G.K. Mitter, J. - (1.) This is an appeal by special leave from an order of the Calcutta High Court in Income-tax Reference No. 99 of 1966 passed on June 18, 1968, discharging a rule nisi issued on February 6, 1967, on the application of the Commissioner of Income-tax (Central), Calcutta.
(2.) The matter arises thus. The respondent-assessee made a claim in its assessment for the assessment year 1952-53, inter alia, for an allowance of Rs. 95,868 as provision for extraordinary legal and other expenses in computing its profits for the purposes of income-tax. The Income-tax Officer disallowed that claim holding, inter alia, that the payments which were made to different firms of solicitors for legal advice in the matter of certain irregularities of the assessees directors and officials whereby the funds of certain companies under the management of the assessee were depleted would not be allowed. It is not necessary to state in detail about the irregularities but it is sufficient to note that they were reported by the chairman to the respondent-company and mentioned in the report dated December 12, 1952, of Messrs. Lovelock and Lewis, auditors -of the company. The profit which arose to the assessee by these transactions was in the region of Rs. 11,60,000. The sum of Rs. 95,868 consisted of four items of payments made to three firms of solicitors and expenses of two individuals who appear to have come over to India for straightening out the alleged irregularities. The allegation of the assessee was that following the legal advice a reconstruction of the board of directors and a reorganisation of the general conduct of the business of the assessee were put through for the benefit of the company. The Appellate Assistant Commissioner disallowed the claim on the ground that the irregularities " arose in connection with the fictitious transactions indulged in by the company which were detected by its auditors after investigation. The expenses incurred as a result of such illegal activities were not the legitimate expenses of the appellant company incurred in the course of its business. " On further appeal, the Appellate Tribunal by its order dated January 18, 1958, allowed the respondents claim for deduction accepting the assessees plea that the expenses were incurred to protect the assessees business as managing agents of various public companies and unless the fair name of the assessee was maintained its business would have suffered and certain managing agencies would have been lost.
(3.) The Commissioner of Income-tax thereupon applied to the Tribunal under Section 66(1) of the Income Tax Act of 1922 for a case to be stated to the High Court for reference of the following two questions of law : (1) Whether, on the facts and in the circumstances of the case, the conclusion of the Tribunal that the expenditure of Rs. 95,868 was wholly and exclusively incurred for the purpose of maintaining the goodwill and reputation of the assessee-company was based on no evidence or was perverse in the accepted sense of the term (2) Whether, in any event, on the facts and in the circumstances of the case, the Tribunal was right in holding that the said expenditure was allowable as a proper revenue deduction ;