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Commissioner of Income-tax Vs. Muir Mills Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 683 of 1977
Judge
Reported in(1984)43CTR(All)178; [1984]148ITR418(All); [1985]20TAXMAN132(All)
ActsIncome Tax Act, 1961 - Sections 10(2)
AppellantCommissioner of Income-tax
RespondentMuir Mills Co. Ltd.
Appellant AdvocateBharatji Agarwal and ;M. Katju, Advs.
Respondent AdvocateNone
Excerpt:
- - , which had been entered into by the managing agents on behalf of the parent company since october, 1947, the future transactions as well could have been affected, the consequence would have been far reaching, and the entire business of the parent company could have been thrown out of gear and, therefore, the assessee-company was, in effect, trying to keep intact the normal running of its business, and, therefore, it was an allowable expenditure. the articles of association, as is well known, governed the internal affairs and management of the company. the appointment of the managing agents by the second resolution clearly related to the business of the company. cit [1972]86itr635(all) .the facts in the said case are clearly distinguishable. 639) :it is interesting to note from the.....1. this is an income-tax reference under section 66 of the repealed indian i.t. act, 1922. it relates to the assessment year 1954-55. a question which has been referred to the court for its answer is as follows :'whether, on the facts and in the circumstances of the case, the sum of rs. 41,441 was a permissible deduction under section 10(2) of the indian income-tax act, 1922, in computing the assessee-company's income for the assessment year 1954-55 ?'2. the facts as stated in the statement of the case submitted by the income-tax appellate tribunal are these.3. the assessee, muir mills co. ltd., during the relevant previous year, carried on business of manufacturing and selling textile goods. it was a public limited company. in the assessment year in question, i.e., 1954-55, the assessee.....
Judgment:

1. This is an income-tax reference under Section 66 of the repealed Indian I.T. Act, 1922. It relates to the assessment year 1954-55. A question which has been referred to the court for its answer is as follows :

'Whether, on the facts and in the circumstances of the case, the sum of Rs. 41,441 was a permissible deduction under Section 10(2) of the Indian Income-tax Act, 1922, in computing the assessee-company's income for the assessment year 1954-55 ?'

2. The facts as stated in the statement of the case submitted by the Income-tax Appellate Tribunal are these.

3. The assessee, Muir Mills Co. Ltd., during the relevant previous year, carried on business of manufacturing and selling textile goods. It was a public limited company. In the assessment year in question, i.e., 1954-55, the assessee claimed a deduction of Rs. 41,411 as litigation expenses incurred in defending a suit filed in the Calcutta High Court. The said suit was a representative action filed by two shareholders of the assessee-company, inter alia, seeking a declaration that special resolutions Nos. 1 and 2 passed at the extraordinary general meeting of the said company held on October 20, 1947, were void and inoperative. Certain other reliefs were sought which were broadly and substantially consequential in nature. The ITO held that the aforesaid amount of Rs. 41,411 which the assessee-company incurred in defending the said suit was not allowable as a business expenditure under Section 10(2)(xv) of the old Indian I.T. Act, 1922. The said officer held that the said expenditure could not be said to have been laid out or expended wholly and exclusively for the purpose of the business of the assessee-company and, in any case, according to the view of the said officer, the expenditure, even if it was incurred for the business of the company, was of a capital nature and, therefore, it was not an allowable deduction under the said provision. The assessee went up in appeal before the AAC but did not succeed. Therefore, the dispute was taken to the Income-tax Appellate Tribunal in an appeal and the said Tribunal allowed the same. The result was that the aforesaid litigation expenses were directed to be deducted in computing the net assessable income of the assessee-company. The Department felt aggrieved with the said decision and obtained a reference to this court under Section 66 of the said Act.

4. It may be stated that almost an identical question came up for answer to this court (CIT v. Muir Sugar Mills Co. Ltd. : [1980]123ITR534(All) ) in respect of this very assessee-company for the preceding assessment year1953-54. The question which was referred on the said occasion was as follows :

'Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,37,387 comprised of litigation expenses, consultation fees, travelling expenses, etc., is an allowable deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922, in computing the assessee's income for the assessment year 1953-54 '

5. The reference was answered in favour of the assessee and against the Department. The decision of the court in the said reference is reported at page 534 of [1980] 123 ITR (CIT v. Muir Sugar Mills Co. Ltd.)

