TMI Blog1986 (4) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... ntitled to export profit rebate in respect of the kyanite business in the assessment years 1965-66 and 1966-67 ? (4) Whether, on the facts and in the circumstances of the case, the losses of Rs. 80,933 in the assessment year 1965-66 and Rs. 25,500 in the assessment year 1966-67 claimed by the assessee on the purchase and sale of securities and bonds could be allowed as business loss ?" The assessee is a public limited company. The first and third questions, quoted above, fell for consideration before this very Bench in Taxation Cases Nos. 185, 186, 205 and 206 of 1971 and 57 and 58 of 1972. [CIT v. Indian Copper Corporation Ltd. [1986] 161 ITR 327 (Pat)]. Those cases related to this very assessee-company and were disposed of on January 23, 1986. One of the questions referred to us in Taxation Cases Nos. 205 and 206 of 1971 was whether, on the facts and in the circumstances of the case, the claim of Rs. 14,43,524 in respect of internal development expenses was revenue expenditure. Those cases related to the assessment year 1962-63. The first question referred to us in these references is the very same matter, viz, whether internal development expenditure could be allowed as reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Officer to compute the rebate. We uphold the mode of computation adopted by the Tribunal. And we do so now once again, Question No. 3 is answered accordingly in favour of the assessee. These conclude oar opinion on questions Nos. 1 and 3 referred to us. Both of them are decided in favour of the assessee and against the Revenue. The second question referred to us relates to the claim of expenditure over defending the directors and the employees against criminal prosecutions. The assessee spent Rs. 2,900 and Rs. 5,017 during the assessment years 1965-66 and 1966-67, respectively, in defending the directors in criminal prosecution under the Mines Act. The prosecution had been initiated by the State on account of an accident that had occurred in North Badala section of its mines at Mosabani on August 17, 1953. Another category of expenditure was Rs. 7,319 and Rs. 2,195 spent in 1965-66 and 1966-67, respectively. These expenditures were incurred for defending the watchmen and other employees of the assessee, who had been posted to guard its premises against hooligans and thieves. The question relating to legal expenses, therefore, had to be tackled from two different a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will and the quality of the goods were at stake. It had to be defended and protected. Their Lordships, therefore, held that the expenditure was deductible under section 10(2)(xv) of the Act. The present case also must be decided on the ratio of the said case. It cannot be doubted for a moment that the expenses had been incurred wholly and exclusively for the purposes of the business of the assessee. Later, the Supreme Court laid down in CIT v. Dhanrajgirji Raja Narasingirji [1973] 91 ITR 544, that the crucial question to be seen is whether the expenditure was bona fide incurred wholly and exclusively for the purpose of the business. For the academic legal question, their Lordships relied upon an earlier decision of the Supreme Court in CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971] 82 ITR 166. The above should have concluded the matters, but cannot resist my temptation of referring to another case of the Calcutta High Court in Parshva Properties Ltd. v. CIT [1976] 104 ITR 631. That was a case of an accident in a quarry. A labourer engaged in it had died in the accident. The director, the agent and manager of the company were prosecuted and sentenced. It had been found i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in defending the prosecution which had ended in acquittal was claimed as allowable deductions. The legal expenses as allowable deductions was rejected by the Supreme Court. In my view, the case of H. Hirjee [1953] 23 ITR 427 (SC) was decided on a different footing. That decision proceeded on the footing that the directors were charged with contravention of section 6 of the Hoarding and Profiteering Ordinance, 1943, which prohibited the sale by a dealer or producer of an article for consideration which was unreasonable. Their Lordships repelled the reasoning of the High Court that since the prosecution had ended in acquittal, the expenses were legally deductible. Their Lordships held that there was chance of conviction as well and, therefore, the question of acquittal or conviction was entirely foreign to the matter in controversy. In this behalf, I can do no better than state that the present case must be decided on the ratio of the Supreme Court decision in Haji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350. Learned counsel for the Revenue placed reliance upon CIT v. Chaman Lal and Bros. [1970] 77 ITR 383 (Delhi), Lakshmi Narayan Gouri Shankar v. CIT[1975] 100 ITR 143 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in defending the directors were not allowable deductions. However, it was contended on behalf of the assessee that the Tribunal had found that those expenses were in proceedings arising out of and were incidental to the assessee's business. This was a finding of fact and, therefore, this court in a reference under section 256(1) of the Act had no jurisdiction to take another view of the matter and hold that the expenses were not wholly and exclusively for the purpose of the business. I regret, I have some difficulty in holding that this was a finding of fact. The Tribunal appears to proceed upon the assumption that