Kirty, J.
1. Pursuant to an order of this court dated July 28, 1964, under Section 66(2) of the Indian Income-tax Act, 1922, the Income-tax Appellate Tribunal, Allahabad Bench, has referred the following two questions along with the statement of the case :
'(1) Whether upon the facts found by the Tribunal and/or admitted by and between the parties before the Tribunal in respect of the litigation in question for the assessment year 1953-54, it could be said that fees paid to counsel for respondents Nos. 2 and 5 (Kedarnath Khetan and Radhey Kishun Khetan) was expenditure which was covered by the provisions of Section 10(2)(xv) of the Act?
(2) Whether, on the facts found by the Tribunal and/or admitted by and between the parties before the Tribunal in respect of the assessment year 1954-55 the expenditure incurred in a writ petition by Onkar Mal Khetan against Kedar Nath Khetan, who had been appointed authorised controller of the assessee-company could be claimed as deduction under Section 10(2)(xv) of the Act ?'
2. The aforesaid questions have been referred at the instance of the assessee, Ishwari Khetan Sugar Mills (P.) Ltd. For the assessment year 1953-54 the assessee had claimed a deduction of Rs. 50,087 on account of legal expenses and Rs. 14,335 for the assessment year 1954-55. The Income-tax Officer disallowed a sum of Rs. 37,734 for the assessment year 1953-54 and the entire sum of Rs. 14,335 for the assessment year 1954-55, Two appeals were preferred by the assessee-company which were dismissed by the Income-tax Appellate Commissioner by a common order dated July 31, 1959. The matter was then taken up in appeal to the Income-tax Appellate Tribunal by the assessee-company. The Tribunal, however, by its judgment and order dated August 5, 1961, dismissed both the appeals. Thereafter, the assessee filed an application under Section 35 of the Act which was dismissed on February 20, 1962. The assessee then filed an application under Section 66(1) of the Act requiring the Appellate Tribunal to refer to the High Court questions of law arising out of the order of the Appellate Tribunal dated August 5, 1961. The Tribunal refused to state the case being of the opinion that no question of law arose. The assessee then filed two applications in this court under Sub-section (2) of Section 66, as a result of which the aforesaid questions have come up for decision.
3. The material facts about which there is no controversy may be briefly stated. Ishwari Khetan Sugar Mills (P.) Ltd. and Maheshwari Khetan Sugar Mills (P.) Ltd. are two companies of which the managing agents respectively were M/s. Devi Dutt Sura] Mal and M/s. Devi Dutt Chaturbhuj. The two managing agency firms were partnership firms. In M/s. Devi Dutt Chaturbhuj, the Khetans held no less than 0-12-0 share as partners. In the other firm Onkar Mal Khetan had a one-fourth share while the remaining three-fourth shares were owned by other members of the Khetan family. It may here be mentioned that Onkar Mal Khetan is the nephew of Kedar Nath Khetan. In pursuance of a mutual arrangement between the partners of the two firms Onkar Mal Khetan was entrusted with the management of Ishwari Khetan Sugar Mills (P.) Ltd., while Kedar Nath Khetan and other members of his group were entrusted with the management of Maheshwari Khetan Sugar Mills Ltd. The two mills continued to be so managed from 1945 onwards till April, 1951, when disputes arose between the partners of the two firms in regard to the management of the two mills. The internal dissensions between the partners gave rise to a number of legal proceedings in courts of law. Suit No. 59 of 1951 was instituted on May 3, 1951, in the court of the Civil Judge, Gorakhpur, against Kedar Nath Khetan and eleven other persons. The two companies were impleaded as defendants Nos. 6 and 7 in that suit. It appears that it was, inter alia, pleaded by Onkar Mal Khetan that Kedar Nath Khetan in collusion with some of the partners of the two managing agency firms and the shareholders of the two companies had ousted or had sought to oust Onkar Mal Khetan from the management of the two companies and, in particular, Ishwari Khetan Sugar Mills (P.) Ltd. One of the reliefs, which has been treated by the Tribunal to be the main relief, was for appointment of receiver of the two sugar mills until such time as proper arrangement for the protection of the rights of Onkar Mal Khetan and his group were made by the court. On an ex parte motion of the plaintiffs of Suit No. 59 of 1951, an interim receiver was appointed by the court. Two appeals were filed in this court against the order appointing receiver--F.A.F.O. No. 127 of 1951 was by the two companies and the other appeal (F.A.F.O. 133/1951) was filed by Kedar Nath Khetan and three other persons as directors of the two companies. These two appeals were dismissed by this court by a common judgment and order dated November 27, 1951. Question No. 1 is in respect of the expenses alleged to have been incurred in the aforesaid litigation during the assessment year 1953-54. It appears that Kedar Nath Khetan was appointed as authorised controller of the assessee-company by the Central Government under the Essential Supplies Act. Writ Petition No. 126 of 1952 was filed in the Supreme Court of India by Onkar Mal Khetan against Kedar Nath Khetan challenging the appointment of Kedar Nath Khetan as authorised controller. The assessee-company was also arrayed as a petitioner in the said writ petition. The second question is in respect of expenses alleged to have been incurred by the assessee-company for defending the appointment of the authorised controller during the assessment year 1954-55.
