TMI Blog1976 (2) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,900, being the total amount of fees paid to the income-tax practitioner, gift-tax practitioner and wealth-tax practitioner (Rs. 1,600 plus Rs. 50 plus Rs. 250, respectively). As regards the first claim, the ITO came to the conclusion that a part of the loan was taken by the assessee to meet her personal expenses and tax liability and he, therefore, disallowed the claim in so far as it related to the interest payable on that part of the loan. The sum so disallowed came to Rs. 6,105. As regards, the second claim, the ITO appears to have disallowed the same on the ground that expenditure of that nature could not be said to have been incurred wholly and exclusively for the purpose of making or earning dividend income and also on the ground that as regards the payment of fees to the income-tax practitioner, the liability in respect of Rs. 1,600, which amount was payable by way of fees in respect of proceedings for assessments of the past four years, could not be said to have been incurred in the year under consideration, since the assessee was following the mercantile system of accounting. In conformity with this decision, a sum of Rs. 8,005 was held inadmissible and it was added back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years being calendar years 1966 and 1967, respectively. The assessee derived income from dividends and also received some income by way of interest on debentures, annuity deposits, etc. In the course of assessment proceedings, the assessee claimed a deduction in respect of two items of expenditure under s. 57(iii). The first item consisted of an amount of Rs. 43,762 for assessment year 1967-68, and an amount of Rs. 53,419 for the assessment year 1968-69, being the sums paid towards interest in respect of the relevant previous years an outstanding loans to the tune of Rs. 8,18,255 and Rs. 8,79,197, respectively. The second item comprised of an amount of Rs. 1,200, being the amount paid as and by way of fees to the assessee's wealth-tax practitioner in the previous year relevant to the assessment year 1967-68, and an amount of Rs. 2,900, being the amount of fees paid to the income-tax practitioner, gift-tax practitioner and wealth-tax practitioner (Rs. 2,400 plus, Rs. 50 plus Rs. 450, respectively). The claim in respect of interest to the extent of Rs. 18,693 and Rs. 21,536 for the two years, in question and the other claim pertaining to the fees of the tax practitioners were both re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure in question was not an admissible deduction under s. 57(iii). It is not in dispute that this decision applies on all fours. Following our decision, in that case, therefore, we answer the first question in each of the references in the affirmative, that is, in favour of the revenue and against the assessee. That takes us to the consideration of the second question in each of the references which raises a common issue on almost identical facts. It was urged on behalf of the revenue that, (i) the expenditure incurred on the payment of fees to the various tax practitioners could not be said to have been laid out wholly and exclusively for the purpose of making or earning the income within the meaning of s. 57(iii) ; (ii) the expenditure in question was really incurred for the private purpose of securing expert assistance for the advantageous computation of the tax liability of the concerned as the arising under the various fiscal statutes and since such tax liability was the personal liability of the concerned assessee, any expenditure incurred for such purpose must be treated as the personal expenses of the assessee ; (iii) such expenditure had no direct connection with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d it would also leave in the hands of the assessee surplus funds for investment which would, in their turn, generate additional income ; and (v) such expenditure was justified, on the ground of commercial expediency even for the reason that if, for want of expert assistance, the tax liability was quantified at a much higher figure, the assessee might be required to liquidate her shareholding to meet such liability or the revenue, in case of default on the part of the assessee to pay the tax, might realise the amount by attachment and sale of such asset and, in either of these events, there would be a proportionate loss of dividend income on account of the depletion of the source of income. The determination of the question as to which of the two rival contentions has merit must, in the ultimate analysis, depend upon the interpretation of the statutory language and its application to the facts and circumstances of the case. It would, therefore, be desirable to refer first to the relevant provisions and then to such of the authorities cited at the Bar which throw some light on the meaning and content of the said provisions. It is pertinent to note that a provision similar to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same terms as section 12(2) of the old Act and, therefore, the decisions on the construction of section 12(2) must also govern the construction of section 57(iii)." At this stage, it would also be convenient to refer to the provisions of s. 37(1) which deals with permissible deductions in respect of the income chargeable under the head "Profits and gains of business or profession". The relevant part of the said section, at the material time, read as under : 37. General. --- (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'." In CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140, the Supreme Court observed that "the expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits' ". Similar observation has also been made in CIT v. Birla Cotton Spg. and Wvg. Mills Ltd. [1971] 82 ITR 166, wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e observations, though they are made in a different context, are apposite in judging the relative, scope of the ss. 37(1) and 57(iii). Even apart from authority, on a comparison of the language of s. 37(1) and s. 57(iii), it becomes clear that the scope of the former section is essentially wider than that of the latter. The word "business" used in s. 37(1) in association with the expression "for the purposes of" is a word of wide connotation. As observed by the Supreme Court in Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765 at p. 773 : "The word 'business' connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose." In the context of a taxing statute, the word "business" would signify an organised and continuous course of commercial activity, which is carried on with the end in view of making or earning profits. Under s. 37(1), therefore, the connection has to be established between the expenditure incurred and the activity undertaken by the assessee with such object. As against this, s. 57(iii) uses the expression "for the purpose of" in conjunction with the words, "making or earning of income" from "other sources". ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities and, on reference, the Calcutta High Court took the view that in computing the income of the assessee, interest paid on those debentures could not be deducted under s. 12(2). On appeal to the Supreme Court, it was observed that in judging a claim for deduction under s. 12(2), the following principles were relevant : "(a) though the question must be decided on the facts of each case the final conclusion is one of law ; (b) it is not necessary show that the expenditure was a profitable one or that in fact any profit was earned ; (c) it is enough to show that the money was expended 'not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business' ; (d) beyond that no hard and fast rule can be laid down to explain what is meant by the word 'solely'." It was pointed out is that case that the consideration that the transaction had the effect of diminishing the taxable income of the assessee without in any manner disturbing the holding of the investments of the company or interfering with the earning of its income and that it ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , who delivered a concurring judgment, observed as under : "The purpose and the sole purpose for incurring this expenditure was to preserve and maintain the source which yielded the income which is shown as being derived from other sources under section 12 of the Indian Income-tax Act ... It would be entirely irrelevant to enter into the motives of Sir Purshottamdas why he fought this litigation ... and as no other purpose appears on the face of the record we must accept that and hold that in this case the object and purpose with which this expenditure was incurred was solely, as required by section 12, sub-section (2), of the Indian Income-tax Act, for earning the income as a member of the Local Board of the Reserve Bank of India ..." The expenditure was, accordingly, held to be an admissible deduction under s. 12(2). In Bai Bhuriben Lallabhai v. CIT [1956] 29 ITR 543 (Bom), the assessee claimed to deduct under s. 12(2) from interest earned by her from fixed deposit the interest on money borrowed by her for the purpose of meeting household expenses, purchasing jewellers and meeting advance tax payment. The claim was negatived by the revenue authorities and, upon a reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in sending out circulars and collecting proxies from shareholders of a public limited company by two of its directors who were assessees in that case and they claimed to deduct their share of the amount so spent in their respective assessments under s. 10(2)(xv) and s. 12(2). The departmental authorities negatived the claim but the Tribunal allowed the expenditure as permissible deduction under s. 12(2). On a reference, this court considered the ambit of the provisions of s. 12(2) in the light of the observation of the Supreme Court in Eastern Investments Ltd.'s case [1951] 20 ITR 1, and observed (pp. 273, 275, 276 of 70 ITR) : " .... in order to decide whether an expenditure is a permissible deduction under section 12(2), we have to examine the nature of the expenditure. The purpose for which the expenditure is incurred must be in order to earn the income and here we must not confuse purpose with motive ...... Moreover, the purpose of making or earning the income must be the sole purpose for which the expenditure is incurred. If the expenditure is incurred for the purpose of making or earning the income as also for another purpose or, in other words, the purpose of making or ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure incurred and the income earned." Applying this test, it was found in that case that the liability of an accountable person under the E. D. Act, 1953, being a personal liability, interest paid on moneys borrowed for the purpose of discharging such a purely personal liability would not be an allowable expenditure under s. 57(iii). In this case also an argument similar to the one advanced before the Bombay High Court in Bhuriben's case [1956] 29 ITR 543, namely, that if moneys had not been borrowed, the assessee would have had to sell the shares for the payment of estate duty---since she had no moneys of her own---and that in that event she would have lost the dividends on those shares and that, therefore, it was for the purpose of earning such dividend income that moneys were borrowed by her, was advanced on behalf of the assessee. This argument was negatived on similar ground, namely, that he assessee's motive for borrowing moneys was not relevant and that what had to be seen for the applicability of s. 57(iii) was not the motive but the purpose of the borrowing. It was observed that if the assessee had chosen to sell the shares and pay the estate duty out of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly for the purpose of making or earning "income from other sources" ; (iv) the purpose of making or earning such income must be the sole purpose for which the expenditure must have been incurred, that is to say, the expenditure should not have been incurred for such purpose as also for another purpose, or for a mixed purpose ; (v) the distinction between purpose and motive must always be borne in mind in this connection, for, what is relevant is the manifest and immediate purpose and not the motive or personal considerations weighing in the mind of the assessee in incurring the expenditure ; (vi) if the assessee has no option except to incur the expenditure in order to make the earning of the income possible, such as when he has to incur legal expense for preserving and maintaining the source of income, then, undoubtedly, such expenditure would be an allowable deduction ; however, where the assessee has an option and the option which he exercises has no connection with the making or earning of the income and the option depends upon personal