Law:

Section:

Section 37(1) of the income-tax act, 1961-Business expenditure-Government of India, in exercise of its statutory power, appointed a commission to report on certain matters related to business of assessee-company-Whether expenditure incurred by assessee in connection with said investigation was an allowable expenditure-held, on facts, yes Facts The assessee was a private limited company belonging to a group of companies controlled by D. On 11-12-1956, the Government of India, in exercise of its powers under section 3 of the Commissions of Inquiry Act, 1952, appointed a Commission of Inquiry to report, inter alia, ( i) on the administration of the affairs of the assessee-company; (ii) on the nature and extent of control of certain persons or their relatives, etc., in the assessee-company; and (iii) with respect to certain allegations involving acts against public policy on the part of the assessee-company. During the assessment year 1958-59, relevant for the accounting year ended 31-3-1958, the assessee claimed certain expenses incurred in connection with the aforesaid investigation as an allowable deduction. The ITO rejected its claim holding that impugned expenses were not incurred in connection with or in respect of carrying on the assessee's business. The AAC and the Tribunal sustained the ITO's order holding that such an inquiry could not be considered as a normal hazard of an honest businessman and the expenditure incurred could not be treated as normal business expenditure. On reference: Held The impugned expenditure was motivated by commercial expediency and the purpose was to protect the assessee's business, its assets and reputation. When an inquiry was set up, it could not sit tight but, in its own interest, had to respond and co-operate with the commission of inquiry. This was necessary to protect its reputation and its business. If the assessee did not take steps to protect its reputation, the value of its shares might have plummetted to an all time low. The assessee was the best judge of how to preserve and protect its assets and interest and it did so with the help of lawyers, etc. It was not a case of payment of penalty for infraction of the law,…

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