PETITIONER: SHREE MEENAKSHI MILLS LTD., MADURAI Vs. RESPONDENT: COMMISSIONER OF INCOME-TAX, MADRAS DATE OF JUDGMENT: 19/09/1966 BENCH: SHAH, J.C. BENCH: SHAH, J.C. BHARGAVA, VISHISHTHA CITATION: 1967 AIR 444 1967 SCR (1) 392 CITATOR INFO : RF 1971 SC2129 (7) R 1972 SC 19 (6) ACT: Income-tax Act, 1922 (11 of 1922), s. 10(2)(xv)-Expenditure in curred for proceedings to prevent enforcement of order interfering with business-It admissible deduction. HEADNOTE: The assessee-mill claimed deduction under s. 10(2) (xv) of the Indian Income-tax Act of the expenses incurred by it and the costs awarded to Government in respect of unsuccessful writ petition and appeals therefrom. The deduction was disallowed by the departmental authorities, and the question was answered against the assessee by the High Court. In appeals to this Court. HELD: The appeal must be allowed. The proceeding started by the assessee was in relation to the business of the assessee. Expenditure incurred to resist in a civil proceeding the enforcement of a measure-legislative or executive, which imposes restrictions on the carrying on of a business or to obtain a declaration that the measure is invalid would.. if other conditions are satisfied, be admissible under s. 10(2) (xv) as a permissible deduction in the computation of taxable income, even though the expenditure does not directly relate to the earning of income. Expenditure may not be denied admission as a permissible deduction in computing the taxable income merely because the proceeding has failed. Persistence of the assessee in launching the proceeding and carrying it from Court to Court and incurring expenditure for that purpose again cannot be a ground for disallowing the claim. (396 B-C; 399 B) Commissioner of Income-tax, West Bengal v. H. Hirjee 23 I.T.R- 427, Morgan (Inspector of Taxes) v. Tate & Lyle Ltd. 26 I.T.R. 195 : 35 T.C. 367 and Commissioner of Income-tax, Kerala v. Malayalam Plantations Ltd., (196 HI 7 S.C.R. 693, referred to. JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 557 & 558
of 1965,
Appeal by special leave from the judgment and order dated
September 19, 1962 of the High Court of Judicature at Madras
(in Tax Case No. 87 of 1960).
R. Ganapathy lyer, for the appellant.
R. M. Hazarnavis and R. N. Sachthey, for the respondent.
The Judgment of the Court was delivered by
Shah, J.-Sree Meenakshi Mills Ltd.-a company incorporated
under the Indian Companies Act with its registered office at
Madurai carries on business of cotton spinning and weaving.
In the premises “of the factory of the Company there are
installed 80 handloorns
393
These handlooms were found inadequate to weave the yarn pro-
duced by the factory and a part of the yarn produced was
distributed to weavers outside the factory who were engaged
by the Company to weave the yarn into cloth. Under cl. 18-B
of the Cotton Cloth and Yarn (Control), Order, 1945, issued
by the Government of India, the Textile Commissioner was
authorized to direct ally manufacturer or dealer or any
class of manufacturers or dealers, inter alia, not to sell
or deliver any yarn or cloth of specified description except
to such person or persons and subject to such conditions as
the Textile Commissioner may specify. On February 7, 1946,
the Textile Commissioner issued an order directing the
Company not to sell or deliver any yarn manufactured by the
Company except to such person or persons as the Textile
Commissioner may specify. It was recited in the order that
“nothing in this Order shall apply to a sale or delivery
made, in pursuance of clause 18-A of the said order, to any
dealer in yarn not engaged in the production of cloth on
handlooms or powerless”. The Company addressed a letter on
February 13, 1946 to the Textile Commissioner submitting
that the prohibition in general terms was ultra wires the
authority conferred by the Cotton Cloth and Yarn (Control)
Order. The Company continued notwithstanding the
prohibition to deliver yarn to weavers and did so till
February 20, 1946. This yarn was seized under the orders of
the Textile Commissioner. On February 20,1946, the
Provincial Textile Commissioner, purporting to act in
exercise of authority conferred upon him by a notification
issued by the Government of India, issued an order addressed
to the Company that:
“You should accordingly confine your delivery
to the categories of persons notified below:-
(a) Licensed yarn dealers (in accordance
with the said 18-A of the Control Order).
