Judgement

Appeal (No. 27 of 1941) from a judgment of the High Court (October 17, 1939) upon a reference made under s. 66, sub-s. 2, of the Indian Income-tax Act, 1922.

Law. Rep. 69 Ind. App. 15 ( 1941- 1942) Commissioner of I.T., Bihar and Orissa v. Maharajadhiraj

79

The following facts are taken from the judgment of the Judicial Committee. In connection with the assessment of the profits and gains of his business as a moneylender for the year 1931- 1932 the respondent claimed the deduction of Rs.2,07,018, expended in the year of account, as an allowance admissible under s. 10, sub-s. 2 (ix.), of the Indian Income-tax Act, 1922. The respondents claim was rejected by the Income-tax Officer, the Assistant Commissioner of Income-tax, and the Commissioner of Income-tax, the last of whom, at the request of the respondent, made a reference under s. 66, sub-s. 2, of the Act to the High Court of Judicature at Patna, which decided the reference in favour of the respondent by a judgment against which the present appeal has been taken by the appellant.

The relevant provisions of s. 10 of the Act are as follows " 10.—(1.) The tax shall be payable by an assessee under the "head Business in respect of the profits or gains of any "business carried on by him.

" (2.) Such profits or gains shall be computed after making "the following allowances, namely

* * * *

" (ix.) any expenditure (not being in the nature of capital "expenditure) incurred solely for the purpose of earning "such profits or gains ...."

The expenditure sought to be deducted consisted of law charges incurred during the accounting year in connection with a suit for damages brought in 1926 by Major Anthony John and others, shareholders in the Agra United Mills Limited, against the respondents father, the late Maharajadhiraj Sir Rameshwar Singh, and several other defendants, for conspiracy, collusion, misrepresentation, breach of contract, etc. During the pendency of the suit, the late Maharajadhiraj died on July 3, 1929, and the respondent and his brother were sub stituted for their father. The suit was dismissed by the Court of the Additional Subordinate Judge of Agra on February 26, 1931.

The only question in the appeal was whether the expenditure in question was "incurred solely for the purpose of earning" the profits or gains of the respondents moneylending business. The respondent had continued the moneylending business carried on by his father. The question of law which was referred to the High Court was, "Whether the cost in question "is legally a business deduction or not ? " After a scrutiny of the plaintiffs allegations in the Agra suit of 1926, and the findings of the Agra Court which led to its dismissal, the appellant stated in paras. 8 and 9 of his statement of case tinder s. 66, sub-s. 2, of the Act "8. The only connection "of the late Maharajadhiraj with the Agra United Mills Co., " Ld., was that he was a shareholder, and that he had advanced "a loan of Rs.10,00,000 to the mill. For the latter the late "Maharajadhiraj had brought a suit and obtained a decree "in 1929. The expenses incurred in this latter suit have been "allowed as expense incurred in the assessees moneylending "business. The Agra suit had no connection with any business "of the assessee. He was involved in the suit because he "happened to be a very rich man and was therefore liable to "attack by unscrupulous persons to relieve him of part of "his surplus cash.

"Opinion of the Commissioner.

" 9. On the above findings of fact, it is respectfully submitted "that the expense for defending the Agra suit was not a "business expense, that is, it was not an expense incurred for "earning any profits assessed to income-tax, and as such the "assessee is not entitled to deduct the sum as a business 111 deduction against the assessable profits."

Law. Rep. 69 Ind. App. 15 ( 1941- 1942) Commissioner of I.T., Bihar and Orissa v. Maharajadhiraj

80

On November 23, 1927, the High Court passed an order which required a further statement from the appellant as to "Whether the moneylending business of the late Maharaja "and the assessee is such as would have included transactions "of the kind into which he was alleged to have entered with "the United Agra Mills Ld." In response to a request by the appellant, the respondent furnished him with the details of six other transactions, which the respondent claimed to be comparable to the transaction now in question. Thereafter the appellant, on August 22, 1938, submitted a further statement of case relating to those six transactions, in which he sought to distinguish those six transactions from the transaction here in question, and answered in the negative the question put to him by the High Court.

