# [1967] 1 S.C.R. 392

- **Citation:** [1967] 1 S.C.R. 392
- **Court:** Supreme Court of India
- **Decided:** 1966-09-19
- **Bench:** J. c. SHAH Al\D v. Bl!ARGAVA
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1967-1-s-c-r-392-3835
- **Pages:** 8

## Headnote

Income-tax Act, 1922 (II of 1922), •· 10(2)(xv)-Expendlturc tn-
-cun-ed for proceedings ·to prevent enforcement of order interfering with
buslMss-lf admissible deduction.
The assessee-mill claimed deduction under s. 10(2) (xv) of the Indian
lllcomo-tax Act of the expemm incurred by It and tho costs awarded ID
Government in respect of unsuccessful writ petition and appeals
therefrom.
The deduction was disallowed by the depanmental authorities, and
tho question was answered against tho asaessce by tho High Court.
ID
appeals to this Court
HEID : Tiie appeal must be allowed.
The proceeding started by the as.,cssee \Vas in relation 10 the busines5
of the assessee.
Bxpcnditure incurred to resist in a civil proceeding
the enforcement
of a measur&--legislative or executive, which imposes restriction• on tho
Q.rrying on of a business Qr to obtain a declarat100
that the mea;urc is
invalid
would. if other conditions are •atmied, be
admissible under a.
10(2) (xv) as a permissible deduction In the computation of taxable Income,
even thoush the expenditure does not direcUy
relate to the earning of
income. Expenditure may not be denied admission as a permissible deduc·
tion in computing the taxable income merely because the proceeding has
failed.
Pe,..istencc of the assessee in launchmg the proceeding and call"f·
Ing it from Coun to Court and Incurring expeoditure for that purpoee
again cannot be a ground far disallowing the claim.
(396 B-C; 399 BJ
Comml.nloner of Income-tax, Wat Bengal v. ff. Hlrjee 23 l.T.ll. 417,
Morgan (Inspector of Taxes) v. Tat• de Lyle Ltd. 26 1.T.R. 195 : 35 T.C.
367 and Commissioner of Incom•-tax, Kuala v. Malaya/am
Plantatlom
Lid., [196 HJ 7 S.C.R. 693, referred to.
OvrL Al'PELLATF. JURISDICTION: Civil Appeals Nos. 557 & 558
()r 1965,
Appeal by special leave from the judgment and order dated
September 19, 1962 of the High Court or Judicature at Madras (in
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Tax Case No. 87 of 1960),
G
R. Ganapatlzy Iyer, for the appellant.
R. M. Jfazarnal'is and R. N. Sachthey, for the respondent.
The Judgment of the Courl was delivered by
Shah, J.-Srec Meenakshi Mills Ltd.-a company incorporated
under the Indian Companies Act with its registered office at Madurai
<:arrics on business of cotton spinning and weaving. In the premises
or the factory of the Company there are initalled 80 handlooms
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MEENAKSHI MILLS v. Ccl.T. (Shah, J.)
393
These h.andlooms were found inadequate to weave the yarn produced by the factory and a part of the yarn produced was distributed
to weavers outside the factory who were engaged by the Company
to weave the yarn into cloth. Under cl. 18-B of the Cotton Cloth
and Yam (Control), Order, ·1945, issued bythe Government of
India, the Textile Commissioner was authorized to direct any
manufacturer or dealer or any class of manufacturers or dealers,
inter alia, not to sell or deliver any yarn or cloth of specified description except to such person or persons and subject to such conditions
as the Textile Commissioner may specify. On February 7, 1946,
the Textile Commissioner issued an order directing the Company
not to sell or deliver any yarn manufactured by the Company exeept
to such person or persons as the Textile Commissioner·may specify.
It was recited in the order that "nothing in this Order shall apply
to a sale or delivery made, in pursuance of clause 18-A of the said
order, to any dealer in yam not engaged in the production of cloth
on handlooms or powerlooms". The Company addressed a letter
on February 13, 1946 to the Textile Commissioner submitting that
the
prohibition in general terms was ultra vires the authority
conferred by the Cotton Cloth and Yarn (Control) Order. The
Company
continued notwithstanding the prohibition to deliver
yarn to weavers and did so till February 20, 1946. This yam
was seized under the orders of the Textile Commissioner. On
February 20, 1946, the Provincial Textile Commissioner, purporting
to act in exercise of authority conferred upon him by a no

## Text

SHREE MEENAKSHI MILLS LTD., MADURAI
A
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COMMISSIONER OF INCOME-TAX, MADRAS
September 19, 1966
(J. c. SHAH Al\D v. Bl!ARGAVA, JJ.]