(b) to consumers who purchased yarn directly
from you during the basic period 1940-42 (in
accordance with my circular letter dated 4th
January 1946 referred to above).
(c) your handloom factory situated in the
premises of your Mill at Madurai (just the
quantity of yam required).
“Note:-Any other delivery of yarn by you which
is not covered by a special order or
permission of the Textile Control Authorities
will accordingly be a contravention of the
Textile Commissioner’s order under clause 18-B
referred to above.”
After this order was issued, the Company did not deliver any
yarn to weavers.
On March 4, 1946 the Company filed a petition for a writ of
nandamus in the High Court of Madras under s. 45 of the
Specific
394
Relief Act praying for an order directing the Provincial
Textile Commissioner, Madras to desist from seizing the yarn
supplied to the weavers at or around Madurai and Rajapalayam
for the purpose of converting the yarn belonging to the
Company into cloth; to restore to the Company or to direct
the Provincial Textile Commissioner and his subordinates to
restore the yam already seized; and to forbear from seizing
or to direct the subordinates of the Provincial Textile
Commissioner to forbear from seizing the yarn that may be
entrusted to the weavers by the Company in the -usual course
of business according to the practice already obtaining for
conversion into cloth. This petition was dismissed by Kunhi
Raman, J, and the order of dismissal was confirmed in appeal
by the High Court. The matter was then carried in appeal to
the Privy Council. The Judicial Committee dismissed the
appeal filed by the Company. They held, agreeing with the
High Court, that the expression “deliver” in cl. 18-B sub-
cl. 1(b) of the Cotton Cloth and Yarn (Control) Order, 1945,
is used in its ordinary broad sense of handing over
possession, as distinct from passing of property, and would
include delivery of possession to a bailer. Accordingly,
delivery of part of its yarn by the Company to owners of
handlooms outside the mill premises for conversion of the
yarn into cloth for the Company was in contravention of the
order made under cl. 18-B sub. cl. (1) (b). The Judicial
Committee also held that a petition under S. 45 of the
Specific Relief Act, 1877, directing the Provincial Textile
Commissioner to desist from seizing the yam supplied to the
weavers and to restore to the Company the yarn already
seized was incompetent as the acts in respect of which
relief was asked for took place outside the limits of the
ordinary original civil jurisdiction of the High Court.
The Company spent Rs. 20,035/- in prosecuting the proceed-
ings under s. 45 of the Specific Relief Act and had also to
pay Rs. 5,912/- as costs to the Government of the
unsuccessful appeal to the Judicial Committee. In its
returns of income the Company claimed deduction of the
amounts of Rs. 20,035/- and Rs., 5,9121/for the assessment
years 1949-50 and 1950-51 respectively as being expenditure
wholly and exclusively laid out for the purpose of its
business. The claims were rejected by the departmental
authorities, and by the Income-tax Appellate Tribunal. The
Tribunal then referred the following question to the High
Court of Judicature at Madras :
“Whether the expenses of Rs. 20,035/- incurred
in the assessment year 1949-50 and Rs. 5,912/-
(relating to the assessment year 1950-5 1)
being the cost paid to Government as directed
by the Privy Council were expenses incurred in
the ordinary course of business and allowable
as deductions?”
395
The question as framed is somewhat vague. But it is common
ground that the Company claimed deduction under s. 10(2)
(xv) of the Indian Income-tax.Act, 1.922 on the footing that
the two amounts represented expenditure laid out wholly and,
exclusively by the Company for the purpose of its business.
The High Court answered the question in the negative. ‘With
special leave, the Company has appealed to this Court.
The Tribunal has found that after the order dated February
20, 1946 was issued, the Company did not deliver yarn to any
weaver. it is recited in the judgment of the Tribunal that a
“correct order by the proper authorities was passed” on
February 20, 1946 and, thereafter the Company did not
distribute any yarn to weavers. The averments made by the
Company in the petition under s. 45 of the Specific Relief
Act, are somewhat involved, but in substance the claim of
the Company was that the Provincial Textile Commissioner was
incompetent to pass the order dated February 20, 1946 which
placed restrictions on the business of the Company and the
order was “likely to cause irreparable and irretrievable
injury”, and it was prayed that an order do issue under s.
45 of the Specific Relief Act restraining the Provincial
Textile Commissioner from enforcing the order and the
Textile Commissioner be prohibited by an order from seizing
the yarn delivered to the weavers outside the factory and be
further ordered to restore the yarn already seized. No
clear averment was made in the petition about the date on
which the yarn seized had been delivered by the Company to
the weavers.
