1. The only issue in this appeal is, whether certain expenses incurred by the assessee amounting to Rs. 3,53,034 would be allowable as a deduction.
2. The assessee is a non-resident company incorporated in the United States. Its main activity is that of running a theatre in the city. The shares of the assessee-company are held by another non-resident company incorporated in the United States. It would appear that a company by name Tramarsa incorporated in Switzerland was interested in getting controlling interest in companies owning theatres in India.
Negotiations between Tramarsa and the holding company were carried out by one Shiv Shankarlal Gupta. As a result, Tramarsa purchased the entire shareholdings in the assessee-company and most of the shares of another company called M.G.M. (Calcutta) Ltd. from the American holding company for 1 million dollars.
3. Tramarsa had appointed Shri Gupta as the constituted attorney to supervise the business of the assessee-company as well as M.G.M.(Calcutta) Ltd. 4. On 26-9-1974, Shri Gupta was detained under the Maintenance of Internal Securities Act. The detention order was challenged in the Bombay High Court. By their order dated 30-11-1974, the High Court held that the detention order was bad in law.
5. Shri Gupta was again detained for the second time on 1-7-1975 under COFEPOSA Ordinance. This detention was also challenged. It appears that Shri Gupta had incurred total expenses in conducting the hearings amounting to Rs. 3,66,174.
6. Shri Gupta got in touch with Tramarsa and had made a request to them that he should be reimbursed in respect of the legal expenses incurred by him. On 4-3-1976, Tramarsa wrote to him that his request had been considered by the board of directors of Metro Theatres and that the board had decided that the company should bear and pay to him the legal expenses that were incurred in that matter. Accordingly, the assessee-company had paid to the solicitors engaged by Shri Gupta, an amount of Rs. 3,53,033 in the course of March 1976 to July 1976.
7. In the assessment for the year 1977-78, for which the accounting year ended on 31-8-1976, the assessee-company claimed the payment made to Shri Gupta as business expenditure. The ITO considered the assessee's claim and held that the claim was untenable. Against this order, an appeal was filed to the Commissioner (Appeals), who agreed with the ITO. The assessee is now on further appeal before us.
8. Shri Bansi Mehta, for the assessee, submitted that the expenditure was incurred by the assessee-company only for the purpose of business and it should have been allowed as a deduction. He pointed out that the business of the assessee-company was closely linked with Shri Gupta. He submitted that it was the Government's case before the High Court in the detention proceedings that Shri Gupta had illegally earned foreign exchange which was used by him in acquiring cinema theatres in benami names of foreign companies. If the proceedings were allowed to be continued, the properties of the assessee would be in jeopardy. The fact that ultimately nothing had happened was not material. He submitted that the assessee had a genuine fear that the properties would be affected. So long as such an apprehension was in the mind of the assessee, expenses incurred should be allowed as a deduction. He further submitted that an enquiry, whether such apprehensions were reasonable or not, would be irrelevant. He relied on the decision of the Supreme Court in the case of Sree Meenakshi Mills Ltd. v. CIT  63 ITR 207. He further pointed out that the Gujarat High Court has held in the case of CIT v. Ahmedabad Controlled Iron & Steel Registered Stockholders Association (P.) Ltd.  99 ITR 567 that in a criminal prosecution, where an agent or employee of the company is involved and the company incurs expenditure for defending such employees or agents, it would be for protecting its business interests.
He also submitted that under the Ordinance, i.e., Smugglers & Foreign Exchange Manipulators (Forfeiture of Property) Order, 1975, the Government can proceed against any associate of a detenu. According to him, the assessee would be an associate within the meaning of the said Act. Shri Mehta had also placed reliance on Section 222 of the Indian Contract Act, 1872, and had submitted that the expenses incurred by an agent had to be reimbursed by the principal.
9. Shri Roongta for the department, pointed out that the acquisition of the properties of Metro was only one of the five charges against Shri Gupta. He also pointed out that Shri Gupta was neither an employee nor a director nor a shareholder of the company. There is no nexus between him and the assessee-company. He is only a constituted attorney of the holding company. He submitted that on the facts shown, no nexus has been established between the expenditure incurred and the business of the assessee. He also pointed out that the assessee-company had not received any notice from the Government nor had they associated themselves in the litigation. Only after the litigation is over, that Shri Gupta requested for the reimbursement. There is not even a remote connection with the asses-see's business.
