JUDGMENT This is reference under Section 66 (1) of the Indian Income-tax Act (XI of 1922) as amended in 1939. The facts of this case are fully set out in the statement of the case made by the Income-tax Appellate Tribunal.
The assessee, Seth Kaluram Kankaria, is a money-lender. On the 21st July, 1930, he took from one Udaimal four mortgages of the aggregate value of Rs. 1,00,000. Three of these mortgages were for Rs. 20,000 each and the fourth one was for Rs. 40,000. On the 18th October, 1930, a creditor filed an application that Udaimal be declared an insolvent and Udaimal was adjudged an insolvent on the 28th March, 1932. The receiver appointed by the Court to take charge of the property of the insolvent filed a suit under Sections 53 and 54 of the Provincial Insolvency Act for annulment of the four mortgages on various grounds. On the 12th September, 1942, the Court ultimately held that the four mortgages were void. The Court came to the conclusion that the three mortgages for Rs. 20,000 each were without consideration and that out of the consideration of Rs. 40,000 the mortgages, Udaimal, had been able to prove the first item of Rs. 15,000. As regards the second item of Rs. 16,000, there was only Udaimals own statement to prove its payment, and the learned Judge who had heard the suit, though he was reluctant to accept his solitary statement, came to the conclusion that it probably formed a part of the consideration. The rest of the consideration was not established. As regards the execution of the four the mortgages, the Court recorded a definite finding that the intention was that since Udaimal was going to be ruined, as much of his property as could be saved might be saved for his cousin, Tejmal. The Court further came to the conclusion that only Rs. 15,000 was the money out of Rs. 1,00,000 which had come out of the stock-in-trade of the appellant, while Rs. 16,000 was not a money-lending advance but was a deposit with the insolvent debtor for meeting the expenses of marriage of a female member who was related to the assessee.
The assessee had spent a sum of Rs. 9,070 in defending his title on the basis of these four mortgages in the suit brought against him by the receiver. He claimed this amount as an admissible deduction under Section 10 (2) (xii) of the Indian Income-tax Act as it stood at the time of the assessment. Section 10 (2) (xii) is as follows :-
"any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of such business, profession or vocation."
The language of the sub-section has not been altered, but it is now, after the amendment in the year 1946, numbered as Section 10 (2) (xv) of the Indian Income-tax Act.
The question which has been referred to us is :-
"Whether, in the circumstances of the case, the legal expense amounting to Rs. 9,070 incurred by the assessee, is an expenditure laid out or expended wholly and exclusively for the purposes of his business within the meaning of Section 10 (2) (xii) of the Indian Income-tax Act ?"
Learned counsel for the assessee had drawn our attention to a decision of their Lordships of the Judicial Committee in Commissioner of Income-tax v. Kameshwar Singh. The Maharaja had in that case claimed deductions for the money spent by him and by his predecessor in defending a suit brought against him by certain shareholders of the Agra United Mills Limited for damages on the false allegation that the money lent to the company was in part performance of a larger contract to finance the company, that the Maharajas father was guilty of the breach of contract and there were additional allegations of fraud, collusion and conspiracy. The suit failed but the Maharaja had to incur considerable expenditure in defending the suit. In view of their Lordships decision that the alleged transaction with the Agra United Mills Limited was not foreign to the money lending business of the respondents father their Lordships decided in favour of the assessee.
The case before us is an entirely different case. Here it was found by the Court that the assessee entered into these four mortgage transactions not in the course of his money-lending business but with the object of preserving a portion of the property for his relation, Tejmal, and on that finding of fact it is impossible to hold that the expenditure of Rs. 9,070 was wholly and exclusively for the purposes of the business of the assessee.
Learned counsel has urged that it is not the result of the suit that should be the criterion. That is no doubt true, but the Court cannot overlook the findings recorded. If the finding had been that the mortgages were taken by the assessee in the ordinary course of his business but that by reason of some legal or technical defect the mortgages were bad, the assessee may have been entitled to a deduction, but on the statement of the case and on the findings of fact recorded in the suit in which this expenditure was incurred, it is impossible to give a decision in favour of the assessee. It cannot be said that the assessee got these mortgages executed in his favour in the course of his money-lending business and that they were not foreign to that business.
Learned counsel has urged that, at any rate, it having been found that a sum of Rs. 15,000 had been lent from his money-lending business, the costs incurred by him were for the protection of this item and the decision should, therefore, be in his favour.
The suit filed by the receiver in insolvency was for setting aside the mortgages, and the question, therefore, was whether the mortgages were got executed by the assessee in the course of his business. Even if a part of the mortgage consideration was genuine, on the finding that the mortgages were executed for the protection of Tejmal, it could not be said that the mortgages were executed for the protection of Tejmal, it could not be said that the mortgages were not foreign to the money-lending business of the assessee. In any case, the expenditure incurred, to be an admissible deduction under Section 10 (2) (xii) of the Act, must be an expenditure wholly and exclusively for the purpose of such business. It could not be said that the sum of Rs. 9,070 was spent wholly and exclusively for the purpose of such business, nor does the assessee claim any right of apportionment.
Learned counsel for the assessee has drawn our attention to a case of the Madras High Court in Mask & Co. v. Commissioner of Income-tax, Madras, and has urged that the question whether the business was carried on honestly or dishonestly should not be any criterion. It is not necessary for us to go into that question, nor is that decision relevant to the decision of this case on the finding recorded by the Judge.
The only other case that was cited by learned counsel for the assessee is Income-tax Appellate Tribunal v. Chhaganmal Mangilal. The question in that case was whether certain deductions claimed were in the nature of capital expenditure.
We are, therefore, of the opinion that the answer to this reference must be in the negative and it must be held that the amount of Rs. 9,070 was not expended wholly and exclusively for the purpose of the business of the assessee within the meaning of Section 10 (2) (xii), which is now 10 (2) (xv), of the Indian Income-tax Act.
The assessee shall pay the costs of the Department. We assessee the fee of learned counsel for the Department at Rs. 150. The certificate of fee may be filed within six weeks.
A copy of the judgment of this Court shall be sent to the Income-tax Appellate Tribunal under the seal of the Court and the signature of the Registrar.
Reference answered accordingly.