1970 (11) TMI 5 - HC - Income Tax

Expenses incurred for the conduct of income-tax proceedings or in conducting appeals including fees paid to the accounts and lawyers - deductibility - allowable u/s 10(2)(xv)Indian Income-tax Act 1922

Summary

Issues Involved:
1. Valuation of property for depreciation computation.
2. Admissibility of expenses for preparing returns and representation before the Income-tax Officer.
3. Admissibility of expenses connected with appeals to the Tribunal.

Detailed Analysis:

1. Valuation of Property for Depreciation Computation:
The firm R.B. Bansilal Abirchand underwent several reconstitutions, and the valuation of property for depreciation purposes became a contentious issue. The firm claimed depreciation based on an initial sum of Rs. 50 lakhs, while the department valued it at Rs. 27,32,650. This valuation dispute persisted from 1946-47 onwards.

2. Admissibility of Expenses for Preparing Returns and Representation Before the Income-tax Officer:
The key question was whether expenses of Rs. 589 for preparing returns and representation before the Income-tax Officer were admissible in computing the income of the assessee under section 10(2)(xv) of the Income-tax Act, 1922. The authorities, including the Income-tax Officer, Appellate Assistant Commissioner, and Tribunal, had previously denied this claim. The court examined section 10(2)(xv), which allows deductions for expenses "wholly and exclusively for the purpose of such business."

The court referred to the leading English case, Smith's Potato Estates Ltd. v. Bolland, where the majority view held that expenses for tax appeals were not for the purpose of earning profits but for ascertaining tax liability. However, the dissenting view argued that reducing tax liability indirectly benefits the business by increasing available funds.

The court found the minority view persuasive, aligning it with the broader interpretation of "for the purpose of business" as established by the Supreme Court in Commissioner of Income-tax v. Malayalam Plantations Ltd. and Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax. These cases ruled that the expression "for the purpose of business" is broader than "for the purpose of earning profits" and includes expenses for protecting business interests.

3. Admissibility of Expenses Connected with Appeals to the Tribunal:
The court also considered expenses of Rs. 3,048 for appeals to the Tribunal. Following the same reasoning as above, the court held that these expenses were incurred "wholly and exclusively for the purpose of business." The court emphasized that such expenses, even if not directly related to earning income, facilitate the carrying on of the business and are allowable under section 10(2)(xv).

The court distinguished the present case from others where expenses were incurred to escape consequences of wrongdoing, such as concealment or fraud. In the present case, there was no allegation of such misconduct, making the expenses admissible.

Conclusion:
The court answered the referred question in the affirmative, stating that the expenses for preparing returns and representation before the Income-tax Officer, as well as expenses connected with appeals to the Tribunal, are admissible in computing the income of the assessee. The Commissioner was ordered to bear the costs of the reference to the Full Bench.