Income-tax Act, 1922 (II of 1922), •· 10(2)(xv)-Expendlturc tn-
-cun-ed for proceedings ·to prevent enforcement of order interfering with
buslMss-lf admissible deduction.
The assessee-mill claimed deduction under s. 10(2) (xv) of the Indian
lllcomo-tax Act of the expemm incurred by It and tho costs awarded ID
Government in respect of unsuccessful writ petition and appeals
therefrom.
The deduction was disallowed by the depanmental authorities, and
tho question was answered against tho asaessce by tho High Court.
ID
appeals to this Court
HEID : Tiie appeal must be allowed.
The proceeding started by the as.,cssee \Vas in relation 10 the busines5
of the assessee.
Bxpcnditure incurred to resist in a civil proceeding
the enforcement
of a measur&--legislative or executive, which imposes restriction• on tho
Q.rrying on of a business Qr to obtain a declarat100
that the mea;urc is
invalid
would. if other conditions are •atmied, be
admissible under a.
10(2) (xv) as a permissible deduction In the computation of taxable Income,
even thoush the expenditure does not direcUy
relate to the earning of
income. Expenditure may not be denied admission as a permissible deduc·
tion in computing the taxable income merely because the proceeding has
failed.
Pe,..istencc of the assessee in launchmg the proceeding and call"f·
Ing it from Coun to Court and Incurring expeoditure for that purpoee
again cannot be a ground far disallowing the claim.
(396 B-C; 399 BJ
Comml.nloner of Income-tax, Wat Bengal v. ff. Hlrjee 23 l.T.ll. 417,
Morgan (Inspector of Taxes) v. Tat• de Lyle Ltd. 26 1.T.R. 195 : 35 T.C.
367 and Commissioner of Incom•-tax, Kuala v. Malaya/am
Plantatlom
Lid., [196 HJ 7 S.C.R. 693, referred to.
OvrL Al'PELLATF. JURISDICTION: Civil Appeals Nos. 557 & 558
()r 1965,
Appeal by special leave from the judgment and order dated
September 19, 1962 of the High Court or Judicature at Madras (in
ll
c
D
E
F
Tax Case No. 87 of 1960),
G
R. Ganapatlzy Iyer, for the appellant.
R. M. Jfazarnal'is and R. N. Sachthey, for the respondent.
The Judgment of the Courl was delivered by
Shah, J.-Srec Meenakshi Mills Ltd.-a company incorporated
under the Indian Companies Act with its registered office at Madurai
<:arrics on business of cotton spinning and weaving. In the premises
or the factory of the Company there are initalled 80 handlooms
H
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MEENAKSHI MILLS v. Ccl.T. (Shah, J.)
393
These h.andlooms were found inadequate to weave the yarn produced by the factory and a part of the yarn produced was distributed
to weavers outside the factory who were engaged by the Company
to weave the yarn into cloth. Under cl. 18-B of the Cotton Cloth
and Yam (Control), Order, ·1945, issued bythe Government of
India, the Textile Commissioner was authorized to direct any
manufacturer or dealer or any class of manufacturers or dealers,
inter alia, not to sell or deliver any yarn or cloth of specified description except to such person or persons and subject to such conditions
as the Textile Commissioner may specify. On February 7, 1946,
the Textile Commissioner issued an order directing the Company
not to sell or deliver any yarn manufactured by the Company exeept
to such person or persons as the Textile Commissioner·may specify.
It was recited in the order that "nothing in this Order shall apply
to a sale or delivery made, in pursuance of clause 18-A of the said
order, to any dealer in yam not engaged in the production of cloth
on handlooms or powerlooms". The Company addressed a letter
on February 13, 1946 to the Textile Commissioner submitting that
the
prohibition in general terms was ultra vires the authority
conferred by the Cotton Cloth and Yarn (Control) Order. The
Company
continued notwithstanding the prohibition to deliver
yarn to weavers and did so till February 20, 1946. This yam
was seized under the orders of the Textile Commissioner. On
February 20, 1946, the Provincial Textile Commissioner, purporting
to act in exercise of authority conferred upon him by a notification
issued by the Government of India, issued an order addressed to
the Company that:
"You should accordingly confine your delivery to the categories
of persons notified below:-
(a) Licensed yarn dealers (in accordance with the said 18-A
of the Control Order).
