Shree Meenakshi Mills Ltd., Madurai Vs.
Commissioner of Income-Tax, Madras [1966] INSC 170 (19 September 1966)
19/09/1966 SHAH, J.C.
SHAH, J.C.
BHARGAVA, VISHISHTHA
CITATION: 1967 AIR 444 1967 SCR (1) 392
CITATOR INFO:
RF 1971 SC2129 (7) R 1972 SC 19 (6)
ACT:
Income-tax Act, 1922 (11 of 1922), s.
10(2)(xv)-Expenditure incurred for proceedings to prevent enforcement of order
interfering with business-It admissible deduction.
HEADNOTE:
The assessee-mill claimed deduction under s.
10(2) (xv) of the Indian Income-tax Act of the expenses incurred by it and the
costs awarded to Government in respect of unsuccessful writ petition and
appeals there from. The deduction was disallowed by the departmental
authorities, and the question was answered against the assessee by the High
Court. In appeals to this Court.
HELD: The appeal must be allowed.
The proceeding started by the assessee was in
relation to the business of the assessee.
Expenditure incurred to resist in a civil
proceeding the enforcement of a measure-legislative or executive, which imposes
restrictions 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
under s. 10(2) (xv) as a permissible deduction in the computation of taxable
income, even though the expenditure does not directly relate to the earning of
income. Expenditure may not be denied admission as a permissible deduction in
computing the taxable income merely because the proceeding has failed. Persistence
of the assessee in launching the proceeding and carrying it from Court to Court
and incurring expenditure for that purpose again cannot be a ground for
disallowing the claim. (396 B-C; 399 B) Commissioner of Income-tax, West Bengal
v. H. Hirjee 23 I.T.R427, Morgan (Inspector of Taxes) v. Tate & Lyle Ltd.
26 I.T.R. 195 : 35 T.C. 367 and Commissioner
of Income-tax, Kerala v. Malayalam Plantations Ltd., (196 HI 7 S.C.R. 693,
referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 557 & 558 of 1965, Appeal by special leave from the judgment and order
dated September 19, 1962 of the High Court of Judicature at Madras (in Tax Case
No. 87 of 1960).
R. Ganapathy lyer, for the appellant.
R. M. Hazarnavis and R. N. Sachthey, for the
respondent.
The Judgment of the Court was delivered by
Shah, J.-Sree Meenakshi Mills Ltd.-a company incorporated under the Indian
Companies Act with its registered office at Madurai carries on business of
cotton spinning and weaving.
In the premises "of the factory of the
Company there are installed 80 handloorns 393 These handlooms were found
inadequate to weave the yarn produced by the factory and a part of the yarn
produced was distributed to weavers outside the factory who were engaged by the
Company to weave the yarn into cloth. Under cl. 18-B of the Cotton Cloth and
Yarn (Control), Order, 1945, issued by the Government of India, the Textile
Commissioner was authorized to direct ally manufacturer or dealer or any class
of manufacturers or dealers, inter alia, not to sell or deliver any yarn or
cloth of specified description except to such person or persons and subject to
such conditions as the Textile Commissioner may specify. On February 7, 1946,
the Textile Commissioner issued an order directing the Company not to sell or
deliver any yarn manufactured by the Company except to such person or persons
as the Textile Commissioner may specify. It was recited in the order that
"nothing in this Order shall apply to a sale or delivery made, in
pursuance of clause 18-A of the said order, to any dealer in yarn not engaged
in the production of cloth on handlooms or powerless". The Company
addressed a letter on February 13, 1946 to the Textile Commissioner submitting
that the prohibition in general terms was ultra wires the authority conferred
by the Cotton Cloth and Yarn (Control) Order. The Company continued
notwithstanding the prohibition to deliver yarn to weavers and did so till
February 20, 1946. This yarn was seized under the orders of the Textile
Commissioner. On February 20,1946, the Provincial Textile Commissioner,
purporting to act in exercise of authority conferred upon him by a notification
issued by the Government of India, issued an order addressed to the Company
that:
"You should accordingly confine your
delivery to the categories of persons notified below:(a) Licensed yarn dealers
(in accordance with the said 18-A of the Control Order).
