Ramanujam, J.:— The assessee is a limited company carrying on business of manufacture and sale of sugar. In the assessment year 1958–59, corresponding to the accounting year ending May 31, 1957, the assessee claimed as an allowable expenditure a sum of Rs. 16,854 paid to its auditors by way of reimbursement of the expenses incurred by them for defending certain proceedings initiated against them by a shareholder of the company. The Income-tax Officer disallowed the said claim on the ground that the expenditure is not necessary for the purpose of carrying on the business of the assessee and of earning the profit. On appeal, the Appellate Assistant Commissioner held that the expenditure has been rightly disallowed by the Income-tax Officer. When the matter went before the Tribunal, it took the view that as the dispute between the auditors and the shareholder in respect of which the expenditure has been incurred having flowed from the employment of the managing agent which was necessary for the business and also arose because of the manner in which the accounts of the company had been prepared for the purpose of obtaining the necessary certificates from the auditors, the amount of Rs. 16,854 paid by way of reimbursement of the expenses incurred by the auditors in connection with the said dispute should be taken to be an expenditure incidental to the carrying on of the assessee's business even assuming that it cannot be taken as directly incurred for the carrying on-of the business of the assessee-company. At the instance of the revenue the following question has been referred to this court as arising out of the said decision of the Tribunal:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing the sum of Rs. 16,854 paid to its auditors by the company as a deduction in computing the profits and gains of the company from its business.”

2. The sum of Rs. 16,854 which is the subject matter of this reference has been paid by the company to their auditors, M/s. Lovelock & Lewes, during the accounting period under the following circumstances. The assessee-company was managed by M/s. Parry & Company Ltd. on the basis of a managing agency agreement dated June 7, 1946. As per the said agreement, the managing agents are to be paid remuneration as follows: (1) office allowance of Rs. 5,000 per mensem, (2) commission of 10 per cent on the annual profits of the company, and (3) commission in respect of sales of the company's products elsewhere than in Madras City at or through the branches or agencies. For the accounting year ending December 31, 1946, the managing agents were paid remuneration under the above three heads. But the profit and loss account of the company for that year as certified by the auditors indicated a sum of Rs. 74,666 as the amount paid towards the managing agent's remuneration which comprised of the office allowance of Rs. 60,000 and 10% commission on annual profits amounting to Rs. 14,666. The selling commission of Rs. 35,400 earned by them under the managing agency agreement was not, however, shown in the said profit and loss account as part of the remuneration paid to them. The said sum of Rs. 35,400 was not even shown as an item of expenditure either as separately or as included in the selling expenses. Thus, from the profit and loss account one would not know that a sum of Rs. 35,400 had at all been paid to the managing agents as commission. The profit and loss account of the company was prepared in this manner and certified by the auditors right up to the year 1952. On January 18, 1954, one Shri Ganesan, a shareholder of the company preferred a complaint to the Institute of Chartered Accountants stating that M/s. Lovelock and Lewes, the auditors of the company, have misled the shareholders into the belief that a lower sum was paid to the managing agents by not disclosing the selling commission paid to them and that, therefore, the action of the auditors offended clauses (o) and (p) of the Schedule to the Chartered Accountants Act, 1949. The matter went on a reference to the Calcutta High Court and the decision of the Calcutta High Court is reported as S. Ganesan…Complainant; v. A.K Joscelyne…. [1957] 27 Comp Cas 114, 142 Cal. In the said decision the court has held that though the charge of wilful negligence and mis-statement have not been established so as to bring the auditors within items (o) and (p) of the Schedule to the Chartered Accountants Act, the auditors have not acted with reasonable care and that it is a clear case of negligence. The ultimate conclusion of the court has been put down in these words:

“For the reasons given above, we must hold that in spite of the evidence of negligence and imprudence in acting on his own responsibility in matters beyond his province and certifying the profit and loss account without obtaining any explanation from the directors which was obviously called for in view of the terms of the agreement and of the difficulty of reconciling the entries in the accounts with even his own view of the meaning of ‘gross income’, the particular charges laid against the respondent had not been established against him.”

3. In connection with their defence in the said proceedings under the Chartered Accountants Act, the auditors have spent a sum of Rs. 16,854 and they claimed this amount from the company by way of reimbursement as per clause 196 of the articles of association of the company. The company accordingly paid the same in the accounting year and claimed it as an allowable deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. As already stated, the Tribunal has allowed this claim on the basis of the following reasoning:

“The whole dispute which went to the court thus flowed from the employment of managing agents which was necessary for the business, and also arose because of the manner in which the accounts of the company had been prepared for the purpose of obtaining the necessary certificate from the auditors. As the matter related to remuneration of the managing agents and it was necessary having regard to the large business conducted by the assessee, we consider that the expenditure now under consideration is incidental to the carrying on of the assessee's business even assuming that it cannot be taken as directly arising in the course of the carrying on of the business of the assessee-company. If there were no managing agents, this dispute would not have arisen ………… The assessee incurred this expenditure in carrying on the business because of the need to show the remuneration paid to them in the accounts. It was in any event incidental to the carrying on of the assessee's business as the way in which the managing agency agreement was interpreted arose in the course of the audit of the assessee's accounts. Thus considered from every point of view, which is germane or relevant in the present context, we are satisfied that the expenditure must be allowed as a deduction.”

