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TMI Blog1962 (10) TMI 74X X X X Extracts X X X X X X X X Extracts X X X X ..... x Officer. The deduction was disallowed by the Income- tax Officer on the ground that the payment said to have been made related to four accounting years. The assessee then preferred an appeal before the Appellate Assistant Commissioner, who disagreed with the view taken by the Income-tax Officer that the payment related to four accounting years. According to the Appellate Assistant Commissioner, the bill for the services rendered was sent by the income-tax adviser on 1st August, 1952, which fell in the material year of account and the liability of the assessee to pay the amount of the bill arose on that date inasmuch as the accounts were maintained by the assessee on the mercantile basis. The Appellate Assistant Commissioner, however, rejected the claim for deduction on the view that the amount of fees paid to the adviser was an amount for ascertaining and disputing the tax liability before the income-tax authority and was not any sum expended wholly and exclusively for the purpose of the assessee's business, that is to say, for the purpose of enabling the assessee to carry on, and earn profits in, the business. The Appellate Assistant Commissioner relied on the decision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al expediency and was an expenditure wholly and exclusively laid out for the purpose of the assessee's trade. In reply, learned Advocate-General appearing for the department contended that the expression "for the purpose of such business, profession or vocation" used in clause (xv) of section 10(2) connoted that the expenditure sought to be deducted must have been one incurred by assessee for enabling him to carry on, and earn profits in, his business; and that it was not sufficient to show that the expenditure was incurred in the course of business but that it must also be shown that it was incurred for the purpose of earning the profits. Learned Advocate-General commended to us for acceptance the view taken by the majority in Smith's Potato Estates Ltd. v. Bolland [1949] 17 I.T.R. (Suppl.) 1. He also drew our attention to the decision of the Bombay High Court in S.D. Sharma v. Commissioner of Income-tax [1962] 45 I.T.R. 107 where, following the judgment of the majority in Smith's Potato Estates Ltd. v. Bolland [1949] 17 I.T.R. (Suppl.) 1, it has been held that expenses incurred for the preparation of statements and accounts for tax purposes and expenses inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emphasised and it was held that and expenditure may be incurred for the purpose of the business even though it may not help the assessee to earn the income or increase his income. In order therefore to see whether a deduction claimed under clause (xv) falls within its terms or not, it would not be legitimate to apply the test whether the expenditure of which deduction is claimed was incurred for the purpose of earning profits in the business. The tests to be applied in deciding whether a payment of money is a deductible expenditure under clause (xv) of section 10(2) have been indicated by the Supreme Court in Commissioner or Income-tax v. Chandulal Keshavlal & Co. [1960] 38 I.T.R. 601 ; [1960] 3 S.C.R. 38; A.I.R. 1960 S.C. 738 and Commissioner of Income-tax v. Royal Calcutta Turf Club [1961] 41 I.T.R. 414 ; [1961] 2 S.C.R. 729; A.I.R. 1961 S.C. 1028. In the first case, it has been held that in deciding whether an expenditure is a deductible one under section 10(2)(xv), one must take into consideration questions of commercial expediency and the principles of ordinary commercial trading; and that the expenditure may be voluntary, but so long as it is incurred for the assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of the company's trade. The observations of Lord Morton, which the Supreme Court quoted, were thus: "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 wording of the relevant income-tax rules in England with reference to which Lord Morton made the above observation is as follows: "The tax shall be charged without any other deduction than is by this Act allowed.... (3) In computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of--(a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purposes of the trade profession, employment or vocation...." The expression "the expenses, not being wholly and exclusively laid out or expended for the purposes of the trade profession, employment or vocation" in the rule in England ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urposes of the trade". It is thus plain that in determining whether the deduction of an expenditure is permissible under section 10(2)(xv), the test to be applied is "commercial expediency" and it would be whether the expenditure of which deduction is claimed was necessary on grounds of commercial expediency and in order indirectly to facilitate the carrying on the business. It is not necessary that the expenditure should be incurred for the direct purpose of earning profits or that there should be any direct co-relation in point of time between expenditure and earning of any profits. An expenditure may not help the assessee to earn or increase the income; but it may be necessary for the business from the point of view of commercial expediency. The "commercial expediency" has to be determined from the point of view of the businessman and not from the point of view of the outsiders including the taxing authorities. Judged by this test the expenditure of ₹ 14,000 incurred by the assessee in the present case can legitimately be regarded as justified on grounds of commercial expediency for facilitating the carrying on of the assessee's business. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money with which with to earn profits next year. It is true that the result of his success is to reduce the tax he has to pay--alternatively, one may say that the result is to show that the profit of the year's trading left to him after paying tax is greater than the revenue was willing to admit--but to my mind the purpose was a trading purpose and nothing else. The trade is not to be regarded as extending over twelve months and no more: indeed, as I have already pointed out, excess profits tax is liable to be adjusted in the light of subsequent trading results, and assessment for income tax is arrived at on figures of the previous year... Lord Davey's gloss on the words of the statute in Strong & Co. of Romsey v. Woodifield [1906] A.C. 448; [1906] 5 Tax Cas. 215 is well known, but I think it is better to concentrate on the statutory words themselves. Rightly understood, however I do not find that Lord Davey's words contradict the view I am disposed to take. Strong & Co. Romsey v. Woodifield [1906] A.C. 448; [1906] 5 Tax Cas. 215 was a case in which the taxpayer sought to deduct a loss no connected with or arising out of his trade. Lord Loreburn said: 'I think on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax. His profit is no more affected by the exigibility of tax than is a man's temperature altered by the purchase of a thermometer even though he starts by haggling about the price of it." Lord Simonds also felt that the deduction allowed by the revenue authorities on account of accountancy charges in computing profits was justified "as a practical matter". Lord Normand was prepared to assume that the ascertainment of the amount of tax payable ought to be regarded as necessary for the proper carrying on of the trade and therefore, for the earning of profits in the future. But he could not agree to the contention that the money spent in prosecuting an appeal could be said to have been laid out "wholly and exclusively for the purpose of the trade". He observed: "It was laid out, as it appears to me, just as much if not more for the purpose of ensuring that he company, like any other taxpayer, should pay the proper amount of tax, no more and no less." Lord Oaksey, who was also one of the minority, said that a trader who increases his profits by incurring a certain expense incurs that expense for the purpose of earning profits; and that prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess would be an expenditure laid out "wholly and exclusively for the purpose of the trade". The fact that when a trader pays income-tax pays as an individual like any other individual, does not alter the position that the tax he pays is on the sum which he has earned as trader and the expenditure incurred by him in determining his tax liability on the profits of his trade is an expenditure incurred by him, not as an individual but as a trader, and is one wholly and exclusively laid out for the purpose of his business. The view expressed by Viscount Simon and Lord Oaksey in Smith's Potato Estates Ltd, v. Bolland [1949] 17 I.T.R. (Suppl.) 1, with which we are in respectful agreement, undoubtedly supports the contention of the assessee in the present case. But the observations of other Law Lords on the permissibility of deduction of the cost of making up accounts for the Inland Revenue on the ground of commercial expediency also help the assessee. Learned Advocate-General also called in aid the decision of the Bombay High Court in S.D. Sharma v. Commissioner of Income-tax [1962] 45 I.T.R. 107. In that case the question raised for consideration of the court was whether a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deducted from the gross income since such charges and costs were not expenditure within the meaning of section 9(2)(ix) of the Income-tax Act, 1918, incurred solely for the purpose of earning such profits but were charges incurred after the profits were earned. This decision is not of assistance in determining whether an expenditure is allowable under section 10(2)(xv) of the Indian Income-tax Act, 1922, for the simple reason that section 9(2)(ix) of the Act of 1918 allowed a deduction of only that expenditure which was "incurred solely for the purpose of earning such profits". The difference between the language of section 10(2)(xv) and the expression "any expenditure...incurred solely for the purpose of earning such profits" has already been pointed out earlier in this judgment. It may be noted that the circular issued by the Central Board of Revenue on 24th August, 1928 (see Income-tax Circulars, Vol. II, page III) saying that the cost of audit and similar operations conducted specially for income-tax purposes, whether in connections with assessments, either appeals or with revision petitions, cannot legally be allowed as a deduction from taxable profits, is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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