The High Court (Agarwala and Meredith JJ.) held that the conclusion of the appellant could not be supported on the facts stated by him, and that the assessee was entitled to the deduction claimed by him. As the appellant had done, they scrutinized the plaint and the judgment in the Agra case, as providing the test for decision of the reference. Agarwala J. stated

"The contention that the suit against the late Maharaja "was instituted against him not because he was a moneylender "but because he was a wealthy nobleman is not, in my "opinion, acceptable. It was because the late Maharaja lent "money to the company that an opportunity was afforded to "the plaintiffs to allege that the advance of 10 lakhs of rupees "actually made was only a part performance of a contract "the scope of which was very much wider. It was the "relationship of moneylender and borrower which provided a "foundation on which the allegations against the late Maharaja "were based, and the main purpose of the suit was to obtain "damages for the breach of an alleged moneylending "transaction."

Meredith J. said

"I agree with the view taken by my learned brother. The "late Maharajadhiraj brought a suit for recovery of 10 lakhs "of rupees advanced to the mill, a decree was obtained in " 1929, and the assessee was allowed to deduct the expenses "incurred in this suit as expenses incurred in his moneylending "business. If spending money to recover this ten lakhs is "treated as not being in the nature of capital expenditure, "and incurred solely for the purpose of earning the profits or "gains of the moneylending business, then I cannot see why "money spent in defending a false claim arising out of the "same transaction is not to be treated upon the same basis. "Both suits were based upon the same transaction, namely, " the advancing of the ten lakhs, though no doubt very different "versions of that transaction were given by the plaintiffs in "each of the suits, the version of the plaintiffs in the suit "against the Maharaja being almost completely false. That "version might have been an almost completely false version of what took place, but it cannot be denied that it was built "up upon the transaction in which the loan of the ten lakhs was made. If the Maharaja was to show a profit upon this "transaction, it was not only necessary for him to sue for "recovery, but also to defend any false claims which might "have been based on the transaction. Defence of such suits "must be regarded, in my view, as a necessary though "unpleasant part of the business of moneylending. I am "satisfied that the suit was primarily against the Maharaja in "his capacity as moneylender, and not merely as a rich "nobleman, and it was based primarily too upon breach of "contract by the moneylender."

Accordingly the High Court, as stated, answered the question referred in favour of the respondent.

1941. Nov. 13. J. Millard Tucker K.C. and Wallach for the appellant. The legal expenses in question were incurred in respect of an action which had nothing whatever to do with the moneylending business, and the claim to deduct them for taxation purposes was wholly unjustified. All the income-tax authorities took the view that the case was as much a defence of the personal reputation of the late

Law. Rep. 69 Ind. App. 15 ( 1941- 1942) Commissioner of I.T., Bihar and Orissa v. Maharajadhiraj

81

Maharaja as any other case. If that is so, it is a question of fact, and no question of law arose for reference to the High Court under s. 66, sub-s. 2, of the Indian Income-tax Act. The question is, can it be said that this expenditure was incurred solely for the purpose of earning profits or preventing some loss in the business? If not, then it does not matter that it has some connection with the business; it is still not one which has been expended for the purpose of earning the profits. The action was not against the respondents father on the incidence of his business as a moneylender, but against him as an individual. Assuming that what was contained in the Agra plaint was true, the action was for breach of the agreement to finance the company, and also in tort for conspiracy to defraud the company. Reliance is placed on In re Lakshmi Narayan Sen and Sons, Ld. (( 1936) 4 I. T. C. 255.). Under the English Income Tax Act the words are "wholly and exclusively " incurred for the purpose of the business. While it is appreciated that cases under the English Act are by no means conclusive of cases under the Indian Act, it is not enough simply to show that the expenditure has arisen in the course of carrying on the business, because if it were it is submitted that Strong & Co., Ld. v. Woodifield ([ 1906] A. C. 448, 452.) would have been decided differently. [Reference was also made to Ward & Co., Ld. v. Commissioner of Taxes ([ 1923] A. C. 145.), Inland Revenue Commissioners v. E. C. Warnes & Co., Ld. (( 1919) 12 Tax Cas. 227, 231.), Inland Revenue Commissioners v. Alexander Von Glehn & Co., Ld. (( 1920) 12 Tax Cas. 232, 236,241.), and Odhams Press, Ld. v. Cook (H.M. Inspector of Taxes) (( 1940) 23 Tax Cas. 233, 257,). The onus was on the assessee to show that the expenditure claimed to be deductible was incurred solely for the purpose of earning the profits of the moneylending business, and on the facts stated by the Income-tax Commissioner the assessee had failed to discharge that onus, and did not fall within s. 10, sub-s. 2 (ix.), of the Act.