6. In view of the said background, normally it would not have been necessary to have discussed the controversy exhaustively in full detail. However, learned counsel for the Department submitted that the aforesaid decision of this court reported in CIT v. Muir Sugar Mills Co. Ltd' : [1980]123ITR534(All) , requires reconsideration inasmuch as relevant consideration and some relevant case law have not been considered there. It has, therefore, become necessary again to decide this controversy with a detailed order. Two special resolutions passed at the extraordinary general meeting of the assessee-company on October 20, 1947, which were attacked in the aforesaid suit in the Calcutta High Court, have been reproduced in the order of the Income-tax Appellate Tribunal in respect of the appeal which was decided by the Tribunal in respect of the assessment year 1953-54. A true copy of the said order has been annexed to the statement of the case and marked as annex, C to the said statement. The resolutions were as follows :

'1. Resolved that the regulations contained in the document submitted to this meeting and for the purpose of identification subscribed by the chairman thereof be and the same are hereby approved and that such regulations be and they are hereby adopted as the articles of association of the company in substitution for and to the exclusion of all existing articles thereof.

2. Resolved that Indian Textile Syndicate Ltd. be appointed managing agents of the company for the period, at the remuneration and on the terms contained in the draft of an agreement, providing for the same, submitted to this meeting and signed in the margin by the chairman of the meeting by way of identification which said agreement be and the same is hereby approved and that the directors shall be and they are hereby authorised to carry the said agreement into effect as on and from the 1st day of October, 1947, with full liberty, subject nevertheless to the provisions of the Indian Companies Act, 1913, to agree to any modifications of such agreement before the same is executed. '

7. In brief, by the first resolution the company replaced its old articles of association by a new set of articles. By the second resolution, Indian Textile Syndicate Ltd. was appointed as the managing agent of the company on certain terms and conditions contained in the draft of an agreement which was submitted to the said extraordinary general meeting for approval. In the aforesaid suit, the validity of the said two resolutions was questioned. It seems that the assessee-company defended the validity of the said two resolutions and incurred litigation expenses. The Tribunal allowed the appeal of the assessee-company, inter alia, holding that if the suit had not been defended, then it would have set at naught the transactions, contracts, etc., which had been entered into by the managing agents on behalf of the parent company since October, 1947, the future transactions as well could have been affected, the consequence would have been far reaching, and the entire business of the parent company could have been thrown out of gear and, therefore, the assessee-company was, in effect, trying to keep intact the normal running of its business, and, therefore, it was an allowable expenditure. The Tribunal further held that the suit was not in the nature of a domestic quarrel between the directors inter se or between two groups. It was emphasised that when the suit was filed in 1950, what was known as Bagla group was firmly in the saddle having acquired a controlling interest in the managing agency company. The Tribunal referred to certain case law and thereafter decided the appeal in favour of the assessee-company.

8. In the earlier decision reported in CIT v. Muir Sugar Mills Co. Ltd, : [1980]123ITR534(All) , the Division Bench observed (p. 536):

' We are in agreement that the first resolution recast. the said articles of association of the company. They dealt with the conduct of the business affairs of the company. The suit which challenged the validity of that resolution would have affected the business of the company. The expenditure incurred in defending the suit in order to maintain the articles of association was an expenditure incurred solely for the purpose of the business of the assessee. '

9. The Division Bench further laid down as follows (p. 537):

' We need not dilate on the second resolution because the suit challenged both and if the subject-matter of the first resolution was such that the company had to defend it in order to save its business, the expenditure incurred in defending that suit was an allowable expenditure even though defending the suit, in so far as it attacks the second resolution, may not go far enough to be covered by the statutory provisions for allowing an expenditure. '

10. Regarding the Department's contention that the business expenditure, in any case, was of a capital nature, the Division Bench laid down as follows (p. 537):

' The litigation did not involve any capital structure of the company either. In fact, though the ITO had expressed the opinion that the expenditure was of a capital nature, neither the AAC nor the Tribunal did advert to that position, presumably because the point was not stressed in those arguments. However, we are clear in our view that the expenditure was not of a capital nature in any case.'

