Ramachandra Raju, J.:— The following are the two questions which were referred for our decision in this reference:

“1. Whether, on the facts and in the circumstances of the case, any part of the expenditure incurred by the assessee in connection with the criminal proceedings initiated and conducted by the Government against Shri Ramgopal Ganpatrai was an allowable deduction under section 10(2)(xv) of the Income-tax Act, 1922 ?

2. If the answer to question No. (1) is in the affirmative, whether there is any basis for estimating such allowable part of expenditure at ⅓rd of the total?”

2. The reference relates to two assessments of the assessee for the assessment years 1950–51 and 1951–52. The assessee, who is an individual, derived during the previous years under consideration income from various sources. The assessee claimed under section 10(2)(xv) of the Income-tax Act of 1922, some deductions for the assessment years 1950–51 and 1951–52, Rs. 39,657 for the assessment year 1950–51 and Rs. 57,066 for the assessment year 1951–52 as amount spent by him in some criminal proceedings. The question relates to this claim. The relevant facts are as follows. In the year 1935, the assessee promoted a public limited company called “Dhanraj Mills Ltd.” at Bombay. By an agreement with the said company the assessee was appointed as its managing agent for a period of 50 years. He was also appointed as its permanent director and chairman of the board of directors. When the company was involved in financial difficulties in the year 1937, upon one Ramgopal Ganpatrai agreeing to bring in the necessary finance, a tripartite arrangement was arrived at between the assessee, the limited company and the said Ramgopal Ganpatrai. It was agreed that the assessee should give up the managing agency, the company should appoint Ramgopal Ganpatrai or his nominee as the new managing agent and a selling agency agreement should also be entered into between the limited company and the said Ramgopal Ganpatrai or his nominee. As a result of this agreement, the assessee was to be paid a certain office allowance and a certain share in the managing agency commission by way of compensation. He was also to become entitled to 3/8th share of the selling agency commission as may accrue under the said selling agency agreement. It was also provided that in case either the managing agency agreement or the selling agency agreement were to be terminated, the assessee, at his option, would be entitled to resume the managing agency as well as the selling agency. In pursuance of the above tripartite agreement, necessary documents were executed by the limited company. Accordingly, the said managing agency business and the selling agency business were run by the said Ramgopal Ganpatrai or his nominee as a family firm for some years. In 1943, the said Ramgopal Ganpatrai floated two private limited companies and assigned the managing agency and the selling agency, respectively, to the two companies. The assessee's consent thereto was also obtained as required. In 1946, Ramgopal Ganpatrai moved a resolution for the dismissal of the assessee as the chairman of the board of directors for certain defaults alleged to have been committed by him under section 86F of the Indian Companies Act. By a resolution of the board of directors, the assessee was removed from the office of the chairman of the board of directors of the company. In 1947, the selling agency was surrendered by the concerned private limited company but it did not revert to the assessee as stipulated for. The assessee thereupon entered into a civil litigation with Dhanraj Mills Ltd. He sought reinstatement as the chairman of the board, of directors and sought to establish his right to assume the selling agency.

3. The assessee's allegation in the suit filed by him was that the defendant-mill company had in collusion with Ramgopal Ganpatrai sought to oust him from his office and had also sought to prevent him from getting the selling agency. During the pendency of the afore-mentioned litigation, the assessee lodged a complaint with the police against the said Ramgopal Ganpatrai, alleging misappropriation, fraudulent acts, etc., in managing the said Dhanraj Mills Co. Ltd., and also breach of High Denomination-Notes (Demonetisation) Ordinance, 1946. In pursuance of the above complaint, the Government instituted criminal proceedings against the said Ramgopal Ganpatrai. With the permission of the court and with the consent of the Government, the assessee employed his own lawyer in the prosecution so launched by the Government. The prosecution culminated in the conviction of the said Ramgopal Ganpatrai. The conviction was upheld by the High Court on June 22, 1951. While the civil litigation was pending and the criminal appeal against the conviction was also pending, the parties, namely, the assessee and the said Ramgopal Ganpatrai, arrived at an amicable settlement whereby each agreed to forbear from continuing the litigation, etc. Ramgopal Ganpatrai agreed to forbear from claiming back any amount to which the assessee had become entitled. The amount received by the assessee from the mill-company towards selling agency commission which the said Ramgopal Ganpatrai forbore from claiming back was duly treated as his income under the above settlement and was taxed in the assessment year 1948–49. The amounts claimed to have been spent by the assessee on the aforementioned civil and criminal proceedings relating to the two assessment years in question are as follows:

