INCOME-TAX APPEAL NOS. 1310/KB AND;1368/KB OF 1982-83, DECIDED ON 25TH JUNE, 1986. Versus INCOME-TAX APPEAL NOS. 1310/KB AND;1368/KB OF 1982-83, DECIDED ON 25TH JUNE, 1986.

ORDER

FARHAT ALI KHAN (MEMBER). ‑‑These cross‑appeals are directed against the order of the learned Commissioner of Income‑tax (Appeals) recorded by him on 10th February, 1983, relating to assessment year 1979‑80. The first appeal filed by the assessee, hereinafter referred as the appellant, is confined to the order of the learned Commissioner of Income‑tax (Appeals) regarding disallowance of Rs.20,000 made by the Income‑tax Officer out of legal and professional charges and the appellants claim of tax credit amounting to Rs.2,24,490. The department appeal, however, is aimed at the direction of Commissioner of Income‑tax Appeals) regarding levy of surcharge. Mr. S. Parekh, appearing for the appellant gave up the claim of the appellant regarding tax credit and his argument was confined to the disallowance of Rs.20,000 made by the Income‑tax Officer out of legal and professional charges. The brief facts giving rise to the disallowance of Rs.20,000 are that in‑ the relevant assessment year the Chairman of the appellant offered through newspaper and T.V. certain inducement to promote the sales of a certain brand of their toilet soap. Since the aforesaid inducement was in contravention of the provision of section 294‑B of the Pakistan Penal Code, a Criminal Case bearing No.880 of 1978 was started against the Chairman of the appellant. However, subsequently, the Home Department of Sind Government decided to withdraw aforesaid criminal case and ultimately on 10th November, 1979 the S.D.M. of Harbour, Karachi, released the Chairman under section 249 of the Criminal Procedure Code. The appellant presumably had engaged some lawyer to defend their Chairman and allegedly paid Rs.20,000 as professional charges to him. In the relevant assessment year aforesaid expenditure was claimed as an amount incurred wholly and exclusively for the purposes of the business of the appellant. The Income‑tax Officer, however, disallowed aforesaid claim with the following remarks:‑

"Professional charges in connection with prosecution under section 294‑B of P.P.C. being not admissible."

The appellant, however, felt aggrieved and went up in first appeal but the learned Commissioner of Income‑tax (Appeals) by his impugned order confirmed the order of the Income‑tax Officer with the following observations: ‑

"From the facts of the case as stated above it is evident that the case was initiated against the Chairman of the Company for the breach of law. Promotion of sate by giving incentive, is not doubt in connection with the business of the company but at r the same time it cannot be held admissible at the cost of breach of law. In the circumstances .the expenditure claimed cannot be said to be an expenditure in connection with the business. The disallowance of Rs.20,000 is, therefore, confirmed."

2. The appellant still was dissatisfied and has come up in second appeal before us. Mr. S. Parekh, appearing for the appellant relying upon Indian Supreme Court decision reported as (1973) 91 I.T.R. 544, C.I.T. Andhra Pradesh v. Dhanraj Girji Raja Narasingh Girji, argued that both the officers below erred in disallowing Rs.20,000 for the reason that aforesaid expenditure was not admissible being an expenditure incurred in defending the Chairman of the appellant who had committed breach of law. The learned Authorised Representative submitted that the moment the Sind Government decided to withdraw the case the illegality attached to the action of the Chairman which was wholly and exclusively or the business purposes of the appellant disappeared. Mr. Muhammad Farid, the learned Departmental Representative however, supported ‑ both‑ the officers 'below on the authority of 1986 PTD 52 General Tyre And Rubber Company v. C.I.T. (Central). He also cited a case from Indian Supreme Court, reported as 1986 PTD 26 C.I.T. v. Payarasingh.

