TMI Blog1975 (11) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... hareholder in respect of which the expenditure has been incurred having flowed from the employment of the managing agent which was necessary for the business and also arose because of the manner in which the accounts of the company had been prepared for the purpose of obtaining the necessary certificates from the auditors, the amount of Rs. 16,854 paid by way of reimbursement of the expenses incurred by the auditors in connection with the said dispute should be taken to be an expenditure incidental to the carrying on of the assessee's business even assuming that it cannot be taken as directly incurred for the carrying on of the business of the assessee-company. At the instance of the revenue the following question has been referred to this court as arising out of the said decision of the Tribunal : " Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing the sum of Rs. 16,854 paid to its auditors by the company as a deduction in computing the profits and gains of the company from its business." The sum of Rs. 16,854 which is the subject matter of this reference has been paid by the company to their auditors, M/s. Lovelo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ountants Act, the auditors have not acted with reasonable care and that it is a clear case of negligence. The ultimate conclusion of the court has been put down in these words : For the reasons given above, we must hold that in spite of the evidence of negligence and imprudence in acting on his own responsibility in matters beyond his province and certifying the profit and loss account without obtaining any explanation from the directors which was obviously called for in view of the terms of the agreement and of the difficulty of reconciling the entries in the accounts with even his own view of the meaning of ' gross income ', the particular charges laid against the respondent had not been established against him." In connection with their defence in the said proceedings under the Chartered Accountants Act, the auditors have spent a sum of Rs. 16,854 and they claimed this amount from the company by way of reimbursement as per clause 196 of the articles of association of the company. The company accordingly paid the same in the accounting year and claimed it as an allowable deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. As already stated, the Tribunal ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against them by a shareholder under the Chartered Accountants Act. The company has paid the said sum to the auditors by way of reimbursement as per article 196 of the articles of association of the company which provides for indemnity in favour of all officers of the company including the auditors in defending any proceedings whether civil and criminal in which judgment is given in their favour. It is not necessary in this case to go into the question as to whether the payment to the auditors is authorised by the said articles of association or not. Even if the said payment is authorised under the said articles of association still the question that remains to be considered is whether the said payment amounts to an expenditure incurred wholly or exclusively for the purpose of the company's business. It cannot be taken that all payments authorised by the articles of association of the company will amount to expenditure incurred wholly and exclusively for the purpose of the business. The question whether the payment was authorised by the company or not is relevant for the purpose of the Companies Act. But that may not be relevant for the purpose of deciding the question as to whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business. We are of the view that the dispute between the shareholder and the auditors in the disciplinary proceedings has no nexus either with the employment of managing agents or with the employment of the auditors by the company. Nor are we inclined to agree with the view of the Tribunal that as the dispute between the shareholder and the auditors arose out of the interpretation to be placed on the managing agency agreement, the expenditure incurred in those proceedings should be taken to be incidental to the carrying on of the business of the assessee. The expenditure incurred was purely personal to the auditors and it is only in their interest to defend those disciplinary proceedings. The company's interest will not in the least suffer even if the auditors were to be held guilty in those proceedings as the auditors can be easily replaced by another without deteriment to the company's interest. In Strong Company of Romsey Limited v. Woodifield the Lord Chancellor had expressed : In my opinion, however, it does not follow that if a loss is in any sense connected with the trade, it must always be allowed as a deduction ; for it may be only remotely connected with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness expenditure on the ground that it was incurred to protect the good name of the business, the prosecution having emanated from an act which took place in the ordinary course of business. The Delhi High Court held that as the company had incurred the expenditure to protect the good name of the business the expenditure should be taken to have been incurred wholly or exclusively for the purpose of the business. In Commissioner of Income-tax v. Ahmedabad Controlled Iron Steel Reg. Stockholders Association P. Ltd. the Gujarat High Court expressed the view that where expenditure is incurred by an assessee for defence in criminal prosecutions, a distinction must be made between two kinds of cases (1) where the assessee defends a proceeding principally concerned with himself, the assessee incurs the expenditure not wholly and exclusively for his business but partly for purposes of the business and partly for saving himself from the punishment that may be imposed as a result of the criminal prosecution, and (2) where the assessee incurred the expenditure for defending one of its employees, he would be protecting his own business interest and the expenditure in that case can be said to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut also the rationalisation of its administration and modernisation of its machinery, the measures for the preservation of business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title, etc. But we are of the view that, however wide the scope of the expression " for the purpose of the business " may be, there are. in-built limitations in section 10(2)(xv) itself. The limitations are (1) the expenditure shall be for the purpose of the business, that is to say, that the expenditure incurred shall be for the carrying on of the business ; and (2) the assessee shall incur it in his capacity as a person carrying on the business. In this case, the payment made has nothing to do with the conduct of the business by the company or its reputation. The mere fact that the articles of association authorised such payment does not make the expenditure any more the expenditure incurred for the conduct of the business. We are, therefore, of the view that the Tribunal is in error in holding that the amount in question is an allowable deduction under section 10(2)(xv). The reference is, therefore, answered in the negative and in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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