(1) The following question has been referred to this Court under Section 66(1) of the Indian Income-tax Act. 1922 (hereinafter referred to as the Act) by the Income-tax Appellate Tribunal on an application made by the Commissioner of Income-tax: ''WHETHERon the facts and in the circumstances of the case, the litigation expenditure of Rs. 6,000.00 was a permissible allowance under Section 10(2) (xv) of the Indian Income-tax Act, 1922 ?"

(2) The assessed-firm is carrying on business of import 'and export of iron and steel. Chaman Lal, one of the partners of the assessed- firm. was prosecuted in the Court of the Chief Presidency Magistrate, Bombay, on a charge of having contravened the provisions of Section 4(3), read with Section 23 of the Foreign Exchange Regulation Act. 1947. According to the prosecution case, Chaman Lal. after having acquired foreign exchange to the extent of 9.841.15.9 as representing the true and correct value of mild steel bars, did nto use 480, out of that amount, for the purpose for which the foreign exchange had been acquired. The defense of the accused was that the foreign exchange had ben utilised for the very purposes for which it had been acquired namely, for remittance to Messrs. Ironside Ltd., London, who actually placed the order on a Japanese concern for the supply of the goods. The Chief Presidency Magistrate as per judgment dated December 14. 1957, held that foreign exchange acquired by the assessed-firm had been utilised for the purpose for which it had been acquired and no portion of it had remained unused. He, accordingly, acquitted the accused. The assessed-firm incurred an expenditure of Rs. 6,000.00 on the defense of Chaman Lal during the previous year ending on March 31. 1958, relevant to the assessment year 1958-59.

(3) The assessed-firm claimed that the expenditure of Rs. 6,000.00 should be deducted in computing its business income. The Income- tax Officer held that the said expenditure of Rs. 6,000.00 was nto incidental to the assessed firm's business and rejected the firm's claim. The assessed-firm then filed an appeal before the Appellate Assistant Commissioner contesting the disallowance of the sum of Rs. 6,000.00. The Appellate Assistant Commissioner held that the prosecution launched against the partner was directly connected with one of the consignment of goods imported by the assessed- firm and it could nto, therefore, be said that the case against one of the partners of the asseessee-firm was nto connected with the assessed-firm's business. The Appellate Assistant Commissioner, accordingly, allowed the sum of Rs. 6,000.00 as deductiun. The Department then preferred an appeal before the Tribunal objecting to the allowance of the sum of Rs. 6,000.00 by the Appellate Assistant Con-imissioner. Reliance was placed by the Department on the case of Commissioner of Income-fax v: H. Hirjee, (1953) 23 I.T.R. 427. The Tribunal observed that the Chief Presidency Magistrate had held that even if there was over-invoicing of the goods, the prosecution had failed to prove that it was done at the instance of the assessed-firm. The Tribunal further observed that the judgment of the Chief Presidency Magistrate showed that it was Messrs. Ironside Ltd., London, who had dealt directly with the Japanese firm and had placed orders for the goods to be suplied to the assessed-firm. It was also observed that Hirjee's case did nto lay down any universal proposition that legal expenses incurred in criminal litigation could nto be allowed under Section 10(2) (xv) of the Income-tax Act. It was held that having regard to the nature and purpose of the legal proceedings, the litigation expenses of Rs. 6,000.00 arose out of matters incidental to the carrying on of the said business of the firm and, as such, the assessed-firm was entitled to the deduction of Rs. 6,000.00 on account of litigation expenses. The appeal filed by the Department was, accordingly dismissed. On the application of the Commissioner of Income-tax the question, reproduced above, was referred to this Court.

(10) The above case was referred to with approval by their Lordships of the Supreme Court in the case of Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, Bombay, (1960) 41 Itr 350. The assessed in that case was carrying on the business of importing dates from abroad and selling them in India. He imported dates from Iraq by a steamer at a time when import of dates was prohibited. The dates were confiscated and were -released on the assessed paying fine under Section 183 of the Sea Customs Act. The assessed sought to deduct the amount paid as fine as an allowable expenditure under Section 10(2)(xv) of the Act. It was held that expense paid by way of penalty for a breach of the law. even though it might involve no personal liability, was nto an allowable deduction. Mr. Keshav Dayal, on behalf of the assessed, has tried to distinguish the above case on the ground that the breach of the law by the assessed in the above case was admitted, while in the present case the finding in the criminal case against Chaman Lal was that there had been no contravention of law. We agree with the learned counsel in this respect and one object in referring to the above case is only with a view to show that the decision in the case of Spofforth and Prince was referred to with approval by their Lordships of the Supreme Court.