3. We have heard both the learned Authorised Representative for the appellant as well as the learned Department Representative and have also perused both assessment as well as impugned orders and the case‑law cited at Bar. Since the offence with which the Chairman of the appellant was charged was punishable under section 294‑B of the Pakistan Penal Code, let us, therefore; start .our discussion with. It would be advantageous to reproduce section 294‑B. It reads as under:‑

"294‑B. Whoever offers, or undertakes to offer, in connection with any trade or business or sale of any committee, any prize, reward or other similar consideration, by whatever name called, whether in money or kind, against any coupon, ticket number or figure, or by any, other device as an inducement or encouragement to trade or business or to the buying of any commodity, or for the purpose of advertisement or popularising any commodity and whoever publishes any such offer, shall be punishable with imprisonment of either description for a term which may extend to six months, or with fine, or with both."

From its bare perusal it appears that the appellant. had presumably committed the offence punishable under section 294‑B when it offered its tiolet soap for sale with an inducement. Such offence was punishable with imprisonment for a term which might have extended to six months or with fine or with both. Thus it is unarguably established that the Chairman of the appellant was prosecuted for an offence which carried with it punishment of imprisonment or fine of both. It, therefore, follows that the money spent as professional charges in defending the Chairman of the appellant for offence which it had allegedly committed. In our judgment the fact that the criminal proceedings were subsequently withdrawn makes no difference as far as the admissibility of the expenditure is concerned. Undoubtedly, the state acting through the Government has the right and privilege of remitting or commuting sentences. It is also true that such orders passed by the Government are nut justiciable. However, the withdrawal of a case stands on different footing. A Court of law can go into the reasonableness of the order of the withdrawal of a prosecution PLD 1977 SC 451 Mir Hassan v . Tariq Saeed and 2 others, for further discussion).

4. Be it as it may, but we think that for Income‑tax purposes the relevant factor is not the subsequent withdrawal of the criminal case even an acquittal or discharge of an accused. The paramount question which an Income Tax Officer has to consider is as to whether the expenses were admissible at the point of time when they were incurred. The subsequent change in the circumstances to our mind would not make any difference. Section 294‑B was a added by Pakistan Penal Code (Amendment Act) in 1965. Thus, if an assessee made any offer of inducement to put up his sale of a certain commodity in assessment year 1964‑65, he would not be deemed to have committed any offence simply because it was not an offence at the relevant time. Similarly, if an assessee has allegedly committed as offence punishable under section 294‑B, the fact that the criminal case was subsequently withdrawn or he was acquitted or discharged would not make any difference. We think that the effect of withdrawal of the criminal case would prove, out of logical necessity, the alleged commission of an offence. We are, therefore, of the view that the Chairman of the appellant allegedly committed offence punishable under section 294‑B of Pakistan Penal Code and the professional fee paid to the lawyer to defend him was expenditure to save him from punishment rather than for purposes of business of the appellant. We are very much fortified in our conclusion by a case reported as 26 T . C . 310, Spofforth And Prince v . Golder. In this case a partner of a firm of C . A. was prosecuted for an alleged offence of conspiracy to defrand the revenue. The firm claimed deduction of firstly, those expenses which it incurred in seeking legal advice as to whether the partner had committed the offence or not and secondly, the expenses as cost of the defence of the criminal case initiated against him. Ultimately, the first expenditure was allowed but for the second, it was held that it was not incurred for the purposes of the firm's business or profession. Let us point out here that in Spofforth's case (supra), the expenditure incurred on defence ultimately resulted in acquittal yet it was not allowed. On the other hand, in the instant case the chairman was released and not discharged or acquitted.

