Atlas Cycle Industries Ltd. vs Commissioner of Income Tax

S.S. Sodhi, J.—The reference here pertains to the following questions :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the depreciation u/s 32(1)(ii) of the Income Tax Act was not admissible in respect of the building of Ram Mandir ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure of Rs. 6,000 disbursed for being incurred on maintenance of Ram Mandir, was not allowable u/s 37(1) of the Income Tax Act ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the expense items of Rs. 2,514, Rs. 24,801, Rs. 2,378 and Rs. 838 were hit by the provisions of Section 37(2A) of the Income Tax Act ?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in disallowing legal expenses amounting to Rs. 7,243 incurred in connection with the criminal litigation pertaining to criminal conspiracy for commission of offence under the Essential Commodities Act, 1955 ?"

The answer to the first two questions has to be in the negative, in favour of the assessee and against the Revenue keeping in view the earlier judgment of this court in ATLAS CYCLE INDUSTRIES LTD. Vs. COMMISSIONER OF Income Tax, PATIALA., , pertaining to the same assessee for the earlier years.

As regards question No. (3), which concerns expenditure incurred on entertainment, the matter is covered by the decision of our Full Bench in Commissioner of Income Tax Vs. Khem Chand Bahadur Chand, , where it was held that all hospitality extended wholly or exclusively for the purposes of business, whether lavish or frugal, comes within the ambit of the phrase "in the nature of entertainment expenditure" and is consequently subject to the ceiling limits prescribed in Clauses (i) to (iv) of Sections 37(2A) of the Income Tax Act, 1961. This question has thus to be answered in the affirmative, in favour of the Revenue and against the assessee.

Turning now to the last question posed, namely, question No. (4), this pertains to legal expenses incurred by the assessee in connection with criminal litigation against the assessee under the Essential Commodities Act, 1955. In dealing with this matter, it would be pertinent to advert to the judgment of the Supreme court in Commissioner of Income Tax, Andhra Pradesh Vs. Dhanrajgiri Raja Narasingirji, , where it was observed, "In our opinion, it makes no difference whether the proceedings are civil or criminal. All that the court has to see is whether the legal expenses were incurred by the asses-see in his character as a trader, in other words, whether the transaction in respect of which proceedings are taken arose out of and was incidental to the assessee''s business. Further, we have to see whether the expenditure in question was bona fide incurred wholly and exclusively for the purpose of business."

Next to be noted is the judgment of our court in J. N. SINGH and CO. PRIVATE LTD. Vs. COMMISSIONER OF Income Tax, NEW DELHI., , where it was held, that "expenses incurred in defending an employee against a criminal prosecution with regard to a transaction carried out in the ordinary course of business of the assessee can be allowed as a permissible deduction". Such an expenditure, it was said, ''would be incurred to protect the good name of the business, the prosecution having emanated with regard to an act which took place in the ordinary course of business and the expenditure would thus be wholly and exclusively for the purpose of the business.

The other judicial precedents in favour of the assessee being ROHTAS INDUSTRIES LTD. Vs. COMMISSIONER OF Income Tax, BIHAR and ORISSA., ; Lakshmiji Sugar Mills Co. (P.) Ltd. Vs. Commissioner of Income Tax, ; and Commissioner of Income Tax Vs. Ahmedabad Controlled Iron and Steel Reg. Stock-Holders Association Pvt. Ltd., .

Mr. Ashok Bhan, Senior Advocate, appearing for the Revenue, on the other hand, sought to rely upon the judgment of the Supreme Court in Commissioner of Income Tax, West Bengal Vs. H. Hirjee, . This was a case pertaining to the prosecution of the assessee u/s 13 of the Hoarding and Profiteering Ordinance, 1943, on a charge of selling goods at prices higher than what was reasonable in contravention of the provisions of Section 6 thereof. The prosecution ended in an acquittal. It was held that, "in the circumstances of the case, the sum spent in defending the criminal proceedings was not an expenditure laid out or expended wholly and exclusively for the purpose of the business and it was, therefore, not an allowable deduction u/s 10(2)(xv) of the Indian Income Tax Act, 1922."

It will be seen that the view of the Supreme Court in Commissioner of Income Tax, West Bengal Vs. H. Hirjee, , appears to be at variance with that of Commissioner of Income Tax, Andhra Pradesh Vs. Dhanrajgiri Raja Narasingirji, , but, what is pertinent to note here are the observations of the Supreme Court in the latter case to the effect that the earlier cases where it had been held that the expenditure incurred by the assessee to defend himself against a criminal charge, did not fall u/s 10(2)(xv) of the Indian Income Tax Act, 1922, were decisions on their own facts. Commissioner of Income Tax, Andhra Pradesh Vs. Dhanrajgiri Raja Narasingirji, is thus what holds the field. Applying the test laid down therein, question No. (4) has clearly to be answered in the negative, in favour of the assessee and against the Revenue.

This reference is disposed of accordingly. There will, however, be no order as to costs.