Commissioner of Income-Tax, West
Bengal Vs. H. Hirjee  INSC 38 (17 April 1953)
SASTRI, M. PATANJALI (CJ) MUKHERJEA, B.K.
DAS, SUDHI RANJAN HASAN, GHULAM
CITATION: 1953 AIR 324 1953 SCR 714
CITATOR INFO :
RF 1961 SC 663 (14) RF 1967 SC 444 (5,8)
Indian Income-tax Act (XI of 1922), s. 10 (2)
(xv)-Business expenditure-Expenses incurred by businessman in defending against
criminal prosecution for offence under Hoarding and Profiteering Act-Finding of
The respondent who carried on business was
prosecuted under s. 13 of the Hoarding and Profiteering Ordinance of 1943 on a
charge of selling goods at an unreasonable price.
He was finally acquitted and claimed in his
assessment for a subsequent year that the sum of Rs. 10,895 which he had spent
in defending himself against the charge should be deducted from his income
under s. 10(2)(xv) of the Income- tax Act as "expenditure laid out or
expended wholly and exclusively for purposes of the business". The
Appellate Tribunal held that in the absence of any evidence that personal
liberty was likely to be jeopardised there was only a chance of his being
fined, that the object of saving himself from fine was so inextricably mixed
with the main purpose of the defence which was solely for the purpose of
maintaining the respondent's name as a good businessman and also to save his
stock from being undersold, that it could be ignored, and that, therefore, the
claim was allowable under s. 10(2)(xv). On a reference the High Court held that
the finding of the Tribunal was one of fact and was binding on it. On further
appeal: Held (i) that the finding of the Tribunal was not one of fact and was
not decisive of the reference; (ii) the finding of the Tribunal was vitiated by
its refusal to consider the possibility of the prosecution ending in a sentence
of imprisonment and throwing on the Income-tax authorities the burden to prove
that the prosecution might result in his imprisonment; and the finding was not
therefore binding on the Court; (iii) in any event, the expenses could not be
said to be " expenditure laid out or expended wholly and exclusively for
the purposes of the business" within s. 10(2)(xv) of the Act.
Legal expenses incurred in civil litigation
&rising out of matters incidental to the carrying on of a business stand on
a different footing as in such a case no question could arise as to the primary
or secondary purpose for which the expenses could be said to have been
The deductibility of such expenses under s. lo(2)
(xv) must depend on the nature and purpose of the legal proceeding and not 715
on the final outcome of it and a distinction cannot therefore be drawn between
expenses of a successful and unsuccessful defence for purposes of s. 10 (2)
J. B. Advani v. Commissioner of Income-tax
( 18 I.T.R. 557) referred to. Commissioner of Income-tax v. Maharajadhiraj
of Darbhanga ( L. R. 69 I.A. 15) distinguished.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 75 of 1952.
Appeal from the Judgment and Order dated the 16th January, 1951, of the High Court of Judicature at Calcutta (Harries C.J. and
Banerjee J.) in Income-tax Reference No.
46 of 1950.
C. K. Daphtary, Solicitor-General for India
(G. N. Joshi with hum) for the appellant Joshi with him N. C. Chatterjee (P. K.
Sen Gupta, with him) for the respondent.
1953. April 17. The Judgment of the Court was
delivered by PATANJALI SASTRI C.J.-This is an appeal from a judgment of the
High Court of Judicature at Calcutta answering a reference under section 66-A
of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act) in
favour of the respondent herein.
The respondent carries on business as selling
agents of the Bengal Potteries Ltd., and he was prosecuted under section 13 of
the Hoarding, and Profiteering Ordinance, 1943, (Ordinance No. XXXV of 1943) on
a charge of selling goods at prices higher than were reasonable in
contravention of the provisions of section 6 thereof. It appears that, before
the prosecution was launched in August, 1944, respondent's business premises
were searched and a part of his stock was seized and taken away. The respondent
defended the case, spending a sum of Rs. 10,895, and the prosecution ended in
an acquittal on February 16, 1945. In his assessment to income-tax for the year
1945-46, the respondent claimed the deduction of the Said sum of Rs.
