred by the assessee in trying to avoid or in reducing the penalty to which he would be liable as a result of his having concealed his income or not having submitted properly the returns, which he was in law obliged to do such an expenditure .....

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profits and, therefore, expended for the purpose of the business and hence allowable under section 10(2)(xv) of the Act, the expenses for which the assessee has claimed deduction in the present case are clearly not of that nature but of an entirely different nature. Mr. Samarth has then contended that the proceedings contemplated by the application, which the assessee had made in 1960, were not in any way different from the proceedings under section 34 of the Indian Income-tax Act and the expens .....

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case where the assessee, being afraid of his own act of concealment, has gone to the income-tax authorities, made an admission of concealment of income on his part and offered to arrive at a settlement in respect of his tax liability in the hope that he might get the maximum indulgence from the authorities for the faults committed by him. The present proceedings were started on the admission of concealment of income on the part of the assessee and related to the settlement of a higher tax liabi .....

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