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TMI Blog1967 (3) TMI 104X X X X Extracts X X X X X X X X Extracts X X X X ..... f the opinion that there had been substantial evasion of income-tax payment in such cases. Similarly, if in the course of an investigation under section 5(1), the commission had reasons to believe that some person other than the one whose case was being investigated evaded payment of income- tax or that points other than those referred to it required investigation, the commission was authorised, under section 5(4), to report to the Central Government, so that the latter could refer the case of such other person or such other points to the commission for investigation. The ultimate object of the investigation was collection of materials showing evasion of tax, so that the evaded income might be taxed and penalties for evasion imposed. The Supreme Court condemned section 5(1) of the Act as an unenforceable and discriminatory piece of legislation, after the introduction of sub-section (1A) to section 34 of the Indian Income-tax Act (vide Shree Meenakshi Mills Ltd. v. A.V. Visvanatha Sastri [1954] 26 I.T.R. 713; [1955] 1 S.C.R. 787). The Supreme Court also condemned section 5(4) of the Act as a discriminatory piece of legislation, offending against article 14 of the Constitution and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. The assessee preferred a further appeal before the Income-tax Appellate Tribunal. It was argued, on behalf of the assessee, that the expenses were incurred: (i) to save its fair name; (ii) to save unnecessary taxation; (iii) to oppose an illegal governmental action; (iv) to safeguard its business. It was further argued on behalf of the assessee that by creating a body known by the name of Investigation Commission, the Government wanted to have a second illegal dig into the assessee's profits. If the assessee had not taken the courage of defending itself, it might have been wiped off the business world by being made to pay heavy taxes and penalties. It was also submitted that the assessee's name having been mentioned as one of those assessees, who were called by the Investigation Commission to appear before them, there was created a circumstance sufficient to lower its prestige and position in the business world, which might affect its business deals and future profits also. It was, therefore, contended that it became necessary for the assessee to spend money in order to safeguard its business position and as such the expenses should be allowed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation of the Investigation Commission, it may be mentioned, was mainly with a view to find out the actual amount of tax that an assessee should have paid. Subsequently, however, by a decision, their Lordships of the Supreme Court in the case of Suraj Mall Mohta Co. [1954] 26 I.T.R. 1 (S.C.) declared it to be a discriminatory legislation and ultra vires the Constitution of India in respect of particular provisions. This fact, however, does not change the nature of the issue before us. It still means that the expenditure incurred in defending the assessee's claim before the Investigation Commission was either, as stated above, to defend itself from paying legitimate tax to the State or looked at from another angle could be an expenditure for settling taxation liability. We need not say that it is already an established proposition that such an expenditure, viz., for settling taxation liabilities, was not an allowable expenditure. The principle of Smith's Potato Estates case** enunciated above applied to this issue also. The last ground upon which this claim is based is that it was to safeguard the assets of the company. We are again unable to appreciate this aspect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian Income-tax Act in order to appreciate the respective contentions of the assessee and the revenue in this matter. 10. (1) The tax shall be payable by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits and gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely:--... (xv) any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and (not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. The words expenditure laid out wholly and exclusively for the purpose of such business have occasioned interesting explanation, either narrow or wide in their sweeps, when dealing with what expenses are to be allowed in computing taxable profits. We shall first of all refer to certain English authorities on the point. Explaining such words, in the context of a case in which a customer sleeping in an inn was injured by the fall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arises out of, or is connected with, the trade, or is made out of the profits of the trade. It must be made for the purpose of earning the profits. Lord James Hereford also agreed with Lord Loreburn but with note of some doubt: ...I concur entirely with the principle laid down by my noble and learned friend the Lord Chancellor. The only question is as to the application of that principle in one small matter to the facts of this case. If the fact were that the accident had occurred to a stranger walking in the street, then I should have no doubt at all. The doubt that did arise in my mind was as to the rule applicable when the accident occurred to a person who was a customer in the house who would not have been injured unless the business of an inn-keeper was being carried on, and when it was in the course of the carrying on of a portion of that business that the customer injured was there; then I think a different principle might arise, and my doubts consequently existed. But, my Lords, my doubts are not strong enough, in relation to this application of a principle about which there is no question, to cause me to dissent from the judgment proposed. The ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not deductible. But it is said that case merely followed Strong v. Woodifield [1906] A.C. 448; 5 Tax Cas. 215, and in any case excess profits tax differs inasmuch as it is imposed on a trader only and, therefore, the cost of ascertaining it is part of the trade. I do not accept this contention. It is true that a trader only is liable to pay it, but it is not payable by him as a trader. He pays as an individual, like any other individual, tax on the sum which he has earned as a trader. 