JAGADISAN, J. - (1.) THE question that is referred to this court under section 66 of the Indian Income-tax Act is as follows : "Whether the expenses of Rs. 20,035 incurred in the assessment year 1949-50 and Rs. 5912 (relating to the assessment year 1950-51) being the cost paid to the Government as directed by the Privy Council were expenses incurred in the ordinary course of business and allowable as deductions."
(2.) THE assessee is a limited company, incorporated under the Indian Companies Act carrying on business in cotton spinning and weaving at Madurai. In the accounting year relevant to the assessment year 1949-50 it claimed as deduction in the computation of its business profits the sum of Rs. 20,035 representing legal expenses incurred by it in connection with a litigation to the details of which we shall refer a little later. In the assessment year 1950-51, relevant to the previous year ending on March 31, 1950, it claimed as deduction the sum of Rs. 5,912 being the costs paid to the Government as a result of the said litigation. THE Income-tax Officer disallowed the claim in respect of both the years on the ground that the assessed failed to furnish detail of the expenses. THE assessee went up on appeal to the Appellate Assistant Commissioner who concurred with the decision of the Income-tax Officer. THE Appellate Assistant Commissioner found that the assessee infringed the provisions of a statute and improperly challenged the court proceedings, the validity of lawful orders passed in pursuance of a statute and that the expenses cannot be said to have been laid out wholly and exclusively for the purpose of the business. THEre was a further appeal to the Income-tax Appellate Tribunal by the assessee. THE Tribunal took the view that the expenses incurred by the assessee and sought to be deducted in the computation of profits were not in the course of business and were due to; a misapprehension of the assessee in respect of the application of a statute. THE result was that the Tribunal affirmed the decision of the department. THE question set out above stands referred by the Tribunal on an application made to it by the assessee. We shall now refer to the events which led the assessee to incur the expenses and costs which are now claimed as proper deductions under section 10(2) (xv) of the Act. As stated already, the assessee is carrying on business in cotton spinning and weaving. Yarn is spun out of cotton and sold. Yarn is also woven into cloth and sold as cloth by the assessee. In the mill premises owned by the assessee, there were about 80 handlooms. These looms were not sufficient to weave all the yarn produced by the mill. Yarn was therefore distributed to outside weavers who were engaged by the assessee to convert the yarn into cloth and to deliver the finished product of cloth. These weavers were paid wages at particulars rates. It appears that they were paid piece rates, that is, according to the quantity of cloth which they produced. In the year 1945 the Government issued the Cotton Cloth and Yarn (Control) Order, which can conveniently be referred to as the Control Order. Clauses 18A and 18B of the Control Order were as follows : "18A. (1) No manufacturer shall, save in accordance with a general or special permission of the Textile Commissioner or in compliance with a direction given under clause 18B - (a) sell or agree to sell cloth or yarn to any person who - (i) is not a licensed dealer under the rules framed in this behalf by the Provincial Government; and (ii) did not as a dealer buy any cloth or yarn from him at any time during the years 1940-1941 and 1942; (b) during any quarter, delivery to any dealer, whether in pursuance of a pre-existing contract or otherwise, cloth or yarn, in excess of his quota determined under the sub-clause (2). . (1) The Textile Commissioner may, with a view to securing a proper distribution of cloth or yarn, or with a view to securing a compliance with this order, direct any manufacturer or dealer, or any class of manufacturers or dealers - (a) to sell to such person or persons such quantities of cloth or yarn as the Textile Commissioner may specify; (b) not to sell or deliver cloth or yarn of specified description except to such person or persons and subject to such conditions as the Textile Commissioner may specify; (c) to furnish such returns or other information relating to his or their undertaking and in such manner as the Textile Commissioner may specify; and may issue such further instruction as he thinks fit regarding the manner in which the direction is to be carried out. (2) Every manufacturer or dealer shall comply with the directions and instructions given under sub-clause (1)." On February 20, 1946, the Provincial Textile Commissioner, Madras, issued a notification under clause sub-clause (1) (b) of the Control Order directing the assessee to confine its delivery of yarn to three categories of persons, namely : (a) licensed yarn dealers; (b) to consumers who purchased yarn directly from the assessee during the basic years 1940-1942; (c) persons working the appellants handlooms erected in the appellants spinning mill at Madurai. In effect this order prohibited the assessee from delivering yarn to weavers outside the mill premises. Despite this prohibition the assessee delivered yarn to operators of handlooms who were not engaged by him in the mill premises. Of course the assessee continued its previous course of business which consisted of converting yarn into cloth by outside weavers at piece rate. The weavers were no doubt bound to bring the article back to the assessee as a finished product. The Textile Commissioner took the view that the delivery by the assessee of yarn to outside weavers was an infringement of his order dated February 20, 1946. He, therefore, seized quantities of yarn which had been delivered to such outside weavers. In these circumstances, the assessee filed a petition under section 45 of the Specific Relief Act on the original side of this court for directions to the Textile Commissioner : (1) to desist from seizing yarn supplied by the assessee to the weavers at or around Madurai and Rajapalayam for the purpose of converting the yarn into cloth; (2) to restore to the assessee yarn already seized; and (3) to forbear from seizing yarn that may be entrusted to the weavers by the assessee in the usual course of business for conversion of yarn into cloth.