(11) In the case of Commissioner of Income-Tux, Burma v. Gasper and Company, Rangoon, (1940) 8 Itr l00, a firm of partners who had for a number of years been importing brands o1 whisky and brandy from a company in Calcutta, claimed to deduct for the purposes of income-tax 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 in Calcutta. It was held that the sum could nto be deducted as business expenditure. In j. N. Singh & Co. Private. Ltd. v. Commissioner of Income-tax. New Delhi, (1966) 60 Itr 732, expenses were incurred in defending an employee in a criminal prosecution with regard to a transaction carried out in the ordinary course of business of the assessed. It was held by the Punjab High Court (D. K. Mahajan and S. K. Kapur, JJ.) that it was a permissible deduction. The learned Judges observed :

"IT,therefore, follows from what has been stated above that the expenses incurred in defending a criminal prosecution arising in the course of business can only be allowed as a permissible deduction, where they are incurred in defending an employee of the business, nto the owner. In the case of an employee, such an expenditure is incurred to prtoect 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) The above observations go to show that it is only the expenses incurred on. defending an employee which are admissible and nto those incurred in defending the owner. Mr. Keshav Dayal has argued that the position of Cliaman Lal. who was a partner of the assessede-firm in the present case, was similar to that of an employee and nto that of an owner. We are unable to agree with the learned counsel in this respect, because, in our opinion, a partner, though he acts as the agent of the firm, cannto be deemed to be an employee. A partner is one of proprietors of the business concern and his position is somewhat similar to that of a joint owner and cannto be relegated to that of an employee.

(13) Reference on. behalf of the assessed has been made to the case of Rohtus Industries Lid. v. Commissioner of Income-Tax, Bihar and Orissa, ( 1968) 67 Itr 361. The assessed-company produced vanaspati oil. Its directors and principal officers were prosecuted under the Essential Supplies Temporary Powers Act. on the allegation that the vegetable oil produced by the company did nto con- lain 5% til oil as required by the Order made under that Act. The Company incurred an expenditure in defending the case and the officers were acquitted. On a claim made by the company to deduct the expenses under Section 10(2) (xv) of the Act, it was held by a Division Bench of the Patna High Court that it was a permissible deduction. The learned Judges dealt with the matter in the following words:

"THEprosectution was on the ground that those goods were below the standard and the company had to defend the quality of their product by defending themselves and their officers, in that criminal case. Ultimately, they succeeded. In those circumstances, the only means of defending and prtoecting the goodwill and the qualit yof their goods was to detend themselves in the enminal proceeding. In that view of the matter, it cannto be said that one of the primary purposes for incurring the expenditure in that criminal case was nto the prtoection of the quality of their manufactured goods from the as- sailment charge against them. Therefore the expenses incurred will be deductible under section 10(2) (xv) of the Act."

(14) In our opinion, the assessed cannto derive much hlep from the above authority because the defense expenditure in that case was with a view to establish that the goods manufactured by the assessed- company were nto of sub-standard quality. The expenditure was thus held to be wholly and exclusively for the purpose of the business of the company. The same cannto, however, be said of the expenditure for defending a partner of an assessed-firm who is being prosecuted for alleged contravention of Foreign Exchange Regulation Act. An accused charged with an offence under Section 4(3), read with Section 23 of the Foreign Exchange Regulation Act, can be sentenced to undergo imprisonment which may extend to two years. The nature of charge in the criminal case against Chaman Lal was of a contravention alleged to have been personally committed by him and the object of spending money on his defense in that case was to save him from being sent to jail. It cannto consequently 'be said that the expenditure of Rs. 6,000.00 was wholly and exclusively for the purpose of the business of the assessed-firm. The fact that the acquittal of Chaman Lal was important for the reputation of the assessed-firm would nto detract from the above conclusion. We, therefore, are of the view that the expenditure of Rs. 6,000.00 is nto a permissible allowance under Section 10(2) (xv) of the Act. The question referred to this Court is consequently answered in the negative. Looking to all the facts, we leave the parties to bear their own costs of the reference.