TMI Blog1981 (2) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 19,170 on account of expenses of the law department could be allowed as deduction in determining the company's profits?" The assessee is a private limited company belonging to a group of companies controlled by Mr. R. Dalmia. The assessment year with which we are concerned is 1958-59 and the corresponding previous year is the year ending 31st March, 1958. On 11th December, 1956, the Govt. of India (Ministry of Finance, Dept. of Economic Affairs), in exercise of the powers under s. 3 of the Commissions of Inquiry Act, 1952, appointed a Commission of Inquiry to report, inter alia, on the administration of the affairs of the companies specified in the Schedule (the assessee being at serial No. 3 of the Schedule) and the nature and ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... giriji Raja [1970] 77 ITR 318 (AP), relied on by the assessee, the Tribunal held that such an inquiry could not be considered as a normal hazard of an honest businessman and the expenditure incurred could not be treated as normal business expenditure. The expenditure in the present case having been incurred in connection with an inquiry which was with respect to certain allegations involving acts against public policy on behalf of the members of the group. Mr. Bishamber Lal, learned counsel for the assessee, however, has contended that, in fact, the expenses incurred with regard to the Commission of Inquiry were expenses incidental to the business and necessitated by commercial expediency. They were incurred for the preservation and the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... travelling expenses in this connection was Rs. 1,80,351. This amount was divided into four equal amounts and debited to M/s. Bharat Union Agencies Ltd., Allen Berry Co., Asia Udyog (P.) Ltd. and the assessee. It was as a result of the abovementioned resolution and apportionment that the amount of Rs. 45,088 was allocated to the assessee. In CIT v. Birla Cotton, Spinning and Weaving Mills Ltd. [1971] 82 ITR 166, the Supreme Court has observed that it is well settled that the deductibility of an expenditure in prosecuting a civil proceeding does not depend on the final outcome of the proceedings, but on whether it is honestly incurred to promote the interests of the business. The court opined that (p. 171): " The essential test which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduce certain documents. The assessee could not sit tight but in its own interest had to respond and co-operate with the Commission of Inquiry. This was necessary to protect its reputation and its business. If the assessee did not take steps to protect its reputation, the value of its shares might have plummetted to an all-time low. The assessee was the best judge of how to preserve and protect its assets and interests and it did so with the help of lawyers, etc. It is not a case of payment of penalty for an infraction of the law but an inquiry not only against certain individuals or groups who were connected and had to be defended but also an inquiry into the administration of the affairs of the assessee. All irregularities in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o ground for disallowing the expenditure. It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best." We will not advert to numerous other decisions of various High Courts but refer only to the decision in Parshva Properties Ltd. v. CIT [1976] 104 ITR 631 of the Calcutta High Court, where the expenditure incurred was for defending a director, agent and manager of the company who were being criminally prosecuted for violating certain regulations with regard to the working of a mine; In that case, Sabyasachi Mukharji J., who spoke for the court, referred to a catena of cases in connection with the deductibility ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. The moneys were spent for safeguarding and saving the business and keeping it on a sound footing. The expenses were incurred by the assessee in its business or trading capacity and were for the purpose of the business and not for the payment of penalty for an infraction of the law. For the reasons outlined above, it would appear to us that the expenses incurred by the assessee on account of the Commission of Inquiry were an allowable business expenditure. With regard to the second question, it is the admitted case that the sum of Rs. 19,170 was spent by the law department of the assessee in connection with the Commission of Inquiry. The ITO had disallowed this amount on the same basis as the expenditure of Rs. 45,088 and the AAC and ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