Expenditure Assessment year Assessment year 1950–51 1951–52 Rs. Rs. Civil 1,500 21,444 Criminal 39,657 57,066 41,157 78,510

4. I The assessee claimed that those amounts spent by him for the civil and criminal proceedings should be allowed as admissible deductions. The claim was rejected by the Income-tax Officer. When the matter came up before the Appellate Assistant Commissioner, he allowed the expenses incurred by the assessee in connection with the civil litigation but upheld the disallowance of expenses incurred in connection with the criminal litigation. The Appellate Assistant Commissioner rejected the assessee's contention that the expenditure incurred by him in connection with the criminal proceedings was for the purpose of earning his income or for preserving his asset from which income was derived. When the matter came up before the Tribunal it observed that the criminal action against the said Ramgopal Ganpatrai was a sequel to the civil litigation started by the assessee against the mill-company in which the said Ramgopal Ganpatrai was made co-defendant and arose, in any case, indirectly out of the relationship with the said Ramgopal Ganpatrai created by the agreements referred to above by and under which the assessee became entitled to the right to receive certain commission including getting the selling agency as a reversioner. It was observed by the Tribunal that the ultimate object of the criminal litigation pursued by the assessee was to get certain amounts by way of compensation in civil litigation which would be his income from the existing sources by way of managing agency commission, etc. The assessee could not have solely been guided by the motive of personal vendetta against the said Ramgopal Ganpatrai. The assessee stood to benefit by protecting the mill-company which had been defrauded of large amounts by Ramgopal Ganpatrai, the reimbursement of which to that extent would have ultimately benefited the assessee. Taking a broad view of the matter the Tribunal observed that “it would be proper to hold that at least a part of these expenses incurred by the assessee over the criminal litigation should be considered as legitimate business expenses allowable as a deduction under section 10(2)(xv) of the Income-tax Act of 1922”. The Tribunal allowed ⅓rd of the amount claimed as legitimate business expenditure. Questioning the above view taken by the Income-tax Appellate Tribunal, on the request of the department, this reference was made.

5. The relevant provision of the Income-tax Act of 1922 is as follows:

“S. 10.(1) The tax shall be payable by an assessee under the head profits and gains of business, profession or vocation in respect of the profits and gains of any business, profession or vocation carried on by him.

(2) Such profits or gains shall be computed after making the following allowances, namely:—….

(xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation….”

6. As seen above, the assessee claimed deduction of the entire amounts spent by him in the civil and criminal litigation, respectively. The Income-B tax Officer without differentiating between the legal expenses incurred by the assessee for civil litigation and the legal expenses incurred by him for criminal litigation disallowed both the expenses on the ground that they are capital expenditure, as the expenditure was to acquire or retain! managing agency rights and not expenditure to earn an income from the! managing agency. On appeal, the Appellate Assistant Commissioner found that with regard to the civil litigation the appellant had incurred thel expenditure for defending his rights which flowed from the tripartite agreement of September, 1937, and the bilateral agreement between the assessee and Dhanraj Mills Ltd., of December, 1937, and, therefore, it is an I admissible expense as it relates to the earning of the business income of the assessee. But, however, the Appellate Assistant Commissioner disallowed I the expenditure incurred for criminal litigation on the ground that, though I the expenses were incurred by the assessee, they have nothing to do with the earning of the income of the assessee.

