1981 (2) TMI 52 - HC - Income Tax

Summary

Issues involved: The judgment addresses the following issues: 1. Allowability of expenses incurred on a Commission of Inquiry, and 2. Deductibility of expenses by the law department in connection with the Commission of Inquiry.

Issue 1 - Allowability of expenses on Commission of Inquiry: The assessee, a private limited company, incurred expenses of Rs. 45,088 in connection with a Commission of Inquiry appointed by the Government of India. The Income Tax Officer (ITO) disallowed the deduction, stating it was not related to the company's business. The Appellate Tribunal upheld this decision, emphasizing that such expenses were not normal business expenditure. However, the counsel for the assessee argued that the expenses were necessary for business preservation and protection. The High Court found merit in this argument, highlighting that the expenses were incurred to safeguard the company's reputation and assets during the inquiry. The Court referred to precedents emphasizing that the essential test for deductibility is whether expenses were honestly incurred to protect the business. It concluded that the expenses were allowable business expenditure, irrespective of the Commission's final decision.

Issue 2 - Deductibility of law department expenses: The second question pertained to the deductibility of Rs. 19,170 spent by the assessee's law department in connection with the Commission of Inquiry. The ITO disallowed this amount based on the same grounds as the previous expenses. However, since the Court determined that the expenses incurred by the assessee for safeguarding its interests were allowable, it also held that the amount spent by the law department should be allowed as a deduction. Therefore, both sets of expenses related to the Commission of Inquiry were deemed deductible.

In conclusion, the High Court ruled in favor of the assessee on both issues. The expenses incurred on the Commission of Inquiry were considered allowable business expenditure, and the amount spent by the law department in connection with the inquiry was also deemed deductible. The assessee was granted costs, including counsel's fee.