JUDGMENT Divan, C.J.

1. In this reference the following question has been referred to the High Court by the Tribunal at the instance of the revenue :

" Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the respondent was entitled to claim the deduction of Rs. 15,420 incurred by it as and by way of legal expenses ?"

The assessee in this particular case is a private limited company and the relevant assessment year is 1965-66. The assessee-company deals in iron and steel materials in accordance with the provisions of the Iron & Steel Control Order. The assessee as a legal person was a partner in a firm known as M/s. Kashiparekh Brothers (Scrap Department). The assessee was represented in that partnership firm by its managing director, one Premchand Gokaldas. There was a first information report to the police on September 28, 1963, against the firm of M/s. Kashiparekh Brothers and also against its two partners, Sarabhai Chhotalal and Gautam Sarabhai. The nominee of the assessee-firm, Premchand Gokaldas, was also one of the persons against whom allegations were made in the course of that first information report. It was alleged in the first information report that the accused persons had committed an offence under Section 7(ii) of the Essential Commodities Act by committing a breach of clauses 5 and 20 of the Iron and Steel Control Order, 1956. The authorities registered a case against all the accused under Section 7(ii) of the Essential Commodities Act. The board of directors of the assessee-company in their meeting held on October 10, 1963, passed a resolution stating that the company should make all efforts and engage the best lawyers and spend all necessary amount in proving the innocence of Premchand Gokaldas in the case started against him along with Sarabhai Chhotalal and Gautam Sarabhai. In due course, the three accused including Premchand Gokaldas were charge-sheeted and were actually charged before the City Magistrate concerned under Section 7(1)(a), Clause (ii), of the Essential Commodities Act and also for an alleged violation of Clause 20 of the Iron & Steel Control Order. Thereafter, Premchand Gokaldas defended himself and in this connection the company incurred an aggregate amount of expenditure of Rs. 16,259. The City Magistrate, Third Court, Ahmedabad, acquitted all the accused except the partnership-firm and thus Premchand Gokaldas also came to be acquitted. In the course of his judgment the learned Magistrate held that the managing director was only a nominee of the assessee-company. The assessee claimed an aggregate amount of Rs. 16,259 spent by it for defending Premchand Gokaldas as a deduction. The Income-tax Officer disallowed the claim. In appeal by the assessee, the Appellate Assistant Commissioner held that an amount of Rs. 8,120 only was allowable as expenditure incurred wholly and exclusively for the purposes of its business. Against the decision of the Appellate Assistant Commissioner the matter was carried in further appeal to the Tribunal by the assessee. The Tribunal came to the conclusion that the assessee was entitled to a deduction of Rs. 15,420 and it held that an amount of Rs. 893 had been incurred in the previous assessment for the year 1965-66. Thereafter, at the instance of the revenue, the above question has been referred to us by the Tribunal.

2. The legal position regarding expenses incurred in connection with certain criminal proceedings with which the assessee is concerned has been considered in a series of decisions and out of them there is only one Supreme Court decision and that is to be found in Commissioner of Income-tax v. H. Hirjee, (1) [1953] 23 ITR 427 (SC). In that particular case the assessee was carrying on business as selling agent of a company and he was prosecuted under Section 13 of the Hoarding and Profiteering Ordinance, 1943, and the charge was of selling goods at prices higher than the reasonable prices in contravention of the provisions of section 6 of the Ordinance. A portion of the stock of the assessee was seized and taken away. The prosecution ended in an acquittal and the assessee claimed to deduct a certain sum spent by him in defending himself in the criminal case. The Tribunal found that the expenditure was incurred solely for the purpose of maintaining the assessee's name as a good businessman and also to save his stock from being undersold if the court held that the prices charged by him were unreasonable. In this case the Supreme Court held that, in the circumstances of the case, the amount was spent by the assessee in defending himself in the criminal proceeding but it was not an expenditure laid out or expended wholly and exclusively for the purpose of the business and was, therefore, not an allowable deduction under Section 10(2)(xv). At page 431 of the report, Patanjali Sastri C. J., delivering the judgment of the Supreme Court, observed :

The deductibility of such expenses under Section 10(2)(xv) must depend on 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. Income-tax assessments have to be made for every year and cannot be held up until the final result of a legal proceeding, which may pass through several courts, is announced.

