Decided on September 10,1973



B.J.DIVAN, B.K.MEHTA - (1.)In this Reference the following question has been referred the High Court by the Tribunal at the instance of the Revenue :
Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the respondent was entitled to claim the deduction of Rs. 15 420 incurred by it as and by way of legal expenses ?

(2.)The assessee in this particular case is a Private Limited Company and the relevant assessment year is 1965-66. The assessee Company deals in iron and steel materials in accordance with the provisions of the Iron & Steel Control Order. The assessee as a legal person was a partner in a firm known as M/s. Kashiparekh Brothers (Scrap Department). The assessee was represented in that partnership firm by its Managing Director Premchand Gokaldas. There was a First Information Report to the police on September 28 1963 against the firm of M/s. Kashiparekh Brothers and also against its two partners Sarabhai Chhotalal and Gautam Sarabhai. The Nominee of the assessee firm Premchand Gokaldas was also one of the persons against whom allegations were made in the course of that First Information Report. It was alleged in the First Information Report that the accused persons had committed an offence under sec. 7(ii) of the Essential Commodities Act by committing a breach of Clauses 5 and 20 of the Iron and Steel Control Order 1956 The authorities registered a case against all the accused under sec. 7(ii) of the Essential Commodities Act. The Board of Directors of the assessee-Company in their meeting held on October 10 1963 passed a Resolution stating that the Company should make all efforts and engage the best lawyers and spend all necessary amount in proving the innocence of Premchand Gokaldas in the case started against him along with Sarabhai Chhotalal and Gautam Sarabhai. In due course the three accused including Premchand Gokaldas were charge-sheeted and were actually charged before the City Magistrate concerned under sec. 7(1)(a) clause (ii) of the Essential Commodities Act and also for an alleged violation of Clause 20 of the Iron & Steel Control Order. Thereafter Premchand Gokaldas defended himself and in this connection the Company incurred an aggregate amount of expenditure of Rs. 16 259 The City Magistrate Third Court Ahmedabad acquitted all the accused except the partnership firm and thus Premchand Gokaldas also came to be acquitted. In the course of his judgment the learned Magistrate held that the Managing Director was only a Nominee of the assessee-Company. The assessee claimed an aggregate amount of Rs.16 259 spent by it for defending Premchand Gokaldas as a deduction. The Income-tax officer disallowed the claim. In appeal by the assessee the Appellate Assistant Commissioner held that an amount of Rs. 8 120 only was allowable as expenditure incurred wholly and exclusively for the purposes of its business. Against the decision of the Appellate Assistant Commissioner the matter was carried in further appeal to the Tribunal by the assessee. The Tribunal came to the conclusion that the assessee was entitled to a deduction of Rs. 15 420 it held that an amount of Rs. 893/which had been incurred in the previous assessment year could not be allowed in connection with assessment for the year 1965-66. Thereafter at the instance of the Revenue the above question has been referred to us by the Tribunal.
(3.)The legal position regarding expenses incurred in connection with certain criminal proceedings with which the assessee is concerned has been considered in a series of decisions and out of them there is only one Supreme Court decision and that is to be found in Commissioner of Income-tax v. H. Hirjee (1953) 23 I.T.R.427. In that particular case the assessee was carrying en business as selling agent of a company and he was prosecuted under sec. 13 of the Hoarding and Profiteering Ordinance 1943 and the charge was of selling goods at prices higher than the reasonable prices in contravention of the provisions of sec. 6 of the Ordinance. A portion of the stock of the assessee was seized and taken away. The prosecution ended in an acquittal and the assessee claimed to deduct a certain sum spent by him in defending himself in the criminal case. The Tribunal found that the expenditure was incurred solely for the purpose of maintaining the assessees name as a good businessman and also to save his stock from being undersold if the Court held that the prices charged by him were unreasonable. In this case the Supreme Court held that in the circumstances of the case the amount was spent by the assessee in defending himself in the criminal proceeding but it was not an expenditure laid out or expended wholly and exclusively for the purpose of the business and was therefore not an allowable deduction under sec. 10(2)(xv). At page 431 of the Report Patanjali Sastri C.J. delivering the judgment of the Supreme Court observed:
The deductibility of such expenses under sec. 10(2)(xv) must depend on the nature and purpose of the legal proceeding in relation to the business whose profits are under computation and cannot be affected by the final out come of that proceeding. Income-tax assessments have to be made for every year and cannot be held up until the final result of a legal proceeding. which may pass through several courts is announced.


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