G. Veerappa Pillai vs Commissioner of Income Tax, Madras

Srinivasan, J.—The assessee, Veerappa Pillai, was running a bus service. He had an account with the Hanuman Bank Ltd., Tanjore. The

bank provided him with overdraft facilities as well. When the bank went into liquidation in 1947, the official liquidators made a claim against the

assessee for a sum of Rs. 2,37,600 as the amount appearing in the books of the bank as a debit against the assessee. The assessee disputed the

correctness of this amount, contending that there was an excess debit to the extent of one lakh of rupees. Proceedings were started by the official

liquidators for recovery of the amount. Ultimately, the question was decided in favour of the assessee. During those proceedings, the assessee

incurred certain legal expenses which he claimed were allowable in his assessments for the relevant assessment years 1949-50 to 1952-53. It may

be mentioned that before the department and the Tribunal a claim was also made in respect of legal expenses connected with a criminal

prosecution of the assessee. It would appear that these criminal proceedings were launched against the assessee, on the charge that he conspired

with the directors of the bank in defrauding the shareholders. These proceedings dragged on for some years and finally the assessee was acquitted.

The Income Tax Officer disallowed the entire expenditure, holding that it was not an expenditure incurred in connection with the assessees

business. On successive appeals, both the Appellate Assistant Commissioner and the Tribunal reached the same conclusion, holding that the

expenditure was not incurred wholly and exclusively for the purpose of the business.

On the application of the assessee, the Tribunal referred the following question :

Whether, on the facts and in the circumstances of the case, the expenditure incurred by the assessee in connection with the civil suit filed by the

liquidators of the Hanuman Bank is an admissible deduction under the provisions of section 10(2)(xv) of the Act ?

It may be stated that at the time the assessee sought for the reference, it was conceded on behalf of the assessee that the allowance claimed in

respect of the expenditure incurred in connection with the criminal proceedings was not pressed. The question, therefore, relates only to the

expenses relevant to the civil proceedings.

It seems to us that, on the bare facts, there can be no doubt that the expenditure in these civil proceedings is an expenditure which clearly falls

within the scope of section 10(2)(xv) of the Act. Mr. Ranganathan, learned counsel for the department, sought to suggest that the assessee had a

banking account for his individual and personal purposes and that it was not established that the transactions with the bank were exclusively in

respect of the business of the assessee. This argument cannot stand scrutiny as the Tribunal in its statement of the case has definitely stated that the

assessee was having an account with the Hanuman Bank for business purposes. ""He was depositing his daily takings in the said bank and was also

drawing on the bank as and when funds were required for expenses, etc., and besides this, he was also having overdraft facilities with the bank.

The Appellate Assistant Commissioner also found, ""the appellant owns a fleet of buses. In the course of his business, he had opened an overdraft

account in the Hanuman Bank Ltd. He was also crediting the daily receipts in the bank."" It may, therefore, be taken to be established that the

banking account was in relation to the business of the assessee so that the argument of the earned counsel for the department that these

transactions with the bank were not wholly and exclusively for the purpose of the business of the assessee cannot be accepted.

The short question then is whether where the assessee had to defend an action which arose out of the conduct of his business the legal expenses

incurred thereby would not properly fall within the scope of section 10(2)(xv) of the Act. The learned counsel for the department was not able to

deny that if the transactions with the bank were wholly concerned with the business of the assessee, the defence to an action with regard to the

claim of the bank must be taken to involve an expenditure relatable to the business. There was no material available to the department and the

Tribunal on the basis of which the Tribunal could hold that the expenditure was not laid out wholly and exclusively for the purpose of the business.

For whatever reasons it might be, there was an exclusive claim on the part of the official liquidators and the assessee had necessarily to contest the

action in the interests of his business, as the liability sought to be enforced arose in connection with the business.

It follows that the expenditure is an admissible deduction u/s 10(2)(xv) of the Act. The question is answered accordingly. The assessee will be

entitled to his costs. Counsels fee Rs. 250. Question answered accordingly.