1971 (12) TMI 3 - HC - Income Tax

Legal expenses in appeal and in connection with settlement of old assessment with the Directorate of Inspection - professional fees paid to chartered accountants in connection with representation to the Central Board of Revenue- allowable as business expenditure u/s 10(2)(xv) of Indian Income-tax Act, 1922

Summary

Issues Involved:
1. Admissibility of legal expenses amounting to Rs. 5,556 as a charge against the income of the previous year.
2. Taxability of Rs. 24,252 realized from the sale of three trucks under section 10(2)(vii) of the Indian Income-tax Act, 1922.

Issue 1: Admissibility of Legal Expenses
The assessee-firm claimed legal expenses and professional fees totaling Rs. 5,556, which were disallowed by the Income-tax Officer, the Appellate Assistant Commissioner, and the Tribunal under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Tribunal followed the Allahabad High Court's decision in J. K. Cotton Manufacturers Ltd. v. Commissioner of Income-tax, which held that such expenses were not incurred wholly and exclusively for business purposes. However, the Supreme Court's decision in Commissioner of Income-tax v. Birla Cotton Spinning & Weaving Mills Ltd. clarified that legal expenses incurred for preserving and protecting the business from processes or proceedings that might reduce its income and profits are allowable under section 10(2)(xv). The Supreme Court emphasized that such expenses, even if incurred to oppose coercive government actions, are justified by commercial expediency and are deductible. The Court also noted that expenditure reasonably and honestly incurred to promote business interests or correct a mistake is admissible as a deduction. Therefore, the answer to the first question is in the affirmative, allowing the deduction of Rs. 5,556.

Issue 2: Taxability of Rs. 24,252 from Sale of Trucks
The second issue pertains to the taxability of Rs. 24,252 realized from the sale of three trucks, which were originally owned by a Hindu undivided family (HUF) and later taken over by the assessee-firm. The written down value of the trucks was zero in the hands of the HUF. The Income-tax Officer taxed the entire sale price as profit under section 10(2)(vii) of the Act. The Tribunal upheld this, stating that the written down value in the hands of the assessee-firm should be the same as that in the hands of the HUF. The assessee contended that the cost of the trucks to it should be zero, thus no excess could be taxed. However, the Court noted that the business of the HUF continued as a running concern under the assessee-firm, merely changing its name and style. Therefore, the original cost of the trucks to the assessee-firm is the same as it was to the HUF. Consequently, the entire sale price was rightly subjected to tax. The answer to the second question is also in the affirmative.

Conclusion:
Both questions referred to the court were answered in the affirmative. The legal expenses of Rs. 5,556 were deemed admissible as a business expense, and the entire sale price of Rs. 24,252 from the trucks was taxable as profit. There was no order as to costs of the reference.