Expenses claimed as business expenses must be laid out or expended wholly and exclusively for the purposes of the business under Section 10(2)(xii) of the Indian Income Tax Act.

"This is an appeal preferred by the Income Tax Officer, Cuddalore, praying that the amount of Rs. 6,203 allowed by the Appellate Assistant Commissioner as business expense to the respondent may be disallowed. The question arose in the following circumstances :-

2. The respondent was assessed on an income of Rs. 28,971 from various sources and a sum of Rs. 6,203 was claimed by the respondent on account of court and damages which he had to pay to one Salai Mohammad Haji Ibrahim Sait. The respondent and three others, has entered into an agreement in 1933 in connection with business in crackeras to sell several kinds of cracker at the rates given in the Schedual thereto. The respondent did not abide by the terms of this agreement and sold his crackers at rates lower than those given in the schedu le, where upon Salia Mohammad Haji Ibrahim Sait filed a suit for damages of Rs. 5,000 aginst the respondent. The High Court of Judicature at Madras on its original said in suit C. S. No. 146/34 awarded damages of Rs. 5,000 as well as the court costs to the plaintiff in that case. The respondent paid the damages and incurred expenses for defending the suit amounting to Rs. 1,203. The respondent claimed this sum of Rs. 6,203 as a business expenses, which the Appellate Assistant Commissioner had allowed.

3. The Income Tax Officer, the appellant in this case, disallowed this alleged expense on the ground that the damages paid for breach of contract and the court expenses incurred by him in connection therewith could not be regarded as expenditure laid out or expended wholly and exclusively for the purposes of the assessees business within the meaning of Section 10(2)(xii) of the Indian Income Tax Act.

4. The Appellate Assistant Commissioner, whose order is under appeal, came to the conclusion that the respondent undersold the goods so that he might steal a march over his competitors. His object in doing so could have been nothing else than, the Appellate Assistant Commissioner proceeded, that to augment his profits and he must necessarily have augmented his profits. The profits earned were more than Rs. 5,000 according to the Appellate Assistant Commissioner and he thought that the breach of agreement was purposely committed for purposes of earning the profits. Relying on the authority of the case reported in Strong & Co. Ltd. v. Woodifield the Appellate Assistant Commissioner held that, the test laid down by Lord Davey in the words : "In my opinion, it does not follow that if a loss is in any sense connected with the trade, it must always be allowed as a deduction; for it may be only remotely connected with the trade or it may be connected with something else quite as much as or even more than with the trade. I think only such losses can be deducted as are connected with the trade in the sense that they are really incidental to the trade itself.............It is not enough that the disbursement is made in the course of, or arises out of, or is connected with the trade, or is made out of the profits of the trade. It must be made for the purpose of earing the profits" was satisfied. The only relevant section under which the expenses could be allowed is Section 10(2)(xii) of the Income Tax Act which is as under :-

"Such profits or gains shall be computed after makng the following allowance, namely, any expenditure 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 purpose, therefore, must be a purpose connected with business, profession or vocation. All expenses cannot be said to be for trade or business. The basis of the allowance of the claim by the Appellate Assistant Commissioner is that the respondent has made profits on account of under-selling and that it was premeditated. It is not possible to say whether the respondent did made any more profits by under-selling than if he had kept to the terms o