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Tax Case No. 1 of 1959, decided on 20th September 1962.

Business expenditure‑Litigation expenses‑Bank account opened for business purposes‑Expenses incurred for defending suit for excessive clam by bank‑Indian Income‑tax Act, 1922, S. 10 (2) (xv).

The assessee kept an account in a bank for getting overdraft and other banking facilities for carrying on his business. The bank went into liquidation and the official liquidator brought a civil suit against the assessee for recovering an amount much in excess of what was in fact due by the assessee. In successfully defending himself in this suit the assessee bad to incur certain expenditure. It was found by the Tribunal that the account in the bank was kept by the assessee for business purposes:

Held, in the facts and circumstances of the case, the expendi ture incurred by the assessee in connection with the civil suit filed by the liquidators of the bank was an admissible deduction under the provisions of section 10 (2) (xv) of the Act.

Advocate‑General (for S. Swaminathan) and K. Ramagopal for the Assessee.

S. Ranganthan, Special Counsel for the Commissioner.

The assessee, Veerappa Pillai, was running a bus service. He had an account with the Hanuman Bank Ltd., Tanjore. The bank provided him with overdraft facilities as well. When the bank went into liquidation in 1947, the official liqui dators made a claim against the assessee for a sum of Rs. 2,37,600 as the amount appearing in the books of the bank as a debit against the assessee. The assessee disputed the correctness of this amount, contending that there was an excess debit ,to the extent of one lakh of rupees. Proceedings were started by the official liquidators for recovery of the amount. Ultimately, the question was decided in favour of the assessee. During those proceedings, the assessee incurred certain legal expenses which he claimed were allowable in his assessments for the relevant assess ment years 1949‑50 to 1952‑53. It may be mentioned that before the Department and the Tribunal a claim was also made in respect of legal expenses connected with a criminal prosecution of the assessee. It would appear that these criminal proceedings were launched against the assessee, on the charge that he conspired with the Directors of the bank in defrauding the shareholders. These proceedings dragged on for some years and finally the assessee was acquitted.

The Income‑tax Officer disallowed the entire expenditure, holding that it was not an expenditure incurred in connection with the assessee's business. On successive appeals, both the Appellate Assistant Commissioner and the Tribunal reached the same conclusion, holding that the expenditure was not incurred wholly and exclusively for the purpose of the business.

On the application of the assessee, the Tribunal referred the following question:

"Whether, on the facts and in the circumstances of the case. the expenditure incurred by the assessee in connection with the civil suit filed by the liquidators of the Hanuman Bank is an admissible deduction under the provisions of section 10 (2) (xv) of the Act 7"

It may be stated that at the time the assessee sought for the reference, it was conceded on behalf of the assessee that the allow ance claimed in respect of the expenditure incurred in connection with the criminal proceedings .was not pressed. The question, therefore, relates only to the expenses relevant to the civil proceedings.

It seems to us that, on the bare facts, there can be no doubt that the expenditure n these civil proceedings is an expenditure which clearly falls within the scope of section 10 (2) (xv) of the Act. Mr. Ranganathan, learned counsel for the Department, sought to suggest that the assessee had a banking account for his individual and personal purposes and that it was not established that the transactions with the bank were exclusively in respect of the business of the assessee. This argument cannot stand scrutiny as the Tribunal in its statement of the case has definitely stated that the assessee was having an account with the Hanuman Bank for business purposes. "He was depositing his daily takings in the said bank and was also drawing on the bank as and when funds were required for expenses, etc,, and besides this, he was also having overdraft facilities with the bank". The Appellate Assistant Commissioner also found, "the appellant owns a fleet of buses. In the course of his business, he had opened an overdraft account in the Hanuman Bank Ltd. He was also crediting the daily receipts in the bank." It may, therefore, be taken to be established that the banking account was in relation to the business of the assessee so that the argument of the learned counsel for the Department that these transactions with the bank were not wholly and exclusively for the purpose of the business of the assessee cannot be accepted.

The short question then is whether where the assessee had to defend an action which arose out of the conduct of his business the legal expenses incurred thereby would not properly fall within the scope of section 10 (2) (xv) of the Act. The learned counsel for the Department was not able to deny that if the transactions with the bank were wholly concerned with the business of the assessee, the defence to an action with regard to the claim of the bank must be taken to involve an expenditure relatable to the business. There was no material available to the Department and the Tribunal on the basis of which the Tribunal could hold that the expenditure was not laid out wholly and exclusively for the purpose of the business. For whatever reasons it might be, there was an excessive claim on the part of the official liquidators and the assessee had necessarily to contest the action in the interests of his business, as the liability sought to be enforced arose in connection with the business.

It follows that the expenditure is an admissible deduction under section 10 (2) (xv) of the Act. The question is answered accordingly. The assessee will be entitled to his costs. Counsel's fee Rs. 250.

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