This petition failed, because the High Court had no
jurisdiction to entertain the petition, and also because the
expression “deliver” used in cl. 18-B of the Control Order
included handing over of yarn to the weavers outside the
premises of the factory for conversion into cloth. But
expenditure incurred in prosecuting a civil proceeding
relating to the business of an assessee is admissible as
expenditure laid out wholly and exclusively for the purpose
of the business even if the proceeding is decided against
the assessee. It was held by this Court in Commissioner of
Income-Tax, West Bengal v. H. Hirjee(1) that the
deductibility of expenditure under s. 10(2) (xv) must depend
on the nature and purpose of the legal proceeding in
relation to the business whose profits are under computation
and cannot be affected by the final outcome of that.
proceeding. The proceeding started by the Company was in
relation to the business of the Company. The Company was
thereby seeking relief against interference by the executive
authorities in the conduct of its business in the manner in
which it was being carried on previously. It was also
seeking to obtain an order for restoration of its goods
which were seized. It may be
(1) [1953] S.C.R. 714 : 23 I.T.R. 427.
M15Sup CI/66 12
396
granted that the Company was, in starting the proceeding,
ill-advised. However wrongheaded, ill-advised, unduly
optimistic, or overconfident in his conviction the assessee
may appear in the light of the ultimate decision,
expenditure in starting and prosecuting the proceeding may
not be denied admission as a permissible deduction in
computing the taxable income, merely because the proceeding
has failed, if otherwise the expenditure is laid out for the
purpose of the business wholly and exclusively, i.e.
reasonably and honestly incurred to promote the interest of
the business. Persistence of the assessee in launching the
proceeding and carrying it from Court to Court and incurring
expenditure for that purpose again cannot be a ground for
disallowing the claim.
Under s. 10(2)(xv) of the Indian Income-tax Act as amended
by Act 7 of 1939 expenditure even though not directly
related to the earning of income may still be admissible as
a deduction. Expenditure on civil litigation commenced or
carried on by an assessee for protecting the business is
admissible as expenditure under s. 10(2) ((xv) provided
other conditions are fulfilled, even though the expenditure
does not directly relate to the earning of income. Expendi-
ture incurred not with a view to direct and immediate
benefit for -purposes of commercial expediency and in order
indirectly to facilitate the carrying on of the business is
therefore expenditure laid out wholly and exclusively for
the purposes of the trade. In Morgan (Inspector of Taxes)
v. Tate & Lyle Ltd.(1) the House of Lords held that
expenditure incurred by a Company engaged in :sugar
refining, in a propaganda campaign to oppose the threatened
nationalization of the industry was a sum wholly and
exclusively laid out for the purpose of the Company’s trade
and was an admissible deduction from its profits for income-
tax purposes. A’. majority of the House held that the
object of the expenditure being to preserve the assets of
the Company from seizure and -so to enable it to carry on
and earn profits, the expenditure was a permissible
deduction under r. 3(a) of the Rules applicable to cases (1) &
(2) of Sch. D of the Income-tax Act, 1918.
The object of the petition filed by the Company was to
secure a declaration that the order dated February 20, 1946
insofar as it sought to put restrictions upon the right of
the Company to carry on its business in the manner in which
it was accustomed to do was unauthorized and to prevent
enforcement of that order: thereby the Company was seeking
to obtain an order from the Court ,enabling the business to
be carried on without interference. Expenditure incurred in
that behalf would without doubt be expenditure laid out
wholly and exclusively for the purpose of the business of
the Company.
(1) 26 I.T.R. 195 : 35 T.C. 367.
