Bharucha, J.:— Three questions are posed in this reference under s. 256(1) of the Income Tax Act. The first question is referred at the instance of the Revenue and the second and third questions at the instance of the assessee. The questions read as under:

1. “Whether, on the facts and in the circumstances of the case, the expenses incurred by the assessee in the E.D.C Plant and Pulp Pilot Plant were scientific research expenses related to a business of the assessee so as to be allowed u/s. 35(2) of the Act?”

2. “Whether, on the facts and in the circumstances of the case, the sum of Rs. 17,800/- spent in the defence of Shri Mahant could be allowed as expenditure incurred for purpose of its business?”

3. “Whether, on the facts and in the circumstances of the case, the sum of Rs. 48,947/- incurred by the assessee on foreign tours of the Managing Director Shri R.J Chinai and the Works Manager Shri J.J Mehta was allowable as revenue expenditure?”

2. In so far as the first question is concerned, counsel are agreed that its answer is governed by the decision of this court in I.T Reference No. 188 of 1971. The identical question was there answered in the affirmative and in favour of the same assessee. Accordingly, without any detailed discussion of facts or law, we answer the first question in the affirmative and in favour of the assessee. The second question arises in unusual circumstances. One Mahant was the Chief Executive of the assessee. He dismissed an employee of the assessee on July 5, 1963. The dismissal was the subject of a tool-down strike in the department in which the dismissed employee had worked. On July 8, 1963 Mahant requested the office bearers of the labour union to discontinue the strike because the Labour Commissioner was expected at the assessee's factory. The strike was called off. The Labour Commissioner arrived and a settlement was reached. The order of dismissal was suspended for 10 days and the dismissed employee was permitted to put forward his defence. A large crowd collected at the factory gate to hear what had happened. After the settlement was reached Mahant came out of the factory and got into his car. Leaving the factory gate he drove the car for about 150 feet along the road to the assessee's residential colony where his bungalow was situated. He then stopped the car, took out a pistol and fired some shots at the crowd, injuring some persons. Mahant was prosecuted, the charge being that he had fired the pistol rashly and negligently so as to endanger human life. To defend Mahant in the criminal proceedings the assessee spent Rs. 17,800/- and claimed the same as business expenditure. The I.T.O and the A.A.C, on appeal, disallowed the assessee's claim. In second appeal the Tribunal was not inclined to accept the assessee's contention that the expenditure was incurred by the assessee for the purpose of its business. The incident had taken place, according to the Tribunal, not within the precincts of the assessee but near the residence of Mahant. It could not be said that by taking the law in his hands Mahant had served the interests of the assessee.

3. Our attention was drawn by Mr. S.J Mehta, learned counsel for the assessee to the judgment of this court in Criminal Revision Application No. 296 of 1965. It was a revision application against the order of acquittal passed in favour of Mahant by the Sessions Judge, Thana. Palekar, J. noted the findings of the learned Sessions Judge that there had been a big crowd outside the factory, that it was excited and violent and was shouting slogans against Mahant and other officers of the assessee, that some of the assessee's workers had hit Mahant's car with umbrellas and had attempted to open the car door to pull out the occupants, that stones had been pelted by the crowd, one of which had broken the rear glass of the car, that Mahant had stopped the car only when the crowd was surrounding the car on all sides. It was then that Mahant had lowered the glass and had fired.

4. Mr. Mehta cited the judgment of the Supreme Court in Commissioner of income-Tax v. Dhanrajgirji Raja Narasingirji. It was there held that it made no difference whether the proceedings were civil or criminal. What the court had to see was whether the legal expenses were incurred by the assessee in his character as a trader; in other words, whether the transaction in respect of which the proceedings were taken arose out of and was incidental to the assessee's business. It was for the assessee to decide how best to protect his own interest.

5. The other judgment which Mr. Mehta cited is a judgment of this Court in Hingir Rampur Coal Co. Ltd. v. Commissioner of Income-Tax, Bombay. The manager of the assessee there suffered stab wounds and died as a result of rioting by the assessee's workmen. The assessee assisted the State in prosecuting the offending workmen by engaging counsel and incurred large expenditure. This expenditure was claimed by the assessee as a deduction. This court upheld the claim. The learned judges observed that if discontent, whether imaginary or real, were to lead to the workmen taking the law into their own hands and going to the extent of a very serious not during which the highest officer of the assessee received as many as twenty-five stab wounds and was murdered, it would be difficult for the assessee to find, a person of the managerial or administrative class to go to its colliery for attending to its work. In helping the State to prosecute, the object of the assessee was to inculcate a sense of discipline in its workers, bring about some sense of security in its managerial staff and thereby help the smooth working of the colliery with a view to ensure that its income did not suffer. Therefore, the legal expenses incurred by the assessee were expended by it wholly and exclusively for the purpose of its business.