4. In respect of deductions claimed for both the assessment years the Income-tax Officer, the Appellate Assistant Commissioner of Income-tax and the Income-tax Appellate Tribunal have held that the litigation expenses in respect of which deductions have been claimed were not expenditure laid out or expended wholly and exclusively for the purpose of the business of the assessee-company.
5. Section 10(1) provides that tax shall be payable by an assessee in respect of the profits or gains of any business carried on by him. Subsection (2) provides that such profits or gains shall be computed after making the allowances mentioned in Clauses (i) to (xv). To come under Section 10(2)(xv) the expenditure must have been laid out or expended wholly and exclusively for the purpose of such business. The asscssee's contention is that in disallowing the litigation expenses the income-tax authorities misapplied the law and that they also failed to appreciate that the expenses in respect of which deductions had been claimed were expenses incurred in connection with the management and the working of the assessee-company.
6. In regard to the assessment year 1953-54 the Appellate Tribunal in its order dated August 5, 1961, inter alia, said :
'It is interesting to note from the copy of the judgment filed by the assessee's counsel that the counsel for the two companies was Sri Jagdish Swarup whereas Sri Kanhaiya Lal Misra was the counsel for the respondents Nos. 2 and 5, namely, Kedar Nath Khetari and Sri Radhey Kishun Khetan. However, the law charges claimed arid disallowed are mostly in respect of fees paid to Sri Kanhaiya Lal Misra and his juniors. '
7. In the application, which was filed under Section 35 of the Act, it was submitted that the aforesaid observation was factually incorrect, inasmuch as Sri Kanhaiya Lal Misra was the counsel for the assessee-company in F. A. F. O. No. 127 of 1951. In support of this submission a copy of the decree in that appeal was filed along with the application. The Tribtinal in its order dated February 20, 1952, dismissing the application observed that the copy of the decree which was filed constituted fresh evidence which could not be accepted at that stage. It further observed that its finding was based On the copy of the judgment of the High Court in F. A. F. O. No. 127 of 1951, which had been filed by the assessee-company. As such, the Tribunal was of opinion, that there was no mistake apparent from the record and the application under Section 35, therefore, could not be allowed. It will thus appear that on the material on the record the Tribunal had recorded its finding or had made the observation in its order dated August 5, 1951, already quoted above. Apparently, this is a finding of fact. On this finding no question of law can really arise as to whether the litigation expenses were covered by the provisions of Section 10(2)(xv) of the Act. Viewed in this light, the answer to question No. 1 must be in the negative.
8. Even otherwise also, in our opinion, the answer to question No. 1 must be in the negative. The Tribunal in its order dated August 5, 1951, had also observed that the main prayer in Suit No. 59 of 1951 filed by Onkar Mal Khetan was that a receiver* should be appointed, and that it failed to see how the appointment of a receiver would have resulted in the stoppage Of business or how it would have adversely affected the assessee-company as such. On the other hand the Tribunal went on to observe that such an appointment would most emphatically have affected the personal interest of Kedar Nath Khetan and the other partners of his group. The conclusion at which the Tribunal arrived was as follows :
'It, therefore, appears to us that the expenditure incurred by the managing agent to safeguard their own interest has been debited to the company and claimed as deduction. In these circumstances, we have to hold that the expenditure in question was not admissible as it was not laid out or expended wholly and exclusively for the purpose of the assessee-company's business.'
