1. The assessee-company, which is an investment company, had underwritten the subscription for the shares issued by the United Board and Paper Mills Ltd. and had, therefore, to take up 76,809 ordinary shares of Rs. 10 each on which Rs. 7.50 was paid up. The assessee had also purchased 2,380 preference shares of Rs. 100 each on which Rs. 75 was paid up. The paper mills was mismanaged and apprehending that the preference shareholders would force the ordinary shareholders to pay the uncalled portion of the equity capital, which would result in requiring the assessee-company to pay Rs. 1,92,000, the assessee-company moved the court for a winding up of the paper mills and ultimately succeeded in taking the company to liquidation. The company had incurred legal expenses in the two assessment years in question which it sought as deduction in computing its income. The claim was, however, rejected by the ITO on the ground that the expenditure was of a capital nature.
2. The AAC also confirmed the order of the ITO holding that the expenditure was to avoid further capital loss to the assessee-company. The Tribunal, in appeal by the assessee, took the view that the expenditure incurred did not bring in any new asset to the assessee nor did it add to the value of any existing asset and the expenses had been incurred only to preserve the existing asset which consisted of a fruitful investment. The expenses incurred by the assessee were held to be deductible.
3. Arising out of this order of the Tribunal, the following question has been referred at the instance of the Revenue :
'Whether, on the facts and in the circumstances of the case, in computing the income of the assessee for the years 1956-57 and 1957-58, the legal expenses of Rs. 11,806 and Rs. 13,306, respectively, were allowable ?'
4. Mr. Joshi appearing on behalf of the Revenue has contended that the expenditure incurred by the assessee was a capital expenditure as it was essentially connected with an attempt on the part of the assessee to avoid further capital loss.
5. It is difficult to accept the argument of the learned counsel for the revenue that the legal expenses incurred by the company should be treated as capital expenditure. It is true that the expenditure was incurred by the assessee-company in order to avoid the company being called upon to pay further moneys to the paper mills by way of unpaid value of the shares, but the proper prospective, in which the proceedings taken by the company for the liquidation of the paper mills, must be considered. The object of the company in moving the court for liquidation of the paper mills was to safeguard its capital asset, viz., the moneys which it would have been required to pay to a company which was on the verge of liquidation on account of mismanagement and which was not functioning properly. The capital asset was protected by taking steps to see that the company is not required to invest its moneys in an unremunerative manner, and when expenditure is incurred for taking such steps, it must be treated as having been incurred for the protection of a capital asset, and consequently such expenditure would be permissible as revenue expenditure as will be clear from the decision of the Supreme Court in CIT v. Malayalam Plantations Ltd. : 53ITR140(SC) , where the Supreme Court has pointed out that the expenditure incurred for the purpose of business would include expenditure for the preservation of the business or for the protection of its assets.
6. In this view of the matter, the question referred to us must be answered in the affirmative and in favour of the assessee. The question is accordingly answered. Revenue to pay costs of the reference.