10,895 from the profits of his business under
section 10(2) (xv) of the Act. The Income-tax Officer 93 716 disallowed the
claim but the Appellate Assistant Com missioner allowed it, and his decision
was confirmed by the Income-tax Appellate Tribunal, Calcutta Bench. Thereupon,
the Commissioner of Income-tax, West Bengal, applied to the Tribunal to state a
case for decision by the High Court under section 66-A of the Act, and the
Tribunal accordingly referred the following question to that Court for its
decision Whether in the circumstances of this case the Tribunal was right in
holding that the sum of Rs. 10,895 spent in defending the criminal, proceeding
was an expenditure laid out or expended wholly and exclusively for the 'purpose
of business as contemplated by section 10(2) (xv) of the Indian Income-tax Act
? In dismissing the appeal preferred by the Income-tax Officer, the Tribunal
"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.................. In any
case, in the absence of any material in this particular case that personal
liberty was likely to be jeopardised, all that we can say is that there was a
chance of conviction in which the respondent might have been fined. 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." In the order made on the reference Harries
C. J. (with whom Banerjee J. concurred) remarked:
"In every criminal prosecution where the
matter is defended to protect the good name of a business or -a professional
man, the fear of possible fine or 717 imprisonment must always be there. But
the Tribunal have pointed out that this was so inextricably mixed up with the
protection of the good name of the business that it can well be found that the
-money' spent in defence in the criminal prosecution wag spent solely and
exclusively for the purpose of the business. The finding is a finding of fact
and is binding upon us." The learned Judges proceeded to refer to a ruling
of the Bombay High Court J. B. Advani v. Commissioner of Income- tax(1)-and
held that the respondent satisfied both the tests laid down there as applicable
in such cases : He was charged with regard to a transaction which took place in
the ordinary course of business and he was charged in his capacity as a trader.
"If these two tests were satisfied and the Court came to the conclusion
that the primary object of incurring the expenditure was to protect the good
name of business, then it could be said that the expenditure was wholly and
exclusively for the purposes of the business".
The learned Judges accordingly answered the
question referred to them in the affirmative. They, however, granted a
certificate under section 66-A (2) of the Act that the case is a fit one for
appeal to this Court.
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 this 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-sec- tion (1) prohibits the sale by a dealer or producer of an article
for a consideration which is unreasonable (1)  is I.T.R. 557.
718 and sub-Section (2) defines
The framers of the Ordinance thus appear to
have regarded the offence as one calling for a deterrent punishment in view of
its antisocial 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. We cannot appreciate
the remark that "even this chance of con- viction and fine was so
inextricably mixed up with the main purpose of the defence that it could, be
ignored." A finding arrived at on this line of reasoning is obviously
vitiated by a serious misapprehension regarding the risk involved in a
prosecution under the Ordinance and it cannot be regarded as binding on the
Court in dealing with the reference. If, as the High Court realised, in every
criminal prosecution where the matter is defended to protect the good name of a
business or a professional man, the fear of possible fine or imprisonment must
always be there, it must ordinarily be difficult for any Court to say, that the
expenses incurred for the defence, -even if they are not to be regarded as the
"personal expenses" of the person accused, constituted
"expenditure laid out or expended wholly and exclusively for the purposes
of the business". Learned counsel for the respondent frankly admitted that
he was not able to find a single case in the books where the expenses incurred
by, a person exercising a trade or profession in defending a criminal
prosecution, which arises out of his business or professional activities, were
allowed to be deducted in the assessment of his profits or gains for income-tax
Reference was made in the course of argument
to numerous cases where legal expenses incurred in civil litigation, arising
out, of matters incidental to the carrying on of a business, were allowed as, a
deduction in the computation of its-profits, e.g. Commissioner of Income-tax v.
Maharajadhiraj of Darbhanga(1), where (1) (1942) L.R. 69 I.A. 15.
719 the Privy Council held that law charges
incurred in defending an action brought against a money-lender for damages for
conspiracy, misrepresentation and breach of contract to advance sufficient
funds to finance e a company were allowable as business expenditure. In that
class of case, no question could arise as to the primary or secondary purpose
for which the legal expenses could be said to have been incurred as in the case
of a criminal prosecution where the defence cannot easily be dissociated from
the purpose of saving the accused person from a possible conviction and
imposition of the prescribed penalty. Nor are we satisfied, -as at present
advised, that a distinction drawn in the Bombay case(1) between the legal
expenses of a successful and unsuccessful defence is sound. The deductibility
of such expenses under, section 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 outcome of that
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.
For the reasons indicated we allow the appeal
and answer the question referred in the negative. The appellant will be
entitled to his costs both here and in the Court below.
'Agent for the appellant: G. B. Rajadhyaksha.
Agent for the respondent: S. C. Banerjee.
(1)  18 I.T.R. 557.