1966 (9) TMI 34 - SC - Income Tax

Whether the expenses of 20, 035 incurred in the assessment year 1949-50 and 5, 912 (relating to the assessment year 1950-51) being the cost paid to Government as directed by the Privy Council were expenses incurred in the ordinary course of business and allowable as deductions ? Held that - Expenditure incurred to resist in a civil proceeding the enforcement of a measure--legislative or executive--which imposes restrictions on the carrying on of a business or to obtain a declaration that the measure is invalid would if other conditions are satisfied be admissible in our judgment under section 10(2)(xv) as a permissible deduction in the computation of taxable income. The appeals are therefore allowed in favour of assessee.

Issues Involved:
1. Validity of the Textile Commissioner's order under clause 18B of the Cotton Cloth and Yarn (Control) Order, 1945.
2. Jurisdiction of the High Court under section 45 of the Specific Relief Act, 1877.
3. Deductibility of legal expenses under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Detailed Analysis:

1. Validity of the Textile Commissioner's Order:
The company, engaged in cotton spinning and weaving, distributed part of its yarn to external weavers due to insufficient handlooms within its factory. The Textile Commissioner, under clause 18B of the Cotton Cloth and Yarn (Control) Order, 1945, directed the company not to sell or deliver any yarn except to specified persons. The company continued to deliver yarn to weavers despite this prohibition until February 20, 1946, when the yarn was seized. The Provincial Textile Commissioner then issued an order confining deliveries to specific categories. The company filed a petition arguing the prohibition was ultra vires, but the High Court and the Privy Council held that the term "deliver" included handing over possession to a bailee, thus the company's actions were in contravention of the order.

2. Jurisdiction of the High Court:
The company filed a petition for a writ of mandamus in the High Court of Madras under section 45 of the Specific Relief Act, seeking to prevent the seizure of yarn and to restore already seized yarn. The petition was dismissed on the grounds that the High Court lacked jurisdiction as the acts occurred outside its ordinary original civil jurisdiction. The Privy Council upheld this view, affirming that the petition was incompetent.

3. Deductibility of Legal Expenses:
The company incurred Rs. 20,035 and Rs. 5,912 in legal expenses for the assessment years 1949-50 and 1950-51 respectively, and claimed these as deductions under section 10(2)(xv) of the Indian Income-tax Act, 1922. The departmental authorities and the Income-tax Appellate Tribunal rejected the claims. The High Court also answered the question in the negative, but the Supreme Court disagreed, emphasizing that expenditure incurred in prosecuting a civil proceeding related to the business is admissible, even if the proceeding fails. The Court referenced Commissioner of Income-tax v. H. Hirjee, stating that the deductibility depends on the nature and purpose of the legal proceeding in relation to the business. The company sought relief against interference by executive authorities and restoration of seized goods, which was deemed expenditure laid out wholly and exclusively for business purposes.

The Supreme Court also referenced Morgan v. Tate & Lyle Ltd., where expenditure on a propaganda campaign to oppose nationalization was allowed as a deduction. The Court concluded that expenditure to resist enforcement of a measure imposing business restrictions or to declare such a measure invalid is admissible under section 10(2)(xv).

Conclusion:
The Supreme Court allowed the appeals, answering the question in the affirmative, and held that the company is entitled to deduct the legal expenses incurred. The company was awarded costs in both the Supreme Court and the High Court.

Appeals allowed.

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