'To my mind', said Lord Selborne L.C. in Mersey Docks and Harbour Board v. Lucas [1883] 8 App. Cas. 891, 905; 2 Tax Cas. 25, 29, 'it is reasonably plain that the gains of a trade are that which is gained by the trading, for whatever purposes it is used', and, therefore, what your Lordships have to determine is whether the expense is incurred in order to earn gain, or is the application or distribution of that gain when earned. With all respect to the opposing view, expenditure to ascertain the true amount of tax to be paid, whether it be income tax or excess profits tax, and whether successful or unsuccessful, is, in my opinion, incurred, at any rate in part, in order to determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... senting view of Viscount Simon in the following language: Reliance is placed upon the dictum of Lord Davey in Strong and Company of Romsey Ltd. v. Woodifield*, which has frequently been cited with approval in other cases, but it is to be observed that Lord Davey did not say 'earning the profits by the operations of the trade', and in my opinion the words' the purposes of the trade' ought not to be construed in this way. A trader does not expend money in an action brought for or against him for negligence or breach of contract in the course of his trade for the purpose of earning the profits of the trade in this sense, for it is not an operation of his trade to engage in litigation. It is, of course, an incident which he may think reasonably necessary for the purposes of his trade to bring or defend actions. But so it is an incident which he may think reasonably necessary for the purposes of his trade to engage in litigation as to the amount of his taxes. If he succeeds in either case he increases the profit arising from his trade, and it appears to me to be no straining of language to say that a trader who increases his profits by incurring a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business of sugar refiners, claimed to deduct, in the computation of its trading profits for income-tax purposes, expenses incurred on a propaganda campaign designed to show that nationalization of the sugar refining industry would be harmful to workers, consumers and stockholders alike. The question arose whether this claim should be allowed. In delivering the majority judgment Lord Morton of Henryton, (with whom Lord Reid and Lord Asquith of Bishopstone agreed--Lord Tucker and Lord Keith of Avonholm dissenting) explained Lord Davey's tests in Strong Co. v. Woodifield [1906] A.C. 448; 5 Tax Cas. 215, and observed: My Lords, apart from authority I should have no hesitation in answering the question just posed in the affirmative. Looking simply at the words of the rule, I would ask: 'If money so spent is not spent for the purposes of the company's trade, for what purpose is it spent?' If the assets are seized, the company can no longer carry on the trade which has been carried on by the use of these assets. Thus the money is spent to preserve the very existence of the company's trade. The same result follows if I apply to the present case the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business was allowable deduction under section 10(2)(xv). Answering the question in the affirmative, the Supreme Court observed, after considering both the English decisions in Strong Co. v. Woodifield [1906] A.C. 448, 453, and Morgan v. Tate Lyle Ltd. [1954] 26 I.T.R. 1 95; 35 Tax Cas. 367. The question as to whether the expenses of running the school for jockeys is deductible has to be decided taking into consideration the circumstances of this case. The business of the respondent was to run race meetings on a commercial scale for which it is necessary to have races of as high an order as possible. For the popularity of the races run by the respondent and to make its business profitable it was necessary that there were jockeys of requisite skill and experience in sufficient numbers who would be available to the owners and trainers because without such efficient jockeys the running of race meeting would not be commercially profitable. It was for this purpose that the respondent started the school for training Indian jockeys. If there were not sufficient number of efficient Indian jockeys to ride horses its interest would have suffered, and it might have had to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments have nothing to do with the conduct of the business. The fact that on his default, if any, in the payment of the dues the revenue may realise the amounts from the business assets is a consequence of the default of the assessee in not discharging his statutory obligation, but it does not make the expenditure any the more expenditure incurred in the conduct of the business. It is manifest that the amounts in question were paid by the assessee as a statutory agent to discharge a statutory duty unconnected with the business, though the occasion for the imposition arose because of the territorial nexus afforded by the accident of its doing business in India. We, therefore, hold that the estate duty paid by the respondent was not an allowable deduction under section 10(2)(xv) of the Act. The other case that we need consider is Travancore Titanium Products Ltd. v. Commissioner of Income-tax [1966] 60 I.T.R. 277 (S.C.), a case in which the question arose whether the amount of wealth-tax paid by an assessee on his net wealth under the Wealth-tax Act was a permissible deduction in his assessment of income-tax. The Supreme Court answered the question in the negative, after consideri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2)(xv) of the Indian Income-tax Act, as amended by Act 7 of 1939, expenditure even though not directly related to the earning of income