9. Even in the statement of the case submitted by the Tribunal dated May 6, 1965, there is nothing from which it can be held to have been established that as a result of the internal dissensions between the partners of the managing agency firms or as a result of the appointment of a receiver the business of the assessee-company had come to a standstill or there was any hindrance or obstacle in the way of the smooth working of the company's business. It may here be mentioned that, from a perusal of the statement of the case it appears that the Tribunal had circulated the draft statement of the case, to the parties inviting suggestions, if any. No suggestion appears to have been made by or on behalf of the assessee-company in regard to the statement drawn up by the Tribunal. The assessee had suggested only some modification in the two questions framed by the Tribunal. Copies of the orders of the Income-tax Officer concerned, of the Appellate Assistant Commissioner, and of the order of the Tribunal are annexed to the statement of the case. Even after perusing the same it has not been possible for us to find any material on which it can be held that the company at any material time was faced with a situation which actually hampered the carrying on of its business or even that there was any such serious apprehended threat to the smooth working or management of the company's business as necessitated the expenditure of any sum by way of litigation expenses to secure the smooth working of the company and to prevent any hindrance or obstacle in the way of the smooth management of the company's business. It was for the assessee, if it so desired, to have produced necessary evidence and material before the income-tax authorities to prove that either there was a stalemate in regard to the working or carrying on of the business of the company or that any such hindrance or obstacle had come to exist for the avoidance of which it had become necessary to incur litigation expenses. Under the circumstances the assessee-company was rightly held not to be entitled to any deduction under Section 10(2)(xv) of the Act in the assessment year 1953-54. Judged in this light also, question No. 1 must be answered in the negative.
10. In so far as question No. 2 is concerned, the learned counsel for the assessee-company, relying on certain observations of the Tribunal in the statement of the case dated May 6, 1965, urged that the expenses amounting to Rs. 14,335 incurred by the assessee-company in connection with Writ Petition No. 126 of 1952, could be legitimately claimed as a deduction for the assessment year 1954-55 under Section 10(2)(xv) of the Act. The observation on which reliance was placed is as follows :
'It appears that, in order to ensure smooth working, the assessee-company applied to the Government of India for intervention and thereupon the Government appointed Kedar Nath Khetan as authorised controller and it appears Onkar Mal Khetan, thereafter, filed a writ petition for staying the operation of the stay order appointing Kedar Nath Khetan as authorised controller.'
11. It has already been mentioned that the writ petition was filed by Onkar Mal Khetan and that the assessee-company was also arrayed as a co-petitioner. The opposite parties were Kedar Nath Khetan and the Union of India. Although the Tribunal in the statement of the case has observed that, in order to ensure smooth working, the assessee-company applied for appointment of an authorised controller, yet, as has already been observed above, there is no material on the record to show that in fact there was any actual obstacle or hindrance in the way of the smooth working of the company or in the way of the carrying on of its business, much Jess is there a finding in regard to this. In order to bring a case under Section 10(2)(xv), it has to be established that the expenditure in question was laid out or expended wholly and exclusively for the purpose of business of the assessee. In this connection, it was urged that expenditure for the purpose of business is not confined only to the expenditure actually laid out or expended wholly and exclusively for the actual carrying out of the business itself and that any expenditure incurred for protecting'the interest of the company and for the purpose of continuance of the company's business in a smooth and unhampered manner would be an expenditure incurred for the purpose of the business of the company. It was also urged that, in the circumstances qf the case, the amount of Rs. 14,335 incurred as expenses in connection with the writ petition in the Supreme Court ought to be held to been expenditure covered by Section 10(2)(xv) of the Act. In support of this contention, reliance was placed by the learned counsel for the assessee on a number of rulings.
