Commissioner of Income Tax, West
Bengal Vs. Birla Cotton Spinning & Weaving Mills Ltd. & Ors  INSC
201 (17 August 1971)
CITATION: 1972 AIR 19 1972 SCR (1) 283 1973
SCC (3) 344
CITATOR INFO :
R 1972 SC 23 (7) F 1974 SC1366 (7)
Indian Income-tax Act (11 of 1922), s.
10(2)(xv)--'For the purpose of business', scope of-Expenses incurred before
Investigation Commission-Whether deductible.
The assessee, a public limited company,
incurred legal expenses for representing its case before the Income-tax
Investigation Commission, ?he proceeding before the Commission was a statutory
proceeding with a view to collecting materials for more taxation. The expenses
were claimed by the assessee as a deduction under s.10(2)(xv) of the Income tax
Act, 1922. The Income tax Officer, Appellate Assistant Commissioner and the
Tribunal disallowed the claim, but the High Court, on reference, held in favour
of the assessee.
Dismissing the appeal to this Court,
HELD: The expression 'for the purpose of the
business' in s. 10(2)(xv) is wider than the expression 'for the purpose of
earning profits'. The former covers, not only the running of the business or
its administration but also measures for the preservation of the business and
protection of its assets and property. The test under the section therefore is
whether the expenses were actually and honestly incurred for the preservation
and protection of the assessee's business from any process or proceedings which
might have resulted in the reduction of its income and profits. [286 G-H, 288D]
The earning of profits and the payment of taxes are not isolated and
independent activities of a business, but are continuous and take place from
year to year during the whole period for which the business continues. If the
assessee takes any steps for reducing its liability to tax which result in more
funds being left for the purpose of carrying on the business there is always a
possibility of higher profits. Therefore, expenditure which was incurred by the
assessee in opposing a coercive governmental action, with the object of saving
taxation and safeguarding business,, was justified by commercial expediency and
was, hence, allowable under s.10(2)(xv) of the Act. [288 E-H., 289A-F]
Travancore Titanium Product Ltd., v. Commissioner of Incometax Kerala, 60
I.T.R. 277(S.C.) and Smith's Potato Estate Ltd. v. Bolland, 30 T.C. 267,
C.T. Calcutta v. Calcutta Landing and
Shipping Co. 77 I.T.R.
575 and Bansilal Abirchand Spinning and Weaving
Mills v. C.T. Poona, 81 I.T.R. 34, approved.
CIVIL APPELLATE JURISDICTION : Civil Appeals
Nos. 1351 to 1353, 1897 and 1241 of 1968.
Appeals from the judgments and orders dated
March, 3, 1967, February 9, 1968 and June 28, 1967 of the Calcutta High Court
in Income-tax Reference Nos. 136 of 1962, 154 of 1964 and 54 of 1963
Jagdish Swarup, Solicitor-General, S. T.
Desai, S. K.
Aiyar, R. N. Sachthey and B. D. Sharma, for
the appellant (in C. As. Nos. 1241 and 1351 to 1353 of 1968) B. B. Ahuja, R. N.
Sachthey and B. D. Sharma for the appellant in C. A. No. 1897 of 1968).
B. Sen, A. C. Mitra, N. R. Khaitan, O. P.
Khaitan, B. P. Maheshwari and Krishna Sen, for respondent (in C.
As. Nos. 1351 to 1353 and 1897 of 1968).
Krishna Sen, N. R. Khaitan, O. P. Khaitan and
B. P. Maheshwari, for respondent (in C.A. No. 1241 of 1968.) The Judgment of
the Court was delivered by Grover, J. These appeals from a judgment of the
Calcutta High Court have been brought by certificate under S. 66A (2) of the
Indian Income tax Act, 1922, hereinafter called the 'Act' and involve a common
question, namely, whether the law charges incurred in connection with the
proceedings before the Investigation Commission were an allowable deduction in
computation of the profits of the business of the assessee.
The facts in the first batch of appeals i.e.
C. As. 13511353/68 may be stated. During the assessment years 1952-53, 1953-54
and 1954-55 the assessee, which is a public limited company, spent Rs. 3810/-,
1,42,377/and Rs. 2,42,688/for representing its case before the Investigation
Commission relating to the past assessment years 1941-42 to 1947-48.
These expenses which were termed as
"general expenses" were claimed by the assessee as deduction under s.
