BANERJEE, J. - (1.) THIS reference under s. 66(1) of the Indian IT Act has been made in circumstances hereinafter stated.
(2.) IT is well-known that, in the year 1947, the Taxation on Income (Investigation Commission) Act was passed "for the purpose of ascertaining whether the actual incidence of taxation on income is and has been in recent years in accordance with the provisions of law, and the extent to which the existing law and procedure for the assessment and recovery of such taxation is adequate to prevent the evasion thereof, to make provision for an investigation to be made into such matters." Sec. 5(1) of the Act invested the Central Government with power to refer particular cases or points in a case to the commission for investigation and report, if the Central Government was of the opinion that there had been substantial evasion of income-tax payment in such cases. Similarly, if in the course of an investigation under s. 5(1), the commission had reasons to believe that some person other than the one whose case was being investigated evaded payment of income-tax or that points other than those referred to it required investigation, the commission was authorised, under s. 5(4), to report to the Central Government, so that the latter could refer the case of such other person or such other points to the commission for investigation. The ultimate object of the investigation was collection of materials showing evasion of tax, so that the evaded income might be taxed and penalties for evasion imposed. The Supreme Court condemned s. 5(1) of the Act as an unenforceable and discriminatory piece of legislation, after the introduction of sub-s. (1A) to s. 34 of the Indian IT Act (vide Shree Meenakshi Mills Ltd. vs. A.V. Visvanatha Sastri (1954) 26 ITR 713 (SC)). The Supreme Court also condemned s. 5(4) of the Act as a discriminatory piece of legislation, offending against Art. 14 of the Constitution and therefore void (vide Suraj Mall Mohta Co. vs. A.V. Visvanatha Sastri (1954) 26 ITR 1(SC)). After the condemnation of the two sub- sections by the Supreme Court, the Investigation Commission became an ineffective body. When the Investigation Commission was effectively functioning, the case of the assessee, a public limited company, was referred to the commission, under s. 5(4) of the Taxation on Income (Investigation Commission) Act, 1947, as a result of investigation into the affairs of other Birla group of concerns, there being reasons to believe that the assessee had also evaded payment of income-tax on about Rs. 4 crores during the years 1941-42 to 1947-48. The assessee had properly to represent its case before the commission by employment of eminent lawyers including Shree G.S. Pathak and others and in challenging the vires of the Act up to the Supreme Court. For the years previous respectively to the asst. yrs. 1952-53, 1953-54 and 1954-55, the assessee- company had to spend respectively Rs. 3,810, Rs. 1,42,377 and Rs. 2,42,688 for the aforesaid purposes. The aforesaid expenses were termed as "general expenses" and were claimed by the assessee as deductions, namely, Rs. 3,810 for 1952-53, Rs. 1,42,377 for 1953-54 and Rs. 2,42,688 for 1954-55, under s. 10(2)(xv) or alternatively under s. 10(2)(i) of the Indian IT Act. The ITO disallowed the claim. The assessee appealed before the AAC and contended (i) that the expenditure having been incurred to save the very existence of the assessee was allowable as business expenditure and (ii) that the Taxation on Income (Investigation Commission) Act, 1947, being an ultra vires piece of legislation, the assessee was justified in spending money, so as to protect itself against inroads by an unconstitutional piece of legislation. The AAC held that there was no threat of seizure of the assets of the assessee but only a proposal to tax a part of the concealed income of the assessee. Inasmuch as money spent by a trader to get taxable profits ascertained by the IT authorities was not expenditure incurred for earning profits in the business, the AAC held that the ITO was right in disallowing the deductions as claimed by the assessee. The assessee preferred a further appeal before the Tribunal. It was argued, on behalf of the assessee, that the expenses were incurred : (i) to save its fair name ; (ii) to save unnecessary taxation ; (iii) to oppose an illegal governmental action ; (iv) to safeguard its business. It was further argued on behalf of the assessee that by creating a body known by the name of Investigation Commission, the Government wanted to have a second illegal dig into the assessee's profits. If the assessee had not taken the courage of defending itself, it might have been wiped off the business world by being made to pay heavy taxes and penalties. It was also submitted that the assessee's name having been mentioned as one of those assessees, who were called by the Investigation Commission to appear before them, there was created a circumstance sufficient to lower its prestige and position in the business world, which might affect its business deals and future profits also. It was, therefore, contended that it became necessary for the assessee to spend money in order to safeguard its business position and as such the expenses should be allowed to be deducted.