4. The question is whether the above reasoning of the Tribunal is correct.

5. Section 10(2) under which the deduction is claimed is as follows:

“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. The deduction can be claimed under the above provision if the expenditure is expended wholly or exclusively for the purpose of the business provided it is not capital or personal expenses of the assessee. Therefore, one has to see whether the amount of Rs. 16,854 has been expended wholly or exclusively for the purpose of the company's business.

7. As already stated, the amount represents the expenditure incurred by the auditors for defending the disciplinary proceedings initiated against them by a shareholder under the Chartered Accountants Act. The company has paid the said sum to the auditors by way of reimbursement as per article 196 of the articles of association of the company which provides for indemnity in favour of all officers of the company including the auditors in defending any proceedings whether civil and criminal in which judgment is given in their favour. It is not necessary in this case to go into the question as to whether the payment to the auditors is authorised by the said articles of association or not. Even if the said payment is authorised under the said articles of association still the question that remains to be considered is whether the said payment amounts to an expenditure incurred wholly or exclusively for the purpose of the company's business. It cannot be taken that all payments authorised by the articles of association of the company will amount to expenditure incurred wholly and exclusively for the purpose of the business. The question whether the payment was authorised by the company or not is relevant for the purpose of the Companies Act. But that may not be relevant for the purpose of deciding the question as to whether the expenditure has been incurred wholly or exclusively for the purpose of the business. Admittedly, the said sum represented expenses incurred by the auditors in defending disciplinary proceedings one way or the other and it will not in the least affect the business or the reputation of the company. ‘Therefore, the expenses for the defence of the auditors in those disciplinary proceedings cannot be said to be in connection with or for the purpose of carrying on the business of the company. The said disciplinary proceedings only related to the auditors’ conduct in not correctly presenting the true picture of the company's affairs as required under the Companies Act, and as such it was the direct result of non-exercise of the necessary caution and prudence which ought to have been exercised by the auditors while certifying the profit and loss account of the company. The proceedings should, therefore, be taken to be entirely personal to the auditors.

8. It is claimed by the assessee that under article 196 of the articles of association the officers of the company including the auditors have to be indemnified in respect of expenditure incurred by any such officer in defending any proceedings directly arising from or incidental to the discharge of his duties to the company. In our view, it is not each and every liability incurred by the company's officers that is reimbursable. Even assuming that the reimbursement is authorised, all payments made by the company by way of reimbursement cannot be said to have been incurred for the purpose of the company's business. The proper test in this case is to see if the auditors are found guilty and convicted, will it in any way affect the company's reputation or its assets or the trading activity. The decision in the disciplinary proceedings one way or the other will not affect the company's interest in the least. In the circumstances, we are not inclined to agree with the view of the Tribunal that merely because the dispute between the shareholder and the auditors in the disciplinary proceedings flowed from the employment of managing agents which was necessary for the business and arose from the manner in which the accounts of the company had been prepared for the purpose of obtaining the necessary certificate from the auditors, the expenditure must be taken to be an expenditure incidental to the assessee's carrying on of the business. We are of the view that the dispute between the shareholder and the auditors in the disciplinary proceedings has no nexus either with the employment of managing agents or with the employment of the auditors by the company. Nor are we inclined to agree with the view of the Tribunal that as the dispute between the shareholder and the auditors arose out of the interpretation to be placed on the managing agency agreement, the expenditure incurred in those proceedings should be taken to be incidental to the carrying on of the business of the assessee. The expenditure incurred was purely personal to the auditors and it is only in their interest to defend those disciplinary proceedings. The company's interest will not in the least suffer even if the auditors were to be held guilty in those proceedings as the auditors can be easily replaced by another without deteriment to the company's interest.

9. In Strong & Company of Romsey Limited v. Woodifield the Lord Chancellor had expressed:

“In my opinion, however, it does not follow that if a loss is in any sense connected with the trade, it must always be allowed as a deduction; for it may be only remotely connected with the trade or it may be connected with something else quite as much as or even more than with the trade. I think only such losses can be deducted as are connected with it in the sense that they are really incidental to the trade itself.”

10. In Travancore Titanium Products Ltd. v. Commissioner Of Income Tax Kerala the Supreme Court has held that to be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, that is, between the expenditure and the character of the assessee as a trader and not as owner of the assets, even if they are assets of the business. Subsequently, in Indian Aluminium Co. Ltd. v. Cit, West Bengal, Calcutta . [1972] 84 ITR 735 SC. the Supreme Court clarified the test adopted in the earlier case by stating that if the expenditure is laid out by the assessee as owner-cum-trader and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business.