10 (2) (xv) or in the alternative under S. 10 (1) of the Income tax Act 1922,
hereinafter called the 'Act'. The Income tax Officer disallowed the claim. His
order was upheld by the Appellate Assistant Commissioner and the 285 Appellate
Tribunal. Thereupon the assessee moved the Tribunal under s. 66 (1) of the Act
to state the case and refer the question of law arising out of its order. The
Tribunal submitted a common statement of the case and referred the following
question to the High Court :"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 computation of the profits of the business either under
s. 10 (1) or under 10 (2) (xv) of the Income tax Act, 1922?" The High
Court held that the expenditure incurred by the assessee in opposing an illegal
and coercive government action with the object of saving taxation and
safeguarding the business was justified by commercial expediency and was an
It is necessary at this stage to notice the
purpose of the Taxation of Income (Investigation 'Commission) Act 1947,
hereinafter called the 'Investigation Commission Act' as also some of its
relevant provisions. That Act was enacted for the purpose of ascertaining
whether the actual incidence of taxation on income was and had 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 was
adequate to prevent the evasion thereof and to make provision for investigation
into such matters. Section 5 (1) conferred power on the Central Government to
refer particular cases or points to the Commission for investigation and report
if the Government was of the opinion that there had been substantial evasion of
payment of income tax in such cases. If in the course of investigation the
Commission had reasons to believe that some person other than the one whose
case was being investigated had avoided payment of income tax the Commission
was authorised under sub-s. (4) of s. 5 to report to the Central Government.
The ultimate object of investigation was collection of material showing evasion
of tax so that the avoided income could be subjected to taxation and penalties
imposed for evasion.
286 Section 5 (1) 'of the Investigation
Commission Act was struck down by this Court as unconstitutional in Shree
Meenakshi Mills Ltd., Madurai & Others v. Sri A. V. Visvanatha Sastri &
Another(1). Similarly S. 5 (4) was declared to be void and unconstitutional in
Surajmial Mohta & Co. v. A. V. Visvanatha & Another.(2) As a result of
investigation into the affairs of Birla group of concerns the case of the
assessee was referred to the Commission while it was functioning for
investigation. The assessee engaged eminent lawyers and incurred the expenses
in question in conducting appropriate proceedings before the Commission as also
in courts where the vires of the aforesaid Investigation Commission Act were
Sub-section (1) of S. 1-0 of the Act provides
that tax shall be payable by the 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. Among the allowances which
are not to be included in the computation of such profits and gains it is
provided by sub. S. (2) (xv) of S. 10 as follows S 10 (2) (xv) " any
expenditure not being an allowance of the nature described in any of the
clauses (i) to (xiv) inclusive, and not being 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 expression "for the purpose of the
business" is essentially wider than the expression "for the purpose
of earning profits". It covers not only the running of the business or its
administration but also measures for the Preservation of the business and
protection of its assets and property. It may legitimately comprehend many
other acts incidental to the carrying on of the business. In Travancore
Titanium Product Ltd. v. Commissioner of Income Tax, Kerala(3) the position
relating to expenditure (1) 26 I.T.R. 713.
(2) 26 I.T.R. I (3) 60 I.T.R. 277, 282.
287 which can be deducted under s. 10 (2)
(xv) of the Act was summarised thus "The nature of the expenditure or
outgoing must be adjudged in the light of accepted commercial practice and
The expenditure must be incidential to the
business and must be necessitated or justified by commercial expediency. It
must be directly and intimately connected with the business and be laid out by
the taxpayer in his character as a trader. To be a permissible deduction, there
must be a direct and intimate connection between the expenditure and the
business, i.e. between the expenditure and the character of the assessee as a
trader, and not as owner of assets, even if they are assets of the
business." It is well settled by now that the deductibility of expenditure
incurred in prosecuting the civil proceedings to resist the enforcement of a
measure, legislative or executive, which means restriction on the carrying on
of a business or to obtain a declaration that the measure is invalid,. would,
if other conditions are satisfied, be admissible as a deduction under s. 10 (2)
Deductibility of such expenditure does not
depend on the final outcome of those proceedings. However, wrong-headed,
ill-advised, unduly optimistic or over confident in his conviction the assessee
might appear in the light of the ultimate decision, expenditure in prosecuting
a civil proceeding cannot be denied as a permissible deduction if it is
reasonably and honestly incurred to promote the interest of the business. (See
Sree Meenakshi Mills Ltd. v. Commissioner of Income, Madras. (1) The point
which has presented some difficulty at least in the English courts is whether
the expenditure incurred by the trader in fighting the Revenue's assessment can
be regarded an allowable expenditure. In Smith's Potato Estate Ltd. v. Bolland
(2) expenses had been incurred in filling an appeal against the decision of the
Commissioners of Inland Revenue to the Board of Referees, in the matter of
certain expenditure which had been claimed by the assessee as an allowable
deduction. It was held by the majority (Viscount Simon and Lord Oaksey
dissenting (1) 63 I.T.R. 207. (2) 30 T.C. 267. 28 8 that the expenditure was
not an allowable deduction for income tax and excess profits tax purposes. The
basis of the view of the majority was that the expenses on the litigation
undertaken for the purpose of reducing the amount of tax payable was not
incurred by a trader for the purpose of his trade but partly atleast for the purpose
of his relationship to the crown as a tax-payer. Therefore the expenditure was
not wholly and exclusively for the purpose of the trade. Viscount Simon and
Lord Oaksey, who took the contrary view, considered that attention should be
concentrated on the statutory words that litigation undertaken for the purpose
of reducing the amount of tax payable was undertaken "wholly and
exclusively" for the purpose of the trade in that the reduction in the
amount of tax increased the traders' monetary resources and so promoted the
carrying on of the trade and the earning of the trading profits. (See also
Simon's Income tax, Second Edition, Vol.