11. The pronouncement of the Supreme Court in CIT v. Ben gal. Assam Investors Ltd. : [1969]72ITR319(Cal) , was distinguished on facts. Similarly the pronouncement of the Madras High Court in Swami Motor Transports Ltd. v. CIT : [1966]60ITR234(Mad) , was also distinguished. The Division Bench concluded by observing as follows (p. 537):

' Here the finding is, with which we agree, that the effect of the litigation was to put the conduct of the business affairs of the company in jeopardy. In order to save the business, the company was obliged to defend the suit.'

12. Section I0(2)(xv) of the old Indian I.T. Act, 1922, laid down as follows :

' 10. (1) The tax shall be payable by an assessed under the head ' Profits and gains of business, profession or vocation ' in respect of the profits and gains of any business, profession or vocation carried on by him.

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

(xv) 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.'

13. The learned counsel for the Department contended that the expenditure in question could not be said to have been incurred wholly and exclusively for the business of the assessee-company. In the alternative, he contended that, in any case, the expenditure was of the nature of a capital expenditure, and not a revenue expenditure. So far as the first contention is concerned, it has not been shown as to how the finding recorded by the Tribunal is vitiated in so far as it had been held that the expenditure was incurred by the company wholly and exclusively in respect of its business. Learned counsel's contention seems to be that it was not obligatory for the assessee-company to defend the suit, and its business was in no way likely to be affected even if the suit had not been defended. In our view, this contention cannot be accepted. There was no doubt that the impugned two resolutions had been passed by the shareholders of the company at the extraordinary general meeting held on October 20, 1947. The company was bound to defend the validity of the said resolutions, being a party to the same. The resolutions concerned the business of the company. The old set of articles of association was replaced by a new set. The articles of association, as is well known, governed the internal affairs and management of the company. The memorandum of association provides the framework but the articles are more detailed and regulate the conduct and affairs of the company. The appointment of the managing agents by the second resolution clearly related to the business of the company. The parent company was formerly managed by a board of directors but now managing agents were being appointed on certain terms and conditions. It is difficult to say how it can be said that the expenditure incurred in defending the validity of the two resolutions in question was unconnected with the business of the company or could be said to be not wholly and exclusively for the purpose of the business of the company. No other purpose has been pointed out to us which motivated the company for defending the said resolutions. Learned counsel for the Department placed heavy reliance on the decision of this court in Ishwari Khetan Sugar Mills (P.) Ltd. v. CIT : [1972]86ITR635(All) . The facts in the said case are clearly distinguishable. There were two sugar mills, Ishwari Khetan Sugar Mills Ltd. and Maheshwari Khetan Sugar Mills Ltd. These two companies owning separately the sugar mills were managed by managing agents. The managing agency firms were partnership firms. Broadly, the controlling partners in the two managing agency firms belonged to the family of the Khetans. In pursuance of a mutual arrangement between the partners of the two managing agency firms, Onkar Mal Khetan was entrusted with the management of Ishwari Khetan Sugar Mills (P.) Ltd., while Kedar Nath Khetan, who was the uncle of Onkar Mal Khetan, was entrusted with the management of Maheshwari Khetan Sugar Mills (P.) 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. Onkar Mal Khetan instituted Suit No. 59 of 1951 in the court of the Civil Judge, Gorakhpur, against Kedar Nath Khetan and eleven other persons. The two companies were also impleaded as defendants in that suit. Onkar Mal Ketan alleged that Khedar Nath Khetan, in collusion with some other partners of the two managing agency firms and shareholders of the two companies, had ousted or had sought to oust the former from the management of the companies in question, and in particular, from the management of Ishwari Khetan Sugar Mills (P.) Ltd. One of the reliefs claimed was for the appointment of a receiver for the two sugar mills until such time as a 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 the High Court against the order appointing the interim receiver. One was filed by the two companies, and the other was filed by Kedar Nath Khetan and three others as directors of the two companies. These two appeals were dismissed by the High Court by a common judgment, dated November 27, 1951. The expenses incurred by the company in respect of the aforesaid litigation were disallowed by the ITO. This disallowance was questioned in the aforesaid reference by the first question which was referred to the court in the said reference. There was a second question which also was referred to the court in the said reference, and that was in connection with the disallowance of an expenditure which was incurred by the company in respect of a writ petition which had been filed by Onkar Mal Khetan against Khedar Nath Ketan who had been appointed as authorised controller of the assessee-company. These expenses were also disallowed by the ITO on the ground that the litigation expenses were not expenditure laid out or expended wholly or exclusively for the purpose of the business of the assessee-company. So far as the first question was concerned, the position was simple on the finding of fact recorded by the Tribunal. The Tribunal had found as follows (p. 639) :

