TMI Blog1969 (9) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee claimed, under section 10(2)(xv) of the Income-tax Act of 1922, some deductions for the assessment years 1950-51 and 1951-52, Rs. 39,657 for the assessment year 1950-51 and Rs. 57,066 for the assessment year 1951-52 as amount spent by him in some criminal proceedings. The question relates to this claim. The relevant facts are as follows : In the year 1935, the assessee promoted a public limited company called " Dhanraj Mills Ltd. " at Bombay. By an agreement with the said company the assessee was appointed as its managing agent for a period of 50 years. He was also appointed as its permanent director and chairman of the board of directors. When the company was involved in financial difficulties in the year 1937, upon one Ramgopal Ganpatrai agreeing to bring in the necessary finance, a tripartite arrangement was arrived at between the assessee, the limited company and the said Ramgopal Ganpatrai. It was agreed that the assessee should give up the managing agency, the company should appoint Ramgopal Ganpatrai or his nominee as the new managing agent and a selling agency agreement should also be entered into between the limited company and the said Ramgopal Ganpatrai or h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst the said Ramgopal Ganpatrai. With the permission of the court and with the consent of the Government, the assessee employed his own lawyer in the prosecution so launched by the Government. The prosecution culminated in the conviction of the said Ramgopal Ganpatrai. The conviction was upheld by the High Court on June 22, 1951. While the civil litigation was pending and the criminal appeal against the conviction was also pending, the parties, namely, the assessee and the said Ramgopal Ganpatrai, arrived at an amicable settlement whereby each agreed to forbear from continuing the litigation, etc. Ramgopal Ganpatrai agreed to forbear from claiming back any amount to which the assessee had become entitled. The amount received by the assessee from the mill-company towards selling agency commission which the said Ramgopal Ganpatrai forbore from claiming back was duly treated as his income under the above settlement and was taxed in the assessment year 1948-49. The amounts claimed to have been spent by the assessee on the aforementioned civil and criminal proceedings relating to the two assessment years in question are as follows : Expenditure Assessment year Assessment year 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioning the above view taken by the Income-tax Appellate Tribunal, on the request of the department, this reference was made. The relevant provision of the Income-tax Act of 1922 is as follows : " S.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. . . . " As seen above, the assessee claimed deduction of the entire amounts spent by him in the civil and criminal litigation, respectively. The Income-tax Officer without differentiating between the legal expenses incurred by the assessee for civil litigation and the legal expenses incurred by him for criminal litigation disallowed both the expenses on the ground that they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as the selling agency when either the managing agency agreement or the selling agency agreement came to be terminated. Thus, the assessee had a vital business asset in the limited company. While so, at the instance of Ramgopal Ganpatrai, the board of directors of the company passed a resolution for the dismissal of the assessee as the chairman of the board of directors. When in 1947, the selling agency was surrendered by the nominee of Ramgopal Ganpatrai Private Limited Company, it did not revert to the assessee as stipulated for. It was also found by the assessee that Ramgopal Ganpatrai perpetrated some fraud in managing the company, Dhanraj Mills Ltd. It is under these circumstances that the assessee started both civil and criminal litigation against Ramgopal Ganpatrai. It is not in doubt and, as a matter of fact it is not disputed, that the assessee was having a business asset in the company, Dhanraj Mills Ltd., to protect which, according to the assessee, he started the civil and criminal litigation in question. There is no difficulty where an asset of business is protected or safeguarded by an assessee in a civil litigation by incurring some expenditure. It would be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the said Ramgopal Ganpatrai on account of his own claims in the civil litigation and the object of starting those proceedings was not to satisfy his personal vendetta against him and there is nothing to show that the assessee was not solely guided by his business considerations in launching the criminal prosecution, it is not possible to say that there was also an element of personal vendetta. We see nothing to warrant a conclusion that the assessee was not wholly motivated by business considerations in launching the criminal prosecution. As laid down by the Supreme Court in the decision in Commissioner of Income-tax v. Calcutta Agency Ltd., the jurisdiction of the High Court in the matter of income-tax references made by the Appellate Tribunal under the Indian Income-tax Act is an advisory jurisdiction and under the Act the decision of the Tribunal on facts is final, unless it can be successfully assailed on the ground that there was no evidence for the conclusion on facts recorded by the Tribunal, and it is therefore the duty of the High Court to start by looking at the facts found by the Tribunal and answer the questions of law on that footing. The Supreme Court in the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnected with the income that he was earning by way of managing agency commission, etc. The relationship between the assessee and the said Ramgopal Ganpatrai was not entirely personal : it was a business relationship from which the assessee stood to gain if everything was done properly. Therefore, we think upon a broad view of the matter, it will be proper to hold that at least a part of these expenses should be considered or treated as a legitimate business expenditure allowable as a deduction under section 10(2)(xv) of the Act. On a reasonable estimate, we would allow one-third of the amount claimed as a legitimate business expenditure." Though the Tribunal