(b) to consumers who purchased yarn directly from you
(luring the basic period 1940-42 (in accordance with my
circular letter dated 4th January 1946 referred to above).
(c) your handloom factory situated in the premises of your Mill
at Madurai (just the quantity of yarn required).
"Note:-Any other delivery of yarn by you which is not
covered by a special order or permission of the Textile
Control Authorities· will accordingly be a contravention
of the Textile Commissioner's order under clause 18-B
referred ~o above."
After this order was issued, the Company did not deliver any
yarn to weavers.
On March 4, 1946 the Company filed a petition for a writ of
mandamus in the High Court of Madras under s. 45 of the Specific
394
SUPREME COURT REPORTS
(1967] I S.C.R.
Relief Act praying for an order directing the Provincial Textile
Commissioner, Madras to desist from seizing the yarn supplied
to the weavers at or around Madurai and Rajapalayam for the
purpose of converting the yarn belonging to the Company into
cloth; to restore to the Company or to direct the Provincial Textile
Commissioner and his subordinates to restore the yarn already
seized; and to forbear from seizing or to direct the subordinates
of the Provincial Textile Commissioner to forbear from seizing the
yarn that may be entrusted to the weavers by the Company in the
usual course of business according to the practice already obtaining
for conversion into cloth. This petition was dismissed by Kunhi
Raman, J, and the order of dismissal was confirmed in appeal by
the High Court. The matter was then carried in appeal to the
Privy
Council. The
Judicial Committee dismissed the appeal
filed by the Company. They held, agreeing with the High Court,
that the expression "deliver" in cl. 18-B sub-cl. l(b) of the Cotton
Cloth and Yarn (Control) Order, 1945, is used in its ordinary broad
sense of handing over possession, as distinct from passing of
property, and would include delivery of possession to a bailee.
Accordingly, delivery of part of its yarn by the Company to owners
of handlooms outside the mill premises for conversion of the yam
into cloth for the Company was in contravention of the order
made under cl. 18-B sub. cl. (I) (b). The Judicial Committee also
held that a petition under s. 45 of the Specific Relief Act, 1877,
directing the Provincial Textile Commissioner to desist from seizing
the yarn supplied to the weavers and to restore to the Company the
yarn already seized was incompetent as the acts in respect of.which
relief was asked for took place outside the limits of the ordinary
original civiljurisdiction of the High Court.
The Company spent Rs. 20,035/- in prosecuting the proceeding., under s. 45 of the Specific Relief Act and had also to pay Rs.
5,912/-
as costs to the Government of the unsuccessful appeal
to the Judicial Committee. In its returns of income the Company
claimed deduction of the amounts of Rs. 20,035/- and Rs. 5,912/-
for the assessment years 1949-50 and 1950-51 respectively as being
expenditure wholly and exclusively laid out for the purpose of its
business. The claims were rejected by the departmental authorities,
and by the Income-tax
Appellate Tribunal. The Tribunal then
referred the following question to the High Court of Judicature
at Madras :
·'Whether the expenses of Rs. 20,035/- incurred in the
assessment year 1949-50 and Rs. 5,912/- (relating to the
assessment year 1950-51) being the cost paid to Government
as directed by the Privy Council were expenses incurred in
the ordinary cour,;e of business
and allowable us
deductions'>"
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MEENAKSffi MIUS 1', C.f.T. (Shah, /.)
The question as framed is somewhat vague. But it is common
ground that the Company claimed deduction under s. 10(2) (xv)
of the Indian Income-tax Act, 1922 on the footing that the . two
amounts represented expenditure laid out . wholly and ~xclus1vely
by the Company for the purpose of its busmess.
Th~ High Court
lU}swered the question in the negative. With special leave, the
Company has appealed to this Court.
'I
The Tribunal has found that after the order dated February 20,
1946 was issued, the Company did riot deliver yarn to any weaver.
It is recited in the judgment of the Tribunal that a "correct order
by the proper authorities was passed" on February 20, 1946 and
thereafter the Company did not distribute any yarn to weavers.
The averments made by the Company in the petition under s, 45
or the Specific Relief Act, are somewhat involved, but in substance
the claim of the Company was that the Provincial Textile Comrnis"
sioner was incompetent to pass the order dated February 20, 1946
which placed restrictions on the business of the Company and
the order was "likely to cause irreparable and irretrievable injury",
and it was prayed that an order do issue under s. 45 of the Specific
Relief Act restraining the Provincial Textile Commissioner from
enforcing the order and the Textile Commissioner be prohibited
by an order from seizing the yarn delivered to the weavers outside·
the factory and be further ordered to restore the yarn already
seized. No clear averment was made in the petition about the
date on which the yarn seized had been delivered by the Company
to the weavers.