12. In J. B. Advani & Co. Ltd. v. Commissioner of Income-tax, [1950] 18 I.T.R. 557 (Bom.), the four managing directors and the manager of the assessee-company were prosecuted in Madras for offences under the Hoarding and Profiteering Prevention Ordinance, 1943, and the charge against them was that the company had sold box boards at Rs. 1-1-0 as against the landed cost of 0-3-10 per lb. They were all discharged by the Chief Presidency Magistrate. The directors and the salesman of the company were also prosecuted at Karachi under the Defence of India Rules on the ground that the salesman refused to sell paper as he should have done. In this case also all the accused were discharged. In connection with the two prosecutions, the assessee claimed to have incurred certain expenditure and the amount expended was claimed as permissible deduction under Section 10(2)(xv) of the Act* It was held that, in the circumstances of the case, the company was entitled to the deduction claimed. It was, inter alia, observed that the charges which the managing directors and the salesman were called upon to meet both at Madras and Karachi were incidental to the business that the company was carrying on. It was the business of the company to sell stationery and the company was charged with having sold it in one case contrary to law and in the other case having refused to sell Therefore, both the charges were directly in connection with the business of the company as a trader. The charges against the accused were also in their capacity as agents ,for a company which was a trading company. It was also noted that the expenses for the litigation were not incurred by the persons charged with the offences themselves but they were incurred by the company in order to save those persons from the consequences of the prosecution. After reviewing a number of cases cited before the court it was observed that there is no difficulty in the class of cases where an asset of a business is protected or safeguarded by an assessee carrying on the business in a civil litigation, the costs of such litigation are always a permissible deduction. The said observation, however, can be availed of by an assessee only when it is established that the costs of the litigation were costs incurred for the protection or safeguard of the assets of a business. In the case before us there is nothing to show that any expenditure had been incurred for the protection of the assets of the company's business ; much less, has it been shown that the expenditure was laid out wholly and exclusively for the purpose of the business of the company. In fact, as observed by the Tribunal, the litigations in reality were litigations arising out of disputes between the partners of the managing agency firms inter se. It is immaterial that the assessee-company had also been arrayed as a petitioner in the writ petition or that the assessee-company had incurred some expense in defending the appointment of Kedar Nath Khetan as authorised controller, so long as it is not shown that such expenditure was necessary and had been incurred for the purpose of the company, that is, either for the safeguard of the company's business assets or for preventing or removing any hindrance or obstacle in the way of the smooth running of the company's business.
13. J. N. Singh and Co. Private Ltd, v. Commissioner of Income-tax, [1966] 60 I.T.R. 732 (Punj.) is also a case in which deduction had been claimed on account of expenses incurred for defending an employee of the assessee-company, who was prosecuted under Section 406 of the Indian Penal Code. The accused was the manager of the assessee-company. The charge against him was that the company through its manager had sold the newsprint which had been allotted to one Mauj Printing Bureau. The quota allotment certificate issued to Mauj Printing Bureau was handed over by the quota-holder to the assessee-company for import and collection of paper. When the newsprint arrived it was not delivered to the quota-holder but was sold by the company and the sale proceeds were recorded in the books of the company. It was held that the expenses incurred by the company in defending its manager were allowable as deductions under Section 10(2)(xv) of the Act. The learned judges relied on the decision of the Bombay High Court in Advani's case. This case is of little help to the assessee before us.
14. Whatever test may be applied in deciding whether any expenditure is allowable as a deduction under Section 10(2)(xv), the essential requirement must in every case be as to whether the expenditure was either in reality or as a measure of business expediency necessary either for the purpose of earning profit or for protecting and safeguarding the business assets of the assessee including goodwill or in connection with some transaction or activity which is directly and substantially connected with the running of the business of the assessee or is intimately connected with the assessee's business activities. Such expense must necessarily pertain to the business itself and must not be an expenditure merely connected with any activity, however remote or ancillary. It has to be shown in every case that not only the expenditure was wholly and exclusively laid out, but it was so laid out for the purpose of the business of the assessee, that is, some purpose directly connected with or attributable to the assessee's normal business activities or the protection of its business interest. In the instant case the expenses incurred in connection with the writ petition cannot be said to be expenditure incurred wholly and exclusively for the purpose of the company's business.
15. It was urged that a company has a right to entrust the conduct of its business to an agent chosen by it and to incur expenditure in preventing disruption of the arrangement made by it in this behalf and that such expenditure would be covered by Section 10(2)(xv). But it has not been shown that the managing agency firm had against the assessee's wishes been prevented from carrying on the assessee's business. If the managing agents found some difficulty in running the company's business it was entirely due to private disputes between the partners of the firm inter se with which the company was not concerned. It had neither appointed Onkar Mal Khetan nor Kedar Nath Khetan to personally manage its business. Its funds could not be utilised in defending or securing the alleged personal right of either of them under some private arrangement between the members of the two managing agency firms. In the writ petition before the Supreme Court the assessee-company being one of the petitioners it would be incongruous to say that expenses for opposing the petition had to be provided by the company. There is nothing on the record to show that the company had objected to its being made a co-petitioner with Onkar Mal Khetan and had got itself transposed to the array of opposite parties. Nothing was also shown, as mentioned in the order of the Income-tax Officer, to establish that the company either in law or under the order by which Kedar Nath Khetan was appointed authorised controller was bound to meet the expenses for defending Kedar Nath Khetan's appointment as authorised controller. Question No. 2 also, therefore, must be answered in the negative.
16. Our answers to both the questions are in the negative. The income-tax department will be entitled to the costs, which we assess at Rs. 400. Counsel's fee is assessed at Rs. 300.