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Issues Involved:
1. Whether the legal expenses incurred by the assessee company are permissible deductions under Section 10(2)(xv) of the Income-tax Act. 2. Whether the sum paid by the company for quarters provided free for the residence of the directors constitutes remuneration under Rule 7(1) of the Rules in Schedule I to the Excess Profits Tax Act. Issue-wise Detailed Analysis: 1. Permissibility of Legal Expenses as Deductions under Section 10(2)(xv) of the Income-tax Act: The primary issue is whether the legal expenses incurred by the assessee company for defending its directors and salesman in criminal prosecutions can be considered permissible deductions under Section 10(2)(xv) of the Income-tax Act. The assessee company, a private limited company with directors having a controlling interest, incurred expenses amounting to Rs. 5,247-0-0 for defending its managing directors and salesman against charges under the Hoarding and Profiteering Prevention Ordinance, 1943, and the Defence of India Rules, respectively. Both prosecutions resulted in the discharge of the accused. The court emphasized that the charges were directly connected to the business activities of the company, as they pertained to the sale of stationery. The expenses were incurred by the company, not the individuals, indicating that the primary objective was to protect the company's reputation and business interests. The court rejected the Attorney-General's argument that the expenses were primarily for saving the individuals from conviction, stating that the company's paramount object was to safeguard its reputation as a trading company. The court referred to several authorities, including Strong v. Woodifield [1906] A.C. 448, where it was established that only losses incidental to the trade itself and falling on the trader in his capacity as a trader could be deducted. Applying this principle, the court found that the expenses were incidental to the trade and incurred in the capacity of a trader. The court distinguished this case from others where convictions occurred, noting that a conviction would preclude claiming such expenses as deductions. The court also reviewed Indian cases, such as the Privy Council case of Maharaja of Darbhanga, where litigation costs to protect business assets were allowed as deductions. The court concluded that if the prosecution ends in acquittal and the charges relate to transactions in the ordinary course of business, the expenses could be considered wholly and exclusively for the purposes of business. 2. Sum Paid for Quarters as Directors' Remuneration under Rule 7(1) of the Excess Profits Tax Act: The second issue is whether the sum of Rs. 5,688 paid by the company for providing free quarters for the residence of the directors constitutes remuneration under Rule 7(1) of the Rules in Schedule I to the Excess Profits Tax Act. The Tribunal held that it was directors' remuneration, which the assessee contested. The court stated that any money or equivalent of money paid by an employer to an employee must be considered remuneration. The court rejected the argument that providing free quarters is different from paying rent in cash, emphasizing that both constitute part of the directors' remuneration. The court distinguished this case from Tennant v. Smith, where the occupation of a house was part of the agent's duty and not a benefit. In the present case, there was no obligation for the directors to reside in the quarters, making the rent paid by the company part of their remuneration. Conclusion: The court answered both questions in the affirmative, holding that the legal expenses incurred were permissible deductions under Section 10(2)(xv) of the Income-tax Act and that the sum paid for the quarters constituted directors' remuneration under Rule 7(1) of the Excess Profits Tax Act. The Commissioner was ordered to pay three-quarters of the costs of the assessees.
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