2, pages 216-217). In Commissioner of Income
tax, Calcutta v. Calcutta Landing & Shipping Co. Ltd. (1) the Calcutta High
Court has sought to distinguish the language of S. 10 (2) (xv) from that of the
provisions in the English Income tax law and has given weighty reasons for
accepting the opinion of Viscount Simon and Lord Oaksey, particularly, because
of the observations of this Court in the decisions which we have already
noticed. The above case was followed by a Full Bench of the Bombay High Court
in R. B. Bansilal Abirchand Spinning & Weaving Mills v. Commissioner of
Income tax, Poona(1).
Learned counsel for the Revenue has relied
upon the observations extracted at an earlier stage from the case of Travancore
Titanium Products Ltd(1) and has argued that there must be a direct and
intimate connection between the expenditure of the business, i.e. between the
expenditure and the character of the assessee as a trader and not as an owner
of assets. We are unable to appreciate how these observations which were made
in the light of different facts in any way militate against the view of
Viscount Simon and Lord Oaksey in Smith Potato Estate case(4) as also the
decision of the Calcutta High Courtin Calcuutta Landing & Shipping Co..
case(1). It may be pointed out that in the ,(1) 77 I.T.R. 575. (2) 81 I.T.R.
(3) 60 I.T.R. 277. (4) 30 T.C. 267.
289 decision relied upon by the Revenue the
question was whether the tax imposed under the Wealth Tax Act on the owner of
assets was a permissible deduction under S. 1.0 (2) (xv) of the Act. It was
emphasised by this Court that the charge of the tax was the same whether the
assets were part of or used in the trading Organisation of the owner or were
merely owned by him. The assets of the bay payer whether incorporated or not
became chargeable to tax because they were owned by him and not because they
were used by him in the business. The position is quite different when it has
to be decided whether an allowance contemplated in s. 10 (2) (xv) is
The essential test which has to be applied is
whether the expenses were incurred for the preservation and protection of the
assessee's business from any such process or proceedings which might have
resulted in the reduction of its income and profits and whether the same were
actually an honestly incurred. It is not possible to understand how the
expenditure on the proceedings in respect of the Investigation Commission by
the assessee will not fall within the above rule. Even otherwise the
expenditure was incidental to the business and was necessitated or justified by
commercial expediency. It must be remembered that the earning of profits and
the payment of taxes are not isolated and independent activities of a business.
These activities are continuous and take place from year to year during the
whole period for which the business continues. If the assessee takes any steps
for reducing its liability to tax which result in more funds being left for the
purpose of carrying on the business there is always a possibility of higher
profits. To give an illustration, if an assessee can, by an appropriate
proceedings, succeed in getting its tax liability for gains and profits reduced
by a sum of Rs. 1,00,000/that amount will essentially become available for the
purpose of business with a reasonable expectation of more profits. As was
observed by Viscount Simon in Smith Potato Estate case(1) if the trader
considers that the Revenue seeks to take too large a share and to leave him
with too little the expenditure which the trader incurs in endeavoring to
correct this mistake is a disbursement laid out for the purposes of his trade.
If he succeeds he will have more money with which to earn profits next year.
(1) 30 T. C. 267.
290 The High Court in the judgment under
appeal, after a discussion of the relevant case law, approached the matter in
this way. The proceeding before the Investigation Commission is not a civil
proceeding; but it is a statutory proceeding with a view to collecting
materials for more taxation. Therefore if the proceeding touched the business
of assessee the expenditure incurred by the assessee in safeguarding its
interest before the Commission would be an allowable deduction. It was pointed
out-and this was based on the material on the record-that the Commission was
holding an investigation on a suspected escapement of income to the tune of
about Rs. 4 cores. Taxes levied on that income and the penalties imposed would
naturally have been very heavy for the business of the assessee and might have
either crippled or annihilated it. To preserve the business from an
investigation which, according to the assessee, was unlawful the assessee was
justified in taking proper steps and spending monies there for. Such an
expenditure 'was not for earning profits but was aimed at preservation of
business from the inroads of a piece of legislation which, it was maintained,
was unconstitutional and was so held by this Court later in certain decisions
that have already been mentioned. The expenditure which was incurred by the
assessee in opposing a coercive governmental action with the object of saving
taxation and safeguarding business was justified by commercial expediency and
was, therefore, allowable under S. 10 (2) (xv) of the Act. We have no doubt
that the above approach of the High Court and its ultimate decision were fully
justified on principle and authority.
In the result all these appeals fail and are
dismissed. But the respondent will be entitled to costs only in C. As. 135
1-1353/68. One hearing fee.
V.P.S. Appeals dismissed.