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TMI Blog1950 (3) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... d the salesman were also prosecuted at Karachi under the Defence of India Rules on the ground that the salesman refused to sell paper as he should have done. The City Magistrate also discharged the accused before him. It is in connection with these two prosecutions that the assessees claim to have incurred an expenditure of ₹ 5,247-0- which they claim as permissible deductions under Section 10(2)(xv) of the Act. Now before we deal with the various authorities that have been cited at the Bar it is necessary to notice two or three important facts in connection with the claim made by the assessee company. The charges which the managing directors and the salesman were called upon to meet both at Madras and at Karachi were incidental to the business that the company was carrying on. It was the business of the company to sell stationery and the company was charged with having sold it is one case contrary to the law and in the other case having refused to sell. Therefore, both the charges were directly in connection with the business of the company as a trader. The charges against the accused were also in their capacity as agents for a company which was a trading company. A furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... House of Lords at page 452 lays down the principle in the following terms:-- In my opinion, however, it does not follow that if a loss is in any sense connected with the trade, it must always be allowed as a deduction; for it may be only remotely connected with the trade, or it may be connected with something else quite as much as or even more than with the trade. I think only such losses can be deducted as are connected with it in the sense that they are really incidental to the trade itself. They cannot be deducted if they are mainly incidental to some other vocation or fall on the trader in some character other than that of trader. There are two points emphasized by the Lord Chancellor, viz., that the loss must be incidental to the trade itself and it must fall on the trader in his character as a trader. Now, applying these two tests to the facts of the case, in my opinion, both the tests are satisfied because the loss is incidental to the trade because it was in the course of its business of selling stationery that the directors were charged with having contravened the law and it is also in its capacity as a trader that the company was called upon to defend its dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to him to be a difference between a commercial loss in trading and a penalty imposed upon a person or a company for a breach of the law which they had committed in that trading. The test that Lord Justice Scrutton applied which is to be found at page 244 was: were these fines made or paid for the purposes of earning profits? As the answer to that question according to the learned Lord Justice was in the negative, he came to the conclusion that it was not a permissible deduction. Certain Indian cases have been referred to at the Bar and excepting one they do not really touch the question that we have to decide, but I shall briefly review these decisions. The first is the Privy Council case of Maharaja of Darbhanga reported in 10 I.T.R. at page 214. In that case a suit was filed by the assessee in respect of a loan of ten lacs of rupees made to a company and there was also a suit by the company challenging the loan on the ground that the assessee had committed a breach of the contract in not properly financing the company. The cost of the litigation to enforce the payment of the loan was allowed as a permissible deduction but the question arose as to whether the expenses of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner of Income-tax v. Gasper Co.) [1940] 8 I.T.R. 100, and the other is a recent English case. In the Rangoon case a partnership firm had been importing for a considerable number of years a certain brand of whisky and brandy from a company at Calcutta. Criminal charges were levelled against the partners of conspiracy of committing offences against the Excise Act and the prosecution resulted in an acquittal of all the partners and the partners claimed that the expenditure incurred was a permissible deduction. Roberts, C.J., held that the assessees were not entitled to this deduction. Now this case has been strongly relied upon by the learned Attorney-General. The one distinguishing feature between the Rangoon case and the case before us is that in the Rangoon case all the partners of the firm which was the assessees were prosecuted for an offence and they defended themselves against the charge and the Chief Justice took the view that it was clear under the circumstances that a part of their object was to save the individual partners from the possible adverse consequences of a criminal conviction. According to the Chief Justice in fighting the prosecution the main purpose was no mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of sur-tax and also having supplied three clerks from his office to apply for shares in a one man company formed solely for the purpose of evading payment of sur-tax by White. In defending this charge Spofforth incurred certain expenditure which he claimed as a permissible deduction and that claim was rejected by Wrottesley, J. Now it is significant to note that the charge against Spofforth was not in his capacity as a chartered accountant but in his personal capacity and therefore he was defending himself against a personal charge. In every thing that he did he acted not as a chartered accountant but he acted purely in his personal capacity. Spofforth was a partner with one Prince in this business of chartered accountants and the assessees were the partnership firm of Spofforth and Prince and it was this partnership firm that was claiming the deduction. Wrottesley, J., expressed a grave doubt in his judgment whether the firm ever incurred the expenditure. According to the learned Judge the documents appeared to suggest that it was Spofforth himself who incurred the expenses. Therefore this case is also distinguishable from the case before us on the two grounds which I hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be remuneration within the meaning of Rule 7(1) of the Rules in Schedule I to the Excess Profits Tax Act. The Tribunal held that it was directors' remuneration and the assessees before us contend that it is not. Prima facie I should have said that money or equivalent of money paid by an employer to an employee must always be remuneration. Sir Jamshedji concedes that if the company had paid rent to the directors in money that rent would have been part of their remuneration but he contends that inasmuch as rent was not paid bat. free quarters were given to the directors the position is different and the rent for the free quarters cannot be considered as part of the remuneration of the directors. I do not understand what difference there can be between an employer giving rent in cash and his securing quarters for the directors and paying rent to the landlord. Sir Jamshedji has relied on a decision (Tennant v. Smith) in 3 Tax Cas, 158 and he has particularly relied on the observations of Halsbury, L.C., where the Lord Chancellor observed that the occupation of a house which was given free of rent may in certain contingencies be not a benefit but a burden. Sir Jamshedji overlooks ..... X X X X Extracts X X X X X X X X Extracts X X X X
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