COMMISSIONER OF INCOME TAX Vs. DHANRAJGIRIJI RAJA

JUDGEMENT

(1.) THE following are the two questions which were referred for our decision in this reference:

(2.) THE reference relates to two assessments of the assessee for the assessment years 1950-51 and 1951-52. THE assessee, who is an individual, derived during the previous years under consideration income from various sources. THE assessee claimed under Section 10(2)(xv) of the Income-tax Act of 1922, some deductions for the assessment years 1950-51 and 1951-52, Rs. 39,657 for the assessment year 1950-51 and Rs. 57,066 for the assessment year 1951-52 as amount spent by him in some criminal proceedings. THE question relates to this claim. THE relevant facts are as follows : In the year 1935, the assessee promoted a public limited company called "Dhanraj Mills Ltd." at Bombay. By an agreement with the said company the assessee was appointed as its managing agent for a period of 50 years. He was also appointed as its permanent director and chairman of the board of directors. When the company was involved in financial difficulties in the year 1937, upon one Ramgopal Ganpatrai agreeing to bring in the necessary finance, a tripartite arrangement was arrived at between the assessee, the limited company and the said Ramgopal Ganpatrai. It was agreed that the assessee should give up the managing agency, the company should appoint Ramgopal Ganpatrai or his nominee as the new managing agent and a selling agency agreement should also be entered into between the limited company and the said Ramgopal Ganpatrai or his nominee. As a result of this agreement, the assessee was to be paid a certain office allowance and a certain share in the managing agency commission by way of compensation. He was also to become entitled to 3/8th share of the selling agency commission as may accrue under the said selling agency agreement. It was also provided that in case either the managing agency agreement or the selling1 agency agreement were to be terminated, the assessee, at his option, would be entitled to resume the managing agency as well as the selling agency. In pursuance of the above tripartite agreement, necessary documents were executed by the limited company. Accordingly, the said managing agency business and the selling agency business were run by the said Ramgopal Ganpatrai or his nominee as a family firm for some years. In 1943, the said Ramgopal Ganpatrai floated two private limited companies and assigned the managing agency and the selling agency, respectively, to the two companies. THE assessee's consent thereto was also obtained as required. In 1946, Ramgopal Ganpatrai moved a resolution for the dismissal of the assessee as the chairman of the board of directors for certain defaults alleged to have been committed by him under Section 86F of the Indian Companies Act. By a resolution of the board of directors, the assessee was removed from the office of the chairman of the board of directors of the company. In 1947, the selling agency was surrendered by the concerned private limited company but it did not revert to the assessee as stipulated for. THE assessee thereupon entered into a civil litigation with Dhanraj Mills Ltd. He sought reinstatement as the chairman of the board of directors and sought to establish his right to assume the selling agency.

(3.) THE assessee claimed that those amounts spent by him for the civil and criminal proceedings should be allowed as admissible deductions. THE claim was rejected by the Income-tax Officer. When the matter came up before the Appellate Assistant Commissioner, he allowed the expenses incurred by the assessee in connection with the civil litigation but upheld the disallowance of expenses incurred in connection with the criminal litigation. THE Appellate Assistant Commissioner rejected the assessee's contention that the expenditure incurred by him in connection with the criminal proceedings was for the purpose of earning his income or for preserving his asset from which income was derived. When the matter came up before the Tribunal, it observed that the criminal action against the said Ramgopal Ganpatrai was a sequel to the civil litigation started by the assessee against the mill-company in which the said Ramgopal Ganpatrai was made co-defendant and arose, in any case, indirectly out of the relationship with the said Ramgopal Ganpatrai created by the agreements referred to above by and under which the assessee became entitled to the right to receive certain commission including getting the selling agency as a revisioner. It was observed by the Tribunal that the ultimate object of the criminal litigation pursued by the assessee was to get certain amounts by way of compensation in civil litigation which would be his income from the existing sources by way of managing agency commission, etc. THE assessee could not have solely been guided by the motive of personal vendetta against the said Ramgopal Ganpatrai. THE assessee stood to benefit by protecting the mill-company which had been defrauded of large amounts by Ramgopal Ganpatrai, the reimbursement of which to that extent would have ultimately benefited the assessee. Taking a broad view of. the matter the Tribunal observed that "it would be proper to hold that at least a part of these expenses incurred by the assessee over the criminal litigation should be considered as legitimate business expenses allowable as a deduction under Section 10(2)(xv) of the Income-tax Act of 1922". THE Tribunal allowed 1/3rd of the amount claimed as legitimate business expenditure. Questioning the above view taken by the Income-tax Appellate Tribunal, on the request of the department, this reference was made.