Law:

Section:

Section 37(1) of the Income-tax Act, 1961 (Corresponding to section 10(2) of the Indian Income-Tax Act, 1922 - Business expenditure - Allowability of - Assessment year 1959-60 - Assessee incurred expenses in respect of legal proceedings relating to assessments made and recovery proceedings taken by department - Said expenditure was incurred on legal proceedings intended to reduce tax liability of assessee consequence of which would have been to raise its profits - Further, said proceedings had nothing to do with concealed income - Whether, on facts, expenditure incurred on legal proceedings was allowable as deduction - Held, yes FACTS For the assessment year 1959-60, pursuant to amalgamation of two other companies with the assessee-company, certain payments made in respect of legal proceedings taken in respect of their income-tax liabilities were made the subject of a claim by the assessee to deduction against the business profits under section 10(2)(xv). Assessments had been completed and recovery proceedings taken by the department to the demands created. The ITO rejected the claim. On second appeal, the Tribunal also held that the expenditure incurred was not an admissible deduction. On reference: HELD There was no dispute that the expenditure was incurred on legal proceedings intended to reduce the tax liability of the assessee. The consequence would have been to raise the profits of the assessee. It was not suggested on the basis of any material on the record that the expenditure was not reasonable and honestly incurred. The case fell within the rule laid down by the Supreme Court inCIT v. Birla Cotton Spinning and Weaving Mills [1971] 82 ITR 166 (SC), wherein it was observed that 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 and honestly incurred; if the assessee takes any steps 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…

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