has put the matter in some negative form, it has come to the conclusion that the assessee was guided by business considerations in starting the criminal prosecution against the said Ramgopal Ganpatrai and as a matter of fact that said Ramgopal Ganpatrai came to terms and the assessee got large amounts which became his income and it was also taxed. But, nonetheless, the Tribunal allowed only one-third of the amounts claimed as legitimate business expenditure. It is not clear on what basis the deduction was allowed only to a o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in successfully defending them. The assessee claimed that a certain amount incurred by it in connection with these prosecutions, was a permissible deduction under section 10(2)(xv) of the Act. In that connection their Lordships of the Bombay High Court, who decided that case, have said the following : " The review of these authorities makes it clear that there is no difficulty in the class of cases where an asset of a business is protected or safeguarded by the assessee carrying on the business in a civil litigation. The costs of such litigation are always a permissible deduction. The difficulty only arises when you have a criminal prosecution. There again, when a criminal prosecution ends in a 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 transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusively for the purpose of business. It was held in that case that, as the infraction of law is not a normal incident of business, therefore, only such disbursements can be deducted as are really incidental to the business itself. We do not think any of the above decisions would help the department in support of its contention. In the above cases the criminal litigation had arisen on account of some penal liability or expenses which were incurred on account of payments of some penalties for infraction of law and it was considered that infraction of law is not a normal incident of business. A distinction was drawn in the above cases between the expenditure incurred in civil litigation and the criminal litigation because of the fact that in civil litigation no question could arise as to the primary and secondary purposes for which legal expenses could be said to have been incurred as in the case of criminal prosecution, where the defence cannot easily be dissociated from the purpose of saving the accused person from possible conviction. But in the present case it is not as if that some criminal litigation was launched on the assessee and the expenses claimed for deduction were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch an expenditure was incurred to protect the good name of the business, the prosecution having emanated with regard to an act which took place in the ordinary course of business and the expenditure is, therefore, wholly and exclusively for the purpose of business ; accordingly, it was held that the deduction was permissible under section 10(2)(xv) of the Income-tax Act of 1922. In this decision there Lordships made a distinction between expenses incurred in defending an employee against a criminal prosecution and expenses incurred in defending an owner, or director or manager of the assessee-company where a part of the object for incurring the expenditure would be to defend the accussed from the possible adverse consequences of a criminal conviction. In the decision, Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, the assessee-company which carried on business of cotton spinning and weaving launched some civil litigation against the Provincial Textile Commissioner to desist from seizing the yarn supplied to some weavers, which it did. The company lost both in the High Court and in the Privy Council. In prosecuting those proceedings the company claimed deduction of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcive process and unlawful exploitation so that the business may remain on a sound footing and may earn better profits in future. Hence, expenses incurred, though not directly related to earning of income, may be allowable deductions if they are related to the carrying on of the business. To spend money against a coercive process would be money laid out wholly and exclusively for business purposes if it was to result in saving business profits, which was the property of the assessee, from belated efforts at taxation. In the decision of Commissioner Income-tax v. Pannalal Narottamdas and Co., the assessee in the course of his business purchased bills of lading and other shipping documents from certain parties in respect of some consignments of goods imported by them from a foreign country. When the goods arrived in India and were sought to be cleared through customs by the assessee on the basis of the documents purchased by it, it was found that the imports were unauthorised and the goods were liable to be confiscated. The assessee paid an amount of Rs. 31,302 by way of penalty for saving the goods from being confiscated. The Bombay High Court held that the actual cost of the good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee claimed that criminal litigation was started against the said Ramgopal Ganpatrai also on account of his claims in the civil litigation. It was found by the Tribunal that the criminal prosecution launched against the said Ramgopal Ganpatrai had the desired effect and the said Ramgopal Ganpatrai came to terms and the assessee received large amounts which became his income and it was taxed. Therefore, the expenses incurred by the assessee in the criminal litigation though not directly related to earning of income or though it cannot be said it is an expenditure which was incurred in trade as such, it is clear that the expenditure was incurred in order to save the business profits of the assessee and for the preservation of his business and for the protection of his business assets and property. If that is so, it is an expenditure incurred wholly and exclusively for the purpose of business within the meaning of section 10(2)(xv) of the Income-tax Act of 1922. We may also add that the assessee is entitled to deduction of the entire amount of the expenses which he actually incurred in the criminal litigation and not only to a portion of it. As we have already said above, it is n ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
