# COMMISSIONER OF INCOME TAX, WEST BENGAL v. BIRLA COTTON SPINNING & WEA YING MILLS LTD. & ORS

- **Citation:** [1972] 1 S.C.R. 283
- **Court:** Supreme Court of India
- **Decided:** 1972
- **Case number:** Civil Appeals Nos. A 1351 to 1353, 1897 and 1241 of 1968
- **Bench:** K. s. HEGDE, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-west-bengal-v-birla-cotton-spinning-wea-ying-mills-5353
- **Pages:** 8

## Headnote

lndian Income-tax Act (11 of 1922), s.
10(2)(xv)-'For'the
purpose of business', scope of-Expenses incurred before Investigation Con1n1iss;on-Whether deductf!;.1.;.
The assessee, a public limited company. incurred legal expenses
for
representing its case before the
income-tax
Investigation
Commission. The proceeding before the Commission was a statutory
proceeding with a view to collecting materials for more taxation. The
expenses were claimed by the assessee as a deduction under s.10(2)(xv)
of the Income tax Act, 1922. The Income tax Officer, Appellate Assistant
Commissioner and the Tribunal disallowed the claim, but the
High Court, on reference, held in favour of the assessee.
Dismissing the appeal to this Court,
HELD: The expression 'for the purpose of the business' ins. 10(2)(xv)
is wider than the expression 'for the purpose of earning profits'. The
former covers,. not only the running of the business or its administration
but also measures for the preservation of the business and protection of
its assets and property. The test under the section therefore is whether
the expenses were actually and honestly incurred for the preservation
and protection of the assessee's business from any process or proceedings
which might have resulted in the reduction of its income and profits.
[286 G-H, 288D]
The earning of profits and the payment of taxes are not isolated and
independent activities of a business, but are continuous and take place:
from year to year during the whole period for which the busines.
coirlinues. If the assessee takes any steps for reducing its liability to
tax .which result in more funds being left for the purpose of carrying
on the ~usmess .there is ~!ways a possibility of higher profits. Therefore,
ex~nd1ture which was incurred by the assessee
in opposing a coerc1Ve go~ernmental action, with the object of saving taxation and
safeguarding business, was justified by commercial expediency and was,
hence, allowable under s.10(2)(xv) of the Act.
[288 E-H., 289A·F]
. Travancore Titanium Product Ltd., v. Commissioner of Income-tax
Kerala, 60 I.T.R. 277(S.C.) and Smith's Potato Estate Ltd. v. Bolland, 30
T.C. 267, referred to.
... C.I.T. Calcutta v. Calcutta Landing and Shipping Co. 77 T.T.R. 575
and Bansilal Abirchand Spinning and Weaving Mills v. C.I.T. Poona,
81 I.T.R. 34, approved.
284
SUPREME COURT REPORTS
fl 972] l S.C.R

## Text

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283
COMMISSIONER
OF INCOME TAX,
WEST
BENGAL
v.
BIRLA COTTON SPINNING & WEA YING MILLS LTD.
& ORS.
August 17, 197 l
(K. s. HEGDE AND A. N. GROVER, JJ.J
lndian Income-tax Act (11 of 1922), s.
10(2)(xv)-'For'the
purpose of business', scope of-Expenses incurred before Investigation Con1n1iss;on-Whether deductf!;.1.;.
The assessee, a public limited company. incurred legal expenses
for
representing its case before the
income-tax
Investigation
Commission. The proceeding before the Commission was a statutory
proceeding with a view to collecting materials for more taxation. The
expenses were claimed by the assessee as a deduction under s.10(2)(xv)
of the Income tax Act, 1922. The Income tax Officer, Appellate Assistant
Commissioner and the Tribunal disallowed the claim, but the
High Court, on reference, held in favour of the assessee.
Dismissing the appeal to this Court,
HELD: The expression 'for the purpose of the business' ins. 10(2)(xv)
is wider than the expression 'for the purpose of earning profits'. The
former covers,. not only the running of the business or its administration
but also measures for the preservation of the business and protection of
its assets and property. The test under the section therefore is whether
the expenses were actually and honestly incurred for the preservation
and protection of the assessee's business from any process or proceedings
which might have resulted in the reduction of its income and profits.
[286 G-H, 288D]
The earning of profits and the payment of taxes are not isolated and
independent activities of a business, but are continuous and take place:
from year to year during the whole period for which the busines.
coirlinues. If the assessee takes any steps for reducing its liability to
tax .which result in more funds being left for the purpose of carrying
on the ~usmess .there is ~!ways a possibility of higher profits. Therefore,
ex~nd1ture which was incurred by the assessee
in opposing a coerc1Ve go~ernmental action, with the object of saving taxation and
safeguarding business, was justified by commercial expediency and was,
hence, allowable under s.10(2)(xv) of the Act.