'
This petition failed, because the High Court had no jurisdiction to entertain the petition, . and also because the expression
"deliver" used in cl. 18-B of the Control Order included handing
over of yarn to the weavers outside the premises of the. factory
for conversion into cloth. · But expenditure incurred in prosecuting
a civil proceediag relating to the business of an assessee is admissible
as expenditure laid out wholly and exclusively for the purpose
of the business even if the proceeding is decided against the assessee.
It was held by this· Court in Commissioner of Income-Tax,
West
Bengal v. H. Hirjee(1) that the deductibility of expenditure ur.der
s. 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 cannot be affected by the final outcome of that
proceeding. The proceeding started
by the Company was in
·relation to the business of the Company. The Company was
thereby seeking relief agairist interference by the executive authorities in the conduct of its business in the manner in which it was·
being carried on previously. It was also seeking to obtain ail
order for restoration of its goods which were seized. It may be
(I) [19531 S.C.R. 714 : 23 I.T.R. 427.
MlSSup Cl/66 12
396
SUPRBMl! COURT ltBPOllTS
[1967] I S.C.R.
granted that the Company was, in starting the proceeding, illadvised. However wrongheaded, ill-advised, unduly optimistic, or
overconfident in his conviction the assessee may appear in the light
ofthe ultimate decision, expenditure in starting and prosecuting the
proceeding may not be denied admission as a permissible deduction
in computing the taxable income, merely because the proceeding ha&
failed, if otherwise the expenditure is laid out for the purpose of the
business wholly and exclusively, i.e.
reasonably and honestly
incurred to promote the interest of the business. Persistence of the
as5essee in launching the proceeding and carrying it from Court te
Court and incurring expenditure for that purpose again cannot be
a ground for disallowing the claim.
Under s. 10(2)(xv) of the Indian Income-tax Act as amended by
Act 7 of 1939 expenditure even though not directly related to the
urning of income may still be admissible as a deduction. Expenditure on civil litigation commenced or carried on by an assessee for
protecting the business is admissible as expenditure under s. 10(2)
(xv) provided other conditions are fulfilled, even though the expenditure does not directly relate to the earning of income. Expenditure incurred not with a view to direct and immediate benefit for
purposes of commercial expediency and in order indirectly to
facilitate the carrying on of the business is therefore expenditure
laid out wholly and exclusively for the purposes of the trade. Iii
Morgan (Inspector of Taxes) v. Tate & Lyle ltd.(1) the House of
Lords held that expenditure incurred by a Company engaged in
sugar refining, in a propaganda campaign to oppose the threatened
nationalization of the industry was a sum wholly and exclusively
laid out for the purpose of the Company's trade and was an admissible deduction from its profits for income-tax purposes. A
majority of the House held that the object of the expenditure
being to preserve the assets of the Company from seizure and
so to enable it to carry on and earn profits, the expenditure was a
permissible deduction under r. 3(a) of the Rules applicable to cases
{I) & (2) of Sch. D of the Income-tax Act, 1918.
The object of the petition filed by the Company was to secure
a declaration that the order dated February 20, 1946 insofar af
it sought to put restrictions upon the right of the Company to
carry on its business in the manner in which it was accustomed
to do was unauthorized and to prevent enforcement of that order:
thereby the Company was seeking to obtain an order from the Court
enabling the business to be carried on without interference. Expenditure incurred in that behalf would without doubt be expenditure laid out wholly and exclusively for the purpose of the business
of the Company.
(I) 26 1.T.R. I9S : 3S T.C. 367.
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MEENAICSHI MILLS V. C.I. T. (Shah, ]. )
397
It was argued however that the yarn delivered by the Company
to the weavers contrary to the prohibitory order dated February
20, 1946 was attached under the order of the Provincial Textile
Commissioner, and since the Company violated the prohibitory
order, the primary object of the petition for mandamus instituted
by the Company was to secure protection against prosecution of
the Company and an order for return of the goods in respect
of which an offence was committed.
Expenditure incUI'red in .
prosecuting that claim was, it was said, . not laid out wholly and
eKclusively for the purpose of the business.
Reliance was placed
upon the judgment of this Court in H. Hirjee's case(') in which
it was held that a person who was prosecuted for an offence under s.
