1970 (4) TMI 54 - HC - Income Tax

Expenditure - claim for deduction - exchange loss in respect of remittances of profit from Pakistan - law charges incurred in respect of business profits tax appeals - law charges incurred for effecting changes in the existing managing agency agreement - interest paid on funds invested in shares which produced no dividend income

Issues Involved:
1. Exchange loss on remittances from Pakistan.
2. Law charges related to business profits tax appeals.
3. Law charges for effecting changes in managing agency agreement.
4. Interest on funds invested in shares without dividend income.
5. Interest on funds invested in shares disallowed in previous assessments.

Detailed Analysis:

1. Exchange Loss on Remittances from Pakistan:
The primary issue was whether the exchange loss of Rs. 11 lakhs for the assessment year 1957-58 and Rs. 5,50,000 for the assessment year 1959-60, incurred due to remittances of profits from Pakistan, was allowable as a deduction. The assessee claimed these losses due to the devaluation of the Pakistani rupee, which affected the conversion rate when profits were remitted to India. The Income-tax Officer, Appellate Assistant Commissioner, and Tribunal disallowed these claims, considering them hypothetical book losses. The Tribunal found no actual loss in the assessee's books and concluded that the losses were illusory. The court held that the exchange loss did not qualify as a business loss under section 10(1) of the Indian Income-tax Act, 1922, as it did not spring directly from the business but was rather a consequence of a sovereign act of devaluation. Thus, the court answered this question in favor of the revenue, stating that the exchange loss was not allowable as a deduction.

2. Law Charges Related to Business Profits Tax Appeals:
The second issue was whether law charges amounting to Rs. 1,170 and Rs. 3,573 for the assessment years 1957-58 and 1959-60, respectively, incurred in connection with business profits tax appeals, were allowable as deductions. The Income-tax Officer and Appellate Assistant Commissioner disallowed these claims, stating they were not allowable under section 10(2)(xv) of the Income-tax Act, 1922. However, the court found that such law charges were admissible expenditures under section 10(2)(xv) as they were incurred for protecting the business. The court relied on the Supreme Court's decision in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, which allowed such expenditures even if they did not directly relate to earned income. Consequently, the court answered this question in favor of the assessee, allowing the deduction of law charges.

3. Law Charges for Effecting Changes in Managing Agency Agreement:
The third issue, concerning the deduction of Rs. 2,551 as law charges for effecting changes in the managing agency agreement for the assessment year 1957-58, was not pressed by the assessee. Therefore, the court did not record an answer for this question.

4. Interest on Funds Invested in Shares Without Dividend Income:
The fourth issue was whether interest amounting to Rs. 5,236 paid on funds invested in shares, which produced no dividend income, was allowable as a deduction for the assessment year 1957-58. The Tribunal disallowed the claim, following the decision in Madanlal Sohanlal v. Commissioner of Income-tax, which stated that an expenditure under section 12(2) required some gross income or return. However, the court found that there was dividend income of Rs. 27,548 under "Other sources of income," from which the interest could be deducted. The court referred to the Supreme Court's decision in Commissioner of Income-tax v. Indian Bank Ltd., which supported the allowance of such deductions. Thus, the court answered this question in favor of the assessee, allowing the deduction of Rs. 5,236.

5. Interest on Funds Invested in Shares Disallowed in Previous Assessments:
The fifth issue, concerning the disallowance of interest amounting to Rs. 10,671 in the assessments for the assessment years 1957-58 and 1958-59 on funds invested in shares, was not pressed by the assessee. Therefore, the court did not record an answer for this question.

Conclusion:
The court ruled in favor of the revenue on the issue of exchange loss, disallowing the deduction. However, it ruled in favor of the assessee on the issues of law charges related to business profits tax appeals and interest on funds invested in shares, allowing these deductions. The remaining issues were not pressed and thus not addressed by the court.

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