Apart from this early decision of the Supreme Court delivered in March, 1963, there is only one other decision of the Supreme Court decided in 1973. That decision is in Commissioner of Income-tax v. Dhanrajgirji Raja Narasingirji, [1973] 91 ITR 544, 550 (SC). In this case of Dhanrajgirji, the assessee who was an individual was appointed managing agent for a period of 50 years of a public limited company which owned a mill. After a few years, the company got into financial difficulties and the assessee invited one R who agreed to bring the necessary finance. Under a tripartite agreement entered between the assessee, R and the company, R or his nominee was appointed the new managing agent and also selling agent of the company and the assessee was to be paid certain office allowance and a share in the managing agency commission and also in the selling agency commission. This agreement continued in force for some years. Civil and criminal litigation between the assessee and R took place and the assessee, with the permission of the court and with the consent of the Government, employed his own lawyers to prosecute the case. While the civil suit and the criminal case were pending, the assessee and R entered into a settlement under which R gave up the managing agency and further affirmed the right of the assessee to the selling agency. The selling agency commission was made payable to the assessee and was taxed in the assessment year 1948-49. The question before the Supreme Court was whether the expenditure in civil and criminal litigation incurred by the assessee was an allowable deduction and the Supreme Court held that the entire expenditure was allowable as it was incurred by the assessee in his character as a trader wholly and exclusively for the purpose of business. The Supreme Court laid down that it made no difference whether the proceedings were civil or criminal. It was contended before the Supreme Court on behalf of the revenue that there was no necessity for the assessee to engage his own lawyers as Government was in charge of the prosecution. The Supreme Court observed while repelling this argument:

" It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best."

Thus, this decision of the Supreme Court in Dhanrajgirji's case takes the matter a great deal further so far as the assessee is concerned.

3. In Saharanpur Electric Supply Co. Ltd. v. Commissioner of Income-tax, [1971] 82 ITR 405 (All) the assessee-company had invested an amount of Rs. 45,000 out of its sur plus funds with a non-scheduled bank. Another amount of Rs. 897 was also in credit with that banking concern. The assessee filed a suit to recover the said amounts from the banking concern as it was failing and obtained a decree but nothing was realised in execution of that decree. The assessee-company instituted criminal proceedings against one M who was its managing agent and also a partner of the banking concern as he was suspected to have committed breach of trust by depositing Rs. 5,000 in the banking concern when insolvency petition was pending against it. M was convicted and fined in those criminal proceedings. The assessee claimed that a sum of Rs. 6,200 which had been incurred as litigation expenses should be deducted in the computation of its total income. The Allahabad High Court on these facts held that the expenses incurred in the civil litigation against the banking concern were of revenue nature and were entitled to deduction under Section 10 of the Indian Income-tax Act, 1922. As regards expenses incurred in connection with the criminal case the Allahabad High Court held that in a company, which is formed for business, all its assets represent business assets. Any surplus capital of the company, which is not invested in the fixed or circulating assets, does not cease to be its business asset, and the Allahabad High Court held that the claim for the sum of money incurred in litigation for the recovery of a business asset was admissible under Section (10)(2)(xv). The Allahabad High Court held that the primary object of a criminal proceeding was to see that the guilty person was punished and the expenses for the criminal case could not be allowed as a deductible item. At page 409 of the report it has been observed:

" The expenditure incurred in prosecuting Mander Das could not be said to have been incurred for realising or protecting any asset. The primary object of a criminal proceeding is to see that the guilty person is punished."

The Allahabad High Court observed:

" In any event, even if one of the reasons for launching a criminal proceeding was to put pressure upon Sri Mander Das, the expenditure could not be said to have been incurred wholly and exclusively for the purposes of the business."

In Commissioner oj Income-tax v. Chaman Lal Bros., [1970] 77 ITR 383 (Delhi), the Delhi High Court has held that the amount spent by the assessee-firm, which was a registered partnership firm for the defence of one of its partners in a criminal case for 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 reputation of the assessee-firm did not detract from this position.

4. On the other hand, we find that the Punjab High Court has in J.N. Singh & Co. (P.) Ltd. v. Commissioner of Income-tax, [1966] 60 ITR 732 (Punj) 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. In the case of an employee, such an 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 and the expenditure would be wholly and exclusively for the purpose of the business. Thus, this decision of the Punjab High Court distinguishes the case when an assessee himself or a partner of the assessee-firm is being prosecuted and expenses are incurred for defending the assessee or the partner, from the case where an employee of the assessee-firm is being prosecuted and expenses are incurred in defending the employee. In the first case, that is, in the case where expenses are incurred in defending the assessee himself, the amount cannot be claimed as a deduction since it cannot be said to have been incurred wholly and exclusively for the purpose of the business of the assessee. On the other hand, when an employee of the assessee is being defended and expenses have to be incurred in defending such an employee, the amount can be claimed as a deductible expenditure since defending the employee is defending the business activity of the assessee concerned, and, therefore, it would be wholly and exclusively for the purposes of the business of the assessee.