' ' 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 Khetan and Sri Radhey Kishun Khetan. However, the law charges claimed and disallowed are mostly in respect of fees paid to Sri Kanhaiya Lal Misra and his juniors.' '

14. In view of this finding, it was obvious that the fees which were in question were not paid to the counsel for the assessee-company but were paid to the counsel who represented Radhey Kishun Khetan and Kedar Nath Khetan personally. It is true that the assessee-company questioned the correctness of the said finding of fact but the Appellate Tribunal did not allow it to be done. This court, therefore, observed (p. 640 of 86 ITR):

' 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. '

15. The court, however, went on to consider the said question No. 1 even on the footing that the fees in question might have been paid to the counsel for the assessee-company. The Tribunal had found as follows (p. 640 of 86 ITR) :

''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 asses-see-company's business.' '

16. This court held as follows (p. 640 of 86 ITR):

' 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. '

17. The first question was, therefore, answered against the assessee, as stated above. The second question was also answered against the assessee-company on the ground that it was not shown that the litigation expenses in connection with the writ petition were incurred for the purpose of the business of the company. The court observed (p. 643 of 86 ITR):

' 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. '

18. The court distinguished the decision of the Bombay High Court in J. B. Advani & Co. Ltd. v. CIT : [1950]18ITR557(Bom) and in J. N. Singh & Co. P. Ltd. v. CIT and concluded as follows (p. 643 of 86 ITR):

' 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 intant 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. '

19. Lastly, the said decision has the following observations (p. 644 of 86 ITR);

' 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. '

20. The facts of the present case are clearly distinguishable. Here the litigation expenses were incurred by the company in meeting an attack which had been made by certain shareholders on the two resolutions which had been passed at the extraordinary general meeting of the company held on October 20, 1947. It was not a litigation which could be said to have been necessitated on account of personal rivalries in the managing agency company. A clear finding has been recorded that the Baglas were in firm management till 1950 whereafter the litigation started. The company had changed its articles of association by the first resolution, and by the second resolution had appointed the Indian Textile Syndicate Ltd. as its managing agents. There were acts of the company, and the company was bound to defend the validity of the said acts. It has been rightly emphasised by the Appellate Tribunal in the impugned order that a lot of complications could have been caused if the plaintiffs would have succeeded in the suit because the payments and disbursements made by the managing agents on behalf of the parent company could have been then shown to have been unauthorised. Further, the entire conduct of the parent company on the basis of the new set of articles of association which had been brought into existence on the basis of the first resolution passed at the extraordinary general meeting on October 20, 1947, would have been put into jeopardy on the ground that in law the old set of articles of association did not stand changed or replaced by a valid resolution passed in the general meeting. In our view, the decision in Ishwari Khetan Sugar Mills (P.) Ltd. v. CIT : [1972]86ITR635(All) is clearly distinguishable from the present case. The expression ' wholly and exclusively for the purposes of the business ' has been the subject-matter of many reported decisions. The Division Bench in the earlier decision relating to this assessee (reported in : [1980]123ITR534(All) --CIT v. Muir Sugar Mills Co. Ltd.) noted two of such decisions, the one in CIT v. Bengal Assam Investors Ltd. : [1969]72ITR319(Cal) and the other in Swamy Motor Transports Ltd. v. CIT : [1966]60ITR234(Mad) , which was a case of litigation expenses in respect of the proceedings under Section 153(C) of the repealed Indian Companies Act, 1913. In our view, the said two cases are also distinguishable from the present case. In CIT v. Birla Cotton Spinning and Weaving Mills Ltd. : [1971]82ITR166(SC) , the Supreme Court was again called upon to examine the controversy regarding the disallowance of litigation expenses incurred by the assessee-company. Certain proceedings were taken against the assessee-company before the Income-tax Investigation Commission, and the assessee-company incurred litigation expenses in respect of the said proceedings in engaging lawyers and in the conduct of the said proceedings. The question was whether the law charges so incurred in connection with the proceedings before the Investigation Commission could be deducted in computing the profits of the business of the assessee. The Supreme Court laid down as follows (p. 169):