may still be admissible as a deduction. Expenditure on civil litigation commenced or carried on by an assessee for protecting the business is admissible as expenditure under section 10(2)(xv) provided other conditions are fulfilled, even though the expenditure does not directly relate to the earning of income. Expenditure incurred not with a view to the direct and immediate benefit for purposes of commercial expediency and in order indirectly to facilitate the carrying on of the business is, therefore, expenditure laid out wholly and exclusively for the purposes of the trade. In Morgan v. Tate Lyle Ltd. [1954] 26 I.T.R. 1 95 (H.L.) the House of Lords held that expenditure incurred by a company engaged in sugar refining, in a propaganda campaign to oppose the threatened nationalization of the industry, was a sum wholly and exclusively laid out for the purpose of the company's trade and was an admissible deduction from its profits for income-tax purposes. (b) The object of the petition filed by the company was to secure a declarat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax [1957] 32 I.T.R. 535 (S.C.) and submitted that the word property was a term of the widest import and, subject to any limitation or qualification which the context might require, it signified every possible interest which a person may acquire, hold and enjoy; business would undoubtedly be property, unless there was something indicated to the contrary. He did not, in his fairness, generally submit that any money spent by an assessee to have the taxable profits of business lawfully computed for assessment would be allowable deduction under section 10(2)(xv). He made the limited submission that profits were the property of an assessee and if any unlawful attempt was made, on the part of the revenue, to grab more out of the profit, in the name of taxation, any money spent to preserve the profits from such unlawful expropriation would be money laid out wholly and exclusively for the purpose of business. He further submitted that the crucial words in section 10(2)(xv) were for the purpose of such business and not for the purpose of earning such profits or gains in business as the language used to be earlier to the amendment in the section by the Amendment Act of 1939. He, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsultant for satisfying the tax authorities with regard to the said statements and accounts were expenses incurred for the purpose of ascertaining tax liability and not for the purpose of carrying on the business or for earning profits and such expenses cannot be allowed as business expenditure. In the case of J.K. Cotton Manufacturers Ltd. v. Commissioner of Income-tax [1962] 46 I.T.R. 970, the Allahabad High Court held that fees paid to chartered accountants and lawyers engaged to appear before the Income-tax Investigation Commission were not allowable deductions, under section 10(2)(xv), being expenses incurred with a view to satisfying the tax authorities with regard to statements and accounts. A contrary view was expressed by the Madhya Pradesh High Court in Binodiram Balchand v. Commissioner of Income-tax* in allowing expenses of professional fees paid to an income-tax adviser during and for the conduct of assessment proceedings before income-tax authorities as deductions under section 10(2)(xv). We do not propose to concern ourselves, in this matter, with the academic question as to whether expenses incurred by an assessee in payment of fees to accountants and lawyers for s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0(2)(xv), were laid down in the above decisions and we are to be guided thereby. Mr. Mitter next contended that the test laid down by Lord Davey in Strong Co. of Romsey Ltd.* was still good law and if an expense was not incurred for earning profit, the same should not be allowed as a deduction. In this contention he is certainly wrong, because in the case of Malayalam Plantations Ltd.** the Supreme Court expressly laid down that the expression for the purpose of the business was wider in scope than the expression for the purpose of earning profits. It is now settled by the decision of the Supreme Court (vide Sree Meenakshi Mills Ltd.***) that: (i) litigation expenses to secure an order from the court for enabling an assessee to carry on its business without interference is allowable deduction under section 10(2)(xv), (ii) expenditure incurred to resist, in a civil proceeding, the enforcement of a measure, legislative or executive, which imposes restrictions on the carriage of a business or to obtain a declaration that the measure was invalid, would, if other conditions are satisfied, be admissible as deduction under section 10(2)(xv), (iii) the deductibility of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits but was aimed at preservation of business from the inroads of an unconstitutional piece of legislation, which might ultimately result in consumption of the present profits, in additional taxation on income escaped in the past, and cripple its business activities either wholly or in part. Such an expenditure comes within the wide meaning given to the expression for the purposes of the business by the Supreme Court in Malayalam Plantations Ltd.'s case [1964] 53 I.T.R. 140 (S.C.), which we have hereinbefore quoted. Sub-sections (1) and (4) of section 5 of the Taxation on Income (Investigation Commission) Act were condemned by the Supreme Court as discriminatory pieces of legislation and therefore void. The purpose of those provisions was to start a probe into the past income of an assessee with the ultimate object of finding out escaped income and taxing the same. The effort being unlawful, the attempt was a sort of a coercive process and the assessee was justified in opposing such a process. To spend money against a coercive process would be money laid out wholly or exclusively for business purposes, particularly when it was to result in saving of business profits, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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