1986 PLP 223 (PTD)

K.A.GHANI, J.‑‑This reference under section 66(1) of the Income‑tax Act No. XI of 1922 has been made by the Income‑tax Appellate, Tribunal at the instance of the assessee. The question of law referred is reproduced below:‑ "Whether on the facts and in the circumstances of this case, the Income‑tax Appellate Tribunal was justified in holding that a sum of Rs.1,050 being fees paid to the Tax Advisers for conducting appeal before the Tribunal against the assessment orders of the Income‑tax Authorities was not an allowable deduction under the Income‑tax, Act, 1922" Parties agree to the statement of the case. The above question has arisen out of the order, dated 7th May, 1974 passed by the Income‑tax Appellate Tribunal, Karachi in I. T. A. No. 961/K.B of 1972‑73 relating to the assessment year. 1968‑

69. The statement of facts show that the assessment for the charge year 1968‑69 ending 31‑12‑1967 was completed by the Income‑tax Officer, Companies Circle VX, Karachi under section 23(3) of the Act of 1922 on 31‑12‑1973. In the accounts for the accounting year ending 31‑12‑1967 the assessee claimed a gum of Rs.1,050 as an allowable deduction under the Income‑tax Act, 1922 which was paid to the Tax Advisers of the assessee for conducting an income‑tax appeal before the Appellate Tribunal. Income‑tax Officer while framing the assessment on 31st January, 1973 disallowed the said sum as being inadmissible. The assesses preferred an appeal to the Appellate Tribunal challenging, inter site, the aforesaid disallowance and contended that the fees paid for conducting appeals is admissible in the same manner as the expenses incurred during the course of assessment proceedings for professional assistance because the appeal proceedings are only continuation of the assessment proceedings. By order passed on 7‑5‑1974, the Income‑tax Appellate Tribunal, however, for the reasons recorded in Its order held that for conducting the appeal the fees paid to the tax advisers is not allowable expense and decided this issue against the assessee.

3. In the above circumstances on an application made by the assessee under the law then in force, the Income‑tax Appellate Tribunal referred the question of law reproduced above to this Court. Mr. Nasim Ahmed, learned Advocate for the assessee contended that under the provisions of section 10(1) read with subsection (2) (xvi) the fees paid for conducting the appeal before the Income‑tax Appellate Tribunal ought to have been allowed to be deducted as the allowable deduction. The provisions of law relied upon, being relevant to appreciate the contentions raised, are reproduced below:‑ "10(1) Subject to the provisions of this Act, the tax shall be payable by an assesses under the head Profits and gains of business, profession or vocation in respect of the profits or gains of any business, profession or vocation carried on by him. (2)??????? Subject to the provisions of this Act such profits or gains shall be computed after making the following allowance; namely:‑ (i)???????? ................................................... (ii)??????? ................................... (iii)?????? ................................... (iv)?????? .......................................... (v)??????? ................................... (vi)?????? ................................... (vii) ???? ................................... (viii)????? .................................?? (ix) ????? .................................. (x)??????? .................................. (xi) ????? .................................. (xii) ???? ................................ (xiii)????? ................................. (xiv) ??? ........................................... (xv) ???? ................................... (xvi)???? any expenditure (not being in the nature of capital expenditure or personal expenses the assesses laid out or expened wholly and exclusively for the purpose or such business, profession or vocation. It may be mentioned that the words underlined by me in subsection (2)(xvi) reproduced above were substituted by Act No.7 of 1939, vide section 11 for "(not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains". As I would hereinafter be referring to the provisions of section 10(2)(xv) of, the Indian Income‑tax Act, 1922 it may be pointed out that the same are part materia with the law as appears in section 10(2)(xvi) of our Act of 1922 reproduced above.