considerations or motives of the assessee, the expenditure incurred in consequence of the exercise of such option cannot be treated as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n such income. The expenditure was not laid out even in order to discharge the assessee's duties and obligations, statutory or otherwise, as a shareholder. In fact, the expenditure was not at all incurred for the imminent purpose of making or earning the dividend income or for augmenting the same. It was incurred ;primarily and immediately for the purpose of proper computation of the tax liability of the assessee under the I. T. Act, W. T. Act and G. T. Act. The liability to pay tax under those various statutes is undoubtedly the personal liability of the assessee and any expenditure incurred for the proper computation of such liability would be clearly for the private purpose of the assessee. It would be in the nature of personal expense of the assessee which by the statutory injunction contained in s. 58(1)(a)(i) is clearly outside the pale of s. 57(iii). It is true that income and taxes are interconnected and that, therefore, an assessee may legitimately incur expenses on securing the services of a tax consultant to ensure that he is not left with a meagre share of the income earned by him. However, such expenditure does not on that account cease to be in the nature of personal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghest, a case in which the purpose of making or earning of income is mixed up with another purpose, namely, to obtain the advantage of a favourable computation of tax liability. Such an expenditure, which is incurred for a dual purpose, would not be a permissible deduction under s. 57(iii). It cannot be overlooked in this connection that in T. S. Krishna's case [1973] 87 ITR 429, the claim for deduction of wealth-tax paid in respect of shares held by the assessee was negatived by the Supreme Court on the ground that the wealth-tax paid did not bear any relationship, direct or indirect, with the earning of dividend income and that it could not, therefore, be allowed to deducted under s. 57(iii). Similarly, in Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC) amounts paid by way of estate duty were held by the Supreme Court to be inadmissible deductions even under s. 10(2)(xv) on the ground that the payments had nothing to do with the conduct of the business and that they were made to discharge a statutory duty unconnected with the business. If the claim for deduction in respect of payments of such taxes has been held to be inadmissible, it is difficult to appreciate as to how expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... three other decisions, in which a claim for deduction in respect of expenses incurred, in engaging the services of lawyers or tax practitioners and other legal expenditure was held to be admissible either under s. 12(2) or s. 10(2)(xv). We shall briefly deal with those cases. In CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971] 82 ITR 166 (SC), the assessee-company spent certain amounts in engaging eminent lawyers and conducting appropriate proceedings before an Investigation Commission and also in courts where the vires of the statute under which the Commission was constituted was challenged. The question was whether the expenditure so incurred in connection with the proceedings before the Investigation. Commission could be deducted in computing the profits of the business of the assessee under s. 10(2)(xv) of the old Act. The ITO disallowed the claim but the AAC allowed it and the Tribunal confirmed that decision. On a reference, the decision of the Tribunal was affirmed. In appeal, the Supreme Court pointed out in the course of its judgment that two of the pivotal provisions of the statute under which the Commission was set up were struck down by it as unconstitutiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lance of Rs. 16,000, it was disallowed both by the ITO and the AAC. The Tribunal however, allowed it. On a reference, the Calcutta High Court held that expenses incurred for conducting proceedings before the I. T. authorities might not be apparently related to the assessee's trading activities, but they were justifiably necessary for increasing the assessee's net profits or for the carrying on of the business with larger funds at the disposal of the assessee. From this point of view, those expenses were expenses for the purpose of the business in the wider sense in which that expression was understood. Now, we are unable to see how these decisions can help the assessee. In the first place, the decisions are given in the context of s. 10(2)(xv) which is equivalent to s. 37(1). As pointed out earlier, the scope of s. 37(1) and s. 57(iii) is much different. The latter is not as wide as the former and many an expenditure which might be covered by the former may not be covered by the latter. Therefore, a case decided under s. 10(2)(xv) can hardly afford any guidance in judging the deductibility of a similar expenditure under s. 57(iii). In the next place, the decision in Birla Cotton ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res held by it in the said mills. Ultimately, an action was initiated in the court on behalf of M/s. Bengal and Assam Investors Ltd. under the Companies Act, 1956, and certain orders were made in these proceedings under which, inter alia, the assessee-company was ordered to run the Muir Mills. Before the said orders were made, the board of directors of the assessee-company resolved that it should bear the costs of the proceedings before the court and reimburse such expenses as the applicants before the court might incur. In taking this decision, the board of directors was influenced by the report of its financial adviser that it had a substantial stake in the Muir Mills Ltd. and that it was in the best interests of the assessee-company if it took steps to protect its interests against the reported misappropriation and mismanagement of the Mills by its existing directors and managing agents. The expenditure incurred on legal and travelling expenses in consequence of this resolution was claimed by the assessee-company as a deduction under s. 12(2). The claim was disallowed by the ITO as also by the AAC. The Tribunal, however, held that the expenditure was admissible but it did not al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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