7. The contention of the assessee is that the expenditure incurred by him in prosecuting both the civil and criminal litigation was wholly for the purpose of protecting his income or source of income and, therefore, the expenses incurred for criminal litigation also are admissible deduction as provided under section 10(2)(xv) of the Income-tax Act of 1922. The criminal prosecution launched against Ramgopal Ganpatrai is not only on account of fraud committed by him under the High Denomination Notes (Demonetisation) Ordinance, but also on account of certain acts of fraud perpetrated by him in managing the company, Dhanraj Mills Ltd. The assessee was having vital business interests in the company of Dhanraj Mills Ltd. According to the original agreement with the said company he was to be the managing agent of the company for a period of 50 years and also a permanent director and chairman of the board of directors. Under the tripartite agreement entered into between the assessee, Ramgopal Ganpatrai and the limited company, it was agreed that the assessee should give up the managing agency, the company should appoint Ramgopal Ganpatrai or his nominee as the new managing agent and a selling agency agreement would also be entered into between the limited company and the said Ramgopal Ganpatrai or his nominee. As a result of that agreement the assessee was to be paid a certain office allowance and 3/8th share in the selling agency commission as may accrue. Under that agreement the assessee had also an option for resuming the managing agency as well as the selling agency when either the managing agency agreement or the selling agency agreement came to be terminated. Thus, the assessee had a vital business asset in the limited company. While so, at the instance of Ramgopal Ganpatrai, the board of directors of the company passed a resolution for the dismissal of the assessee as the chairman of the board of directors. When in 1947, the selling agency was surrendered by the nominee of Ramgopal Ganpatrai Private Limited Company, it did not revert to the assessee as stipulated for. It was I also found by the assessee that Ramgopal Ganpatrai perpetrated some fraud in managing the company, Dhanraj Mills Ltd. It is under these circumstances that the assessee started both civil and criminal litigation against Ramgopal Ganpatrai. It is not in doubt and, as a matter of fact it is not disputed, that the assessee was having a business asset in the company, Dhanraj Mills Ltd., to protect which, according to the assessee, he started the civil and criminal litigation in question. There is no difficulty where an asset of business is protected or safeguarded by an assessee in a civil litigation by incurring some expenditure. It would be an admissible deduction. As a matter of fact in the present case the amounts of expenses incurred by the assessee in the civil litigation against Ramgopal Ganpatrai and the Dhanraj Mills Co. Ltd. were allowed by the income-tax department as admissible under section 10(2)(xv) of the Act.

8. The difficulty has arisen only with regard to the expenses incurred by the assessee in the criminal litigation which he started against Ramgopal Ganpatrai. Sri Anantha Babu, the standing counsel for the department, argued before us that the expenditure incurred in the criminal litigation was not necessary at all for the assessee to have incurred after he made the criminal complaint and the criminal prosecution was taken up by the State. It was for the State to carry on the prosecution and there was no need at all for the assessee to spend any amount by engaging his own counsel to conduct the prosecution and it was a voluntary act on the part of the assessee to incur the expenditure and, even otherwise, it cannot be said that the assessee was motivated wholly by business considerations and there was also an element of personal vendetta against the said Ramgopal Ganpatrai and, therefore, it cannot be said that the expenditure was incurred wholly and exclusively for the purposes of business. But it was contended on behalf of the assessee that in view of the large claims pending against the mill-company which was at that time fully under the control of the said Ramgopal Ganpatrai, the assessee had to take interest himself in the criminal prosecution against him. Therefore, according to the assessee, even though the expenditure related to the criminal case against the said Ramgopal Ganpatrai, it had the ultimate object of getting certain amount by way of compensation in the civil litigation which would be his income from the existing sources by way of managing agency commission, etc.

9. Both the court and the Government thought fit to allow the assessee to engage his own counsel for conducting the prosecution and accordingly accorded permission and the assessee engaged a counsel and conducted the criminal litigation himself. If that is so, it is not possible to say, without anything more, that there was no necessity and the assessee unnecessarily spent his own moneys for conducting the criminal prosecution. When the assessee asserted that he started the criminal proceedings against the said Ramgopal Ganpatrai on account of his own claims in the civil litigation and the object of starting those proceedings was not to satisfy his personal vendetta against him and there is nothing to show that the assessee was not solely guided by his business considerations in launching the criminal prosecution, it is not possible to say that there was also an element of personal vendetta. We see nothing to warrant a conclusion that the assessee was not wholly motivated by business considerations in launching the criminal prosecution.