11. A Full Bench of the Allahabad High Court in Swadeshi Cotton Mills Co. Ltd. v. Commissioner of Income-tax [1975] 100 ITR 59 All [FB]. was concerned with a claim for deduction under section 10(2)(xv) in respect of the expenses incurred by a company in defending its directors, officers and employees who were prosecuted under the Essential Supplies (Temporary Powers) Act for having stamped on cloth produced by the company prices higher than those fixed under the Textile Control Order, 1948. The Tribunal disallowed the expenditure on the ground that there was no compulsion on the company to shield the accused persons and, therefore, the expenses were not incurred for the purpose of or in connection with the business of the company. The court held that the decisive factor in such cases is to see as to what is the intention and motive of the assessee in incurring the expenditure and that the company in that case having incurred the expenditure only with a view to save the accused from punishment and there being no material to show that the expenditure was incurred with a view to save its own reputation and goodwill, the company was not entitled to deduct the said expenses. In Lakshmiji Sugar Mills Co. (P.) Ltd. v. Commissioner of Income-tax [1975] 98 ITR 568 Delhi. a company incurred certain sum in connection with a criminal case against its director and its employees for the offence of bribery. The company claimed the amount as business expenditure on the ground that it was incurred to protect the good name of the business, the prosecution having emanated from an act which took place in the ordinary course of business. The Delhi High Court held that as the company had incurred the expenditure to protect the good name of the business the expenditure should be taken to have been incurred wholly or exclusively for the purpose of the business. In Commissioner of Income-tax v. Ahmedabad Controlled Iron & Steel Reg. Stockholders Association P. Ltd. the Gujarat High Court expressed the view that where expenditure is incurred by an assessee for defence in criminal prosecutions, a distinction must be made between two kinds of cases (1) where the assessee defends a proceeding principally concerned with himself, the assessee incurs the expenditure not wholly and exclusively for his business but partly for purposes of the business and partly for saving himself from the punishment that may be imposed as a result of the criminal prosecution, and (2) where the assessee incurred the expenditure for defending one of its employees, he would be, protecting his own business interest and the expenditure in that case can be said to be wholly and exclusively incurred for the purpose of his business. In Commissioner of Income-tax v. Chaman Lal and Bros. the Delhi High Court has held that the amount spent by a firm for the defence of one of its partners in a criminal case for the alleged contravention of the provisions of the Foreign Exchange Regulation Act, 1947, was not deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922, and the fact that the acquittal of the partner was important for the purpose of the business did not detract from this position. The Punjab High Court in J.N Singh. & Co. (P.) Ltd. v. Commissioner of Income-tax had 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 business of the assessee can be allowed as a permissible deduction as the expenditure is 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.

12. From the above decisions it will be clear that, if the expenditure has been incurred purely with a view to save the reputation of the company in defending certain criminal proceedings against an officer of the company, it can be taken that the expenses have been incurred exclusively for the purpose of the business. As already stated, the disposal of the disciplinary proceedings one way or the other will not affect in the least the reputation of the company and it will affect only the reputation of the auditors concerned. The assessee-company is not bound to protect the reputation of the auditor. Even otherwise, the expenses for the auditor's defence in the disciplinary proceedings have nothing to do with the carrying on of the business of the company. The learned counsel for the assessee would refer to the decision of the Supreme Court in Commissioner of Income-tax v. Malayalam Plantations Ltd. in support of his stand that the sum of Rs. 16,854 paid to the auditors by way of reimbursement should be taken to be for the purpose of the business. In that case the Supreme Court had expressed that the expression “for the purpose of the business” occurring in section 10(2)(xv) is wider in scope than the expression “for the purpose of earning profits”, that its range is wide, that it will take in not only the day to day running of the business but also the rationalisation of its administration and modernisation of its machinery, the measures for the preservation of business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title, etc. But we are of the view that, however wide the scope of the expression “for the purpose of the business” may be, there are in-built limitations in section 10(2)(xv) itself. The limitations are (1) the expenditure shall be for the purpose of the business, that is to say, that the expenditure incurred shall be for the carrying on of the business; and (2) the assessee shall incur it in his capacity as a person carrying on the business. In this case, the payment made has nothing to do with the conduct of the business by the company or its reputation. The mere fact that the articles of association authorised such payment does not make the expenditure any more the expenditure incurred for the conduct of the business. We are, therefore, of the view that the Tribunal is in error in holding that the amount in question is an allowable deduction under section 10(2)(xv).

13. The reference is, therefore, answered in the negative and in favour of the revenue. The revenue will have its costs from the assessee. Counsel's fee, Rs. 250.