(3.) THE main contention of the assessee was that the ground on which he filed the petition under section 45 of the Specific Relief Act, that the delivery of yarn to outside weavers was not transfer of property and was not therefore a sale, and that it was delivery by way of bailment and such delivery would not fall within the provisions of the Control Order. THE Textile Commissioner resisted the application and contended that the notification issued by him was within the limits of his jurisdiction under the Control Order. Kunhiraman J. who heard the petition upheld the Textile Commissioners view point and dismissed the application of the assessee. THE assessee preferred an appeal to a Division Bench consisting of Leach C.J. and Lakshmana Rao J., but failed. Against his decision the assessee preferred an appeal to the Judicial Committee of the Privy Council. This appeal was also dismissed with costs. THE decision of the Judicial Committee is reported as Sree Meenakshi Mills Ltd. v. Provincial Textile Commissioner Madras. THE contention of the assessee based upon its construction upon the word "deliver" in the Control Order was repelled by Sir Madhavan Nair, who delivered the judgment of the Board, in these terms : "It was argued on behalf of the appellant that the delivery contemplated under clause 18B(1) (b) relates only to delivery to the outside public and not delivery to outside weavers who are bailees, as in the present case. THE scope of the Control Order is very wide. It relates to both dealers and manufacturers (these terms are defined in clause (c) of the Control Order), in their dealings with themselves or with outside persons, the object of the directions issued under clause 18B as already stated, being the proper distribution of cloth or yarn of a specified description. THEir Lordships do not think that the operation of the clause is limited to dealings with the outside public only, as contended for by the appellant. THE object aimed at by the clause will not be secured if the scope of the order is so limited.... clause 18B is wider in its scope as its object is to prohibit delivery of cloth or yarn to any person, including delivery to a bailee." The assessees present claim for deduction only relates to the legal expenses incurred and the costs paid in respect of the civil litigation referred to above. It appears from the record that there were also criminal proceedings taken against the assessee as a result of the violation of the Control Order. The exact nature of these proceedings does not however appear from the records. The order of the Appellate Tribunal discloses that the yarn bales seized by the authorities were returned to the assessee. The expense incurred by the assessee in respect of these criminal proceedings are not claimed as deduction. The question for our consideration therefore is whether the legal expenses and costs paid by the assessee in the litigation which commenced as an application for a mandamus under section 45 of the Specific Relief Act and which terminated against the assessee by the decision of the Judicial Committee are proper allowances falling within section 10(2) (xv) of the Act. That provision is as follows : "Such profits or gains (as mentioned in sub-section (1)) shall be computed after making the following allowances, namely : (xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expenditure wholly and exclusively for the purpose of such business, profession or vocation." The assessee can claim the deduction of legal expenses and costs paid to the successful party in the litigation only if it satisfies the requirements of section 10(2) (xv), or if it shows that they are such inevitable business expenses intimately associated with the earning of the profits that without their deduction the true profits cannot be ascertained. ;