ROHTAS INDUSTRIES LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) This is a reference under section 66 (1) of the Indian Income Tax Act, at the instance of the assessee, Messrs. Rohtas Industries Ltd., relating to the assessment year 1953-54 (previous year from 1st of November, 1951, to 31st of October, 1952).

(2.) The assessee produced vanaspati vegetable oil. Their directors and principal officers were prosecuted under the Essential Supplies Temporary Powers Act, because the vegetable oil product of the company did not contain 5% til oil, as required by the order made under clause (9) of the aforesaid Act. The company incurred an expenditure of Rs. 5,859 in conducting that case and defending their officers. Ultimately, they were acquitted. The assessee claimed this expenditure as an expense under section 10 (2) (xv) of the Income Tax and finally, the Income Tax Appellate Tribunal. On the request of the assessee, the Tribunal has stated the case and formulated the following question to be considered by this court :

(3.) The main basis of disallowing the claim of the assessee by the revenue authorities was that the expenses in the criminal proceedings, in which the company and its officers were involved, could not be easily dissociated from the purposes of saving the accused person from a possible conviction and imposition of penalty. This reasoning was adopted from the decision of the Supreme court in Commissioner of Income Tax V/s. H. Hirjee. In our view, the facts of that case are company and its officers were involved, could not be easily dissociated from the purposes of saving the accused person from a possible conviction and imposition of penalty. This reasoning was adopted from the facts of the instant case before us. There, the assessee, who was a selling agent of a company was alleged to have sold goods at rates higher than the statutorily prescribed rate and was prosecuted on that account. The expenses incurred by him in defending himself till the stage of his acquittal were claimed as a deduction from the profits under section 10 (2) (xv) of the Act. There, it was disallowed on the ground that the primary purpose, for which the legal expense were incurred, was to save the accused from conviction and punishment and not for any purpose connected with the business. There, Lordships of the Supreme Court laid down that, "the deductibility of such expenses under section 10 (2) (xv) must depend on the nature and purpose of the legal proceeding in relation to the business whose profits are under computation, and account be affected by the final outcome of that proceeding." In the instant case, there cannot be any doubt that the nature and purpose of the legal proceedings was in relation to the quality and standard of the manufactured goods of the company. The prosecution was on the ground that those goods were below the standard and the company had to defend the quality of their were below the standard and the company had to defend the quality of their product by defending themselves in the criminal proceeding. In that view of the matter, it cannot be said that one of the primary purposes for incurring the expenditure in that criminal case was not the protection of the quality of their manufactured goods from the assailment charge against them. Therefore, the expenses incurred will be deductible under section 10 (2) (xv) of the Act.