[288 E-H., 289A·F]
. Travancore Titanium Product Ltd., v. Commissioner of Income-tax
Kerala, 60 I.T.R. 277(S.C.) and Smith's Potato Estate Ltd. v. Bolland, 30
T.C. 267, referred to.
... C.I.T. Calcutta v. Calcutta Landing and Shipping Co. 77 T.T.R. 575
and Bansilal Abirchand Spinning and Weaving Mills v. C.I.T. Poona,
81 I.T.R. 34, approved.
284
SUPREME COURT REPORTS
fl 972] l S.C.R
CIVIL APPELLATE JURISDICTION : Civil
Appeals Nos.
A
1351 to 1353, 1897 and 1241 of 1968.
Appeals from the judgments and orders dated March,
3, 1967,
February 9,
1968 and June 28, 1967 of the
Calcutta High Court
in Income-tax
Reference Nos.
136 of 1962, 154 of 1964 and 54 of 1963 respectively.
B
Jagdish
Swarup,
Solicitor-General,
S.
T.
Desai,
S. K. Aiyar, R. N.
Sachthey and B.
D.
Sharma,
for the appellant (in C. As. Nos. 1241 and 1351 to 1353 of
1968)
B. B. Ahuja, R. N.
Sachthey and B. D.
Sharma c
for the appellant in C. A. No. 1897 of 1968).
B. Sen, A. C. Mitra, N. R. Khaitan,
0. P. Khaitan,
B. P.
1\faheslnvari and
Krishna
Sen, for respondent
(in C. As. Nos. 1351 to 1353 and 1897of1968).
Krishna Sen, N. R.
B. P.
l\f ahesh1vari,
for
of 1968.)
D
Khaitan, 0. P.
Khaitan and
respondent (in C.A. No. 1241
The Judgment of the Court was delivered by
Grover, J. These appeals from a judgment of- the
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Calcutta High Court have been brought by certificate
under s. 66A (2) of the Indian Income tax Act, 1922, hereinafter called the 'Act' and involve a common question,
namely, whether the law charges incurred in connection
with the proceedings before the Investigation Commission
were an allowable deduction in computation of the profits
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of the business of the assessee.
The facts in the first batch of appeals i.e. C. As. 13511353/68 may be stated. During the assessment years
1952-53, 1953-54 and 1954-55 the. assessee., which is a public
limited company, spent Rs. 3810/-, 1,42,377/- and Rs.
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2,42,688/- for re.presenting its case before the Investigation
Commission relating to the past assessment years 1941-42
to 1947-48.
These expenses which were termed as "general
expenses" were claimed by the assessee as deduction under
s. IO (2) (xv) or in the alternative under s. 10 (I) of the
Income tax Act 1922, hereinafter called the 'Act'. The
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Income tax Officer disallowed the claim.
His order was
upheld by the Appellate Assistant Commissioner and the
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(.f.T. \', BlRLA COTTON & SPG. MILLS (Grover, J.)
285
Appellate Tribunal. Thereupon the assessee moved the
Tribunal under s. 66 (1) of the Act to state the case and
refer the question of law arising out of its order. The
Tribunal submitted a common statement of the case and
referred the following question to the High Court :-
"Whether on the facts and in the circumstances
of the case the Tribunal was right in holding that
the law charges incurred in connection with the
proceedings before the Investigation Commission
were not allowable deductions in computation of the
profits of the business either under s. 10 (1) or under
. 10 (2) (xv) of the Income tax Act, 1922 ?"
The High Court held that the expenditure incurred by
the assessee in opposing an illegal and coercive government
action with the object of saving taxation and safeguarding
the business was justified by commercial expediency and
was an allowable expenditure.
It is necessary at this stage to notice the purpose of
the Taxation of Income (Investigation Commission) Act
1947, hereinafter called the 'Investigation Commission
Act' as also some of its relevant provisions. That Act
was enacted for the purpose of ascertaining whether the
actual incidence of taxation on income was and had been
in recent years in accordance with the provisions of law
and the extent to which the existing law and procedure for
the assessment and recovery of such taxation was adequate
to prevent the evasion thereof and to make provision for
investigation into such matters. Section 5 (1) conferred
power on the Central Government to refer particular cases
or points to the Commission for investigation and report
if the Government was of the opinion that there had been
substantial evasion of payment of income tax in such cases.
If in the course of investigation the Commission had
reasons to believe that some person other than the one
whose case was being investigated h!ld avoided payment
of income tax the Commission was authorised under
sub-s. (4) of s. 5 to report to the Central Government. The
ultimate object of investigation was collection of material
showing evasion of tax so that the avoided income ~ould
be subjected to taxation and penalties imposed for evasion.
286
SUPREME COURT REPORTS
[f972J l S.C.R.
