M.R.A. Ansari, J.
1. The following three questions have been referred to this court by the Income-tax Appellate Tribunal, Delhi Bench (hereinafter referred to as 'the Tribunal'), in compliance with the direction of this court under Section 66(2) of the Indian Income-tax Act, 1922 (hereinafter called as 'the Act'):
'1. Whether, on the facts and in the circumstances of the case, the amount of Rs. 5,256 deducted by M/s. Iron & Steel Stockists (Civil Supplies) Association, Delhi, is a proper deduction from the business income of the assessed as business loss, bad debt or business expense ?
2. Whether legal expenses of Rs. 550 incurred by the assessed in defending a suit filed by its former managing director for a declaration that his removal was illegal and he continued as the managing director were admissible deduction from business income ?
3. Whether the law charges of Rs. 825 and Rs. 385 incurred by the assessed-company in connection with criminal complaints against the former managing director for misappropriation of company's funds and efforts to take forcible possession of company's business premises, respectively, are a permissible deduction from business profits of the assessed-company ?'
2. The facts which are relevant to the first question, which can be gathered from the statement of the case and the supplementary statement of the case and the annexures thereto, may be briefly stated. The assessed in this case is M/s. Iron Traders Private Ltd., and the assessment year under reference is the year 1957-58, for which the relevant previous year is the financial year ending 31st March, 1957. The assessed along with other registered stockholders of iron and steel formed themselves into an association called the Iron Steel Stockists (Civil Supplies) Association, Delhi, for the purpose of purchase and sale of disposal goods from the Government of India. This association (hereinafter called as the association) was formed in the year 1947. The members of this association contributed various sums according to their classification as A, B and C class of registered stockholders to the association and the assessed contributed Rs. 77,506 to the association. The association deposited a sum of Rs. 8'39 lakhs with the Government of India for the purchase of the disposal goods. But on account of the partition of the country, no allotment could be made to the association of any disposal goods and the amount deposited by the association was refunded to it by the Government subsequently subject to certain deductions. Out of the amount contributed by the assessed to the association, a sum of Rs. 72,244 was returned to it. The balance of Rs. 5,256 was deducted out of the assessed's contribution on account of its share of expenses or interest. The amount of Rs. 72,244 was paid to the assessed during the previous year relevant to the assessment year 1957-58. The assessed claimed that in computing its income for this year, it was entitled to the deduction of Rs. 5,256 as a business expense. The Income-tax Officer disallowed the assessed's claim on two grounds, namely :
(i) that the assessed had failed to furnish complete details of the loss claimed by it, and
(ii) that the amount could at best be considered as a share of loss from an unregistered firm since the association was never registered.
3. The Appellate Assistant Commissioner confirmed this disallowance; according to him, what the association refunded to the assessed was the amount of capital contributed by it after deducting the expenses incurred and that, thereforee, it was clearly a loss of capital invested by the assessed in the association. The disallowance was again confirmed by the Tribunal on the ground that it was a loss of capital.
4. The learned counsel for the assessed has raised two contentions in support of the assessed's claim for the deduction of the amount of Rs. 5,256, namely :
(i) that the amount of Rs. 77,506 which was contributed by the assessed to the association represented the purchase price paid in advance of the stock-in-trade of the assessed's business and the sum of Rs. 5,256 being a portion of the purchase price of the stock-in-trade which was not returned to the assessed was in the nature of revenue expenditure; and
(ii) that the amount of Rs. 77,506 was an expenditure incurred by the assessed for preserving its business and the amount claimed by the assessed being a portion of the said expenditure was an allowable deduction.
5. We have to consider these contentions in the light of the material placed before us in the form of the annexures to the supplementary statement of the case.
6. Annexure 'E' to the supplementary statement of the case is a copy of the proceedings of a meeting of the 'A' and 'B' class registered stockholders of iron and steel held on March 11, 1947, under the presidentship of the Deputy Director of Civil Supplies. In this meeting the following decisions were taken :
'1. An association of registered stockholders, who used to get their quotas regularly be formed and styled as Iron & Steel Stockists (Civil Supplies) Association, Delhi. This association will procure and sell all the steel.