4. Mr. Nasim Ahmed, the learned counsel for the assesses submitted that the expenses incurred by way of payment of fee to the tax‑adviser by the assessee for conducting the appeal before the Income‑tax Appellate Tribunal in connection with the Income‑tax assessment proceedings were wholly and exclusively for the purposes of the business of the assessee and thus ought to have been allowed to be deducted as admissible allowance under section 10(2)(xvi). It was argued that the majority decision given in the case reported as Smith's Potato Estates Ltd. v. Bolland (1949) I.T.A. Supplement (1) ought not to have been followed by the Income‑tax Appellate Tribunal, which according to the learned counsel has not laid down the correct law. It was further submitted by the learned counsel that the minority decision given by the two other learned Judges of the said Court (House of Lords) interpreted the law correctly.

5. We heard the learned Advocate for the assessee as well as Mrs. Rasheeda Patel counsel who appeared for the Commissioner for Income‑tax at length and proceed to examine the relevant law in the light of decided cases to answer the question referred to us.

6. The first case to which I may refer is reported as Travancore Titanium Product Ltd. v. Commissioner of Income‑tax, Kerala (1966) 40 I.T.R. 277 decided by Supreme Court of India. In the said case the question which came up for consideration was as to whether the amount of wealth‑tax paid by assesses on his net wealth under the Indian Wealth Tax Act 1957, was not a permissible deduction under section 10(2)(xv) of the Indian Income‑tax Act, 1922 (which provision as already observed above is same terms as section 10(2)(xvi) of Income‑tax Act 1922 which is under consideration in this case). The learned Judges of the Supreme Court of India while holding that wealth tax paid was not permissible deduction observed:‑ "An allowance permissible under clause (xv) In the computation of taxable Income is, therefore, expenditure incurred in the year of account in respect of a business carried on by the assessee; the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee and it must have been laid out or explained wholly and exclusively for the purpose of the business." At page 282 of the said report the principles governing permissible deduction under section 10(2)(xv) of the Indian Income‑tax Act, 1922, (which I have already noted above is part materia with that of clause (xvi) of the Act of 1922 in force here) are summarised by the learned Judges as follows:‑ "...The nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles the expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and be laid out by the tax‑payer in his character as a trader. To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business."

7. Reference may now be made to the case reported as Commissioner of Income‑tax v. Calcutta Lending and Shipping Co. Ltd. (1970) 77 IT R