(b) to consumers who purchased yarn directly
from you during the basic period 1940-42 (in accordance with my circular letter
dated 4th January 1946 referred to above).
(c) your handloom factory situated in the
premises of your Mill at Madurai (just the quantity of yam required).
"Note:-Any other delivery of yarn by you
which is not covered by a special order or permission of the Textile Control
Authorities will accordingly be a contravention of the Textile Commissioner's
order under clause 18-B referred to above." After this order was issued,
the Company did not deliver any yarn to weavers.
On March 4, 1946 the Company filed a petition
for a writ of nandamus in the High Court of Madras under s. 45 of the Specific
394 Relief Act praying for an order directing the Provincial Textile
Commissioner, Madras to desist from seizing the yarn supplied to the weavers at
or around Madurai and Rajapalayam for the purpose of converting the yarn
belonging to the Company into cloth; to restore to the Company or to direct the
Provincial Textile Commissioner and his subordinates to restore the yam already
seized; and to forbear from seizing or to direct the subordinates of the
Provincial Textile Commissioner to forbear from seizing the yarn that may be
entrusted to the weavers by the Company in the -usual course of business
according to the practice already obtaining for conversion into cloth. This
petition was dismissed by Kunhi Raman, J, and the order of dismissal was
confirmed in appeal by the High Court. The matter was then carried in appeal to
the Privy Council. The Judicial Committee dismissed the appeal filed by the
Company. They held, agreeing with the High Court, that the expression
"deliver" in cl. 18-B subcl. 1(b) of the Cotton Cloth and Yarn
(Control) Order, 1945, is used in its ordinary broad sense of handing over
possession, as distinct from passing of property, and would include delivery of
possession to a bailer. Accordingly, delivery of part of its yarn by the
Company to owners of handlooms outside the mill premises for conversion of the
yarn into cloth for the Company was in contravention of the order made under
cl. 18-B sub. cl. (1) (b). The Judicial Committee also held that a petition
under S. 45 of the Specific Relief Act, 1877, directing the Provincial Textile
Commissioner to desist from seizing the yam supplied to the weavers and to
restore to the Company the yarn already seized was incompetent as the acts in
respect of which relief was asked for took place outside the limits of the
ordinary original civil jurisdiction of the High Court.
The Company spent Rs. 20,035/in prosecuting
the proceedings under s. 45 of the Specific Relief Act and had also to pay Rs.
5,912/as costs to the Government of the unsuccessful appeal to the Judicial
Committee. In its returns of income the Company claimed deduction of the
amounts of Rs. 20,035/and Rs., 5,9121/for the assessment years 1949-50 and
1950-51 respectively as being expenditure wholly and exclusively laid out for
the purpose of its business. The claims were rejected by the departmental
authorities, and by the Income-tax Appellate Tribunal. The Tribunal then
referred the following question to the High Court of Judicature at Madras :
"Whether the expenses of Rs. 20,035/incurred
in the assessment year 1949-50 and Rs. 5,912/(relating to the assessment year
1950-5 1) being the cost paid to Government as directed by the Privy Council
were expenses incurred in the ordinary course of business and allowable as
deductions?" 395 The question as framed is somewhat vague. But it is
common ground that the Company claimed deduction under s. 10(2) (xv) of the
Indian Income-tax.Act, 1.922 on the footing that the two amounts represented
expenditure laid out wholly and, exclusively by the Company for the purpose of
its business.
The High Court answered the question in the
negative. 'With special leave, the Company has appealed to this Court.
The Tribunal has found that after the order
dated February 20, 1946 was issued, the Company did not deliver yarn to any
weaver. it is recited in the judgment of the Tribunal that a "correct
order by the proper authorities was passed" on February 20, 1946 and,
thereafter the Company did not distribute any yarn to weavers. The averments
made by the Company in the petition under s. 45 of the Specific Relief Act, are
somewhat involved, but in substance the claim of the Company was that the
Provincial Textile Commissioner was incompetent to pass the order dated
February 20, 1946 which placed restrictions on the business of the Company and
the order was "likely to cause irreparable and irretrievable injury",
and it was prayed that an order do issue under s.
