TMI Blog1989 (7) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... 7-78 ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the legal expenses in connection with the writ petition filed by the assessee against the Government orders under the Sugar Control Order should be allowed as business expenditure ?" The facts relating to the first question are that the Income-tax Officer made a disallowance of Rs. 22,664 in terms of sub-section (5) of section 40A of the Income-tax Act, 1961, on account of certain perquisites, including concessional residential accommodation. The working of the disallowance of Rs. 22,664 has been given by the Income-tax Officer as annexure to the assessment order for the assessment year 1977-78. On appeal, the Commissioner of Income-tax (Appeals) confirmed the order of the Income-tax Officer on this point. The matter was taken up in appeal to the Tribunal., The Tribunal accepted the assessee's plea by observing as follows : "As regards the perquisite relating to accommodations provided to the directors, we hold that, on parity of reasoning, the perquisite in terms of rule 3 of the Income-tax Rules, 1962, alone would be the ceiling in the hands of the assessee-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court had quashed the levy of interest under the Bihar Sugar Factories Control Act for the season 1962, the Ordinance had come with retrospective effect for the levy of the same, and, therefore, it was urged that the Commissioner of Income-tax (Appeals) was not correct in ignoring the claim of the assessee by relying on the judgment of the Patna High Court and in not considering the effect of the Ordinances of 1968 and 1975. The Tribunal accepted the above claim of the assessee. In the context of the aforesaid facts and circumstances, the question which calls for determination is whether the interest on cane cess is allowable as a deduction in computing the business income of the assessee. contention has been raised that, since no provision was made by the assessee for the amount claimed, the assessee is not entitled to get the deduction. In our view, this contention has no substance. It is true that the assessee has not created a separate provision for this liability in the accounts. However, by note 2 under Schedule 11, the assessee has given reasons therefor. The reasons are : "No provision has been made in respect of interest on cane cess outstanding Rs. 4,59,953. It has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of interest on arrears of cess relating to previous years. Admittedly, the assessee has been following the mercantile method of accounting and any liability which had accrued in the previous year can be claimed as a liability even though actually not paid. The question then arises whether this claim is allowable or not. The assessee-company has a sugar mill at Lauriya in the District of Champaran and the sugar cess is payable under the provision of section 29 of the Bihar Sugar Factories Control Act, 1937. The interest, penalty and fine, which were in arrears for the session 1961-62 were sought to be realised by the State Government and, in this connection, the assessee filed a writ petition before the Patna High Court in case No. 1121 of 1972 and the Patna High Court has held that the second proviso to rule 46A(2) framed for implementing the aforesaid Act and which provided for the levy of interest was found to be beyond the rule-making power inasmuch as the Act itself did not provide the limits of the standards in relation thereto. Therefore, the Patna High Court held that the proviso was beyond the rule-making power and accordingly not enforceable. In the statement of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest begins to accrue and it is not a penalty but is in the nature of compensation paid to the Government for delay in the payment of cess. We are, therefore, of the view that the assessee is entitled to the deduction claimed and allow the claim. For the foregoing reasons, the second question is answered in the affirmative and in favour of the assessee. The third question relates to the legal expenses of Rs. 11,695 incurred in connection with the writ petition filed in the Calcutta High Court challenging the Sugar Control Order and asking the High Court to permit it to collect excess price of sugar. The Calcutta High Court allowed the assessee-company to realise the sale price of sugar over the price fixed by the Government, but such sale price realised was to be secured by a bank guarantee and was to be kept in a separate account till the final disposal of the writ petition. The expenditure in question amounting to Rs. 11,693 had been incurred in pursuing the aforementioned writ petition. The claim of the assessee to allow the said expenditure was negatived by the Income-tax Officer who pointed out that the excess sale price realised by the assessee had not yet become part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred for earning immediate profits. Such expediency may also require that expenses be incurred to save business from coercive process and unlawful expropriation so that business may remain on sound footing and may earn greater profits in future. Where an assessee takes any steps for reducing its liability to tax which results in more fund being left for the purpose of carrying on the business or where the assessee takes steps for increasing the sale price for generating more funds for the purpose of carrying on business, there is always a possibility of higher profits. Accordingly, in determining whether an expenditure was deductible, the essential test which has to be applied was whether the expenses were incurred for the preservation and protection of the assessee's business from any such process or proceedings which might have resulted in the reduction of its income and profits. In our view, legal expenses claimed by the assessee are allowable as business expenditure. Even otherwise, the expenditure was incidental to the business and was necessitated or justified by commercial expediency. Accordingly, the expenditure is deductible. In the result, we answer the third question ..... 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