10. As laid down by the Supreme Court in the decision in Commissioner Of Income Tax, West Bengal v. Calcutta Agency Ltd. [1951] 19 I.T.R 191, the jurisdiction of the High Court in the matter of income-tax references made by the Appellate Tribunal under the Indian Income-tax Act is an advisory jurisdiction and under the Act the decision of the Tribunal on facts is final, unless it can be successfully I assailed on the ground that there was no evidence for the conclusion on facts recorded by the Tribunal, and it is therefore the duty of the High Court to start by looking at the facts found by the Tribunal and answer the questions of law on that footing. The Supreme Court in the decision in Commissioner of Income-tax v. A. Tellery and Sons Pvt. Ltd. [1967] 63 I.T.R 288 S.C. has further held that the question whether the assessee is entitled to a deduction of certain expenditure under section 10(2)(xv) of the Income-tax Act, 1922, should be decided on the facts of each particular case and the question whether the expenditure was laid out wholly and exclusively for the purpose of the business is a question which involves, in the first place, the ascertainment of facts by the Appellate Tribunal, and in the second place, the application of the correct principle of law to the facts so found. Therefore, the claim of the assessee in any particular case that he is entitled to deduction of certain items of expenditure under section 10(2)(xv) of the Act, involves the application of law to the facts found in the setting of the particular case. Therefore, the question is, what are the facts that were found by the Income-tax Appellate Tribunal in this case. In its order the Income-tax Appellate Tribunal has said the following:

“We think there is a good deal of force in this argument made on behalf of the assessee. As we have already stated, the criminal case had no apparent connection with the civil case. But the assessee could not have solely been guided by the motive of personal vendetta against the said Ramgopal Ganpatrai, and if he alleged any criminal acts the part of the said Ramgopal Ganpatrai, the assessee stood to benefit by protecting the mill-company which had been defrauded of large amounts, by the said Ramgopal Ganpatrai, the reimbursement of which would have ultimately benefited the assessee himself. It is to be remembered that it was not a case of the assessee trying to save himself from an attack on his personal liberty, but it was a case of the assessee's endangering the personal liberty of some one else, and that, in the circumstances, cannot be said to have been done by the assessee from pure personal motives. It is well-known that pressure of criminal prosecution many times brings about fruitful results by way of settlement of civil claims. In this case, that is exactly what has happened, for the said Ramgopal Ganpatrai came to terms and the assessee got large amounts which became his income which was taxed. Therefore, it will not be correct to hold that no part of this expenditure incurred by the assessee in the criminal case could even be remotely connected with the income that he was earning by way of managing agency commission, etc. The relationship between the assessee and the said Ramgopal Ganpatrai was not entirely personal it was a business relationship from which the assessee stood to gain if everything was done properly. Therefore, we think upon a broad view of the matter, it will be proper to hold that at least a part of these expenses should be considered or treated as a legitimate business expenditure allowable as a deduction under section 10(2)(xv) of the Act on a reasonable estimate, we would allow one-third of the amount claimed as a legitimate business expenditure.”

11. Though the Tribunal has put the matter in some negative form, it has come to the conclusion that the assessee was guided by business considerations in starting the criminal prosecution against the said Ramgopal Ganpatrai and as a matter of fact the said Ramgopal Ganpatrai came to terms and the assessee got large amounts which became his income and it was also taxed. But, nonetheless, the Tribunal allowed only one-third of the amounts claimed as legitimate business expenditure. It is not clear on what basis the deduction was allowed only to a one-third of the amounts claimed. We do not think that any distinction can be drawn between the expenses incurred in a civil litigation and the expenses incurred in a criminal litigation, if as a matter of fact they were incurred for the purpose of business. Both should be admissible deductions if it could be shown that they were incurred wholly and exclusively for the purpose of business. On the facts of this case we are inclined to come to the conclusion that the items of expenditure, actually spent by the assessee for the purpose of criminal litigation, should be taken as wholly and exclusively spent for the purpose of business and should be allowed as deductible expense.