575. The facts of this case were that the assessee had agreed to pay a firm of chartered accountants a consolidated a sum of Rs:2,000 per year for 12 years for settling each year's income‑tax assessment irrespective of whether there was an, appeal or not in respect of any particular year. A sum of Rs.8,000 was paid in the preceding year being fees due for 4 years and this amount was allowed. The assessee claimed the balance of Ra.16,000 which it had paid to the firm of the chartered accountants under the agreement as In allowance under section 10(2)(xv) of the Indian Income‑tax Act, 1922. Income‑tax Officer held that as the said firm had not only appeared before the Income‑tax Officer but also appealed to the Appellate Assistant Commissioner and also to the Tribunal, an amount of Rs.8,000 could be estimated as apportionable to fees payable for appearing in the appeal proceedings accordingly held that this amount of Rs.8, 00 was not allowable as a deduction and added the amount back. The Appellate Assistant Commissioner agreed with the Income‑tax Officer. The Tribunal, however, in appeal agreed with the assessee's contention that it was immaterial whether the fees were paid for attending the proceedings before the Income‑tax Officer or before the Appellate Assistant Commissioner or before the Tribunal. Accordingly the Tribunal held that the entire amount claimed by the assessee was an admissible deduction under section 10(2)(xv) of the Income‑tax Act, 1922. In these circumstances the following question of law arising out of the Tribunals' orders was referred to the learned High Court of Calcutta. "Whether, on the facts and in the circumstances of the case the Tribunal was correct in holding that the sum of Rs.16,000 paid by the assessee as professional fees to its tax consultants for their services at the consolidated rate of Rs.2,000 per assessment year for settling each year's assessment irrespective of the fact whether there were any appeals or not, was an admissible deduction under section 10(2)(xv) of the Indian Income‑tax Act, 1922?" Before the learned Judges of the said High Court the case reported as Smith's Potato Estates Ltd. v. Holland was cited In order to resolve the controversy. Notice was taken of the observations made by Lord Greens M.R. who was the principal exponent of the majority view:‑ "...costs incurred in ascertaining the correct amount of tax are incurred by a tax‑payer partly if not mainly in his capacity as a tax‑payer, and for the purpose of securing that his liability as a tax‑payer is assessed at the correct amount, and cannot be said to be wholly and exclusively laid out for the purposes of his trade." Reference was then made to the opinion Viscount Simon and Lord Oaksey, J. The observations on which reliance was placed by the learned High Court, however, are reproduced below:‑ "It seems to me that it is essential for the proper carrying on of a. trade that the trader should know what portion of his profits in a given year is left to him after the revenue has taken its share by taxation. If, therefore, he considers that the revenue seeks to take too large a share and to leave him with too little, the expenditure, which the Order incurs in endeavouring to correct this mistake is a disbursement, laid out for the purposes of his trade. If he succeeds he will have more money with which 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 years 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. With all respect to those who think otherwise, I regard it as fallacious to argue that the traders expenditure in fighting the revenue's assessment is not wholly and exclusively incurred for the purposes of the trade, because the expenditure would not be incurred if there was no tax to pay. If there was no tax to pay, the benefit realised by the trader from carrying on the trade would not be reduced by taxation, and it is the purpose of trade (at any rate under private enterprise) to make its legitimate profit. Viewed in this light I do not see why the expenditure here in question is not wholly and exclusively laid out for the purposes of the trade, if it had not been incurred, the trade would be less profitable. Lord Davey's gloss on the words of the statute in Strong and Co. of Romsey Ltd. v. Woodifield (7906) A C 448; 5 T C 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 that I am disposed to take. Strong and Co. v. Woodifield (1906) A C 448; 5 T C 215 was a case in which the tax‑payer sought to deduct a loss not connected with or arising out of his trade. Lord Loreburn, L.C. said, at page 452; I think only such losses can be deducted as are connected with in the sense that they are really incidental to, the trade itself. Lord Davey's test was that the purpose of the expenditure must be the purpose of enabling a person to carry on and earn profits in the trade (page 4533). Here the expenditure was, in my view, Incurred for the purpose of carrying on and earning profits in the trade, for a reduction in the amount of tax does increase the fund in the trader's hands after tax is paid and so promotes the carrying on of the trade and the earning of trading profits. The incidental consequence that the trader is not taxed so heavily In respect of his profits from trade does not sr. it seems to me, alter the fact that the litigation was wholly, end exclusively undertaken for the purposes of the trade." Reference then was also made to the following observations of Lord Oaksey:‑ "But it is the character of the expense which must be considered. The expense in this case was not a capital investment, it was incurred not to distribute but to increase and in that sense to earn the profits. On the other hand, if it is to be held that such expenses are not deductible, what is to be said of the costs of audit, which the Companies Acts make necessary, or of that part of the cost of book‑keeping which is used in the preparation of such an audit or of accounts for taxation. They are not incurred for the purpose, of earning the profits of the trade in the limited sense contended for by the Crown. It is clear, therefore, that one point of view is that expenses incurred in conducting proceedings connected with the assessment of tax are not deductible expenses inasmuch as such expenses are incurred by the assessee not wholly and exclusively for the purpose of his trade but partly, if not mainly, as a tax‑payer. And the other point of view if that this expenditure is incurred for the purpose of carrying on and earning profits in the trade, for a reduction in the amount of tax increases the fund in the trader's hand after tax is paid and promotes the carrying on of his trade and the earning of his trading profits. We have given our most anxious consideration to both the points of view and have reached the conclusion that the view expressed by Viscount Simon, with whore Lord Oaksey had concurred, should be accepted by us. In this conclusion we derive some support from certain observations of .our Supreme Court which may, at this stage be fruitfully referred to. In the earlier part of this judgment the difference, so far as section 10(2)(xv) is concerned between its provisions upto 1939 and the provisions subsequent thereto has been noted. We have seen that previously what was expenditure "incurred solely for purpose of earning such profits or gains" is now an expenditure "laid out or expended wholly and exclusively for purposes of such business, profession or vocation." The minority view in the Bolland was followed as laying the correct view. Conclusion was thus reached that the sum paid by the assessee as professional fees to its tax consultants was an admissible deduction.