10. We have considered the facts of the case. The principle involved in deciding whether the legal expenses incurred by a company are allowable or not, is fairly well settled. The case laws on the point have all been catalogued by the Calcutta High Court in the case of Albert David Ltd. v. CIT  131 ITR 192. The principle called out from these case laws is that the expenses should be for protecting the business of the assessee-company or for preserving the business assets of the company. If, either of the two objects is not affected by the litigation, then the expenditure cannot be considered as permissible deduction. We, therefore, have to consider whether factually, the assessee had established a nexus with either the business assets or the running of the business. We will consider both these issues.
11. We will first take up the question whether the expenses are connected with the business assets. Shri B.S. Mehta had emphasized this by pointing out that the Metro Theatre building owned by the assessee would be in jeopardy if the litigation proceedings had been continued.
Therefore, the expenses, according to him, were to protect the business assets. We are of the opinion that the facts do not support the assessee's contention. Shri Gupta had been detained under COFEPOSA mainly on five grounds. These grounds are that he had underinvoiced imports and exports, that he had retained secret bank account abroad and in foreign countries and that he had utilised the foreign exchange in the said accounts for buying property in India. These three grounds were the grounds in which he was detained under MISA in 1974. In the detention order under COFEPOSA, these grounds were again repeated with two additional grounds. The additional grounds, as per the order of the High Court discharging him, are found at pages 225 to 318. The grounds would be summarized as follows: The searches conducted in the premises would show that in the deal regarding transfer of Metro Theatre, the assessee itself was the buyer and the Swiss company was only a benami of Shri Gupta. The High Court found that none of these grounds would be sufficient for detention. Now, out of the above grounds, only one ground has something to do with the assessee. That is 'Metro Deal'. Now, Shri B.S. Mehta's submission is that since the ground is about the purchase of Metro Theatre, if the detention order was not challenged, the property would pass on to other persons. This would affect the assessee's business. The litigation expenditure could, therefore, be for protecting the assessee's property. We are afraid that such an inference does not follow from the facts. It is nobody's case that Shri Gupta owned the Metro Theatre. Even the charge, as understood by the High Court (pages 243-276), is that the Metro Theatre was purchased in the benami name of a Swiss company.
Therefore, the charge of the Government against Shri Gupta is that the Swiss company 'Tramarsa' is only a benami of Shri Gupta. If the litigation had gone unchallenged, the result would be that Shri Gupta might be stripped of his holdings in Tramarsa. That would not affect the property of the assessee. It is well settled in law that a company is different from shareholders. The shares of a company may change hands, but the company's existence would not be affected by the change of the shareholders. The right of the shares being the same, it is immaterial whether at any given point of time shares are held by one individual or the other. That would not affect the business assets of the company or the conducting of the business of the company.
12. A direct authority on this point is the decision of the Calcutta High Court in Albert David Ltd.'s case (supra). Therein, there was a litigation between two groups of shareholders regarding the ownership of certain shares. The company was also impleaded. One group of shareholders owed the company's certain funds. The company was impleaded and the expenses were claimed by the company as business expenditure, on the ground that the debt due from one group of shareholders was a business asset and the expenses were, therefore, for the purpose of preserving the business assets. Rejecting this contention, the Calcutta High Court observed as under: ...it appears to us that there was sufficient material before the Tribunal to come to the conclusion that the said litigation was really the offshoot of the disputes and quarrels between the two groups over the control of the assessee. It is quite clear that the assessee was being used as a springboard. The persons in charge of the assessee at the material time sought to quantify the assessee's dues from Judah, its ex-director and shareholder, on an unrealistic basis so that his means of control of the assessee, viz., his shares, could be immobilised. Judah fought back with all suitable means so that he could regain his control over the assessee and in the course of such fight, no doubt, a part of the book debt in the company became involved. But it cannot be said that in the litigation the company was only seeking to preserve its book debts as a business asset....
From the above quotation, it would be seen that where a litigation affected the rights of shareholders and did not affect the rights of the assessee-company over business assets, no expenditure could be treated as allowable.
