1966 (9) TMI 17 - HC - Income Tax

Assessee produced vanaspati vegetable oil. Their directors and principal officers were prosecuted - held that sum incurred in defending the criminal proceedings against the company and its officers was a permissible deduction for the purpose of computing the profits and gains of the assessee s business

Summary

Issues:
1. Deductibility of expenses incurred in defending criminal proceedings as a business expense under section 10(2)(xv) of the Income-tax Act.

Analysis:
The judgment pertains to a reference under section 66(1) of the Indian Income-tax Act, concerning the deductibility of expenses incurred by an assessee, Messrs. Rohtas Industries Ltd., in defending criminal proceedings against the company and its officers. The company, engaged in producing vanaspati vegetable oil, faced prosecution under the Essential Supplies Temporary Powers Act for not meeting the prescribed standards. The company spent Rs. 5,859 in conducting the case and defending its officers, who were ultimately acquitted. The core issue revolved around whether this expenditure could be claimed as a deductible expense under section 10(2)(xv) of the Income-tax Act.

The revenue authorities disallowed the claim, contending that the expenses incurred in the criminal proceedings were primarily aimed at saving the accused from conviction and penalty, rather than being directly related to the business. They relied on the decision in Commissioner of Income-tax v. H. Hirjee, where legal expenses incurred for personal benefit were not considered deductible. However, the High Court distinguished the present case from the aforementioned precedent. In this instance, the legal proceedings were directly linked to the quality and standard of the company's manufactured goods. The prosecution was based on the inferior quality of the goods, and defending the case was crucial to safeguarding the company's reputation and product quality. As the expenses were incurred to protect the goodwill and quality of the goods, they were deemed to be deductible under section 10(2)(xv) of the Act.

The court emphasized that the nature and purpose of the legal proceedings were integral to the business operations and the protection of the company's product standards. Given that the primary objective of incurring the expenses was to defend the quality of the manufactured goods against the charges levied, the expenditure was considered a legitimate business expense. Consequently, the court answered the question in favor of the assessee, allowing the deduction of the expenses incurred in defending the criminal proceedings. No costs were awarded in the circumstances of the case, and the judgment favored the assessee in this matter.