5. As far as the case of Dhanraj Girji (supra) is concerned, with due respect to Mr. Parekh, we are of the view that it does not support the case of the appellant at all. In that case the expenditure incurred' was on hiring a private lawyer to assist the prosecution of another person who had usurped the selling and commission, agency of the assessee and who was being prosecuted by the Government. It was held by their Lordship of the Indian Supreme Court that the assessee had spent the money wholly and exclusively for purposes of the business because the prosecution brought the other person round and he ultimately acceded to the claim of the assessee. There is a difference between an infraction of law committed in the carrying on a lawful business and an infraction of law committed in a business inherently unlawful and constituting the normal incident of it. It was because of this difference that their Lordship of Indian Supreme Court in Payarasingh Case (supra) has. allowed as business loss to a smugglar an amount of currency which was confiscated. The same position of law has been enunciated by their Lordship of our own Supreme Court in P L D 1981 SC 293 C.I.T. v. Alpha Insurance Company Limited. In this case an insurance company had exceeded the prescribed limit of management expenses in violation of rule 40 of the Insurance Rules, read with section 40‑C of the Insurance Act. The question which ultimately cropped up before their lordship of our own Supreme Court was as to whether the expenses incurred in excess of the prescribed limit were in the nature of penalty., fine or forfeiture for the purposes of their admissibility for deduction as business expenses under section 10 of the Income‑tax Act. Their lordship answered the above question in the negative and made the following observations:‑

"It follows, therefore, that, penalty, fine and foreiture have a different content altogether and are bound to receive a different treatment than expenses of business incurred either in contravention of law or in carrying out the business in contravention of law. The former is in variably disallowed and the latter when some factor other than or in addition to the taint of illegality is present, not otherwise."

6. As far as case of General Tyre & Rubber Company (supra) is concerned, which has been relied upon by Mr. Mohammad Farid, the learned Department Representative, it revolves round its own fact. In that case the assessee had' imported certain goods without valid import licences and the assessee in order to obtain the delivery of goods had to pay certain amount of penalty. It was claimed as an expenditure incurred wholly and exclusively for the purposes of business. The Tribunal held that the amount of penalty was not admissible and on a reference a Division Bench of the High Court confirmed the order of the Tribunal.

7. However, from all this discussion it appears that since the appellant was carrying on lawful business and allegedly committed an offence in carrying it out, the Chairman was prosecuted. As such, the money spent on defending him was not for the purposes of business of the appellant. In our judgment both the officers below were right in cisallowing it. We, therefore, confirm the impugned order on this point.

8. Now coming to the question of levy of surcharge involved in departmental appeal, it appears that in the relevant assessment year the appellant declared its income at Its.4,70,036, which was, however, assessed at Rs.4,97,17,311 on which the Income‑tax Officer determined the tax of the tune of Rs. 2, 72,15, 210 and treating it as unretained income levied surcharge thereon amounting to Rs.33,90,339. On appeal it was held by the learned Commissioner that the amount of taxes payable was to be treated as retained income and no surcharge could be levied on it. However, he directed the levy of surcharge to be restricted to 10% of tax on the difference of income retained and income assessed. Mr. Parekh relied upon a decision of this Tribunal recorded in I.T.A. Nos.1319 to 1321/KB of 1982‑83, dated 19th May, 1986. In our judgment the direction of learned Commissioner of Income‑tax (Appeals) is not correct. Since the amount of taxes payable is lesser than the declared income, the direction of the learned Commissioner of Income‑tax (Appeals) was not sustainable in view of the decision of this Tribunal in aforesaid appeal and several others. Mr. Mohammad Farid, learned Departmental Representative, however, submitted that the department has not reconciled itself to the finding of the Tribunal that the amount of taxes payable was retained income and not liable to levy of surcharge and several Reference Applications were pending in High Court. He further submitted that the department had come up in appeal as a matter of principle and in order to safeguard the revenue interest. It is true that several Reference Applications are pending in High Court in which the question of levy of surcharge on amount of taxes payable requires to be adjudicated upon. However, as far as this Tribunal is concerned, it has been consistently following its view taken in the case reported as (1979) 40 Tax. (Trib.). Under the facts and circumstances of this case, we see no reason to depart from it. As such, we find no force in this departmental appeal.

9. In view of discussion made above, both the appeals are found to be devoid of any merit and are rejected accordingly.

M. Y. H Appeal dismissed.