12. Now we will refer to the various decisions cited at the Bar both on behalf of the department and the assessee.

13. The following are the decisions relied on by the department in support of its contention. In Amrita Bazar Patrika, In re some expenses were incurred by a newspaper company in defending its editor and printer in proceedings for contempt of court. The company claimed that the expenditure thus incurred should be deducted under section 10(2)(ix) of the Income-tax Act in computing its assessable income. It was held that the expenditure in question was not incurred for the purpose of earning profits or gains and consequently was not allowable as a deduction under section 10(2)(ix) of the Act. In Commissioner of Income-tax v. Gasper and Company, a firm of partners who had for a number of years been importing certain brands of whisky and brandy from a company in Calcutta claimed to deduct from their income-tax assessment the expenses incurred in successfully defending the individual partners and the manager of their liquor department against criminal charges of conspiracy to commit offences against the Excise Act brought against them. It was held that the sum could not be deducted either as a business loss, or as an expenditure under section 10(2)(ix) of the Act. It was held further that the expenditure has been incurred by persons to protect their good name and they have succeeded and they cannot be said to have suffered loss. In J.B Advani & Co. Ltd. v. Commissioner of Income-tax [1950] 18 I.T.R 557, 567 Bom.., the facts are that the directors and the salesman of the assessee-company were prosecuted under Hoarding and Profiteering Prevention Ordinance, 1943, and the Defence of India Rules. Expenses were incurred in successfully defending them. The assessee claimed that a certain amount incurred by it in connection with these prosecutions was a permissible deduction under section 10(2)(xv) of the Act. In that connection their Lordships of the Bombay High Court, who decided that case, have said the following:

“The review of these authorities makes it clear that there is no difficulty in the class of cases where an asset of a business is protected or safeguarded by the assessee carrying on the business in a civil litigation.

The costs of such litigation are always a permissible deduction. The difficulty only arises when you have a criminal prosecution. There again, when a criminal prosecution ends in a conviction there is no difficulty because the assessee who is guilty of a breach of the law cannot be heard to say that the costs of the litigation against him was a permissible deduction because the commission of an offence was not necessary for the purposes of his trade. The real difficulty only arises when you have a case where the prosecution terminates in acquittal. Then the two tests to be applied as suggested would be whether the assessee was charged with regard to a transaction which took place in the ordinary course of business, and the other test would be whether he was charged in his capacity as a trader. If these two tests are satisfied and the court comes to the conclusion that the primary object of incurring the expenditure was to protect the good name of the business then it could be said that the expenditure was wholly and exclusively for the purposes of business.”

14. In Commissioner Of Income Tax, West Bengal v. Mr H. Hirjee the assessee carrying on business as selling agent of a company was prosecuted under section 13 of the Hoarding and Profiteering Prevention Ordinance, 1943, on a charge of selling goods at prices higher than were reasonable in contravention of the provisions of section 6 thereof and a part of his stock was seized and taken away. The prosecution ended in an acquittal and the assessee claimed to deduct from the profits of his business under section 10(2)(xv) of the Indian Income-tax Act, 1922, a certain sum spent on defending the case. It was held that the sum spent in defending the criminal proceeding was not an expenditure laid out or expended wholly and exclusively for the purpose of the business and it was, therefore, not an allowable deduction under section 10(2)(xv). In Juggilal Kamlapat Cotton Spinning and Weaving Co. Ltd. v. Commissioner of Income-tax the assessee-company submitted a return showing its assessable income at Rs. 42,510. The Income-tax Officer found that the assessee's assessable income was Rs. 8,17,137. The assessee's managing director was thereafter served with notice to show cause why criminal proceedings should not be taken against him. The assessee paid a sum of Rs. 7,50,000 and compounded the offence. It was held in that case that the payment of Rs. 7,50,000 could not be said to have been made wholly and exclusively for the purpose of the business within the meaning of section 10(2)(xv) of the Act and could not be excluded in determining the assessable income of the company. In Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, goods were imported contrary to law and they were confiscated by the customs authorities. Thereupon the fine was paid and the goods were released. Then a question arose whether the fine paid is an allowable expenditure. It was held that the expense which was paid by way of penalty for a breach of the law cannot be said to be an amount spent wholly and exclusively for the purpose of business. It was held in that case that, as the infraction of law is not a normal incident of business, therefore, only such disbursements can be deducted as are really incidental to the business itself.

15. We do not think any of the above decisions would help the department in support of its contention. In the above cases the criminal litigation had arisen on account of some penal liability or expenses which were incurred on account of payments of some penalties for infraction of law and it was considered that infraction of law is not a normal incident of business. A distinction was drawn in the above cases between the expenditure incurred in civil litigation and the criminal litigation because of the fact that in civil litigation no question could arise as to the primary and secondary purpes for which legal expenses could be said to have been incurred as in the case of criminal prosecution, where the defence cannot easily be dissociated from the purpose of saving the accused person from possible conviction. But in the present case it is not as if that some criminal litigation was launched on the assessee and the expenses claimed for deduction were incurred in that litigation. It is quite the other way. The assessee himself had to launch the criminal prosecution against the said Ramgopal Ganpatrai because of his (assessee's) business connections with Dhanraj Mills Co. Ltd. and in order to save his business income from that company. There fore, there is no question of primary and secondary purposes in the criminal prosecution which was launched by the assessee and for which he incurred the expenditure in question. That expenditure has also nothing to do with anything like payment of penalty for infraction of any law.

