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TMI Blog1966 (9) TMI 162X X X X Extracts X X X X X X X X Extracts X X X X ..... hania in 1936 as printing master in its calico department. There was no written contract of service between either of these two employees and the assessee. Both these employees were involved in a murder case and remained in jail as under-trial prisoners from August 23, 1948, to April, 1950. They were both acquitted in 1950. In these circumstances, the question arose whether the amount paid towards their salaries and bonuses during the period for which they were in jail as under-trial prisoners was an allowable business expense under section 10(2)(xv) of the Act. This court held that the payments made to both of these employees, who are closely related to Sri Sohan Lal Singhania, the director-in-charge, and Sri P.D. Singhania, the director of the assessee-company, were made due to extra-commercial considerations. Hence, the whole amount could not be deducted under section 10(2)(xv) of the Act, but the amounts paid to Sri H.P. Pasari for a period of 29½ days and to Madan Lal Singhania for 24½ days, for which periods these gentlemen could remain on leave on full salary under their terms of service, could be allowed to be deducted. The first question before us was framed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttee, consisting of the then Home Minister, the Joint Chief Secretary in the U.P. Government, and another high Government official (who subsequently became a judge of this court) was constituted to discuss matters with Lala Sohan Lal Singhania, the director-in-charge of the company. The matters discussed related to: (1) sale of fents, i.e., cloth pieces under one yard; (2) sale of about 1,500 turbans packed in 10½ bales; (3) nine bales of cloth found in the godown of M/s. Laxmi & Co.; (4) a number of cash memos of the assessee-company's retail shop alleged to have been recovered from the premises of Messrs. Kanodia Brothers; and (5) fabrication of ready-made garments. The above-mentioned unsigned and undated letter contained an expression of what the assessee thought were the views of the above-mentioned "high-powered" committee. The document summarised the alleged views of the high-powered committee as follows: "(i) That even though there might be grounds for suspicion or technical breaches, the Government had no water-tight case in respect of any of the above matters. (ii) That if proceedings were started against the company, they would take a lot of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s honesty before parting with such a large sum. At least in one instance it had to admit that there was breach, e.g., in regard to the sale of fents. The assessee has failed to convince us that this large sum was an expenditure laid out wholly and exclusively for the purpose of business by its failure to prove the true nature of this payment." Finally, the Tribunal came to the conclusion that the payment did not represent "a loss incidental to business". As the nature of the case taken up initially was not clear to us from the findings of the Tribunal, we looked at the assessment order where we found that the assessee had admitted before the Income-tax Officer that the above-mentioned payment was the "composition money" paid to the U.P. Government in connection with a criminal proceeding which the Government proposed to take against the assessee-company. Apparently, the assessee-company was not willing to reveal very much about the nature of the transaction, and it contended itself by placing its case no higher than that a payment was made for avoiding prosecution for infringement of control orders. In stating the case to us, the Tribunal pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the staff; and after referring to the contention of the Crown that the sum of £ 31,784 was not money wholly and exclusively laid out for the purposes of the trade under the rule above referred to, they found that the deduction was admissible--thus, in effect, although not in terms, negativing the Crown's contention." It is clear that Viscount Cave L.C. was dealing with a case in which the assessee-company had contributed to the nucleus of a pension fund established by a trust deed for the benefit of clerical, technical and salaried staff. In our opinion, offering of such benefits to the employees in order to give them a feeling of security and make the service conditions of the employer more attractive, could not be equated with a payment of a rather mystifying character to the Government with the vague object of "purchasing peace", whatever that may imply. Reliance was also placed on behalf of the assessee on Golder v. Great Boulder Proprietary Gold Mines Ltd. [1952] 33 Tax Cas. 75, where civil actions were brought against the assessee-company for alleged fraud and deceit but the company had paid £ 25,000 to settle the claims and had incurred c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r remote, it cannot be reasonably covered by rather emphatic words "wholly and exclusively for the purposes of business"--used in section 10(2)(xv) of the Act. The purpose of the business has to be judged by a reference to the character of the business carried on. An allowable deduction under the head must be incurred by the assessee in its character as a business or trading concern. This principle was expressed in Strong and Co. v. Woodifield [1906] 5 Tax Cas. 215, 219, 200 by the Lord Chancellor as follows: "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. The nature of the trade is to be considered." In this very case Lord Davey explained the expres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was held there: "If a sum is paid by an assessee conducting his business, because in conducting it he has acted in a manner which has rendered him liable to penalty, it cannot be claimed as a deductible expense. It must be a commercial loss and in its nature must be contemplable as such. Such penalties which are incurred by an assessee in proceedings launched against him for an infraction of the law cannot be called commercial losses incurred by an assessee in carrying on his business. Infraction of the law is not a normal incident of business and, therefore, only such disbursements can be deducted as are really incidental to the business itself. They cannot be deducted if they fall on the assessee in some character other than that of a trader." On behalf of the Commissioner of Income-tax, reliance was placed on Commissioner of Income-tax v. H. Hirjee [1953] 23 I.T.R. 427; [1953] S.C.R. 714, where their Lordships of the Supreme Court made a distinction between the expenditure incurred on civil and criminal litigation and observed that an expenditure on a purpose which cannot be easily dissociated from the purpose of saving the accused from a possible conviction and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business in defending himself from criminal prosecution whereas in the case before the Punjab High Court the expenses had been incurred in defending an employee of the assessee-company while he was acting in the discharge of his normal business activities as an employee of the assessee. The short answer to this argument is that the case before us is not that of an employee at all but of the assessee-company itself which had, presumably, warded off criminal prosecution by paying a very large sum of money to the U.P. Government. The Tribunal had not, in our opinion, erred in assuming that the company had not acted imprudently in paying such a large sum of money. The circumstances did give rise to the presumption that the company must have been conscious of the infringement of the law which was discussed with its representative by the high powered committee. On the authorities as they stand we are unable to see how the purpose for which the expense was incurred could be dissociated from warding off criminal prosecution for activities which must be held to be outside the scope of business of the assessee-company. On the other hand, if that purpose was not to ward off the crimi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Cas. 477 and the observations of Lord Cave in British Insulated and Helsby Cables Ltd. v. Atherton [1925] 10 Tax Cas. 155, 191 were approved by the Supreme Court in Eastern Investments Ltd. In those English cases it was held that a payment made voluntarily, on grounds of a commercial expediency and in order indirectly to facilitate the carrying on of the business may be wholly and exclusively expended for the purpose of the trade. The Supreme Court while approving pointed out that the test of commercial expediency would apply where the expenditure was for the real and primary scope of the business. A fortiori, there should be a direct concern and purpose for which money is expended with the carrying on of the business and not merely to produce some remote or indirect result. Can it be said in the present case that the real and primary purpose of the payment, assuming it to have been proved, was for the purpose of carrying on the business of the assessee or was the primary purpose to save the company or its directors from embarrassment and trouble in respect of some criminal enquiry or prosecution which was threatened or at least round the corner? The primary purpose as found b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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