5. In Rohtas Industries Ltd. v. Commissioner of Income-tax, [1968] 67 ITR 361 (Pat) the directors and the principal officers of the assessee-company were prosecuted under the Essential Supplies Temporary Powers Act, on the allegation that the vegetable oil produced by the company did not contain 5 per cent. til oil as required by the order made under Clause (9) of the Act. The company incurred an expenditure in defending the case and the officers were acquit ted. On a claim made by the company to deduct the expenses under Section 10(2)(xv) of the Act, the Patna High Court held that the expenditure had been incurred with a view to proving the quality and standard of the manufactured goods produced by the assessee and was deductible under Section 10(2)(xv). At page 364 of the report, the Patna High Court pointed out that the prosecution was on the ground that goods produced by the company were below the standard and the company had to defend the quality of their product by defending themselves and their officer, in that criminal case. Ultimately, they succeeded. In those circumstances, the only means of defending and protecting the goodwill and the quality of their goods were to defend themselves in the criminal proceeding. In that view of the matter it cannot be said that one of the primary purposes for incurring the expenditure in that criminal case was not the protection of the quality of their manufactured goods from the assailment charged against them and, therefore, the expenses incurred would be deductible under Section 10(2)(xv) of the Act.

6. It seems to us that a clear line of distinction can be made between those cases where the assessee concerned has incurred an a expenditure in defending himself where the assessee is an individual or a partner of the firm and where the assessee is a registered partnership firm or some person principally concerned with the assessee, there the assessee incurs the expenditure not wholly and exclusively for his business but partly for the purposes of the business and partly for saving himself from punishment that may be imposed as a result of the criminal prosecution. On the other side of the line will come those cases where the assessee has incurred expenses in defending one of its employees because, in that case, by defending the employee the assessee concerned would be protecting its own business interest and thus the expenditure can be said to be wholly and exclusively incurred for the purposes of the business of the assessee.

7. To illustrate the point that we are making, we may point out that medical expenses incurred by the assessee himself for securing medical treatment for himself cannot be deducted under the provisions of the Act but if an employer incurs expenditure for giving medical treatment to his employee, such amount will be deductible on the ground that it is incurred wholly and exclusively for the purposes of the business of the assessee.

8. Applying these principles to the facts of the present case, it must be pointed out that Premchand Gokaldas, the managing director of the assessee-company, was sought to be prosecuted because he represented the assessee-company in the partnership firm of Messrs. Kashiparekh Brothers. The assessee-company had put forward Premchand Gokaldas as its nominee and when it incurred the expenditure of Rs. 15,420 in defending Premchand Gokaldas in the criminal case, it was defending its own nominee and agent. Thus, the present case would fall on the other side of the line with those cases where the assessee has incurred expenditure for defending an employee in a criminal case. It is true that as managing director of the assessee-company, Premchand Gokaldas was one of the principal persons concerned in the assessee-company but he was not being prosecuted for something done by him in connection with the affairs of the assessee-company. He was sought to be prosecuted for something done by the partnership firm in which Premchand Gokaldas represented the assessee-company. Under the circumstances, Premchand Gokaldas stood in the same position as the agent or the representative or the employee of an assessee in the criminal case to the limited extent to which the allegations contained in the first information report were against Premchand Gokaldas. Hence, in trying to defend premchand Gokaldas, the assessee-company was defending its own representative or nominee. Under these circumstances, it mnst be said that in trying to defend Premchand Gokaldas, the assessee-company was defending its own name as an upright business organization and hence the amount of Rs. 15,420 referred to above must be held to have been spent wholly and exclusively for the purposes of its business.

9. In the light of the above discussion we hold that the Tribunal was right in holding that the assessee-company was entitled to claim deduction of Rs. 15,420 incurred by it as and by way of legal expenses in defending Premchand Gokaldas in the criminal case. We, therefore, answer the question referred to us in the affirmative. The Commissioner will pay the costs of this reference to the assessee.