16. Now we will consider the decisions relied on on behalf of the assessee. In Mitchell (Inspector of Taxes) v. B.W Noble Ltd., a company which carried on an insurance business made some payment to a director to get rid of him in order to save the company from some scandal and in order to enable the other 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 a bad effect on the credit of the company. Deduction of that amount was claimed under rule 3 of the Rules of the Income-tax Act of 1918, that is to say, as being the sum (wholly and exclusively) laid out or expended for the purposes of the trade. It was held that the payment made to the director was deductible expenditure under that rule. It was also held that the expenditure was attributable to income and not to capital.

17. In Morgan (Inspector of Taxes) v. Tate and Lyle Ltd., a company engaged in sugar refilling incurred expenses in a propaganda campaign to oppose the threatened nationalization of the industry. The company claimed deduction under a rule which is substantially in pari materia with the rule contained in section 10(2)(xv) of our Act. It was held in that case that the expenditure incurred was for the purpose of preventing the company from losing its business and preservation of its assets intact and, therefore, it was an expenditure “for the purpose of the trade”.

18. In the decision, J.N Singh and Co. P. Ltd. v. Commissioner of Income-tax, the Punjab High Court has held that the expenses incurred in defending an employee against a criminal prosecution with regard to a transaction carried out in the ordinary course of the business of the assessee can be allowed as permissible deduction. It said that, in the case of an employee, such an expenditure was incurred to protect the good name of the business, the prosecution having emanated with regard to an act which took place in the ordinary course of business and the expenditure is, therefore, wholly and exclusively for the purpose of business; accordingly, it was held that the deduction was permissible under section 10(2)(xv) of the Income-tax Act of 1922. In this decision their Lordships made a distinction between expenses incurred in defending an employee against a criminal prosecution and expenses incurred in defending an owner, or director or manager of the assessee-company where a part of the object for incurring the expenditure would be to defend the accused from the possible adverse consequences of a criminal conviction.

19. In the decision, Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, the assessee-company which carried on business of cotton spinning and weaving launched some civil litigation against the Provincial Textile Commissioner to desist from seizing the yarn supplied to some weavers, which it did. The company lost both in the High Court and in the Privy Council. In prosecuting those proceedings the company claimed deduction of this amount as expenditure wholly and exclusively laid out for the purpose of its business. The Supreme Court held that:

“The deductibility of expenditure incurred in prosecuting a civil proceeding depends upon the nature and purpose of the legal proceeding in relation to the assessee's business and cannot be affected by the final outcome of that proceeding. However wrong-headed, ill-advised, unduly optimistic or over-confident in his conviction the assessee might appear in the light of the ultimate decision, expenditure in starting and prosecuting a civil proceeding cannot be denied as a permissible deduction in computing the taxable income merely because the proceeding had failed, if otherwise the expenditure was laid out for the purpose of the business wholly and exclusively, that is, reasonably and honestly incurred to promote the interest of the business. Persistence of the assessee in launching the proceeding and carrying it from court to court and incurring expenditure for that purpose is not a ground for disallowing the claim.

In order that an expenditure may be admissible as a deduction under section 10(2)(xv), it is not necessary that the primary motive in incurring it must be directly to earn income thereby.”

20. In the decision of Birla Cotton Spinning and Weaving Mills Ltd. v. Commissioner of Income-tax, decided by the Calcutta High Court, the assessee-company expended considerable sums of money in engaging lawyers for making representations before the Income-tax Investigation Commission to whom its case had been referred and also for challenging the validity of the Taxation of Income (Investigation Commission) Act, 1947, and claimed to deduct these sums as business expenditure. The departmental authorities and the Tribunal negatived the claim. On a reference to the High Court, it was held that as the expenditure was incurred by the assessee-company in opposing an illegal and coercive governmental action with the object of saving taxation and safeguarding the business it was justified by commercial expediency and was, therefore, allowable expenditure. It was further held that though the main object of business was to earn profit, business purposes are wider than profit-making purposes. Business expediency does not require that expenses should be incurred only for earning immediate profits; expenses may be incurred to save the business from coercive process and unlawful exploitation so that the business may remain on a sound footing and may earn better profits in future. Hence, expenses incurred, though not directly related to earning of income, may be allowable deductions if they are related to the carrying on of the business. To spend money against a coercive process would be money laid out wholly and exclusively for business purposes if it was to result in saving business profits, which was the property of the assessee, from belated efforts at taxation.

