Gulati, J. - (1.) THIS is a reference under Section 66(2) of the Indian Income-tax Act, 1922 (hereinafter referred to as "the Act").
(2.) THE assessee is a limited company, which runs a textile mill. On or about 31st July, 1950, some directors, officers and employees of the company were prosecuted under the Essential Supplies (Temporary Powers) Act, for having stamped on the cloth produced by the company prices higher than those fixed under the Textile Control Order, 1948. THE company passed a resolution to defray the expenses incurred on the defence of the accused. During the accounting years relevant to the assessment years 1952-53, 1953-54 and 1954-55, the company incurred varying amounts in connection with this litigation and claimed that these expenses should be allowed as deductions in computing its net income for the assessment years in question under Section 10(2)(xv) of the Act. THE Income-tax Officer held that the breaches committed by the accused were not in the normal course of discharge of their duties nor were they acquitted honourably. He accordingly disallowed the expenses. THE assessee's appeal before the Appellate Assistant Commissioner of Income-tax also failed. THE assessee then preferred a second appeal before the Income-tax Appellate Tribunal. THE Tribunal, relying upon its decision on the assessee's appeal for the assessment year 1951-52, rejected the appeals. THE Tribunal also rejected the assessee's application for a reference under Section 66(1) of the Act, on the ground that a similar application had been rejected by the High Court under Section 66(2), relating to the assessment year 1951-52. THE assessee then moved the High Court under Section 66(2) of the Act. A Division Bench of this court, however, allowed the application on the ground that the decision of the Supreme Court in Commissioner of Income-tax v. H. Hirjee, 1953 23 ITR 427 (SC) relied upon by the earlier Bench, could be distinguished and directed the Tribunal to submit a statement of the case. In compliance with this order the Tribunal has now referred the following question of law for the opinion of this court : " Whether, on the facts and in the circumstances of the case, the assessee-company was entitled to deduct while computing its net income for the assessment years 1952-53, 1953-54 and 1954-55, the sums of Rs. 28,957, Rs. 12,519 and Rs. 4,330 spent by it in defending its directors, officers and employees in the proceedings under the Essential Supplies (Temporary Powers) Act, under Section 10(2)(xv) of the Income-tax Act ?" When this reference came up before a Bench of this court it was argued on behalf of the assessee that the decision of the Supreme Court in the case of Hirjee was distinguishable, inasmuch as in that case it was the assessee who was prosecuted but in the instant case the assessee's directors, officers and employees were prosecuted and, as such, the principle laid down in that case would not apply. To support this contention reliance was placed on the decision of the Gujarat High Court in Commissioner of Income-tax v. Ahmedabad Controlled Iron and Steel Registered Stockholders Association Pvt. Ltd., [1975] 99 ITR 567 (Guj) The Bench felt that the decision of this court rendered on the assessee's application under Section 66(2) for the assessment year 1951-52 required reconsideration by a larger Bench. That is how this reference has now come up before us. Section 10 of the Act deals with the computation of income from business. Sub-section (2) of Section 10 enumerates certain deductions to be made in the computation of net income. Clause (xv) of Section 10(2) is a residuary clause, which provides that any expenditure wholly and exclusively laid out for the purpose of the business may be allowed as a deduction. The question arises as to whether the expenses incurred by the assessee in defending its directors and employees could be said to be an expenditure wholly and exclusively laid out for the purpose of the business.
(3.) THE transaction which gave raise to the prosecution no doubt pertains to the assessee's business but that is not enough. THE assessee had further to prove that the expenses in question were laid out wholly and exclusively for the purpose of the business. In other words, the assessee had to establish that the expenditure in question was incurred purely out of business considerations and not for any other purpose. THE finding that an expenditure had been incurred wholly for business considerations is an inference to be drawn from the facts of each case and the attending circumstances. Generally, there is no difficulty in judging whether such an inference has been correctly drawn in respect of expenses incurred on a civil litigation arising out of the conduct of the business of an assessee. THE courts have, however, felt some difficulty in answering a similar question relating to expenses incurred in criminal litigation. In Commissioner of Income-tax v. Hirjee the Supreme Court had to deal with a similar question. THEre the assessee carried on business as selling agent of Bengal Potteries Ltd. He was prosecuted under Section 13 of the Hoarding and Profiteering Ordinance, 1943, on the charge that he had sold the goods at a price which was unreasonable. THE Income-tax Officer had disallowed the expenditure. Ultimately, the matter went up before the Income-tax Appellate Tribunal. On behalf of the department it was contended that since in the criminal prosecution there was a chance of the assessee being convicted and punished, any expenditure incurred by the assessee to save himself from punishment could not be said to be wholly and exclusively laid out for the purpose of the business. Repelling this contention the Tribunal held as follows: " It may be stated straight off that it has not been established by any material that the conviction in cases like this may end in imprisonment. THE question that personal liberty was likely to be jeopardised, therefore, will not be considered by us. .... No doubt, the element of saving himself from the fine, if any, might be there, but it is so inextricably mixed up with the main purpose for the defence that we are prepared to ignore that little element. In our opinion, the defence was solely for the purpose of maintaining his name as a good businessman and also to save his stock from being undersold if the court held that the prices charged by the respondent were unreasonable." On a reference the Calcutta High Court held that the finding recorded by the Tribunal was a finding of fact and was binding on them and, as such, answered the reference in favour of the assessee. On appeal, the Supreme Court held that the finding of the Tribunal was vitiated by its refusal to consider the possibility of the criminal proceedings terminating in prosecution and imprisonment of the assessee, and, as such, the finding of the Tribunal was not binding on the courts. This is what their Lordships observed at page 430: " We are unable to agree that the finding of the Tribunal, to which reference has been made, is binding on the court as a finding of fact and is decisive of the reference. The finding of the Tribunal is vitiated by its refusal to consider the possibility of the criminal proceeding terminating in the conviction and imprisonment of the respondent. As has been stated, the respondent was prosecuted under Section 13, which provides: 'Whoever contravenes the provisions of the Ordinance shall be punishable with imprisonment for a term which may extend to five years or with fine or with both.' The respondent was charged with contravention of Section 6, which by Sub-section (1) prohibits the sale by a dealer or producer of an article for a consideration which is unreasonable and Sub-section (2) defines ' unreasonable consideration'. The framers of the Ordinance thus appear to have regarded the offence as one calling for a deterrent punishment in view of its anti-social character, and it is idle to suggest that it is for the income-tax authorities to prove in such cases that the conviction might result in a sentence of imprisonment and that, in the absence of such proof, there was, at the most, only a chance of conviction and fine." ;