Legal expenses incurred in connection with a suit to recover tax are allowable as a business expenditure, while travelling expenses of the chairman on tour to foreign countries for setting up a new project or extending the business are not allowable as a business expenditure.

1. THE Income-tax Appellate Tribunal, Delhi Bench "A ", has under Section 256(1) of the Act referred the following two questions for our opinion :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was legally right in holding that the sum of Rs. 6,525 was not expenditure of allowable nature ?

2. Whether, on the facts and in the circumstances of the case, any part of the expenditure amounting to Rs. 32,477 was inadmissible as deduction under Section 37 of the Income-tax Act, 1961 ? "

2. THE facts necessary for answering these two questions may now be stated. The petitioner-company and one Modi Supply Corporation Ltd. were amalgamated under a scheme sanctioned by the Punjab High Court on May 25, 1956. The amalgamation, however, actually took place on 25th August, 1956. Subsequently, assessment was made of Modi Supply Corporation Ltd. for the assessment year 1952-53, on a total income of Rs. 3,97,644. Subsequently, a demand for an amount of Rs. 61,537 including taxes and penalty was raised, and the amount was recovered by the department from the assessee some time before September 30, 1959. The assessee's appeal in respect of this amount to the Appellate Assistant Commissioner and the Tribunal were unsuccessful. In 1961, a suit was filed against the Union of India in the Court of II Civil Judge, Meerut, for the recovery of the amount of tax, realised from them on account of the demand on Modi Supply Corporation. This suit was dismissed on May 23, 1962. Expenses to the tune of Rs. 6,025 had been incurred by the assessee in connection with this litigation, and this was claimed as a deduction. The Income-tax Officer held that the amount was not allowable because it related to recovery of income-tax. The Appellate Assistant Commissioner also disallowed the claim. The Tribunal on appeal did not accept the assessee's contention arid disallowed the claim.

In this very assessment year, i.e., 1959-60, an amount of Rs. 32,477 had been incurred as travelling expenses by Sri G.M. Modi, the chairman. The expenses had been incurred on tour undertaken by the chairman of several places like Rome, Paris, Berlin, New York, Stockholm, London, Tokyo, etc. The chairman was accompanied by his wife on this tour and the expenditure claimed include expenditure on his wife also. The Income-tax Officer disallowed the expenditure on the ground that it was not necessary for the chairman to have taken his wife and that the purpose of the tour was mainly for setting up two new projects. The Appellate Assistant Commissioner on appeal upheld the Income-tax Officer's order. The Tribunal on further appeal by the assessee allowed an amount of Rs. 6,000 towards this claim, and disallowed the balance.

3. WE propose to deal with the questions referred in seriatim. It has been seen that the claim for deduction of Rs. 6,525 was based on the ground that this amount had been spent by the assessee in connection with a suit to recover amounts paid by it on behalf of Modi Supply Corporation Ltd. The question is whether it is an allowable revenue expenditure.

4. THE principle on which legal expenses are allowable as "business expenditure" are more or less now settled by a catena of decisions. Normally speaking, legal costs incurred in the course of the normal carrying on of a business is an allowable deduction. The general test, so far as legal expenses are concerned, is as to whether the assessee incurred the expenses in its character as a trader and the liability fell on him as a trader, and whether the transaction in respect of which the proceedings are taken out, arose out of and was incidental to the assessee's business. The deducibility of such expenditure is not dependent on the merits of the case, or the result of the proceedings (See Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax [1967] 63 ITR 207 (SC)). The question is whether the expenditure incurred by the assessee can, on these principles, be allowed as a business expendi