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TMI Blog1944 (12) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... filed Civil Suit No. 8-A of 1939 in the Court of the Second Subordinate Judge, First Class, Amraoti, against the assessee on 5th August, 1939, for injunction, rendition of account and damages on the allegation that he had infringed their trade mark and that his trade mark was a colourable imitation of their trade mark. On 11th October, 1939, the Court passed an order of temporary injunction against him and in favour of the Mills on condition that they furnished security for making good the loss which the assessee might suffer in consequence thereof in the event of the suit being unsuccessful. The assessee filed Miscellaneous Appeal No. 255 of 1939 in the High Court against the order. During the pendency of the appeal, the parties compromised the subject-matter of the suit and filed an application in the High Court on 20th July, 1940, for directing the lower Court to pass a decree in terms of the compromise. The High court sent the compromise petition to the lower Court in order to enable it to pass a decree in accordance with the terms of the compromise and dismissed the appeal on 24th July, 1940, as compromised. In the paper book the compromise petition or the decree which was pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee for the charge year 1940-41 by adding back the amount of ₹ 949 was in accordance with the provisions of Section 34 of the Act? Under Section 10 of the Income-tax Act of 1922, a tax is payable by an assessee under the head Business in respect of any profits or gains of any business carried on by him. In computing such profits or gains certain allowances are permitted. One of such permissible allowances was given in clause (ix) which was in these terms:- any expenditure (not being in the nature of capital expenditure) incurred solely for the purposes of earning such profits or gains. The section and its several clauses were amended by the Income- tax (Amendment) Act, VII of 1939. The amended clause was re-numbered as clause (xii) and runs thus: any expenditure (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...... The assessments for 1940-41 and 1941-42 were made after the Income-tax (Amendment) Act, VII of 1939 had come into force. The reference is to be decided in accordance with the provisions of the Income-tax Act, 1922, as amended by Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termining whether a particular item may not be deducted from the profits, it is necessary to inquire whether the deduction in expressly allowed. The item of coasts incurred by an assessee in litigation arising our of a business has not been specifically mentioned as one of the allowance permissible under the Indian Income-tax Act nor has it been prohibited under the English Income Tax Act. In Commissioner of Income-tax, Bihar Orissa v. Kameshwar Singh [1942] 10 I.T.R. 214 ; 23 Pat. 491 , the Privy Council affirmed the decision of the Patna High Court in Income-tax Commissioner, Bihar Orissa v. Kameshwar Singh [1940] 8 I.T.R. 52. The question was whether an expenditure of ₹ 2,07,018 incurred by an assessee in defending a suit which had been filed against his father for damages for the breach of contract arising out of the money-lending transaction was a deductible item. The decision was that the defence to the action was just as essential for the full protection of this rights as the creditor in the loan of rupees ten lakhs, as was his suit for the recovery of the loan and that the item of expenditure in defence was an admissible item of expenditure under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eader was published in that paper under the caption Calcutta High Court which contained certain observations which reflected upon the independence of the judiciary. The editor and printer of the newspaper were found guilty of contempt of Court by the Calcutta High Court, the former sentenced to three months' simple imprisonment and the latter to one month's imprisonment. The judgment is reported in In the matter of Tushar Kanti Ghosh [1935] 63 Cal. 217 . The company incurred an expenses of ₹ 5,577-7-9 in defending the editor and the printer and claimed that this item should be deducted in determining the profits of the business of the company. This was disallowed. The case was governed by Section 10 before its amendment by Act VII of 1939. The item was disallowed on two grounds, viz., (i) the payment of this sum in no way assisted the company in earning profits or gains in the year of assessment and (ii) the business could be carried on without any infraction of the law. In the case under reference before us the expenditure was incurred for the purpose of the business and it has not been established that the assessee committed any breach of the law. The decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when a fine, which is what it comes to, has been inflicted upon a trading body, it can be said that that is 'a loss connected with or arising out of' the trade within the meaning of this Rule. The decision was that the mitigated penalty and costs were not a loss connected with and arising out of the company's trade within the meaning of Rule 3, Case I, Schedule D, of the Income Tax Act, 1842, and that they were, therefore, not deductible in arriving at the profits of the company's trade for excess profits duty purposes. The same principle was involved in Commissioner of Inland Revenue v. Alexander Von Glehn Co., Ltd. [1920] 12 Tax Cas. 232. The respondent company carried on business as general produce merchants and exported goods to Russia and Scandinavia and was sued for penalties under the Customer (War Powers) Act, 1915, on informations by the Attorney-General, in respect of infringements of that Act, in the course of its trade. The actions were settled by consent on the company agreeing to pay a compromise penalty of Pounds 3,000. The company incurred legal costs amounting to Pounds 1,074 12s. 7d. in respect of the proceedings. The Court of Appeal af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst him and the statement did not amount to an admission that he had committed an infringement of the trade mark. In the carrying on of his business he was involved in a litigation and he was bound to defend the case and conduct it in a prudent manner which would be for his benefit and would minimise his losses. The expenditure was laid out or expended wholly and exclusively for the purpose of such business. The principle enunciated in the English cases referred to above is not applicable to the present case. In Commissioner of Income-tax, C.P. and U.P. v. Mathuradas Mannalal [1942] 10 I.T.R. 95 , a Divisional Bench of this Court held that the expenditure incurred by the assessee in avoiding a business liability was an allowable expenditure under Section 10(2)(ix) of the Income-tax Act in the year in which the expenditure was actually incurred. The assessee in that case entered into certain forward contracts for the purchase and sale of cotton and these contracts resulted in losses which the assessee was not able to meet and a suit was instituted against him. The litigation extended for some years and was eventually compromised. A sum of ₹ 2,382 was incurred in defending t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the phrase is to be found in the cases. Various tests have been formulated in several cases in determining whether an expenditure is a capital expenditure or a revenue expenditure. In Vallambrosa Rubber Co., Ltd. v. Farmer [1910] 5 Tax Cas. 529 , at page 536, Lord Dunedin as President, stated:- ......in a rough way I think it is not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year. This rule has been amplified by Lord Cave in British Insulated and Helsby Cables v. Atherton [1926] A.C. 205; 10 Tax Cas. 155, at p. 192. , at page 213. After quoting the passage above cited Lord Cave observed:- But the criterion suggested is not, and was obviously not intended by Lord Dunedin to be, a decisive one in every case; for it is easy to imagine many cases in which a payment, though made 'once and for all' would be properly chargeable against the receipts for the year. and instances were given in which though the expenditure was incurred once and for all yet it was treat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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