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Issues Involved:
1. Deductibility of legal expenses incurred by a company in defending its managing director in a criminal case. Detailed Analysis: 1. Deductibility of Legal Expenses: The central issue in this case is whether the legal expenses incurred by a private limited company in defending its managing director, who was prosecuted under the Essential Commodities Act, can be claimed as a deduction under the Income-tax Act. Background: The assessee, a private limited company dealing in iron and steel, was a partner in a firm, represented by its managing director, Premchand Gokaldas. A first information report was filed against the firm and its partners, including Gokaldas, alleging a breach of the Iron and Steel Control Order. The company incurred legal expenses to defend Gokaldas, who was eventually acquitted. The assessee sought to deduct these expenses, which the Income-tax Officer disallowed. The Appellate Assistant Commissioner allowed part of the expenses, and the Tribunal allowed a larger portion. The revenue then referred the question to the High Court. Legal Precedents: The court considered several precedents: - Commissioner of Income-tax v. H. Hirjee: The Supreme Court held that legal expenses incurred in defending a criminal proceeding were not deductible if not wholly and exclusively for business purposes. - Commissioner of Income-tax v. Dhanrajgirji Raja Narasingirji: The Supreme Court allowed deduction of legal expenses incurred in both civil and criminal cases if they were for business purposes. - Saharanpur Electric Supply Co. Ltd. v. Commissioner of Income-tax: The Allahabad High Court distinguished between civil litigation expenses (deductible) and criminal litigation expenses (non-deductible). - Commissioner of Income-tax v. Chaman Lal Bros.: The Delhi High Court held that legal expenses for defending a partner in a criminal case were not deductible. - J. N. Singh & Co. (P.) Ltd. v. Commissioner of Income-tax: The Punjab High Court allowed deduction for expenses incurred in defending an employee in a criminal case. - Rohtas Industries Ltd. v. Commissioner of Income-tax: The Patna High Court allowed deduction for legal expenses incurred to defend the quality of goods produced by the company. Court's Reasoning: The court distinguished between expenses incurred in defending the assessee or its partners (generally non-deductible) and expenses incurred in defending employees (deductible if for business purposes). The court noted that Premchand Gokaldas, as the managing director, was the company's nominee in the partnership firm. Thus, defending Gokaldas was akin to defending an employee or representative of the company. The court concluded that the expenses were incurred to protect the company's business interests and reputation. Conclusion: The court held that the legal expenses of Rs. 15,420 incurred by the assessee-company in defending its managing director were deductible as they were spent wholly and exclusively for the business purposes of the company. The Tribunal's decision was affirmed, and the question was answered in the affirmative, with costs awarded to the assessee.
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