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1967 Supreme(Del) 46
High Court Of Delhi
COMMISSIONER OF INCOME TAX - Appellant
Versus
CHAMAN LAL AND BROTHERS - Respondent
Decided On : 03/02/1967
Litigation expenses incurred by an assessee-firm in defending a partner in a criminal prosecution for alleged contravention of the Foreign Exchange Regulation Act are not allowable as a deduction under Section 10(2)(xv) of the Income-tax Act, 1922, as they are not wholly and exclusively for the purpose of the assessee-firm's business.
Headnote:
INCOME TAX - Litigation expenses - Whether expenditure of Rs. 6,000 incurred by the assessee-firm on the defence of a partner in a criminal prosecution for alleged contravention of the Foreign Exchange Regulation Act is an allowable deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922 - Held, no.
Fact of the Case:
The assessee-firm, carrying on the business of import and export of iron and steel, incurred an expenditure of Rs. 6,000 on the defence of one of its partners, Chaman Lal, in a criminal prosecution for alleged contravention of the Foreign Exchange Regulation Act. The Chief Presidency Magistrate acquitted Chaman Lal, holding that the foreign exchange acquired by the assessee-firm had been utilized for the purpose for which it had been acquired and no portion of it had remained unused. The assessee-firm claimed the expenditure as a deduction under Section 10(2)(xv) of the Income-tax Act, 1922, but the Income-tax Officer disallowed it. The Appellate Assistant Commissioner allowed the deduction, but the Tribunal, on appeal by the Department, held that the expenditure was not allowable as it was not wholly and exclusively for the purpose of the assessee-firm's business.
Finding of the Court:
The Supreme Court held that the expenditure of Rs. 6,000 incurred by the assessee-firm on the defence of Chaman Lal in the criminal prosecution was not an allowable deduction under Section 10(2)(xv) of the Income-tax Act, 1922.
Issues: Whether the expenditure of Rs. 6,000 incurred by the assessee-firm on the defence of Chaman Lal in the criminal prosecution was an allowable deduction under Section 10(2)(xv) of the Income-tax Act, 1922.
Ratio Decidendi: The Court held that the expenditure was not allowable as it was not wholly and exclusively for the purpose of the assessee-firm's business. The Court distinguished the case from those where the expenses were incurred in defending an employee in a criminal prosecution arising in the course of business, holding that a partner, though acting as an agent of the firm, cannot be deemed to be an employee. The Court also distinguished the case from one where the defence expenditure was incurred to establish that the goods manufactured by the assessee-company were not of sub-standard quality, holding that the expenditure in the present case was to save Chaman Lal from being sent to jail.
Final Decision: The Court answered the question referred to it in the negative, holding that the expenditure of Rs. 6,000 was not a permissible allowance under Section 10(2)(xv) of the Income-tax Act, 1922.
( 1 ) THE following question has been REFERRED TO to this Court under Section 66 (1) of the Indian Income-tax Act. 1922 (hereinafter REFERRED TO to as the Act) by the Income-tax Appellate Tribunal on an application made by the Commissioner of Income-tax:
whether on the facts and in the circumstances of the case, the litigation expenditure of Rs. 6,000. 00 was a permissible allowance under Section 10 (2) (xv) of the Indian Income-tax Act, 1922 ?"
( 2 ) THE assessee-firm is carrying on business of import and export of iron and steel. Chaman Lal, one of the partners of the assessee- firm. was prosecuted in the Court of the Chief Presidency Magistrate, Bombay, on a charge of having contravened the provisions of Section 4 (3), read with Section 23 of the Foreign Exchange Regulation Act. 1947. According to the prosecution case, Chaman Lal. after having acquired foreign exchange to the extent of 9. 841. 15. 9 as representing the true and correct value of mild steel bars, did not use 480, out of that amount, for the purpose for which the foreign exchange had been acquired. The defence of the accused was that the foreign exchange had ben utilised for the very purposes for which it had been acquired namely, for remittance to Messrs. Ironside Ltd. , London, who actually placed the order on a Japanese concern for the supply of the goods. The Chief Presidency Magistrate as per judgment dated December 14. 1957, held that foreign exchange acquired by the assessee-firm had been utilised for the purpose for which it had been acquired and no portion of it had remained unused. He, accordingly, acquitted the accused. The assessee-firm incurred an expenditure of Rs. 6,000. 00 on the defence of Chaman Lal during the previous year ending on March 31. 1958, relevant to the assessment year 1958-59.
( 3 ) THE assessee-firm claimed that the expenditure of Rs. 6,000. 00 should be deducted in computing its business income. The Income- tax Officer held that the said expenditure of Rs. 6,000. 00 was not incidental to the assessee firm s business and rejected the firm s claim. The assessee-firm then filed an appeal before the Appellate Assistant Commissioner contesting the disallowance of the sum of Rs. 6,000. 00. The Appellate Assistant Commissioner held that the prosecution launched against the partner was directly connected with one of the consignment of goods imported by the assessee- firm and it could not, therefore, be said that the case against one of the partners of the asseessee-firm was not connected with the assessee-firm s business. The Appellate Assistant Commissioner, accordingly, allowed the sum of Rs. 6,000. 00 as deductiun. The Department then preferred TO an appeal before the Tribunal objecting to the allowance of the sum of Rs. 6,000. 00 by the Appellate Assistant Con-imissioner. Reliance was placed by the Department on the case of Commissioner of Income-fax v: H. Hirjee, (1953) 23 I. T. R. 427. The Tribunal observed that the Chief Presidency Magistrate had held that even if there was over-invoicing of the goods, the prosecution had failed to prove that it was done at the instance of the assessee-firm. The Tribunal further observed that the judgment of the Chief Presidency Magistrate showed that it was Messrs. Ironside Ltd. , London, who had dealt directly with the Japanese firm and had placed orders for the goods to be suplied to the assessee-firm. It was also observed that Hirjee s case did not lay down any universal proposition that legal expenses incurred in criminal litigation could not be allowed under Section 10 (2) (xv) of the Income-tax Act. It was held that having regard to the nature and purpose of the legal proceedings, the litigation expenses of Rs. 6,000. 00 arose out of matters incidental to the carrying on of the said business of the firm and, as such, the assessee-firm was entitled to the deduction of Rs. 6,000. 00 on account of litigation expenses. The appeal filed by the Department was, accordingly di
