1970 (3) TMI 46 - HC - Income Tax

Allowable expenditure - assessee suffered a loss by reason of the riots -expenses incurred by the assessee in assisting the prosecution of certain persons who were accused of having rioted and caused the death of its manager while he was engaged in the business of the assessee - expenses are allowable u/s 10(2)(xv)

Issues Involved:
1. Whether the expenses incurred by the assessee in assisting the prosecution of certain persons accused of rioting and causing the death of its manager were deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Nature of the Expenses and Their Connection to the Business:
- The primary issue was whether the legal expenses incurred by the assessee in aiding the prosecution of individuals involved in a riot, which resulted in the death of its manager, could be considered as expenditures allowable under section 10(2)(xv) of the Indian Income-tax Act, 1922.
- The assessee contended that these expenses were incurred indirectly for the purposes of its business, aiming to ensure a disciplined work environment and prevent future riots, thereby facilitating the smooth running of the colliery.
- The revenue argued that the expenses were only remotely connected with the business and were incurred with an eye on ensuring that the accused were punished.

2. Legal Framework and Precedents:
- Section 10(2)(xv) allows for the deduction of expenses if they are "laid out or expended wholly and exclusively for the purpose of such business."
- The Supreme Court's judgment in Eastern Investments Ltd. v. Commissioner of Income-tax was cited, which established that expenditures need not be incurred with a direct and immediate benefit to the trade but could be allowed if incurred voluntarily on the grounds of commercial expediency to indirectly facilitate the business.
- Another relevant judgment was Sree Meenakshi Wills Ltd. v. Commissioner of Income-tax, where the Supreme Court held that expenditures incurred to resist restrictions on business operations were deductible, emphasizing that the primary motive need not be directly to earn income.

3. Application of Principles to the Case:
- The court noted that the manager's stabbing and subsequent death were serious incidents affecting law and order, and more critically, the business operations of the assessee.
- The court recognized that riots and disturbances could disrupt business operations, generate indiscipline among workers, and deter managerial staff from working at the colliery.
- The court acknowledged the assessee's argument that the legal expenses were aimed at producing a disciplinary effect on labor and ensuring an atmosphere conducive to preventing future riots, thereby facilitating smooth business operations.

4. Necessity and Commercial Expediency:
- The court dismissed the revenue's argument that the expenses were incurred out of a sense of revenge, noting the assessee's stated intention to assist the prosecution to ensure a deterrent effect against future offenses.
- The court emphasized that the large sums spent on legal assistance indicated the assessee's serious concern for maintaining discipline and security, which were crucial for the smooth functioning of the business.

5. Conclusion:
- The court concluded that the legal expenses incurred by the assessee were indeed expended wholly and exclusively for the purpose of its business.
- The question was answered in the affirmative, allowing the deduction of the expenses under section 10(2)(xv).

Final Judgment:
- The court ruled in favor of the assessee, stating that the expenses incurred in aiding the prosecution were deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922.
- The revenue was ordered to pay the costs of the assessee.

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