Case: Commissioner of Income Tax, Delhi Vs. Delhi Safe Deposit Company Limited

which the expenditure serves is the same, the mere fact that to some extent the expenditure enures to a third partys benefit, say that of the publican, or that the brewer incidentally obtains some advantage, say in his character of landlord cannot in law defeat the effect of the finding as to the whole and exclusive purpose."5. In British Insulated and Helsby Cables Ltd. v. Atherton Lord Cave observed."It was made clear in the above cit ed cases of Ushers Wiltshire Brewery v. Bruce, [1915] A.C. 433 and Smith v. Incorporated Council of Law Reporting for England and Wales, [1914] 3 K.B. 674 that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on the business, may yet be expended wholly and exclusively f or the purposes of the trade."6. Rowlatt, J. in Mitchell v. B.W. Noble Ltd. held that the money spent on getting rid of a director and saving the company from scandal was deductible. Affirming the above view, the Court of Appeal (whose judgment appears at page 731) held that as the payment was not made to secure an actual asset so as effectually to increase the capital of the company but was made in order to enable the directors to carry on the business of the company as they had done in the past unfettered by the presence of the retiring director, which might have had a bad effect on the credit of the company, it must be treated as the income and not as capital expenditure and was deductible as such for income-tax purposes.The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than of a trader. In Commissioner of Income-tax, Kerala v. Malayalam Plantation Ltd. Subba Rao, J. (as he then was) summarised the legal position at page 705 thus:-"The aforesaid discussion leads t o the following result: 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 its administration and modernization of its machinery; it may include measure for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile titles; it may also comprehend payment of statutory dues and taxes imposed as a pre- condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business that is to say, the expenditure incurred shall be for carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business."7. In the instant case, the assessee incurred the expenditure in question to avoid any adverse effect on its reputation, to protect the managing agency which was an income earning apparatus and for retaining it with the reconstituted firm in which the interest of the assessee was the same as before. It was likely that but for the expenditure, the fair name of the assessee would have been tarnished or rendered suspicious and the managing agency would have been terminated. The expenditure incurred on the preservation of a profit earning asset of a business has al ways been held to be a deductible expenditure by courts. In the circumstances, it is difficult to hold that the expenditure incurred by the assessee was either gratuitous or one incurred outside the trading activities of the assessee. The expenditure was, therefore, rightly held to be deductible under section 37. We, therefore, reject the contention of the Revenue that the amount in question could not be claimed as a deduction under section 37 of the Act.The next contention of the Department is that the payment in question should have been first assessed as a loss in the assessment proceedings of the firm and in the absence of any claim made in the course of such proceedings by the firm, it was not possible to al low its deduction in the assessment of the assessee. Reliance is placed on sections 187 and 67 of the Act in support of this submission. It is seen that the expenditure in question had not been incurred by the firm. Even if the amount had been paid through the firm by the assessee, it would not be payment of the firms funds. In the accounts of the firm, there would be a credit and debit entry cancelling each other showing a receipt from the assessee and a payment to the managed company, not in any way affecting the capital structure of the firm. If the amount had been paid by the assessee directly to the managed company which appears to be more probable then the expenditure is obviously one incurred by the assessee itself though on account of the firm. In any view of the matter, the fact that the firm has not claimed the expenditure as its own does not affect the right of the assessee to claim deduction in respect of the amount in question in its a ssessment proceedings which it is legitimately entitled to do. It is not shown how in the peculiar circumstances of the case there is any statutory bar to the claim made by the assessee.8. We are satisfied that in the circumstances of the case the decision of the High Court does not call for interference.9.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]It is no doubt true that the solution to a question of this nature sometimes is difficult to arrive at. But, however difficult the task may be, a decision on that question should be given having regard to the decisions bearing on the question and ordinary principles of commercial trading and of commercial expediency. The facts found in the present case are that the assessee was carrying on business as a partner of the managing agency firm and it also had other businesses. The managing agency agreement with the managed company was a profitable source of income and that the assessee had continuously earned income from that source. But on account of the negligence on the part of one o f its partners, there arose a serious dispute which could have ordinarily resulted in a long drawn out litigation between the managing agency firm and the managed company affecting seriously the reputation of the assessee in addition to any pecuniary loss which the assessee as a partner was liable to bear on account of the joint and several liability arising under the law of partnership. The settlement arrived at between the parties prevented effectively the hazards involved in any litigation and also helped the assessee in continuing to enjoy the benefit of the managing agency which was a sound business proposition. It also assisted the assessee in retaining the business reputation unsullied which it had built up over a number of years. It is also material to notice here that it was not shown that the settlement was a gratuitous arrangement entered into by the assessee to benefit the defaulting partner exclusively even though he might have been bene fitted to some extent. It is no doubt true that it was voluntary in character but on the facts and in the circumstances of the case whether it would make any difference at all is the point forthe instant case, the assessee incurred the expenditure in question to avoid any adverse effect on its reputation, to protect the managing agency which was an income earning apparatus and for retaining it with the reconstituted firm in which the interest of the assessee was the same as before. It was likely that but for the expenditure, the fair name of the assessee would have been tarnished or rendered suspicious and the managing agency would have been terminated. The expenditure incurred on the preservation of a profit earning asset of a business has al ways been held to be a deductible expenditure by courts. In the circumstances, it is difficult to hold that the expenditure incurred by the assessee was either gratuitous or one incurred outside the trading activities of the assessee. The expenditure was, therefore, rightly held to be deductible under section 37. We, therefore, reject the contention of the Revenue that the amount in question could not be claimed as a deduction under section 37 of the Act.The next contention of the Department is that the payment in question should have been first assessed as a loss in the assessment proceedings of the firm and in the absence of any claim made in the course of such proceedings by the firm, it was not possible to al low its deduction in the assessment of the assessee. Reliance is placed on sections 187 and 67 of the Act in support of this submission. It is seen that the expenditure in question had not been incurred by the firm. Even if the amount had been paid through the firm by the assessee, it would not be payment of the firms funds. In the accounts of the firm, there would be a credit and debit entry cancelling each other showing a receipt from the assessee and a payment to the managed company, not in any way affecting the capital structure of the firm. If the amount had been paid by the assessee directly to the managed company which appears to be more probable then the expenditure is obviously one incurred by the assessee itself though on account of the firm. In any view of the matter, the fact that the firm has not claimed the expenditure as its own does not affect the right of the assessee to claim deduction in respect of the amount in question in its a ssessment proceedings which it is legitimately entitled to do. It is not shown how in the peculiar circumstances of the case there is any statutory bar to the claim made by theare satisfied that in the circumstances of the case the decision of the High Court does not call for interfere