6. Mr. Dhanuka, learned counsel for the Revenue, laid stress on the Supreme Court judgment in Commissioner of Income-tax, W.B v. H. Hirjee. The assessee was an individual. He was carrying on business as the selling agent of a company. He was prosecuted on a charge of selling goods at prices higher than were reasonable in contravention of the provisions of an Ordinance. The prosecution ended in an acquittal. The assessee claimed to deduct from the profits of his business the amount spent by him in defending himself. The Supreme Court laid stress upon the fact that no case has been found where the expenses incurred by a person exercising a trade or profession in defending a criminal prosecution which arose out of his business or professional activities were allowed to be deducted in the assessment of his profits or gains for income-tax purposes. The Supreme Court observed that the deductibility of such expenses must depend upon the nature and purpose of the legal proceeding in relation to the business whose profits are under computation and cannot be affected by the final outcome of that proceeding. The deduction was not allowed.

7. When an individual is prosecuted for an alleged offence arising out of his business or profession the expenditure that individual incurs in defending himself cannot, patently, be said to be wholly and exclusively for the purposes of his business. We are not here concerned with the deductibility of such expenditure.

8. Our attention was drawn by Mr. Dhanuka to the judgment of the Delhi High Court in Commissioner of Income-tax, Delhi & Rajasthan v. Chaman Lal & Bros.. A partner of the assessee firm was prosecuted on the allegation that he had contravened the Foreign Exchange Regulation Act. The Delhi High Court held that the amounts spent by the assessee-firm on the defence of its partner were not deductible. The judgments cited showed that only the expenses incurred in defending an employee were admissible and not those incurred in defending the owner. The nature of the charge in the criminal case against the partner of the assessee-firm was a contravention personally committed by him. The object of spending money on his defence was to save him from being sent to the jail.

9. The emphasis in the Delhi case was on the fact that the partner of the assessee-firm was one of the owners of the assessee and the expenditure incurred by the assessee-firm for the defence of an owner could not be said to be wholly and exclusively business expenditure.

10. A Full Bench of the Allahabad High Court took the view in Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income-tax, U.P, that expenditure incurred to defend in a criminal prosecution directors and employees of the assessee and outsiders, who were relatives of one of the directors, could not be said to have been incurred for commercial considerations and was not deductible. The court noted that the intention and the motive of an assessee in incurring expenses on a criminal litigation must be gathered from the facts of each case and the attending circumstances. The fact that the assessee incurred expenses on the defence of its employee was a relevant circumstance to show that the object of the assessee in incurring expenses was to save its business reputation and property but that circumstance was not conclusive.

11. Where an assessee incurs expenditure to defend those who are, and those who are not its directors and employees, the expenditure is not wholly and exclusively for its business.

12. Mr. Dhanuka fairly drew our attention to the judgment of the Gujarat High Court in Commissioner of Income-tax v. Ahmedabgd Controlled Iron & Steel Reg. Stockholders Association Pvt. Ltd., wherein, after referring to some decided cases, including the Delhi case to which we have adverted, it was observed that a clear line of distinction had to be made between two kinds of cases. Where the assessee was an individual or a firm and incurred expenditure in defending the assessee-owner or a partner, it incurred the expenditure not wholly and exclusively for its business. Where the assessee incurred expenditure in defending one of its employees, the assessee was protecting its business interests and the expenditure could be said to be wholly and exclusively incurred for purposes of its business.

13. Now, Mr. Mahant had, as Chief Executive of the assessee, dismissed an employee. The dismissal had created unrest among the assessee's workers. The unrest manifested itself in a most disturbing form when Mahant left the factory-gate in his car and proceeded towards his bungalow, which was within the assessee's residential colony. He was then surrounded by a crowd showing violent tendencies. With the intention of defending himself and a senior officer of the assessee who was in the car with him, Mahant drew out a pistol and fired some shots. He injured some people. He was prosecuted. The genesis of the prosecution was the action taken by Mahant, as Chief Executive of the assessee, of dismissing an employee. It was patently in the best interest of the assessee's business to stand by Mahant in his predicament. If the assessee had not stood by Mahant, he and other employees would have come to believe that the assessee was unwilling to extend assistance though what had created the predicament had been done in the assessee's interest. This would have lessened the loyalty of the employees and would have resulted in poorer service. It would also have adversely affected new recruitments by the assessee. In our view, therefore, the assessee incurred the expenditure of Rs. 17,800/- on defending Mahant wholly and exclusively in the interests of its business, and the expenditure is deductible.

