Legal expenses incurred by a company in defending an employee against criminal breach of trust charges arising from a transaction in the ordinary course of business are a permissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.

D.K.MAHAJAN, J.

1. The following question of law has been referred by the Income-tax Appellate Tribunal (Delhi Bench) under section 66(2) of the Indian Income-tax Act, 1922, for our opinion :

"Whether the legal expenses of Rs. 10,000 incurred by the company in defending successfully the Bombay branch manager, against charges of criminal breach of trust levelled by one of the customers in respect of a transaction which arose on the normal course and entirely out of the business of the company were an expenditure paid out wholly and exclusively for the propose of the companys business and a permissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922 ?"

2. The assessee in a private limited company and the dispute concerns the assessment year 1952-53, the period of account ending 30th June, 1951. The assessees business is of import and sale of newsprint and other kinds of paper. The head office of the company is at Delhi while the branch office is in Bombay. Ranbir Singh was the manager of the Bombay branch. In the year 1941, paper for newsprint was issued on basis of quota allotment certificates to newspapers. One Mauj Printing Bureau had received the quota allotment certificate by the end of August, 1941. According to the procedure prevailing, the certificate was handed over by the quota-holder to the assessee for import and collection of paper. The newsprint duly arrived from Canada but was not delivered to the Mauj Printing Bureau, but instead, was sold by the company and the sale proceeds were recorded in the books of the company. Mauj Printing Bureau initiated criminal proceedings against the manager of the assessees branch for criminal breach of trust under section 406 of the Indian Penal Code in Bombay. Ranbir Singh was sentenced to undergo rigorous imprisonment for three months and a fine of Rs. 1,000. Against this decision, Ranbir Singh successfully preferred an appeal to the Bombay High Court and was acquitted. The company incurred an expenditure of Rs. 10,000 in defending Ranbir Singh. This amount was claimed as permissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922, by the company. The Income-tax Officer disallowed this deduction for the reasons, which may be stated in his own words :

"For the reasons explained in Commissioner of Income-tax v. Hirjee the sum spent in defending the criminal proceedings cannot be said to have been laid out wholly and exclusively for the purpose of the business."

3. Aganist this order, the assessee went up in appeal to the Appellate Assistant Commissioner, who allowed the appeal and held the expenditure of Rs. 10,000 as a permissible deduction. While dealing with the matter, the Appellate Assistant Commissioner made the following observations :

"In my opinion, the contention of the appellant is correct. As stated above, the newsprint which was actually imported was sold by the company on its own account. The judgment of the High Court clears the Bombay manager of the charge of criminal breach of trust. The resultant position, therefore, is that whatever the manager did was in the normal course of business. Since a serious charge was brought against a trusted employee of the company questioning his action, the company was justified in arranging for his defence."

4. The Income-tax Officer was dissatisfied with the Appellate Assistant Commissioners decision and preferred an appeal to the Income-tax Appellate Tribunal (Delhi Bench.) The Tribunal relying on the observations of the Supreme Court in Commissioner of Income-tax v. H. Hirjee reversed the decision of the Appellate Assistant Commissioner.

5. In the present case, it is abundantly clear that the criminal prosecution was launched against an employee of the company with regard to a transaction pertaining to the business of the company or, in other words, for a transaction carried out by the company in its ordinary course of business. Its manager was proceeded against under section 4