45 of the Specific Relief Act restraining the
Provincial Textile Commissioner from enforcing the order and the Textile
Commissioner be prohibited by an order from seizing the yarn delivered to the
weavers outside the factory and be further ordered to restore the yarn already
seized. No clear averment was made in the petition about the date on which the
yarn seized had been delivered by the Company to the weavers.
This petition failed, because the High Court
had no jurisdiction to entertain the petition, and also because the expression
"deliver" used in cl. 18-B of the Control Order included handing over
of yarn to the weavers outside the premises of the factory for conversion into
cloth. But expenditure incurred in prosecuting a civil proceeding relating to
the business of an assessee is admissible as expenditure laid out wholly and
exclusively for the purpose of the business even if the proceeding is decided
against the assessee. It was held by this Court in Commissioner of Income-Tax,
West Bengal v. H. Hirjee(1) that the deductibility of expenditure under s.
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.
proceeding. The proceeding started by the
Company was in relation to the business of the Company. The Company was thereby
seeking relief against interference by the executive authorities in the conduct
of its business in the manner in which it was being carried on previously. It
was also seeking to obtain an order for restoration of its goods which were
seized. It may be (1) [1953] S.C.R. 714 : 23 I.T.R. 427.
M15Sup CI/66 12 396 granted that the Company
was, in starting the proceeding, ill-advised. However wrongheaded, ill-advised,
unduly optimistic, or overconfident in his conviction the assessee may appear
in the light of the ultimate decision, expenditure in starting and prosecuting
the proceeding may not be denied admission as a permissible deduction in
computing the taxable income, merely because the proceeding has failed, if
otherwise the expenditure is laid out for the purpose of the business wholly
and exclusively, i.e. reasonably and honestly incurred to promote the interest
of the business. Persistence of the assessee in launching the proceeding and
carrying it from Court to Court and incurring expenditure for that purpose
again cannot be a ground for disallowing the claim.
Under s. 10(2)(xv) of the Indian Income-tax
Act as amended by Act 7 of 1939 expenditure even though not directly related to
the earning of income may still be admissible as a deduction. Expenditure on
civil litigation commenced or carried on by an assessee for protecting the
business is admissible as expenditure under s. 10(2) ((xv) provided other
conditions are fulfilled, even though the expenditure does not directly relate
to the earning of income. Expenditure incurred not with a view to direct and immediate
benefit for -purposes of commercial expediency and in order indirectly to
facilitate the carrying on of the business is therefore expenditure laid out
wholly and exclusively for the purposes of the trade. In Morgan (Inspector of
Taxes) v. Tate & Lyle Ltd.(1) the House of Lords held that expenditure
incurred by a Company engaged in :sugar refining, in a propaganda campaign to
oppose the threatened nationalization of the industry was a sum wholly and
exclusively laid out for the purpose of the Company's trade and was an
admissible deduction from its profits for incometax purposes. A'. majority of
the House held that the object of the expenditure being to preserve the assets
of the Company from seizure and -so to enable it to carry on and earn profits,
the expenditure was a permissible deduction under r. 3(a) of the Rules
applicable to cases (1) & (2) of Sch. D of the Income-tax Act, 1918.
The object of the petition filed by the
Company was to secure a declaration that the order dated February 20, 1946
insofar as it sought to put restrictions upon the right of the Company to carry
on its business in the manner in which it was accustomed to do was unauthorized
and to prevent enforcement of that order: thereby the Company was seeking to
obtain an order from the Court ,enabling the business to be carried on without
interference. Expenditure incurred in that behalf would without doubt be
expenditure laid out wholly and exclusively for the purpose of the business of
the Company.
(1) 26 I.T.R. 195 : 35 T.C. 367.