2. The investment will be made by the registered stockholder according to classifications previously made and on which basis they had been getting their quota of steel from the Regional Deputy Iron and Steel Controller, Lahore. The net profits after deduction of all expenses of the association will be divided among the members in accordance with the capital invested on the basis of units allotted to each member as per para. 3 below.'
7. Annexure 'G' is a copy of the rules and regulations of the association. According to these rules and regulations of the association, one of the objects of the association was 'to buy, sell and deal in such iron and steel materials as are allocated by the Iron and Steel Controller to the registered stockholders jointly or severally'. Rule 3 provides that 'the capital of the association shall be Rs. 7 1/2 lakhs divided in shares of the value of Rs. 5,000. Each share shall have one vote'. Rule 15 provides that 'all profits shall be divided to the shareholders in proportion of the shares held by them'.
8. Annexure 'F' is the copy of the proceedings of the meeting of the managing committee of the association held on March 12, 1947, under the chairmanship of the Deputy Director (Civil Supplies). In this meeting, it was decided that the association should accept 1,000 tons of steel which was allotted to Delhi Province as its quota and the Iron and Steel Controller may be informed accordingly and further that the secretary of the association should also make necessary arrangements for stocking the materials at Ajmeri Gate, Delhi sidings, and call for funds from the members of the association for the procurement of steel allotted by the Iron and Steel Controller from time to time. It was further decided that the association would take over all the tonnage of steel, orders for which had been placed to them for periods I and II and also that of 3,000 tons of steel from Harbanspura and that arrangements for stocking the material and making payments would be made by the newly formed association. It was further resolved that in regard to the existing stock with registered stockholders, all permits shall be drawn by the Civil Supplies Department on the Iron and Steel Stockists (Civil Supplies) Association which would then issue their own permits on the various registered stockholders. The registered stockholders shall be asked by the department to submit their fortnightly returns to the Iron and Steel Stockists (Civil Supplies) Association and not to the department. The association will in turn send in a consolidated form to the department.
9. Annexure 'I' is the copy of the balance-sheet of the association as on 30th November, 1949. This is reproduced below :
' Tele. 20994.Suresh C. Mathur & Co.,Chartered Accountants. ChandniChowk,(Above Mercantile Bank Ltd.),Delhi.Dated 19th March, 1955.The Iron and Steel Stockists (C. S.) Association, Delhi.Balance Sheet as at 30th November, 1949.LIABILITIES Rs.ASSETSRs.Deposit from members 5,90,000-0- 0Advance for goods : - (as per list) Office commanding S. D. C. Harbanspura8,39,326-6-0Loans payable : Other advances : Laxmi Iron and Steel Mfg. 54,959-12-6Delhi Iron & Steel Stockists Co. Ltd., (C. S.) Association Ltd.6,339-8-0 Profit and Loss A/C Pt. Bhondumal Nihal Chand 11,052-14-6Loss up to Nov., 1948.-3,690-15-11Delhi Iron & Syndicate 46,993- 0-0 L Cirdhari Lal Gupta 31,147-13-0Loss of the year16,470-11-9Sh. Ram Chand Sharma 27,446-13-0 20,161-11-8 1,71,599-12-0 Bank Overdraft payable Punjab National Bank Ltd., ChawriBazar. Delhi 1,04,224-1-11 Suspense : Pending adjustment 3-12-0 8,65,827- 9-11 8,65,827- 9-11
10. Annexure 'D' is the copy of the statement of accounts of M/s. Iron & Steel Stockists (C. S.) Association, Delhi, in respect of the assessed. The contributions or deposits made by the assessed and the payments made to the assessed are stated as under :
DateParticularsRs.Rs.20th May, 1947To cheque22,500 31st Aug., 1947To cheque22,500 31st Mar., 1955To amount22,500 16th Jan., 1957By cheque 72,24417th Jan., 1957To amounttfd. From10,000 L. Hansraj G. Gupta 30th Mar., 1957By amount ofexpen- 5,256 ses adjusted___________ 77,50077,500 '
