MODI INDUSTRIES LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE Income-tax Appellate Tribunal, Delhi Bench "A ", has under Section 256(1) of the Act referred Ihe following two questions for our opinion :

(2.) THE facts necessary for answering these two questions may now be stated. THE petitioner-company and one Modi Supply Corporation Ltd. were amalgamated under a scheme sanctioned by the Punjab High Court on May 25, 1956. THE amalgamation, however, actually took place on 25th August, 1956. Subsequently, assessment was made of Modi Supply Corporation Ltd. for the assessment year 1952-53, on a total income of Rs. 3,97,644. Subsequently, a demand for an amount of Rs. 61,537 including taxes and penalty was raised, and the amount was recovered by the department from the assessee some time before September 30, 1959. THE assessee's appeal in respect of this amount to the Appellate Assistant Commissioner and the Tribunal were unsuccessful. In 1961, a suit was filed against the Union of India in the Court of II Civil Judge, Meerut, for the recovery of the amount of tax, realised from them on account of the demand on Modi Supply Corporation. This suit was dismissed on May 23, 1962. Expenses to the tune of Rs. 6,025 had been incurred by the assessee in connection with this litigation, and this was claimed as a deduction. THE Income-tax Officer held that the amount was not allowable because it related to recovery of income-tax. THE Appellate Assistant Commissioner also disallowed the claim. THE Tribunal on appeal did not accept the assessee's contention arid disallowed the claim.

(3.) THE principle on which legal expenses are allowable as "business expenditure" are more or less now settled by a catena of decisions. Normally speaking, legal costs incurred in the course of the normal carrying on of a business is an allowable deduction. THE general test, so far as legal expenses are concerned, is as to whether the assessee incurred the expenses in its character as a trader and the liability fell on him as a trader, and whether the transaction in respect of which the proceedings are taken out, arose out of and was incidental to the assessee's business. THE deducibility of such expenditure is not dependent on the merits of the case, or the result of the proceedings (See Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax [1967] 63 ITR 207 (SC)). THE question is whether the expendi ture incurred by the assessee can, on these principles, be allowed as a business expenditure. In this connection, it is now necessary to refer to cases relied upon by the counsel for the assessee in order to substantiate the claim of the assessee for deduction.