13. It was also submitted before us that the expenditure was necessary to continue the business of the company as it was being done then. It was Shri Mehta's submission that a change in the shareholding or change in the controlling affairs would lead to a change in the pattern of business. But that is of no consequence for a company. This is also a point covered by an authority. We may refer to the decision of the Bombay High Court in the case of Harinagar Sugar Mills Ltd. v. CIT  117 ITR 945. In that case, the assessee-company incurred business expenditure in respect of two different litigations. The first litigation was in resisting the application for transfer of shares by one set of shareholders. The Bombay High Court has held that such an expenditure was not a business expenditure of the company, since a nexus with the business of the company was not established. The second type of litigation expenditure considered in that decision is the expenditure incurred in resisting the appointment of an inspector to report on the affairs of the company. The Bombay High Court held that such an expenditure incurred was not for preserving the fair name of the company. It was only for the purpose of saving persons, who were charged with mismanagement. The High Court observed: What we have to consider in this case is whether preventing the investigation of the affairs of the assessee-company pursuant to a report made by the Registrar of Companies was a step taken honestly and reasonably to promote the interest of the business of the assessee-company. The assessee-company could well have preserved its fair name by proving to the investigator that so far as the affairs of the company were concerned, they were clean and untarnished, but instead of doing so, ostensibly with the object of screening the persons who were guilty of mismanagement of the affairs of the company the proceedings were adopted which ultimately failed. Such expenses could not, therefore, be regarded as expenses incurred for promoting the interest of the business of the assessee-company and have been rightly disallowed by the taxing authorities and the Tribunal.
On the above principles, it would be seen that the expenditure involved has nothing to do with the conduct of the assessee's business. We, therefore, hold that no nexus has been established.
14. Shri Roongta had pointed out that Shri Gupta had no locus standi at all with the assessee-company. Shri Gupta was not a shareholder of the company or a director or even an employee. He was merely the constituted attorney of Tramarsa. We find this tp be a fact. Shri Gupta has no legal claim in respect of the assessee-company. If at all, Tramarsa might be the person affected by any adverse order passed by the authorities in this litigation. If at all, the expenses might be the expenses of Tramarsa. It could not be an expenditure of the assessee-company. In order to meet this point, Shri Mehta had submitted that for this purpose, no distinction should be made between a subsidiary company and a holding company. The activities of a holding company would be affecting the subsidiary company and so any expenditure of a holding company has to be considered as an expenditure of the subsidiary company because of its impact on it. We are unable to accept this submission. In law, the holding company is separate from the subsidiary company. A holding company merely holds the majority shares in a subsidiary company. The shareholders might change, but it will not in law affect either the business or the business assets of the subsidiary company.
15. Shri Mehta had also referred to the provisions of COFEPOSA and had submitted that it was open for the Government to proceed against the associates of a detenu. According to him, the assessee would be one such associate. We are unable to accept this submission either. The associate, if at all, will be the Swiss company. The assessee-company does not come within the definition of 'associate' for this purpose.
16. Much reliance had been placed on the decision of the Supreme Court in the case of Sree Meenakshi Mills Ltd. (supra). It was submitted that irrespective of the outcome of the litigation, irrespective of whether the litigation was ill-advised or not, the expenditure should be allowed if the assessee had honestly felt that it would affect the business. We are unable to accept the submission that the ratio in that case would be applicable to the facts of the case. As pointed out by the Calcutta High Court in the case of Albert David Ltd. (supra), the Supreme Court was allowing an expenditure incurred by an assessee to resist in a civil proceeding the enforcement of a measure--legislative or executive--which imposed restrictions on the carrying on of a business, or to obtain a declaration that the measure is invalid would, if other conditions are satisfied, be admissible. It will be seen that the measures taken by the Government should impose some restrictions on the carrying on of the business ; then only the principles would be applicable. Whether the assessee's attempt in resisting the measure is foolhardy or not, will not be a question then. In the case before us, a nexus with the business is not at all established. Therefore, the assessee's case is lost at the threshold itself. The principles of Sree Meenakshi Mills Ltd. 's case (supra) will not be applicable.
17. Reliance placed by him on Section 222 is also out of place. The assessee is not the principal and Shri Gupta is not its agent. Shri Gupta, at best, may be the agent of the Swiss company.
18. Thus, on all considerations of the facts, we are of the opinion that the assessee is not entitled to the deduction. The appeal is dismissed.