Law:

Section:

Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] - Business expenditure - Allowability of - Assessment years 1952-53 to 1954-55 - ITO disallowed expenses incurred by assessee-company for representing its case before Investigation Commission - Whether expenditure in prosecuting a civil proceeding cannot be denied as a permissible deduction if it is reasonably and honestly incurred to promote interest of business - Held, yes - Whether to preserve business from an investigation which, according to assessee, was unlawful and from inroads of a piece of legislation which was unconstitutional and was so held by Supreme Court later in decisions, assessee was justified in taking proper steps and spending monies therefor - Held, yes - Whether, therefore expenditure which was incurred by assessee in opposing a coercive Governmental action with object of saving taxation and safeguarding business was justified by commercial expendiency and was, therefore, allowable under section 10(2)(xv) of 1922 Act - Held, yes FACTS For the assessment years 1952-53 to 1954-55, the assessee-company incurred expenses for representing its case before the Investigation Commission relating to past assessment years and claimed as deduction under section 10(2)(xv), or in the alternative, under section 10(1). The ITO disallowed the claim, and the disallowance was upheld by the Tribunal. On reference, the High Court was of the view that the proceeding before the Investigation Commission was not a civil proceeding; but it was a statutory proceeding with a view to collecting of materials for more taxation; therefore, if the proceeding touched the business of the assessee the expenditure incurred by the assessee in safeguarding its interest before the Commission would be an allowable deduction. It, therefore, 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. On appeal to the Supreme Court : HELD As a result of investigation into the affairs of the…

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