1953 (4) TMI 1 - SC - Income Tax

Whether in the circumstances of this case the Tribunal was right in holding that the sum of ₹ 10,895 spent in defending the criminal proceeding was an expenditure laid out or expended wholly and exclusively for the purpose of business as contemplated by Section 10(2)(xv) of the Indian Income-tax Act ? Held that - The deductibility of such expenses under Section 10(2)(xv) must depend on the nature and purpose of the legal proceeding in relation to the business whose profits are under computation, and cannot be affected by the final outcome of that proceeding. Income-tax assessments have to be made for every year and cannot be held up until the final result of a legal proceeding, which may pass through several courts, is announced. We allow the appeal and answer the question referred in the negative.

Summary

Issues:
1. Deductibility of expenses incurred in defending a criminal prosecution under Section 10(2)(xv) of the Indian Income-tax Act, 1922.

Detailed Analysis:
The case involved an appeal from a judgment of the High Court regarding the deduction of expenses incurred in defending a criminal prosecution under Section 10(2)(xv) of the Indian Income-tax Act, 1922. The respondent, a selling agent, was prosecuted under the Hoarding and Profiteering Ordinance, 1943, for selling goods at prices higher than reasonable. The respondent claimed the deduction of the defense expenses from his business profits in his income-tax assessment for the year 1945-46. The Income-tax Officer disallowed the claim, but the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal allowed it. The Commissioner of Income-tax then applied for a reference to the High Court under Section 66(1) of the Act. The Tribunal had to decide whether the expenses were incurred wholly and exclusively for the purpose of business as per Section 10(2)(xv).

The Tribunal, in dismissing the appeal by the Income-tax Officer, found that the defense expenses were solely for maintaining the respondent's name as a good businessman and to save his stock from being under-sold if found guilty. The High Court, in its order on the reference, held that the finding of the Tribunal, considering the primary purpose of incurring the expenses, was a finding of fact and binding. The High Court referred to a Bombay High Court ruling and concluded that the respondent satisfied the tests laid down in that ruling, thus allowing the deduction of expenses.

However, the Supreme Court disagreed with the Tribunal's finding, stating that it was vitiated by its refusal to consider the possibility of the criminal proceeding resulting in a conviction and imprisonment. The Court highlighted the seriousness of the offense under the Ordinance, which could lead to imprisonment. The Court emphasized that the fear of possible fine or imprisonment must always be present in such cases, making it challenging to consider the defense expenses as solely for the business purpose. The Court noted the absence of precedents allowing deduction of expenses for defending criminal prosecutions related to business activities.

Furthermore, the Court distinguished legal expenses in civil litigation from those in criminal prosecutions, emphasizing that the nature and purpose of the legal proceeding in relation to the business are crucial for deductibility under Section 10(2)(xv). The Court rejected the distinction between successful and unsuccessful defense expenses, asserting that the deductibility should not depend on the outcome of the legal proceeding. Consequently, the Court allowed the appeal, answered the reference question in the negative, and awarded costs to the appellant.

In conclusion, the Supreme Court ruled against the deductibility of expenses incurred in defending a criminal prosecution under Section 10(2)(xv) of the Indian Income-tax Act, emphasizing the serious nature of the offense and the difficulty in establishing that such expenses are solely for the business purpose. The Court highlighted the distinction between legal expenses in civil litigation and criminal prosecutions, emphasizing the importance of the nature and purpose of the legal proceeding for deductibility in income-tax assessments.