South Asia Industries (P) Ltd. vs Commissioner of Income Tax

Dr. M.K. Sharma, J.—In this reference at the instance of the assessed the Tribunal has referred the following question to this Court for its opinion under s. 256(1) of the IT Act, 1961 (hereinafter called the Act) :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that Rs. 7,684 incurred on account of commission of inquiry expenses is not allowable revenue expenditure?"

The assessed is a private limited company. The reference relates to the asst. yr. 1961-62 for which the relevant accounting period was the year ending on 31st March, 1961. A commission of inquiry was appointed by the Central Government under the Commission of Inquiry Act to enquire into a report on the administration of nine companies, belonging to the group, the nature and extent of the control, direct or indirect, exercised over such companies and firms or any of them. The persons having control over the companies, their relatives, employees or persons asked for being defended by the companies concerned and desired that all the expenses legal or otherwise incurred or to be incurred in connection with or relating to the commission of inquiry be borne by these companies. In pursuance of the said request the board of directors of the company adopted a resolution resolving that all the expenses connected with the commission of inquiry shall be borne by the four companies of which the assessee-company was one. During the course of the aforesaid enquiry the assessee-company incurred a total expenditure of Rs. 40,726 in this regard and dividend the same into 4 parts to be shared by the said four companies and the amount coming to the share of the assessee-company was stated to be Rs. 7,684 which was claimed as a deduction in this year. The ITO held that there was no legal liability on the company to defend the said five persons or their relations or to incur a substantial expenditure in this regard. He disallowed the amount as being not in connection with or in respect of the carrying on of the business by the company. The AAC upheld the action of the ITO. In further appeal before the Tribunal it was held that as the enquiry in question was in connection with certain allegations against the group of which the assessee-company was a member it could not be taken as a normal hazard of an honest businessman and that as such the expenditure could not be considered to be the normal expenditure of the business wholly and exclusively laid out for its purpose.

Our attention has been drawn to two decisions of this Court in South Asia Industries (P) Ltd. Vs. The Commissioner of Income Tax, New Delhi, and also in the case of the same assessed namely - South Asia Industries (P.) Ltd. Vs. Commissioner of Income Tax, Delhi (Central), It is submitted that the question referred to us in the present reference is covered by the aforesaid two decisions of this Court. We have perused the ratio of the aforesaid two decisions referred to us and, in our opinion, the question referred to us in the present reference could be answered on the basis of the reasoning given in the said two cases decided by this Court. Accordingly, following the ratio of the aforesaid two decisions of this Court we answer the question referred to us in the negative, in favor of the assessed and against the Revenue.