1969 (9) TMI 22 - HC - Income Tax

Amount spent in some criminal proceedings is an allowable deduction under section 10(2)(xv) of the IT Act, 1922

Issues Involved:
1. Whether any part of the expenditure incurred by the assessee in connection with the criminal proceedings was an allowable deduction under section 10(2)(xv) of the Income-tax Act, 1922.
2. If the answer to the first question is affirmative, whether there is any basis for estimating such allowable part of expenditure at 1/3rd of the total.

Issue-Wise Detailed Analysis:

1. Allowability of Expenditure Incurred in Criminal Proceedings:

Facts and Circumstances:
The assessee promoted a public limited company and was later involved in a tripartite agreement where he gave up his managing agency in return for certain compensations. Subsequently, the assessee was removed from his position, and he initiated civil and criminal proceedings against Ramgopal Ganpatrai, alleging misappropriation and fraudulent acts.

Legal Proceedings:
The criminal proceedings were initiated by the Government on the assessee's complaint, and the assessee employed his own lawyer with the court's permission. The prosecution led to the conviction of Ramgopal Ganpatrai, which was upheld by the High Court.

Tribunal's Findings:
The Tribunal observed that the criminal action was a sequel to the civil litigation and indirectly arose from the relationship created by the agreements. The ultimate objective was to get compensation, which would be income from existing sources. The Tribunal allowed 1/3rd of the expenditure as a legitimate business expense.

High Court's Analysis:
The High Court emphasized that the expenditure incurred in criminal litigation should be considered if it was wholly and exclusively for business purposes. The court noted that the assessee's motive was not personal vendetta but to protect his business interests. The court referenced several precedents to support the view that expenses incurred to protect or safeguard business assets, even in criminal litigation, could be deductible.

Conclusion:
The High Court concluded that the entire expenditure incurred by the assessee in the criminal litigation was for the purpose of business and should be allowed as a deductible expense under section 10(2)(xv) of the Income-tax Act, 1922.

2. Basis for Estimating Allowable Part of Expenditure at 1/3rd:

Tribunal's Approach:
The Tribunal allowed only 1/3rd of the claimed expenditure as a legitimate business expense without providing a clear basis for this estimation.

High Court's Analysis:
The High Court found no justification for limiting the deduction to 1/3rd of the expenditure. It emphasized that if the expenditure was incurred wholly and exclusively for business purposes, the entire amount should be deductible.

Conclusion:
The High Court directed the Tribunal to allow the entire amount of expenditure actually incurred by the assessee in the criminal litigation as a deductible expense. The Tribunal was instructed to verify the specific items of expenditure claimed for the two assessment years and allow those that were actually spent for the criminal litigation.

Final Judgment:
The High Court answered the reference by stating that the assessee is entitled to the deduction of the entire amounts of expenditure incurred in the criminal litigation, not just a portion. The Tribunal was directed to review the specific items of expenditure and allow those that were actually spent for the criminal litigation. The assessee was also awarded costs for the reference, with an advocate's fee fixed at Rs. 250.

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