21. In the decision of Commissioner Of Income-Tax, Bombay v. Pannalal Narottamdas & Co.* and Co., the assessee in the course of his business purchased bills of lading and other shipping documents from certain parties in respect of some consignments of goods imported by them from a foreign country. When the goods arrived in India and were sought to be cleared through customs by the assessee on the basis of the documents purchased by it, it was found that the imports were unauthorised and the goods were liable to be confiscated. The assessee paid an amount of Rs. 31,302 by way of penalty for saving the goods from being confiscated. The Bombay High Court held that the actual cost of the goods to the assessee was not only what it had paid to the importers but in addition thereto what it had to pay by way of penalty in order to save the goods from being confiscated and lost to it. The penalty paid by it could, therefore, be regarded as part of the cost of the goods to it. It can also be regarded as an amount expended by it wholly and exclusively for the purposes of business, because, unless the said amount was expended, the goods could not have been saved from confiscation. In that case the Bombay High Court found that the assessee was not at fault and in purchasing the goods it did not carry on its business in any unlawful manner and in contravention of any rules or regulations and the penalty was not paid by the assessee for such conduct thereof.

22. In the decision of Commissioner of Income-tax v. Malayalam Plantations Ltd., the Supreme Court has said that 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 rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; 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. The above decisions relied on on behalf of the assessee support his contention in one way or the other. In this case the assessee took out both civil litigation and criminal litigation. Admittedly, the civil litigation was for the purpose of his business. As we have already stated we do not think that any distinction can be drawn between the expenses incurred in a civil litigation and those incurred in a criminal litigation for the purpose of deduction except with regard to expenses of criminal litigation and the question would arise, having regard to the facts of the particular case, whether the expenses can be said to have been incurred wholly and exclusively for the purpose of business. It was not found as a fact by the Tribunal that the criminal litigation was started on a consideration of personal vendetta. The assessee claimed that criminal litigation was started against the said Ramgopal Ganpatrai also on account of his claims in the civil litigation. It was found by the Tribunal that the criminal prosecution launched against the said Ramgopal Ganpatrai had the desired effect and the said Ramgopal Ganpatrai came to terms and the assessee received large amounts which became his income and it was taxed. Therefore, the expenses incurred by the assessee in the criminal litigation though not directly related to earning of income or though it cannot be said it is an expenditure which was incurred in trade as such, it is clear that the expenditure was incurred in order to save the business profits of the assessee and for the preservation of his business and for the protection of his business assets and property. If that is so it is an expenditure incurred wholly and exclusively for the purpose of business within the meaning of section 10(2)(xv) of the Income-tax Act of 1922.

23. We may also add that the assessee is entitled to deduction of the entire amount of the expenses which he actually incurred in the criminal litigation and not only to a portion of it. As we have already said above, it is not clear on what basis the Tribunal allowed one third of the amounts claimed as legitimate business expenditure. For the two assessment years in question, namely, 1950–51 and 1951–52, the assessee claimed deduction of Rs. 39,657 and Rs. 57,066 as expenses incurred for criminal litigation, respectively. The Tribunal may, after perusing the various items of expenditure relating to those amounts, allow the items actually spent by the assessee for the purpose of the criminal litigation as admissible deductions.

24. Therefore, our answer to the two questions referred to us is as follows. The assessee is entitled to deduction of the entire amounts of expenditure which he actually incurred in the criminal litigation and not only to any portion of them. The Tribunal is at liberty to peruse the various items of expenditure which constitute the two amounts of Rs. 39,657 and Rs. 57,066 claimed for deduction and determine, if at all or what items were actually spent by the assessee for the purpose of the criminal litigation and allow those items as permissible deductions as were found to be actually spent for the criminal litigation. The assessee is entitled to his costs in this reference. Advocate's fee is fixed at Rs. 250.