TMI Blog1971 (2) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... n and Radhey Kishun Khetan) was expenditure which was covered by the provisions of section 10(2)(xv) of the Act? (2) Whether, on the facts found by the Tribunal and/or admitted by and between the parties before the Tribunal in respect of the assessment year 1954-55 the expenditure incurred in a writ petition by Onkar Mal Khetan against Kedar Nath Khetan, who had been appointed authorised controller of the assessee-company could be claimed as deduction under section 10(2)(xv) of the Act?" The aforesaid questions have been referred at the instance of the assessee, Ishwari Khetan Sugar Mills (P.) Ltd. For the assessment year 1953-54 the assessee had claimed a deduction of Rs. 50,087 on account of legal expenses and Rs. 14,335 for the assessment year 1954-55. The Income-tax Officer disallowed a sum of Rs. 37,734 for the assessment year 1953-54 and the entire sum of Rs. 14,335 for the assessment year 1954-55. Two appeals were preferred by the assessee-company which were dismissed by the Income-tax Appellate Commissioner by a common order dated July 31, 1959. The matter was then taken up in appeal to the Income-tax Appellate Tribunal by the assessee-company. The Tribunal, however, by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two companies and, in particular, Ishwari Khetan Sugar Mills (P.) Ltd. One of the reliefs, which has been treated by the Tribunal to be the main relief, was for appointment of receiver of the two sugar mills until such time as proper arrangement for the protection of the rights of Onkar Mal Khetan and his group were made by the court. On an ex parte motion of the plaintiffs of Suit No. 59 of 1951, an interim receiver was appointed by the court. Two appeals were filed in this court against the order appointing receiver-F.A.F.O. No. 127 of 1951 was by the two companies and the other appeal (F.A.F.O. 133/1951) was filed by Kedar Nath Khetan and three other persons as directors of the two companies. These two appeals were dismissed by this court by a common judgment and order dated November 27, 1951. Question No. 1 is in respect of the expenses alleged to have been incurred in the aforesaid litigation during the assessment year 1953-54. It appears that Kedar Nath Khetan was appointed as authorised controller of the assessee-company by the Central Government under the Essential Supplies Act. Writ Petition No. 126 of 1952 was filed in the Supreme Court of India by Onkar Mal Khetan agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed February 20, 1952, dismissing the application observed that the copy of the decree which was filed constituted fresh evidence which could not be accepted at that stage. It further observed that its finding was based on the copy of the judgment of the High Court in F. A. F. O. No. 127 of 1951, which had been, filed by the assessee-company. As such, the Tribunal was of opinion, that there was no mistake apparent from the record and the application under section 35, therefore, could not be allowed. It will thus appear that on the material on the record the Tribunal had recorded its finding or had made the observation in its order dated August 5, 1951, already quoted above. Apparently, this is a finding of fact. On this finding no question of law can really arise as to whether the litigation expenses were covered by the provisions of section 10(2)(xv) of the Act. Viewed in this light, the answer to question No. 1 must be in the negative. Even otherwise also, in our opinion, the answer to question No. 1 must be in the negative. The Tribunal in its order dated August 5, 1951, had also observed that the main prayer in Suit No. 59 of 1951 filed by Onkar Mal Khetan was that a receiver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the smooth management of the company's business. It was for the assessee, if it so desired, to have produced necessary evidence and material before the income-tax authorities to prove that either there was a stalemate in regard to the working or carrying on of the business of the company or that any such hindrance or obstacle had come to exist for the avoidance of which it had become necessary to incur litigation expenses. Under the circumstances the assessee-company was rightly held not to be entitled to any deduction under section 10(2)(xv) of the Act in the assessment year 1953-54. Judged in this light also, question No. 1 must be answered in the negative. In so far as question No. 2 is concerned, the learned counsel for the assessee-company, relying on certain observations of the Tribunal in the statement of the case dated May 6, 1965, urged that the expenses amounting to Rs. 14,335 incurred by the assessee-company in connection with Writ Petition No. 126 of 1952, could be legitimately claimed as a deduction for the assessment year 1954-55 under section 10(2)(xv) of the Act. The observation on which reliance was placed is as follows: "It appears that, in order to ensure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3-10 per lb. They were all discharged by the Chief Presidency Magistrate. The directors and the salesman of the company 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. In this case also all the accused were discharged. In connection with the two prosecutions, the assessee claimed to have incurred certain expenditure and the amount expended was claimed as permissible deduction under section 10(2)(xv) of the Act. It was held that, in the circumstances of the case, the company was entitled to the deduction claimed. It was, inter alia, observed that the charges which the managing directors and the salesman were called upon to meet both at Madras and Karachi were incidental to the business that the company was carrying on. It was the business of the company to sell stationery and the company was charged with having sold it in one case contrary to 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 tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to the quota-holder but was sold by the company and the sale proceeds were recorded in the books of the company. It was held that the expenses incurred by the company in defending its manager were allowable as deductions under section 10(2)(xv) of the Act. The learned judges relied on the decision of the Bombay High Court in Advani's case. This case is of little help to the assessee before us. Whatever test may be applied in deciding whether any expenditure is allowable as a deduction under section 10(2)(xv), the essential requirement must in every case be as to whether the expenditure was either in reality or as a measure of business expediency necessary either for the purpose of earning profit or for protecting and safeguarding the business assets of the assessee including goodwill or in connection with some transaction or activity which is directly and substantially connected with the running of the business of the assessee or is intimately connected with the assessee's business activities. Such expense must necessarily pertain to the business itself and must not be an expenditure merely connected with any activity, however remote or ancillary. It has to be shown in every ..... X X X X Extracts X X X X X X X X Extracts X X X X
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