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

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 1021 of 1975
Judge
Reported in(1980)16CTR(All)145; [1980]123ITR534(All); [1980]3TAXMAN569(All)
ActsIncome Tax Act, 1922 - Sections 10(2)
AppellantCommissioner of Income-tax
RespondentMuir Sugar Mills Co. Ltd.
Appellant AdvocateR.K. Gulati and ;A. Gupta, Advs.
Respondent AdvocateNone
Excerpt:
- .....the validity of the two special resolutions passed at the extraordinary general meeting of the company held on 20th october, 1947. the ito repelled the claim. he held that the expenditure was not revenue in nature. in the alternative he held that the expenditure was of a capital nature because it was incurred for the purpose of defending the articles and memorandum of association of the company. the assessee went up in appeal but the aac dismissed it. the assessee then went up to the tribunal. the tribunal held that by the first impugned resolution the said articles of association of the company was recast. the articles of association dealt with the day-to-day conduct of business. it is virtually the constitution of the company. the expenditure incurred in defending the articles of.....
Judgment:

Satish Chanpra, C.J.

1. The assessee is a public limited company carrying on business of manufacture and sale of textile goods. For the assessment year 1953-54, it claimed a deduction of Rs. 1,37,387 on account of legal charges incurred in connection with defending a suit filed by two of its shareholders against the company. The suit was filed to challenge the validity of the two special resolutions passed at the extraordinary general meeting of the company held on 20th October, 1947. The ITO repelled the claim. He held that the expenditure was not revenue in nature. In the alternative he held that the expenditure was of a capital nature because it was incurred for the purpose of defending the articles and memorandum of association of the company. The assessee went up in appeal but the AAC dismissed it. The assessee then went up to the Tribunal. The Tribunal held that by the first impugned resolution the said articles of association of the company was recast. The articles of association dealt with the day-to-day conduct of business. It is virtually the constitution of the company. The expenditure incurred in defending the articles of association was incurred for the purpose of carrying on the business and was hence an allowable revenue expenditure. In respect of the second resolution it held that the suit was not a result of in-fighting between two groups of the company's shareholders because when the suit was filed in 1950, the Bagla group was firmly in saddle. The suit, if allowed to succeed, would have set at naught the transactions, contracts, etc., which would have been entered into by the managing agents. Future transactions and contracts would also have been affected and the consequences would have been to throw the business out of gear. Therefore, by defending the suit the assessee was trying to keep intact the normal running of the business and, as such, the expenditure was one which was laid out or expended wholly for the purpose of business. The suit was against the company's management as a whole and, therefore, had a direct bearing on the conduct of its business. It accordingly allowed the appeal and held that the claimed expenditure was allowable.

2. At the instance of the Commissioner, the Tribunal has referred the following question of law for our opinion:

' 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?'

3. The two resolutions, which were challenged in the suit, were passed at the extraordinary general meeting of the company on 20th October, 1947. They provided:

'(1) That the regulations contained in the document submitted to this meeting and for the purpose of identi6cation 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) 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 modification of such agreement before the same is executed. '

4. 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. The second resolution appointed Indian Textile Syndicate Ltd. as the managing agent of the company. It has been found that when the suit was filed in 1950, there was no internal dispute and the Bagla group was firmly in saddle. Therefore, this was not a case in which one group was attacking another group or where the attack was on individual directors of the company in which it could be said that the company was not intrinsically interested. 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.

5. Learned counsel invited our attention to CIT v. Bengal Assam Investors Ltd. : [1969]72ITR319(Cal) . In that case, the assessee had purchased shares in a company in an auction sale. There arose a dispute regarding the value of the shares and a suit was filed. The expenses incurred in conducting the suit were disallowed. It was held that by claiming expenses for the suits for amending the articles of association, the assessee was trying to enhance the value of the shares and hence the expenditure was also of a capital nature incurred for making additions or alterations to the assets. This case is distinguishable. In our case, the resolutions passed by the company itself do not result in any diminution in value in the capital asset. 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 capital nature in any case.

6. In Swami Motor Transports'Ltd. v. CIT : [1966]60ITR234(Mad) the expenditure incurred in conducting the proceedings under Section 153C of the Indian Companies Act was allowed in part, it was held that there was hardly any justification for the company feeling that its very existence was threatened by some of the shareholders by filing an application under Section 153C. The company's continued existence was not in jeopardy. The expense cannot hence be held to be an allowable one except the expenditure incurred in the audit directed by the court or the holding of the meeting which was also directed to be held by the orders of the court. This decision is inapplicable to the present case. 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.

7. In the result, we answer the question referred to us in the affirmative in favour of the assessee and against the department. As no one has appeared on behalf of the assessee, there will be no order as to costs.


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