14. We now turn to the third question. On May 31, 1967 the assessee sent to the Reserve Bank applications for release of foreign exchange to meet the travelling and other expenses of its Managing Director and Works Manager. The covering letter recorded that the assessee had plants for the manufacture of viscose rayon, tyre cord and heavy chemicals. It had received a letter of intent for setting up a plant to manufacture nylon industrial yarn for tyre cord, fishing nets, ropes, etc. The letter of intent had been issued on the condition that the assessee utilised the technical knowhow developed in the country to save foreign exchange as much as possible. The assessee had received a proposal from Chattillon, Italy, with whom it had been negotiating for the supply of plant and machinery, but the requirement of foreign exchange therein had been found to be too high. The assessee had asked Chattillon to revise their proposal in an endeavour to reduce the foreign exchange component and Chattillon had suggested a meeting to discuss ways and means of fabricating some items in India. The position in regard to the proposal for supply of plant and machinery received from Chemtex Incorporated, U.S.A was similar. The covering letter stated that the assessee's managing director and works manager would discuss the Chemtex proposal in the United States of America. Thereafter a letter was written on June 30, 1967 by the assessee to the Reserve Bank. It stated that the purpose of the visit to Italy and the United States of America was to finalise the nylon tyre cord project and the managing director would be discussing and negotiating the same with top officials of Chattillon and Chemtex.

15. The I.T.O and the A.A.C turned down the assessee's contention that the sum of Rs. 48,947/- incurred by the assessee on the travel of the managing director and works manager was allowable revenue expenditure. The assessee's appeal to the Tribunal was also turned down because the Tribunal considered that the primary purpose of the visit was to set up the project for which the letter of intent had been issued. The Tribunal recorded that the Project had not come through even on the date of their order (May 23, 1972) and the plant and machinery was yet to be set up.

16. The letter dated May 31, 1967 shows that the principal purpose of the visit was to reduce the foreign exchange component in the expenditure to be incurred in setting up the nylon yarn plant.

17. Observations have been made by a Division Bench of this court in the case of Antifriction Bearings Corporation Ltd. v. Commissioner of Income-tax, Bombay City-III, Bombay, which are of assistance to the assessee. Two judgments of the Gujarat High Court were cited before the Division Bench. In Ambika Mills Ltd. v. Commissioner of Income-tax, it was held that a tour undertaken for the purpose of a primary survey for manufacturing, designing or processing of new machinery with a view to purchase it, even if not immediately but at a later stage, would be one for the purpose of bringing into existence capital assets and such expenditure would therefore, be capital expenditure. In a later decision in Sayaji Iron & Engineering Works Pvt. Ltd. v. Commissioner of Income-tax, Gujarat II, there are observations of the Gujarat High Court which run counter to the decision in the Ambika Mills & Spg. case, although it must be stated that the Ambika Mills' judgment was not cited. In the later case the tour was for getting an idea as to the new designs which were to be adopted by the assessee and the manufacturing process involved therein. This was held to be very essential for increasing the assessee's profits. The expenditure was held to be of a revenue nature. The Division Bench of this court stated that it was more inclined to agree with the decision in the later case.

18. Mr. Dhanuka relied upon a judgment of the Andhra Pradesh High Court in Hyderabad Allwyn Metal Works Ltd. v. Commissioner of Income-tax, A.P The assessee there was manufacturing steel refrigerators and steel furniture and was building bus bodies. The expenditure that was claimed to be revenue expenditure was that incurred in financing the tour of a director to Japan because the assesses intended to manufacture scooters, motor cycles and light and heavy three-wheelers. The court was of the view that only if expenditure was incurred in connection with a business which was already carried on could it be considered to be revenue expenditure, as it was intended to bring in more profits; but if it was a new adventure which the assessee was seeking to start, even though it might not have ended successfully at that stage, it was for the initiation of a new business end if the assessee had started it would have brought the assessee a benefit of an enduring nature. Even intangible initial outlay for the initiation of a new line of business, when the business was started, would be of enduring benefit to the assessee and would be in the nature of capital expenditure.

19. In our judgment, the view expressed by the Division Bench of this Court in Antifriction Bearings Corporation Ltd. v. Commissioner of Income-tax, Bombay City-III, Bombay, (supra), is correct. We cannot subscribe to the wide statement made in the Andhra Pradesh judgment. Unless the expenditure is directly related to a capital asset, acquired or to be acquired in the near future, it cannot be said to have brought about an enduring benefit and to be of a capital nature.

20. Mr. Dhanuka also referred to a judgment of the Punjab and Haryana High Court in Dalmia Dadri Cement Co. Ltd. v. Commissioner of Income-tax, Punjab (No. 1). This judgment need not detain us long for the expenditure which was incurred was in connection with a tour to inspect machinery to be purchased by the company. The tour was so intimately linked to the machinery to be purchased that the expenditure was held to be of a capital nature.

21. We, hold, in the light of this discussion, that the expenditure incurred in the instant case was allowable revenue expenditure.

22. We answer the questions as under:

23. Question No. 1 in the affirmative and in favour of the assessee.

24. Question No. 2 in the affirmative and in favour of the assessee.

25. Question No. 3 in the affirmative and in favour of the assessee. The Revenue shall pay to the assessee the costs of the reference.

26. Order accordingly.