8. The next case relevant for the determination of the question Involved, to which I may refer is reported as' R. B. Bansilal Abirchand Spinning and Weaving Mills v. Commissioner of Income‑tax Poona (1971) 81 I.T.R. 34, a judgment given by the Full Bench of the Bombay High Court. In the said case the question which came up for consideration before the learned High Court read as follow:‑ "Whether the expenses for preparing return, etc., and representation before the Income‑tax Officer (Rs.589) and expenses connected with appeals to the Tribunal (Rs.3,048) are admissible in computing the income of the assesses?" The learned Judges of the High Court considering the provisions contained in section 10(2)(xv) while taking notice of the word "wholly and exclusively for the purpose of such business" and describing the same as the key words to observe:‑ "The words "wholly" in plain English means completely or in its entirety or in full. The word "exclusively means excluding all but the purpose specified, i.e. for the business or for the sole or single purpose of the business. The more important word of the two is the word "exclusively" for it conveys that the amount allowed as expenditure has to be an expenditure only for the purpose of the business and for no other purpose. While we are on this section we may also say that "for the purpose of the business" is riot the same thing as meaning amount expended "in the business" and as well shall presently show it has been held that it bear a casual connection in the business and need not be directly utilised for the business and may even be utilised indirectly (see Sree Meenakshi Mills Ltd. v. Commissioner of Income‑tax (1967) 63 1 T R 207 ; (1967 1 S C R .392 (S C )' After considering the opinions given by the majority and those of Viscount Simon and Lord Oaksey, relevant observations from which have already been reproduced above by me, the learned High Court agreeing with the view expressed Viscount Simon held:‑ "With all respect of those who think otherwise, I regard it was fallacious to argue that the trader's expenditure in fighting the revenue's assessment is not wholly and exclusively' Incurred for the purposes of the trade because the expenditure would not be incurred if there was no tax to pay. If there was no tax to pay, the benefit realised by the trader from carrying on the trade would not be reduced by taxation, and it is the purpose of trade (at any rate under private enterprise) to make its legitimate profit. Viewed in this light, I do not see why the expenditure here in question is not wholly and exclusively laid out for the purposes of the trade if it had not been incurred, the trade would be less profitable." The learned High Court proceeded further hold that though the expenses incurred for conducting proceeding before the Income‑tax Authorities the Income‑tax Officer, or laid out in conducting appeals including fees paid to the accountants and lawyers may not apparently relate to the assessee's trading they may justifiably necessary for increasing the assessee's net profits or for carrying on the business with larger funds at the disposal of the assessee and looked at from that point of view such expenses were for the purpose of the business'. The question raised in the reference by the Tribunal, reproduced above, was answered in the affirmative.

9. In the case of Commissioner of Income‑tax West Bengal v. Birla Cotton Spinning and Weaving Mills Ltd. (1971) 82 I T R 166 (S C) This was an appeal, which arose out of the judgment given by the Calcutta High Court to which the following question was referred by the Tribunal:‑ "Whether, on the facts and in the circumstances of the case the Tribunal was right in holding that the law charges incurred in connection with the proceedings before the Investigation Commission were not allowable deduction, in the computation of the profits of the business either under section 10(1) or under section 10(2)(xv) of the (Indian) Income‑tax Act, 1922?" The learned Court held that the expenditure incurred by the assessee in opposing an Illegal and coercive governmental action with the object of saving taxation and safeguarding the business was justified by commercial expediency and was allowable expenditure‑ under section The learned judges of the Supreme Court of India after considering dissenting opinions given in the case of Smith's Potato Estate, and judgments given In the cases of Commissioner of Income‑tax y. Calcutta Landing and Shipping Co. Ltd. (1970) 77 I T R (Cal.)