SectiJn 5 (1) of the Investigation Commission Act was
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struck down by this Court as unconstitutional in Shree
Meenakshi Mills Ltd., Madurai & Others
v. Sri A. V.
Visvanatha Sastri & Another(1). Similarly s. 5 ( 4) was declared to be void and unconstitutional in Surajmal Mohta
& Co. v. A. V. Visvanatha & Another.(2)
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As a result of investigation into the affairs of Birla
group of concerns the case of the assessee was referred to
the Commission while it was functioning for investigation.
The assessee engaged eminent lawyers and incurred the
expenses in question in conducting appropriate proceedings c
before the Commission as also in courts where the vires
of the aforesaid Investigation Commission Act were challenged.
Sub-section (!) of s. IO of the Act provides that tax
shall be payable by the assessee under the head profits and
gains of business, profession or vocation in respect of the
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profits and gains of any business, profession or vocation
carried on by him. Among the allowances which are not
to be included in the computation of such profits and gains
it is provided by sub. s. (2) (xv) of s. 10 as follows
S. 10 (2) (xv) :
"any expenditure not being an allowance of the
nature described in any of the clauses (i) to (xiv)
inclusive, and not being the nature of capital expenditure or personal expenses of the assessee laid out
or expended wholly and exclusively for the purpose
of such business, profession or vocation".
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The expression "for the purpo·se of the business'' is
essentially wider than the expression "foi; the- purpose of
earning profits". It covers not only the running of the
business or its administration but also measures for the
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preservation of the business and protection of its assets
and property. It may legitimately comprehend many
other acts incidential to the carrying on of the business.
In Travancore Titanium Product Ltd. v. Commissioner of
Income Tax, Kerala(3) the position relating to expenditure
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(I) 261.T.R. 713.
(2) 261.T.R. I
(3) 60 I.T.R. 277, 282.
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C.I.T. v. BIRLA COTTON & SPG. MILLS (Grover, J.)
287
which can be deducted under s. IO (2) (xv) of the Act wassummarised thus :
"The nature of the expenditure or outgoing
must be adjudged in the light of accepted commercial practice and trading principles. The expenditure
must be incidential to the business and must be
necessitated or justified by commercial expendiency.
It must be directly and intimately connected with the
business and be laid out by the taxpayer in his
character as a trader. To be a permissible deduction,
there must be a direct and intimate connection
between the expenditure and the business, i.e.
between the expenditure and the character of the
assessee as a trader, and not as owner of assets,
even if they are assets of the business."
It is well settled by now that the deductibility of ex-,
penditure incurred in prosecuting the civil proceedings to
resist the enforcement of a measure, legislatiye or executive, which means restriction on the carrying on of a business or to obtain a declaration that the measurt' is invalid,
would, if other conditions are satisfied, be admissible as
a deduction under s. IO (2) (xv).
Deductibility of such
expenditure does not depend on the final outcome of those
proceedings. However, wrong-headed, ill-advised, unduly
optimistic or over confident in his conviction the assessee
might appear in the light of the ultimate decision, expenditure in prosecuting a civil proceeding cannot be denied as
a permissible deduction if it is reasonably and honestly
incurred to promote the interest of the business. (See
Sree Meenakshi Mills Ltd. v. Commissioner of Income
lax Madras. (I)
The point which has presented some difficulty at least
in the English courts is whether the expenditure incurred
by the trader in fighting the Revenue's assessment can be
regarded an allowable expenditure. In Smith's Potato
Estate Ltd. v. Bolland (2) expenses had been incurred in
filling an appeal against the decision of the Commissioners
of Inland Revenue to the Board of Referees in the matter
of certain expenditure which had been claimed by the
assessee as an allowable deduction. It was held by the
majority (Viscount Simon and Lord Oaksey dissenting)
(I) 631.T.R. 207.
(2) 30 T.C. 267.
288
SUPREME COURT REPORTS
[1972] I S.C R
that the expenditure was not an allowable. decuction for
income tax and excess profits tax purposes. The basiS" of
the view ~f the m,ajority was that the expenses on the litigation undertaken for the purpose of reducing the amoum
of tax payable was not incurred by a trader for the purpose
of his trade but partly atleast for the purpose of his relationship to the crown as a tax-payer. Therefore the
expenditure was not wholly and exclusively for the purpose
of the trade. Viscount Simon and Lord Oaksey, who took
the contrary view, considered that attention should be
concentrated on the statutory words that litigation undertaken for the purpose of reducing the amount of tax payable was undertaken "wholly and exclusively" for the purpose of the trade in that the reduction in the amount of tax
increased the traders' monetary resources and so promoted
the carrying on of the trade and the earning of the trading·
profits. (See also Simon's Income tax, Second Edition.
Vol. 2, pages 216-217).
In Commissioner of In,come tax.