11 of the Hoarding and Profiteering Ordinance, 1943, on a charge of
selling goods at prices higher than were reasonable, in contravention of the provisions of s. 6 thereof, and a part of his stock was
seized and taken away, was not entitled to claim deduction undet s.
VJ(2)(xv) of the Income-tax Act for the sums spent in defending the
criminal proeeedings against him because the expenditure could not
be said to have been laid out and expended wholly and exclusively
for the purpose of the business. But the assumption underlying the
argument is not true. The Tribunal has in the statement of the case
observed in paragraph-2 :
"Subsequently, on 20th February 1946; a proper order
by the appropriate authority was pas·sed and it is common
ground that after that date, at anv rate no further distribution of yarn was made by the assessee.
In the interim
(period) between 7th February 1946 and 20th February
1946, the yarn which wa' -distributed to the handloom
weavers was the subject of seizure by the provincial Textile Commissioner and this the assesse~ sought to resist by
filing an application under section 45 of the Specific Relief
Act I of 1877 . . ."
In the view of the Tribunal the Company did not act in violation
of the terms of the order dated February 20, 1946; it cannot therefore be said that the Company was seeking "to protect itself against
a criminal prosecution and the consequences arising from infringment of the order dated February 20, 1946.
It is true that in the judgment in appeal from the order refusing
mandamus, Leach, C.J., speaking for the Court observed: (see
Sree Meenakshi Mills v. Provincial Textile Commissioner, Madras(2):
"In spite of the fact that this order in effect prohibited
the appellant delivering yarn to owners of handlooms situate
outside the mill premises, the appellant continued to deliver
yarn to such weavers.", and
(1) (1953] S.C.R. 714: 23 1.T.R. 427.
(2) A.LR. 1947 Mad. 82.
398
SUPREME COURT REPORTS
[1967] l s.c.R.
the Judicial Committee observed:
"Despite the prohibition the appellant continued to
deliver yarn to such owners in order (as already mentioned)
that they might turn the yarn into cloth and bring the
article back to the mills."
(See Sree Meenakshi Mills Ltd. v. Provincial Textile Commissioner,
Madras(').
But the Tribunal has observed .in its order dismissing the appeal
filed by the Company that it was "not disputed before" them that
after February 20, 1946 the Company did not distribute any yam.
The question referred in this case must be decided not on what
was found or observed by the High Court in appeal from order
in.the proceedings under s. 45 of the Specific Relief Act or by the
Judicial Committee,
but upon findings of fact recorded by the
Tribunal. It is unfortunate that the High Court took the facts
not from the statement of the case, but apparently from the judgment of the Judicial Committee. The High Court assumed that
the Company had contravened the law because it delivered yarn
to weavers in contravention of the order dated February 20, 1946.
But the assumption on which the discussion is founded is erroneous.
The High Court also thought that expenditure to fall within
the terms of s. 10(2)(xv) must be one for the purpose of earning income, and there was no material on the record to show that the
expenditure was so incurred. If it is intended thereby to imply
that the primary motive in incurring the expenditure admissible
to deduction under s. 10(2)(xv) must be directly to earn income
thereby, we are with respect unable to agree with thal view.
This Court in Commissioner of Income-tax, Kera/a v. Malayalam Plantations Ltd.(2) observed:
"The expression "for the purpose of the business" is
wider in scope than the expression "for the purpose of
earning profits''. Its range is wide: it may take in not only
the day to day running of a business, but also the rationalization of administration and modernization of its machinery:
it may include measures for the preservation of the business
or for the protection of its assets and property from expropriation, coercive process or assertion of hostile title: it may
also comprehend payment of statutory dues and taxes
imposed as a precondition to commence or for carrying
(I) L.R. 76 I.A. 19t, 195.
(2} (19641 7 S.C.R. 693, 705 : S3 l.T.R. 140, ISO.
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MEENAKSm MILLS v. C.I.T. (Shah, J.)
on of a busiiiess; it may comprehend many other acts incidental to the carrying on of a business."
399
Expenditqre incurred to resist in a civil proceeding the enforcement
of a measure-legislative or executive, which imposes restrictions
on the carrying on of a business, or to obtain a declaration that
the measure is invalid would, if other conditions are satisfied, be
admissible, in our judgment, under s. 10(2)(xv) as a permissible
deduction in the computation of taxable· income.
The appeals are therefore allowed. The question referred is
answered in the affirmative. The appellant-Company' will . be
entitled to its costs in this Court and the High Court. One hearing
fee.
Y.P ..
Appeals allowed.