Roland Burrows K.C. and C. /. Colombos for the respondent were not called upon.

Dec. 12. The judgment of their Lordships was delivered by LORD THANKERTON, who stated the facts set out above and continued In the opinion of their Lordships, the only right view as to the nature of the Agra suit is that expressed by the learned judges of the High Court. It appears that the conclusion arrived at by the appellant was mainly based on his view that there was no connection between the late Maharajas loan of Rs.10 lakhs to the mills and the transactions alleged by the plaintiffs in the Agra suit. This view is expressed in para. 8 of the appellants statement of case, and is repeated in his further statement of case in commenting on the six other transactions cited by the assessee. In reference to Nos. (ii.) and (vi.), he states "In both these cases the "assessee found himself compelled to take over the businesses "and run them on his own account in order to safeguard the "money which he had previously invested in them ; whereas "in the case of the Agra United Mills, Ld., there was no "connection between the loan of Rs.10 lakhs and the "transaction into which he was alleged to have entered with "the company. It will be seen that the former transaction "is expressly dissociated from the latter in para. "The said sum of Rs.10 lak hs was advanced by the said Maharaja almost entirely to pay creditors and substitute himself therefor and not as expressly agreed upon to provide the necessary finance for the proper work ing of the companys mills and factories so as to revive the company and enable it to earn profits and the said agreement whereby the Maharaja secured the managing agency of the company and, as a result, the banianship of the company, has been brok en.”of the "plaint in the civil suit " (1). In the opinion of their Lordships, the appellant has not sufficiently considered the relation of the paragraph to which he refers to the rest of para. 39. The opening sentences make clear that the loan of Rs.10 lakhs (of which Rs.8 ½ lakhs had already been advanced) was part of the promises made in the alleged agreement of October 21, 1923 (see para. 34), under which the Maharaja was to finance the company, and the remainder of para. 39 is concerned with the alleged failures of the Maharaja to implement his promises and in crediting the Maharaja with oblique motives for his failure. The allegations of fraud, conspiracy, etc., were merely the extravagant embroidery

Law. Rep. 69 Ind. App. 15 ( 1941- 1942) Commissioner of I.T., Bihar and Orissa v. Maharajadhiraj

82

which is commonly found in such actions ; they do not alter the main character of the action as being directed against the late Maharaja as the moneylender, and the latters defence to the action was just as essential for the full protection of his rights as the creditor in the loan of Rs.10 lakhs as was his suit for the recovery of the loan. It has to be remembered that money is the stock in trade of a moneylender. The appellant might well have come to a different conclusion if he had realized the close connection of this loan with the transactions alleged in the Agra suit.

If it really added anything, their Lordships would agree with the High Court that at least three of the other transactions referred to in the appellants further statement of case provide evidence that the alleged transaction with the Agra United Mills was not foreign to the moneylending business of the respondent and his father.

Their Lordships are therefore of opinion that the facts stated by the Commissioner cannot justify the opinion expressed by him, but that the expenditure in question was incurred solely for the purpose of earning the profits or gains of the moneylending business, and that the High Court were right in holding the respondent entitled to the deduction claimed, and in answering the question of law asked by the Commissioner in favour of the respondent.

Accordingly, their Lordships will humbly advise His Majesty that the appeal should be dismissed, and that the judgment of the High Court should be affirmed. The appellant will pay the respondents costs of the appeal.