1962 (9) TMI 67 - HC - Income Tax

Summary

Issues Involved:
1. Whether the legal expenses incurred by the assessee in the assessment years 1949-50 and 1950-51 were allowable as deductions under section 10(2)(xv) of the Indian Income-tax Act.
2. Whether the expenses incurred were for the purpose of earning profits from the business.
3. Whether the expenses could be claimed as a proper commercial loss in the computation of profits.

Detailed Analysis:

1. Allowability of Legal Expenses as Deductions:
The core issue was whether the expenses of Rs. 20,035 for the assessment year 1949-50 and Rs. 5,912 for the assessment year 1950-51, incurred in connection with litigation, were allowable as deductions under section 10(2)(xv) of the Indian Income-tax Act. The assessee, a limited company engaged in cotton spinning and weaving, claimed these expenses as deductions. The Income-tax Officer disallowed the claim due to lack of details, a decision upheld by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The Tribunal concluded that the expenses were not incurred in the ordinary course of business but due to a misapprehension of a statute by the assessee.

2. Purpose of Earning Profits:
The High Court scrutinized whether the expenses were laid out "wholly and exclusively for the purpose of the business" as required by section 10(2)(xv). It was observed that the expenses must be commercially expedient and aimed at the continuance and furtherance of the business. The court noted that the assessee's expenses were incurred due to its violation of the Cotton Cloth and Yarn (Control) Order, 1945, specifically clauses 18A and 18B, which restricted the delivery of yarn to certain categories of persons. The assessee's continued delivery of yarn to outside weavers, despite the prohibition, led to litigation. The court held that the expenses incurred due to the assessee's infraction of the law and subsequent legal battles were not for the purpose of earning profits but were a consequence of its wrongful actions.

3. Commercial Loss in Computation of Profits:
The court examined whether the legal expenses could be considered a commercial loss. It referred to precedents, including the Supreme Court's ruling in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, which held that penalties for breach of law, even if incurred in the course of business, cannot be considered deductible expenses. The court emphasized that infraction of the law is not a normal incident of business, and expenses incurred in defending such infractions cannot be deemed necessary for earning profits. The court concluded that the legal expenses were incurred to justify a wrongful act and were not incidental to the business.

Conclusion:
The High Court answered the referred question in the negative, ruling against the assessee. It held that the legal expenses incurred due to the assessee's violation of the Control Order and subsequent litigation were not allowable as deductions under section 10(2)(xv) of the Indian Income-tax Act. The expenses were not for the purpose of earning profits but were a result of the assessee's wrongful actions. Consequently, the question was answered against the assessee, who was also ordered to pay the costs of the department, with counsel's fee fixed at Rs. 250.