' The expression ' for the purpose of the business ' is essentially wider than the expression ' for the purpose of earning profits '. It covers not only the running of the business or its administration but also measures for the preservation of the business and protection of its assets and property. It may legitimately comprehend many other acts incidental to the carrying on of the business. '

21. The Supreme Court referred to its earlier two decisions in Travancore Titanium Products Ltd. v. CIT : [1966]60ITR277(SC) and in Sree Meenakski Mills Ltd. v. CIT : [1967]63ITR207(SC) . In CIT v. Malayalam Plantations Ltd. : [1964]53ITR140(SC) , Subba Rao J. examined the relevant English cases and held that the payment of estate duty by a resident company incorporated outside India on the death of its shareholders not domiciled in India, was not an allowable deduction under Section 10(2)(xv) of the Act, The expenditure was not ' for the purpose of the business ' of the assessee-company. The Supreme Court again emphasised that before the Amending Act of 1939, the Indian I.T. Act, 1922, had a different phraseology which was a narrower one as compared to the phraseology which was brought into existence by the Amending Act of 1939. Formerly, the words were ' not being in the nature of capital expenditure incurred solely for the purpose of earning such profits or gains '. After the Amending Act of 1939, Section 10(2Xxv) contained the words 'for the purpose of such business '. The Supreme Court noticed the decision of the House of Lords in Strong and Co. of Romsey Ltd. v. Woodifield [1906] 5 TC 215, Subba Rao J., referred to Lord Davey's dictum in the said case. The same was as follows (p. 145 of 53 ITR):

' ' It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade or is made out of the profits of the trade. It must be made for the purpose of earning the profits.' '

22. The learned judge felt that the definition given by Lord Davey was a narrow one, and other law Lords had given more liberal interpretation. The learned judge recapitulated the legal position in England in these words (p. 148 of 53 ITR):

' Broadly, English courts applied two tests to ascertain whether a deduction was permissible or not, namely, (i) whether the expenditure was incurred for the purpose of carrying on of the business and for removing obstacles and impediments in the conduct of the business, and (ii) whether the assessed paid the amount in his capacity as businessman or in his personal capacity.'

23. Thereafter, the learned judge noticed some of the Indian decisions and, in particular, referred to the decision of Kapur J. in Haji Aziz and Abdul Shakoor Bros. v. CIT : 1983ECR1942D(SC) . There, the legal position was laid down in the following words (p. 150 of 53 ITR) :

' The aforesaid discussion leads to the following result: The expression ' for the purpose of the business' is wider in scope than the expression ' for the purpose of earning profits '. Its range is wide; it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business ; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory ; in that event, he pays the amount on behalf of another and for a purpose unconnected with the business. '

24. There are certain cases of disallowance of litigation expenses in connection with the infringement of trade mark or patent rights. For example, CIT v. Rohtas Industries Ltd. : [1968]68ITR174(Patna) , Income-tax Appellate Tribunal v. Chhaganmal Mangilal ; certain cases which arose out of the disallowance of litigation expenses incurred in relation to proceedings under Section 153C of the old Indian Companies Act, 1913. We have already referred to the decision in Swami Motor Transports Ltd. v. CIT : [1966]60ITR234(Mad) and there is another one, CIT v. Shiwalik Talkies Ltd. . It is not necessary to advert to the details of these cases. However, it may be observed that the nature of the dispute in the proceedings under Section 153C of the old Indian Companies Act, 1913 was a different one, and it was held that the expenses which were incurred in defending the attack on certain directors could not be said to be expenses concerning the purpose of the business of the company. Admittedly, the present is not a case which can be said to be analogous to such a situation. However, we would like to refer to the decision of the Bombay High Court in Premier Construction Co. Ltd. v. CIT : [1966]62ITR176(Bom) . The Bombay High Court was dealing with the disallowance of expenses which the assessee had incurred in defending a suit, and, thereafter, incurred in filing and prosecuting an appeal. It was held that while the expenses incurred in defending the suit were allowable deduction, the expenses incurred in prosecuting the appeal were not allowable deduction. V. S. Desai J. laid down as follows (p. 181);