397
It was argued however that the any delivered by the Company
to the weavers contrary to the prohibitory order dated
February 20, 1946 was attached under the order of the
Provincial Textile Commissioner, and since the Company
violated the prohibitory order, the primary object of the
petition for mandamus instituted by the Company was to
secure protection against prosecution of the Company and an
order for return of the goods in respect of which an offence
was committed. Expenditure incurred,in prosecuting that
claim was, it was said, not laid out wholly and exclusively
for the purpose of the business. Reliance was placed upon
the judgment of this Court in H. Hirjee’s case(1) in which
it was held that a person who was prosecuted for an offence
under s. 13 of the Hoarding and Profiteering Ordinance,
1943, on a charge, of selling goods at prices higher than
were reasonable, in contravention of the provisions of s. 6
thereof, and a part of his stock was seized and taken away,
was not entitled to claim deduction under S. 10(2)(xv) of
the Income-tax Act for the sums spent in defending the
criminal proceedings against him because the expenditure
could not be said to have been laid out and expended wholly
and exclusively for the purpose of the business. But the
assumption underlying the argument is not true. The
Tribunal has in the statement of the case observed in
paragraph-2 :
“Subsequently, on 20th February 1946, a proper
order by the appropriate authority was passed
and it is common ground that after that date,
at any rate no further distribution of yarn
was made by the assessee. In the interim
(period) between 7th February 1946 and 20th
February 1946, the yarn which was distributed
to the handloom weavers was the subject of
seizure by the provincial Textile Commissioner
and this the assesse sought to resist by
filing an application under section 45 of the
Specific Relief Act 1, of 1877
In the view of the Tribunal the Company did -not act in
violation of the terms of the order dated February 20, 1946;
it cannot there fore be said that the Company was seeking to
protect itself against a criminal prosecution and the
consequences arising from infringement of the order dated
February 20, 1946.
It is true that in the judgment in appeal from the order
refusing mandamus, Leach, C.J. speaking for the Court
observed: (see Sree Meenakshi Mills v. Provincial Textile
Commissioner, Madras(2):
“In spite of the fact that this order in
effect prohibited the appellant delivering
yarn to owners of handlooms situate outside
the mill premises, the appellant continued to
deliver yarn to such weavers.”, and
(1) [1953] S.C.R. 714 23 I.T.R. 427.
(2) A.I.R. 1947 Mad. 82,
398
the Judicial Committee observed:
“Despite. the prohibition the appellant
continued to deliver yarn to such owners in
order (as already mentioned) that they might
turn the yarn into. cloth and bring the
article back to the mills.”
(See Sree Meenakshi Mills Ltd. v. Provincial Textile
Commissioner; Madras(1).
But the Tribunal has observed in its order dismissing the
appeal filed by the Company that it was “not disputed
before” them that, after February 20, 1946 the Company did
not distribute any yam.
The question referred in this case must be decided not on
what was found or observed by the High Court in appeal from
order, in the proceedings under s. 45 of the Specific Relief
Act or by the Judicial Committee, but upon findings of fact
recorded by. the Tribunal. It is unfortunate that the High
Court took the facts, not from the statement of the case,
but apparently from the judgment. of the Judicial Committee.
The High Court assumed that the Company had contravened the
law because it delivered yarn to weavers in contravention of
the order dated February 20, 1946. But the assumption on
which the discussion is founded is erroneous.
The High Court also thought that expenditure to fall within
the terms of s. 10(2)(xv) must be one for the purpose of
earning income, and there was no material on the record to
show that the expenditure was so incurred. If it is
intended thereby to imply that the primary motive in
incurring the expenditure admissible to deduction under s.
10(2)(xv) must be directly to earn income thereby, we are
with respect unable to agree with that view.
This Court in Commissioner of Income-tax, Kerala v. Malaya-
lam, Plantations Ltd.(2) observed:
“The expression “for the purpose of the
business” is wider in scope than the
expression “for the purpose of earning
profits”. It’s range is wide: it may take in
not only the day to day running of a
business, but also the rationalizationof
administration and modernization of its
machinery: it may include measures for the
preservation of the business or for the
protection of its assets and property from
expropriation coercive process or assertion of
hostile title: it may also comprehend payment
of statutory dues and taxes imposed as a
precondition to commence or for carrying
(1)L.R. 76, I.A. 191, 195.
(2)[1964] 7 S.C.R. 693,705:53 I.T.R. 140, 150.
399
on of a business; it may comprehend many other
acts incidental to the carrying on of a
business.”
Expenditure incurred to resist in a civil proceeding the
enforcement of a measure-legislative or executive, which
imposes restrictions on the carrying on of a business, or to
obtain a declaration that the measure is invalid would, if
other conditions are satisfied, be admissible, in our
judgment, under s. 10(2)(xv) as a permissible deduction in
the computation of taxable income.
The appeals are therefore allowed. The question referred is
answered in the affirmative.- The appellant-Company will be
entitled to its costs in this Court and the High Court. One
hearing fee.
y. P.
Appeals allowed.
400