575. R.B. Bansilal Abrichand Spinning and Weaving Mills v. Commissioner Income‑tax (1971) 81 I T R 34, Shree Menakhshi Ltd. v. A.V. Visvanatha Sastri (1954) 26

1. T R 713 (S C) Surij Mal Mohta 4 Co. v. A.V. Visvanatha Sastri (54) 26 1 T R 1 (S C) and Travancore Titanium Products Ltd. v. Commissioner Income‑tax held:‑ "The essential test which has to be applied is whether the expenses were incurred for the preservation and protection of the assessee's business from any such process or proceedings, which might have resulted in the reduction of its income and profits and whether the same were actually and honestly incurred. It is not possible to understand how the expenditure on the proceedings in respect of the Investigation Commission by the assessee will not fall within the above rule. Even otherwise, the expenditure was incidental to the business and was necessitated or justified by Commercial expediency. It must be remembered that the earning of profits and the payment of taxes are not insolated and independent activities of a business. These activities are continuous and take place from year to year during the whole period for which the business continues. If the assessee takes any steps for reducing its liability to tax which result in more funds being left for the purpose of carrying on the business there Is always a possibility of higher profits. To give an illustration, if an assessee can, by an appropriate proceeding, succeed in getting its tax liability for gains and profits reduced by a sum of Rs.1,00,000 that amount will essentially become available for the purpose of business with a reasonable expectation of more profits. As was observed by Viscount Simon in Smith's Potato Estates case if the trader considers that the revenue seeks to take too large a share and to leave him with too little the expenditure, which the trader incurred in endeavouring to correct this mistake is a disbursement laid out for the purposes of his trade. If he succeeds he will have more money with which to earn profits next year." Accordingly affirming the decision of the High Court of Calcutta it was held that the law charges incurred by the assesses in opposing a coercive Governmental action with the object of saving taxation and safeguarding business was justified by commercial expediency and was, therefore, allowable under section 10(2)(xv) of the Act.

10. Lastly I may refer to the case reported as Modi Sugar Mills Ltd., v. Commissioner of Income‑tax (1973) 90 I T R 201 the case decided by Allahabad High Court to whom the Income‑tax Appellate Tribunal had referred the following question:‑ "Whether, on the facts and in the circumstances of the case, the expenses totaling Rs.6,321 are an admissible charge against the income of the previous year?" The circumstances in which the controversy arose be stated. The assesses who had made payments in respect of legal proceedings, such as appellate proceedings before the Income‑tax authorities, writ petitions in the High Court and legal proceedings taken to reduce its tax liability payment claimed the same as admissible deduction against the profits of the business under section 10(2)(xv) of Indian Income‑tax Act, 1922. The revenue authorities including the appellate Tribunal disallowed the deduction claimed and held that the expenditure incurred was not an admissible deduction. Relying upon the rule laid down by the Supreme Court of India in the case of Commissioner of Income‑tax. v. Birla Cotton Spinning and Weaving Mills (ibid), the learned High Court observed that when the Supreme Court spoke of an expenditure reasonably and honestly incurred in taking legal proceedings, it referred to proceedings which were prosecuted bona fide and not with an ulterior motive and that if the object of the proceeding was to reduce the tax liability of the assessee, there was no reason as to why expenditure incurred in prosecuting legal proceedings should not be allowed as admissible deduction. If the assesses takes any steps for reducing its liability to tax which results In more funds being left for the purpose of carrying on the business there was always a possibility of higher profits Accordingly it was held that the deduction claimed by the assesses was admissible, answered the question referred in the affirmative.