the moment the assessee asserts that expenditure was incurred for defending the directors in criminal prosecution, the deduction must be allowed. I do not think that is the law. It will have to be seen on the facts of each case whether the expenditure was in the interests of the business or whether it was in the interests of an individual. In that view of the matter, I am of the view that Rs. 2.000 and Rs. 5,017 spent in 1965-66 and 1966-67, respectively, were not allowable deductions. The answers to question No. (2) must be that the expenses over defending the watchmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rests of the business. The Tribunal in a very glib and cryptic manner accepted the stand of the assessee observing that the very fact that they were sold shortly after they were purchased in a way indicate that the purchases were made only to oblige others. It is difficult to comprehend whether it was meant to oblige others or it was meant to oblige the powers that be under the assessee-company. It may be a convenient way of cornering the profits of the company. The Tribunal has not gone into the question as to whom these assets were sold. The Appellate Assistant Commissioner did hold that these sales were to outsiders but " outsider " is too vague an expression. These " outsiders " may well be sons, nephews and other relatives. Merely saying that the sales were to outsiders is insufficient material to hold that they were genuine sales and purchases. The Tribunal allowed the deduction on the finding that the purchases were only to oblige others. Even upon this finding, it can hardly justify allowance of such an expenditure. The assessee did not disclose who had applied pressure nor did he disclose what was the kind of pressure applied. There is nothing to show what would have hap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the pressure was necessary in order to obtain Form No. XX without which goods could not have been despatched. That decision should be read carefully to follow the ratio. From the facts, it was obvious that in that case nexus was established between the act of the assessee and the pressure or persuasion applied by the Department. If the nexus can be established between the two, it is obvious that the expenses would be in the interests of the business. That is not the situation before us. The real problem in accepting the submission urged on behalf of the assessee is that nothing has been spelt out about the nature of the pressure or the source of the pressure. In this connection, it would be useful to advert to a Full Bench decision of the Madhya Pradesh High Court in Addl. CIT v. Kuber Singh Bhagwandas [1979] 118 ITR 379. Since this case has been relied upon heavily by learned counsel for the assessee, it would be apt to deal with this case at some length in order to show that it does not really help the assessee. The facts of that case are that there was a drought in the relevant assessment year in Madhya Pradesh. Twelve districts of the State of Madhya Pradesh were badly hit b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Drought Relief Fund and obtained the permit. In the assessment, the assessee claimed deduction of the amount contributed to the Chief Minister's Drought Relief Fund. The Tribunal upheld the stand of the assessee that the expenditure had been incurred for the purposes of the business. On a reference at the instance of the Commissioner, the High Court upheld the stand of the assessee and rejected that of the Commissioner. The High Court held that the contribution was an allowable deduction. On the face of it, the decision seems to support learned counsel for the assessee. A proper appreciation is, however, required. The Madhya Pradesh High Court noticed four aspects in upholding the claim for deduction. They are rather important. The first aspect was that the Government was prepared to grant the permits only when the Maha Sangh speaking for the trading community offered its services for the benefit of the public. The procedure which was followed in obtaining a permit had direct relationship with the quantity of foodgrains for which the permit was applied for and granted. There was thus clear nexus between the expenditure and the object. Legally, the traders were not bound to make t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd sale of the bonds? The answer to all these questions must be " we do not know ", since there is no material in this behalf. For all these reasons, the Full Bench decision of the Madhya Pradesh High Court can be of no help to the assessee. If the assessee intended to take advantage of section 37(1) of the Act, some more materials were required. The ratio of that case really goes against the assessee. Learned counsel for the assessee relied upon Addl. CIT v. B. M. S. (P.) Ltd. [1979] 119 ITR 321 (Mad). This was also a case of purchase and sale of Government bonds which brought about loss to the assessee. The losses were allowed as deductible expenditure. This case is again distinguishable because the nexus between the investment and the loss was obvious. The trouble in our case is that the nexus has not been established. The nexus has not even been alleged much less established. In that view of the matter, I am of the view that the losses incurred by the assessee were not business losses. The expenditure cannot be held to have been incurred wholly and exclusively for the purposes of the business. In my view, therefore, the Tribunal was not right in allowing the sum of Rs. 80,933 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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