' Now in order that the expense of a civil litigation could be permissible as an expense wholly and exclusively laid out for the purpose of the business of the assessee, the expense must have been incurred by the assessee in its character as a trader and the transaction in respect of which the proceedings were taken must have arisen out of, or must have been incidental to, the assessee's business. An assessee could be said to have incurred the expenditure in his character as a trader if the litigation was necessary to be carried on by the assessee or defended by it to protect its trade or business or to avert a danger or threat to its carrying on of its business. If the present litigation was purely in relation to a domestic quarrel between the shareholders and the board of directors as held by the Tribunal, it could readily be said that the company would not be justifiedin claiming the expense incurred by it in the said litigation as expense of its business. We find, however, that the suit, which Motishaw had filed against the assessee-company and the board of directors, did not confine itself merely to the settlement of the quarrel between himself and the president of the assessee-company, but went far beyond and threatened to interfere with the business of the assessee-company itself. The reliefs, which were prayed for in the suit, were that all proceedings of the meeting subsequent to the ruling given by the president of the meeting against Motishaw should be declared as null and void ; all the resolutions passed at the said meeting should be declared as illegal and all conduct of the business of the assessee-company should also be declared illegal and the company should, be restrained from acting in pursuance of the said resolutions......... In our opinion, therefore, so far as the expenditure incurredby the assessee-company in defending the suit itself was concerned, it could be said that the said expense was wholly and exclusively laid out for the purpose of its business.'

25. This decision, to a very great extent, is analogous to the facts involved in the present reference. We have already shown the nature of the two resolutions, and what could have been the effect on the business of the assessee-company if the said resolutions had been declared as invalid.

26. It seems to us that the position in law is well settled now that the expenditure which is incurred in resisting an attack on the structure and assets of a company is always an allowable deduction. Here, in the facts of the instant case, the attack was on the validity of the two resolutions which had been passed by the company at its extraordinary general meeting. By the first resolution, a new set of articles was substituted for the old set. By the second, the company appointed managing agents to run its business. In defending the validity of the said resolutions, the company was really resisting an attack on its structure and on the conduct of its business which had gone on since October 20, 1947. In the commentary on Income Tax by Kanga and Palkhivala, 7th edn., Vol. I, page 462, a reference has been made to the decision of the House of Lords in IRC v. Carron Co. [1968] 45 TC 18, where it was held that legal charges for amending the memorandum and articles of association to facilitate the company's trading operations were allowable deductions. It is well known that if a winding up petition is made against a company, the expense incurred by the company in resisting such winding up petition is an allowable deduction. It should be always remembered that the question of the deducibility of the expenditure is not dependent upon the merits of the defence which the assessee has set up, whether the same is strong or weak. These are not the considerations. The test is whether the expenditure was incurred inthe character of the assessee as a trader, and not in some non-trading capacity, for example, as held in the aforesaid decision in CIT v. Malayalam Plantations Ltd. : [1964]53ITR140(SC) , the payments made by a company in respect of the estate duty concerning some of the deceased shareholders were held to be not an expenditure for the purpose of the business of the company. In the facts of the instant case, it cannot be contended that the assessee-company incurred the expenses in question in any non-trading capacity. Accordingly, we hold that the expenditure in question was incurred wholly and exclusively for the business of the company as envisaged in Section 10(2)(xv) of the old Indian I.T. Act, 1922.