(3.) THE Tribunal repelled the contentions raised on behalf of the assessee with the following observations : "Now the first ground, which has been urged for claiming it as a business expenditure is that it was incurred to save its fair name. Firstly, we are unable to appreciate as to how the directors and shareholders of the company came to feel that going before the Investigation Commission was a matter of shame or disgrace affecting the status and reputation of the company. THE feeling, if we may say so, was wholly imaginary. Nobody loses one's reputation or fair name by being called upon to answer whether any further amount of tax was actually due from him. But even conceding that it was an expenditure incurred to save its fair name, firstly, it does not arise out of the assessee- company's trade and, secondly, as has been observed by Chief Justice Beaumont in the case of CIT vs. Sir Homi M. Mehta (1943) 11 ITR 142, 'THE maintenance of business reputation is undoubtedly a capital asset' and that 'it is impossible to say that payment for the maintenance of business reputation is not payment for a capital purpose', the expenses incurred by the assessee in protecting its fair name is capital in nature. THE second ground on which the appellant claimed it as an expenditure is that it was to save the assessee from unnecessary taxation. This cannot again be allowed as a business expenditure. THE profits had already been earned and by this expenditure they could not be altered. THE majority decision in the case of Smith's Potato Estates Ltd. (1949) 17 ITR (Suppl) 1 is now an approved principle on this issue. THE legal expenses, in question, are not disbursements wholly and exclusively laid out or expended for the purpose of the trade and as such cannot be excluded out of the trader's profits. THE third ground is that this expenditure was incurred in order to stop the Government from illegal acts that they were doing in calling upon the assessee to explain matters regarding settlement of taxes already settled before the Investigation Commission. This, in our opinion, could also not be a business expenditure ; firstly, because it has got nothing to do with the commercial expediency to defend itself from paying taxes that might legally be found due against an assessee. THE formation of the Investigation Commission, it may be mentioned, was mainly with a view to find out the actual amount of tax that an assessee should have paid. Subsequently, however, by a decision, their Lordships of the Supreme Court in the case of Suraj Mall Mohta and Co. (supra) declared it to be a discriminatory legislation and ultra vires the Constitution of India in respect of particular provisions. This fact, however, does not change the nature of the issue before us. It still means that the expenditure incurred in defending the assessee's claim before the Investigation Commission was either, as stated above, to defend itself from paying legitimate tax to the State or looked at from another angle could be an expenditure for settling taxation liability. We need not say that it is already an established proposition that such an expenditure, viz., for settling taxation liabilities, was not an allowable expenditure. THE principle of Smith's Potato Estates case (supra) enunciated above applied to this issue also. The last ground upon which this claim is based is that it was to safeguard the assets of the company. We are again unable to appreciate this aspect of the matter. The Investigation Commission did not fall upon the assessee to usurp its capital assets so that safeguarding itself against it became an imperative factor. The commission only came to recommend as to the correct amount of tax which the assessee should have paid. There was no provision in the scheme of the said commission which could make any one so touchy as to think that the commission had come as an usurper. Clearly, therefore, in its very nature, by this ground the assessee speaks of saving itself from paying the actual taxes that might have been found due from it and as such the expenditure could only be called a non-revenue expenditure having no nexus to the trading aspect of a trader. The Tribunal relied on the following observations by Romer L.J. in Worsley Brewery Co. Ltd. vs. IRC (1932) 17 Tax Cas. 349 : "I am not prepared to hold that, when all that has been done and the profits have been ascertained after the employment of the accountants in the normal way and a question arises at some subsequent period between the trading concern and some third party, which involves a consideration of the question whether the profits so ascertained were correctly ascertained, the expense of further investigating the accounts is an expense incurred for the purpose of earning the profits. It is not incurred for that purpose at all ; it is incurred merely for the purpose of settling the dispute which has arisen" and expressed the opinion that the expenses incurred in the proceedings before the Investigation Commission, which the assessee claimed as law charges, were not allowable either under s. 10(1) or under s. 10(2)(xv) of the Indian IT Act. Thereupon, the assessee-company obtained a reference to this Court under s. 66(1) of the Indian IT Act, on the following question : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the law charges incurred in connection with the proceedings before the Investigation Commission were not allowable deductions in the computation of the profits of the business either under s. 10 (1) or under s. 10(2)(xv) of the IT Act, 1922 ?" It is necessary for us, at this stage, to refer to the language of sub-ss. (1) and (2)(xv) of s. 10 of the Indian IT Act in order to appreciate the respective contentions of the assessee and the Revenue in this matter. "10. (1) The tax shall be payable by an assessee under the head' Profits and gains of business, profession or vocation 'in respect of the profits and gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely : . . . (xv) any expenditure not being an allowance of the nature described in any of the cls. (i) to (xiv) inclusive, and (not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purpose of such business, profession or vocation." The words "expenditure laid out wholly and exclusively for the purpose of such business" have occasioned interesting explanation, either narrow or wide in their sweeps, when dealing with what expenses are to be allowed in computing taxable profits. We shall first of all refer to certain English authorities on the point. Explaining such words, in the context of a case in which a customer sleeping in an inn was injured by the fall of a chimney and recovered damages and costs against the company owning the inn for the injury, Lord Loreburn L. C. observed in the case of Strong and Co. Ltd. vs. Woodifield (1906) AC 448 : "A deduction cannot be allowed on account of loss not connected with or arising out of such trade. That is one indication. And no sum can be deducted unless it be money wholly and exclusively laid out or expended for the purposes of such trade. That is another indication. Beyond that the Act is silent. ;