Calcutta v . . Calcutta Landing & Shipping Co. Ltd. (l) the
Calcutta High Court has sought to distinguish the language
of s. IO (2) (xv) from that of the provisions in the English
Income tax law and has given weighty reasons for accepting
the opinion of Viscount Simon and Lord Oaksey, particularly, because of the observations of this Court in the
decisions which we have already noticed. The above
case was followed by a Full Bench of the Bombay High
Court in R. B. Bansi/al Abirchand Spinning & Weal'ing
Jfil/s v. Commissioner of Income tax, Poona(2).
Learned counsel for the Revenue has relied upon the
observations extracted at an earlier stage from the cast:
of Ti·avancore Titanium Products Ltd(3) and has argued
that there must be a direct and intimate connection between
the expenditure of the business, i.e. between the expenditure
.and the character of the assessee as a trader and not as an
owner of assets.
We are unable to appreciate how these
observations which were made in the light of different
facts in any way militate against the view of Viscount Simon
.and Lord Oaksey in Smith Potaio Estate case(4) as also the
decision of the Calcutta High. Court in Calcutta Landing
.& Shipping Co. case(1). It may be pointed out that in the
(I) 77 l.T.R. 57;,
-.tll 6~ l.T.R. 277.
12) 81 l.T.R. 34.
14) JO T.C. 267.
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C.l.T. V. BIRLA COTTON & SPG. MILLS (Grover, J.)
289
decision relied upon by the Revenue the question was \vhethef
the tax imposed under the Wealth Tax Act on the owner of
assets was a permissible deduction under s. 10 (2) (xv) of
the Act. It was emphasised by this Court that the charge
of the tax was the same whether the assets were part of or
used in the trading organisation of the O\\'ner or were
merely owned by him. The assets of the tax-payer whether
incorporated or not became chargeable to tax because
they were owned by him and not because they were used
by him in the business. The position is quite different
when it has to be decided whether an allowance contemplated in s. 10 (2) (xv) is deductible.
The essential test which has to be applied is whether
the expenses were incurred for the preservation and protection of the assessee's business from any such process or
proceedings which might have resulted in the reduction of
its income and profits and whether the same were actually
an honestly incurred.
lt is not possible to understand how
the expenditure on the proceedings in respect of the Investigation Commission by the assessee will not fall within
the above rule.
Even otherwise the expenditure was
incidential to the business and was necessitated or justified
by commercial expediency.
It must be remembered that
the earning of profits and the payment of taxes are not
isolated and independent activities of a business. These
activities are continuous and take place from year to year
during the whole period for which the business continues.
ff the assessee takes any steps for reducing its liability to
tax which result in more funds being left for the purpose of
carrying on the business there is always a possibility of
higher profits. To give an illustration, if an assessee can,
by an appropriate proceedings, succeed in getting its tax
liability for gains and profits reduced by a sum
of
Rs. 1,00,000/- that amount will essentially become available for the purpose of business with a reasonable expectation of more profits. As was observed by Viscount Simon
in Smith Potato Estate case(1) if the trader considers that
the Revenue seeks to take too large a share and to leave
him with too little the expenditure which the trader incurs
in endeavouring to correct this mistake is a disbursement
laid 9ut for the purposes of his trade. lf he succeeds he
will have more money with which to earn profits next year.
II) JOT. C. 267.
290
SUPREME COURT REPORTS
jl972J 1 S.C.K.
The High Court in the judgment under appeal, after a
discussion of the relevant case law, approached the matter
in this way.
The proceeding before the Investigation
Commission is not a civil proceeding; but it is a statutory
proceeding with a view to collecting materials for more
taxation. Therefore if the proceeding touched the business
of assessee the expenditure incurred by the assessee in
safeguarding its interest before the Commission would be
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an allowable deduction. It was pointed out-and this
was based on the material on the record-that the Commission was holding an investigation on a suspected escapement of income to the tune of about Rs. 4 crores. Taxes c
levied on that income and the penalties ·imposed would
naturally have been very heavy for the business of the
assessee and might have either crippled or annihilated it.
To preserve the business from an investigation which,
according to the assessee, was unlawful the assessee was
justified in taking proper steps and spending monies therefor.
Such an expenditure was not for earning profits but
was aimed at preservation of business from the inroads of a
piece of legislation which, it was maintained, was unconstitutional and was so held by this Court later in certain
decisions that have already been mentioned. The expenditure which was incurred by the assessee in opposing a
coercive governmental action with the object of saving
taxation and safeguarding business was justified by commercial expediency and was, therefore, allowable under
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s. 10 (2) (xv) of the Act.We have no doubt that the above
approach of the High Court and its ultimate decision were
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fully justified on principle and authority.
In the result all these appeals fail and are dismissed.
But the respondent will be entitled to costs only in C. As.
1351-1353/68. One hearing fee.
V.P.S.
Appeals dismissed.
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