27. Now, adverting to the second contention of the learned counsel for the Department, namely, that even if it was an expenditure incurred for the business of the company, it was a capital expenditure, and, therefore, could not be allowed under the aforesaid provision, reliance has been placed on three decisions Travancore-Cockin Chemicals Ltd. v. CIT : [1977]106ITR900(SC) , CIT v. Malayalam Plantations Ltd. : [1964]53ITR140(SC) and Sitalpur Sugar Works Ltd. v. CIT : [1963]49ITR160(SC) . Further, reliance has been placed on a passage in the , aforesaid commentary of Kanga and Palkhivala, at page 479. The said passage has its heading as 'Bringing into existence an asset or advantage of enduring benefit '. The passage in question in the said commentary is itself based on the well-known decision of the House of Lords in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, equivalent to [1926] AC 205. In particular, the famous observations of Viscount Cave L.C. in the following words were relied upon :

' When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. '

28. In Travancore-Cochin Chemicals Ltd. v. CIT : [1977]106ITR900(SC) , certain expenses were incurred in the construction of new roads. The Supreme Court held that the construction of new roads resulted in an advantage of an enduring nature to the assessee-company, and the expenditure incurred was of a capital nature. We have already dealt with the facts of CIT v. Malayalam Plantations Ltd. : [1964]53ITR140(SC) and the same have been distinguished. This decision does not deal with the controversy as to whether the expenditure was of a capital or revenue nature. It turned upon the question whether the expenditure was incurred wholly and exclusively for the purpose of the business of the assessee in the said case. In Sitalpur Sugar Works Ltd. v. CIT : [1963]49ITR160(SC) it was held that the expenditure incurred in dismantling and refitting existing plant at a better site is as much capital expenditure as expenditure incurred for acquiring an additional plant. In our view, these cases are clearly distinguishable. They brought into existence capital assets or advantage of an enduring nature. A reference here may be made to Dalmia Jain and Co. Ltd. v. CIT : 1988CriLJ116 , where the Supreme Court laid down as follows (p. 757):

' The question for decision is whether the litigation expenses incurred by the assessee were for the purpose of creating, curing or completing the assessee's title to capital or whether it was for the purpose of protecting its business. If it is the former then the expenses incurred must be considered as capital expenditure. But on the other hand if it is held that the expenses were incurred to protect the business of the assessee, then it must be considered as a business loss. The principle which has to be deduced from decided cases is that, where the expenditure laid out for the acquisition or improvement of a fixed capital asset is attributable to capital, it is a capital expenditure but if it is incurred to protect the trade or business of the assessee then it is a revenue expenditure. In deciding whether a particular expenditure is capital or revenue in nature, what the courts have to see is whether the expenditure in question was incurred to create any new asset or was incurred for maintaining the business of the company. If it is the former, it is capital expenditure; if it is the latter, it is revenue expenditure. '

29. Applying the said test, it should be seen that the expenditure in question was incurred for defending the validity of the two resolutions which had come into operation as a result of the extraordinary general meeting of the assessee-company held on October. 20, 1947. What would have been the nature of expenses which were incurred by the company in passing the said two resolutions--whether they were of capital nature or of revenue nature is not the controversy at hand. In 1950, when the suit was filed questioning the validity of the said two resolutions, the company incurred expenses in defending such suit and in defending its two resolutions passed in 1947. It cannot be said that the company was seeking to bring into existence any capital asset in 1950. It is a situation which can be said to be a serious attack on the company's title or on its business. It was not an expenditure which was incurred to cure any imperfection in the title or to acquire any new advantage or new asset. In an old decision of the Bombay High Court which may be considered to have some relevance in the present case, this controversy was adverted to and decided. The reported decision is CIT v. Sir Purushottamdas Thakurdas [1946] 14 ITR 305. The assessee who had been elected as a member of the local board of the Reserve Bank of India incurred in the previous year expenses of Rs. 7,500 in successfully defending a suit brought some time after his election for a declaration that his election was invalid. The Bombay High Court held that the expenditure was not capital in nature inasmuch as it was not an expenditure incurred in creating or in originating the source of income or in bringing it into being but in preserving it when it was already there. The accent was on the aspect of preservation rather than bringing into existence any new asset. The same is the position in the instant case also. Accordingly, in our view, the second submission of the learned counsel for the Department is also not tenable. We, therefore, answer the question referred to us in the affirmative, in favour of the assessee and against the Department. There will be no order as to costs as no one has appeared on behalf of the assessee.


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