11. Mrs. Rasheeda Patel, the learned counsel who appeared for the Commissioner of Income‑tax placed argued that in view of the decision given in the case reported as J.K. Cotton Manufacturers Ltd. v. Commissioner of Income‑tax (1962) 46 I T R 970 holding that the fees paid by the assesses to the chartered accountants and lawyers who appeared before the Income‑tax Investigation Commission in connection with income‑tax proceedings could not be claimed the same as admissible deduction under section 10(2)(xv) of the Indian Act, 1922 the fees paid by the applicant to Its lawyers also cannot be allowed as admissible allowance as the said expenditure was not wholly and exclusively incurred for the purpose of the business. I have gone through the cited judgment and find that the conclusion reached by the learned High Court was mainly based upon the majority view of the learned Judges who decided the case reported as Smith's Potsvo Estates Limited v. Rolland (ibid). But the learned counsel however failed to notice' that this case of J. K. Cotton Manufacturers Ltd. v. Commissioner of Income‑‑tax upon which she had placed reliance in a subsequent case (Modi Sugar Mills v. Commissioner Income‑tax) was not followed in view of the judgment given by the Supreme Court of India in the case of Commissioner of Income-tax v. Birla Cotton Spinning and Weaving Mills (ibid). I am of the considered view in the light of law discussed above that the decision given in the case of J. K. Cotton Manufacturers Ltd. does not lay down the correct law.

12. Finally, I may refer to the case of Ata Hussain v. Commissioner of Income‑tax P L D 1969 S C 517 wherein the following question which had been answered in the negative by the High Court came 'up for consideration in appeal filed by the assessee. "Whether on the facts and the circumstances of the case 'the disallowances of a sum of Rs.12,000 for each of the assessment years 1957‑58 and 1958‑‑59 out of the expenses incurred by the applicant (appellant) for payment of remuneration to the Managing Director was justified under the provisions of section 10(2) of the Income‑tax Act." The following observations made by Honourable Supreme Court being relevant for purposes of resolving the controversy, are reproduced here:‑ "In the case of Eastern Investments Limited v. Commissioner of Income‑tax, 20 1 T R 1, the Supreme Court of India applied certain principles in construing section 12(2) of the Income‑tax Act. The words that occur in this section are "any expenditure (not being in the nature bf capital expenditure) incurred solely far the purpose of making or earning such Income, profits or gains." It was said: "(a)?????? though the question must be, decided on the facts of each case the final conclusion is one of law: Indian Radio and Cable Communication Ltd, v. The Commissioner of Income‑tax Bombay (1937) 6 1 T R 270 (P C) and Tata Hydro Electric Agencies Ltd. v. The Commissioner of Income‑tax Bombay (1937) 5 I T R 202 (P C); (b)??????? It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned; Moore v. Stewards and Lloyds (1906) 6 Tax Case 501 and Usher's Cas. (1915) A C 533; (c)??????? it is enough to show that the money was expended ''not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business" British Insulated and Helsby Cables Ltd v. Atherton (1926) A C 205 at pp.221 and 235; (d)??????? beyond that no hard and fast rule can be laid down to explain what is meant by the word solely". We respectfully agree with the view taken In this case. It will, thus, be seen that the most important factor in determining whether an expenditure by way of payment of remuneration to the Managing Director in "wholly and exclusively for the purpose" of the business of tine Company, is whether the expenditure Is voluntary and is incurred on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business. The question is not whether the expenditure is reasonable but whether it is incurred bona fide on the ground of commercial expediency. It is not for the Income‑tax Department to say that the expenditure is not reasonable." Applying the above principles and for other reasons recorded, the Honourable Supreme Court accepted the appeal and the question submitted to the High Court for its opinion was answered in the negative.

13. For the reasons discussed above I hold that fees paid to tax' advisers, by the assessee in conducting legal proceedings before the Income‑tax Appellate Tribunal to reduce tax liability of the assessee reasonably, and honestly are likely to result in more funds being left for the purposes of carrying on its business and thus a possibility of higher profits, are admissible deductions within the meaning of section 10(2)(xvi) of the Income‑tax Act, 1922. The question referred is accordingly answered in the negative. The parties are left to bear their own costs. M.Y.H.??????????????????????????????????????????????????????????????????????? Question answered in negative.