397 It was argued however that the any
delivered by the Company to the weavers contrary to the prohibitory order dated
February 20, 1946 was attached under the order of the Provincial Textile
Commissioner, and since the Company violated the prohibitory order, the primary
object of the petition for mandamus instituted by the Company was to secure
protection against prosecution of the Company and an order for return of the
goods in respect of which an offence was committed. Expenditure incurred,in prosecuting
that claim was, it was said, not laid out wholly and exclusively for the
purpose of the business. Reliance was placed upon the judgment of this Court in
H. Hirjee's case(1) in which it was held that a person who was prosecuted for
an offence under s. 13 of the Hoarding and Profiteering Ordinance, 1943, on a
charge, of selling goods at prices higher than were reasonable, in
contravention of the provisions of s. 6 thereof, and a part of his stock was
seized and taken away, was not entitled to claim deduction under S. 10(2)(xv)
of the Income-tax Act for the sums spent in defending the criminal proceedings
against him because the expenditure could not be said to have been laid out and
expended wholly and exclusively for the purpose of the business. But the
assumption underlying the argument is not true. The Tribunal has in the
statement of the case observed in paragraph-2 :
"Subsequently, on 20th February 1946, a
proper order by the appropriate authority was passed and it is common ground
that after that date, at any rate no further distribution of yarn was made by
the assessee. In the interim (period) between 7th February 1946 and 20th
February 1946, the yarn which was distributed to the handloom weavers was the
subject of seizure by the provincial Textile Commissioner and this the assesse
sought to resist by filing an application under section 45 of the Specific
Relief Act 1, of 1877 In the view of the Tribunal the Company did -not act in
violation of the terms of the order dated February 20, 1946;
it cannot there fore be said that the Company
was seeking to protect itself against a criminal prosecution and the
consequences arising from infringement of the order dated February 20, 1946.
It is true that in the judgment in appeal
from the order refusing mandamus, Leach, C.J. speaking for the Court observed:
(see Sree Meenakshi Mills v. Provincial Textile Commissioner, Madras(2):
"In spite of the fact that this order in
effect prohibited the appellant delivering yarn to owners of handlooms situate
outside the mill premises, the appellant continued to deliver yarn to such
weavers.", and (1) [1953] S.C.R. 714 23 I.T.R. 427.
(2) A.I.R. 1947 Mad. 82, 398 the Judicial
Committee observed:
"Despite. the prohibition the appellant
continued to deliver yarn to such owners in order (as already mentioned) that
they might turn the yarn into. cloth and bring the article back to the
mills." (See Sree Meenakshi Mills Ltd. v. Provincial Textile Commissioner;
Madras(1).
But the Tribunal has observed in its order
dismissing the appeal filed by the Company that it was "not disputed
before" them that, after February 20, 1946 the Company did not distribute
any yam.
The question referred in this case must be
decided not on what was found or observed by the High Court in appeal from
order, in the proceedings under s. 45 of the Specific Relief Act or by the
Judicial Committee, but upon findings of fact recorded by the Tribunal. It is
unfortunate that the High Court took the facts, not from the statement of the
case, but apparently from the judgment of the Judicial Committee.
The High Court assumed that the Company had
contravened the law because it delivered yarn to weavers in contravention of
the order dated February 20, 1946. But the assumption on which the discussion
is founded is erroneous.
The High Court also thought that expenditure
to fall within the terms of s. 10(2)(xv) must be one for the purpose of earning
income, and there was no material on the record to show that the expenditure
was so incurred. If it is intended thereby to imply that the primary motive in incurring
the expenditure admissible to deduction under s. 10(2)(xv) must be directly to
earn income thereby, we are with respect unable to agree with that view.
This Court in Commissioner of Income-tax,
Kerala v. Malayalam, Plantations Ltd.(2) observed:
"The expression "for the purpose of
the business" is wider in scope than the expression "for the purpose
of earning profits". It's range is wide: it may take in not only the day
to day running of a business, but also the rationalization of administration and
modernization of its machinery: it may include measures for the preservation of
the business or for the protection of its assets and property from
expropriation coercive process or assertion of hostile title: it may also
comprehend payment of statutory dues and taxes imposed as a precondition to
commence or for carrying (1)L.R. 76, I.A. 191, 195.
(2)[1964] 7 S.C.R. 693,705:53 I.T.R. 140,
150.
399 on of a business; it may comprehend many
other acts incidental to the carrying on of a business." Expenditure
incurred to resist in a civil proceeding the enforcement of a
measure-legislative or executive, which imposes restrictions 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, in our judgment, under s.
10(2)(xv) as a permissible deduction in the computation of taxable income.
The appeals are therefore allowed. The
question referred is answered in the affirmative. The appellant-Company will be
entitled to its costs in this Court and the High Court. One hearing fee.
y. P.
Appeals allowed.
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