11. A perusal of the above documents shows that the assessed and other registered stockholders of iron and steel formed themselves into an association, probably on the advice of the Directorate of Civil Supplies, so that, instead of each of the registered stockholders separately obtaining the disposal goods from the Government and selling them, the association would obtain the disposal goods and sell them. Although the contributions made by the members of the association might proximate to the cost of the goods which the association would obtain from the Government, these contributions were not in the nature of the price of the goods paid in advance by the members of the association. These contributions are in the nature of contribution of share capital by the members of the association. That is why annexure 'I' described these contributions as deposits from the members. It is the association which purchases the disposal goods from the Government and sells them. After deducting the expenses of such purchase and sale, the net profits are distributed among the members in proportion to their share capital. The members of the association do not deal directly with the concerned Government authorities. It is only association which deals with him. Annexure 'D' itself does not show that the entire amount of Rs. 77,500 which was paid by the assessed to the association represented either the price of the stock-in-trade or the assessed's share capital in the association. The assessed appears to have paid Rs. 22,500 to the association on 20th May, 1947, and another sum of Rs. 22,500 on 31st August, 1947. These two a mounts may very well represent the assessed's contribution towards the capital of the association. Then it is only on 31st March, 1955, that a further amount of Rs. 22,500 was paid by the assessed to the association. This amount cannot obviously represent the price of the stock-in-trade, because by that date, it was known that by reason of the partition of the country, the Government was not in a position to sell the disposal goods to the association. It is, thereforee, not clear what this amount of Rs. 22,500 paid by the assessed on March 31, 1955, actually represented. Then on January 16, 1957, the assessed received a sum of Rs. 72,244 from the association. This would mean that whatever was paid by the assessed to the association either as share capital or otherwise was paid back to the assessed. The payment of Rs. 10,000 by the assessed to the association on January 17, 1957, cannot obviously relate to the purpose for which the association was formed. A sum of Rs. 5,256 was adjusted on March 30, 1957, towards expenses. The nature of these expenses is not indicated. Whether this amount was deducted from the contribution of the assessed towards the share capital of the association or from the other amounts paid by it is thereforee not clear.
12. Under these circumstances, there is no material to support the contentions of the assessed either that the amount of Rs. 74,500 represented the price of the stock-in-trade of the assessed or that it represented the expenditure incurred for preserving the assessed's business. It cannot thereforee, be said that this amount of Rs. 5,256 was in the nature of revenue expenditure. The Tribunal was, thereforee, right in disallowing the assessed's claim in this regard. The answer to the first question referred to us is, thereforee, in the negative, i.e., against the assessed and in favor of the revenue.
13. The next question referred to us is in respect of the legal expenses of Rs. 550. This amount represented the expenses incurred by the assessed to defend a suit filed by Shri Shiv Saran Lal, a former managing director of the assessed-company. There is no dispute that this expenditure was in fact incurred by the assessed in connection with the suit filed by Shri Shiv Saran Lal. The assessed's claim was disallowed by the income-tax authorities as well as by the Tribunal on the ground that this suit arose out of the personal differences between Shri Shiv Saran Lal and the other directors of the assessed-company and that the assessed-company itself was not concerned with the outcome of this suit. From the statement of the case, it would appear that Shri Shiv Saran Lal had filed the suit against the assessed-company after he had ceased to be a director of the company. The suit was not filed against the directors of the company as such. The company was bound to defend the suit and we fail to see how the company (sic). It was clearly in the interest of the company to defend such a suit. The expenses incurred by the assessed-company in defending the suit are in the nature of revenue expenditure and the assessed is entitled to deduct the same in computing its income. The second question referred to us is, thereforee, answered in the negative, i.e., against the revenue and in favor of the assessed.
14. The subject-matter of the third question consists of two amounts, namely, (1) Rs. 825, and (2) Rs. 385, representing the expenditure incurred by the assessed-company in connection with the criminal complaint filed by the assessed-company against the former managing director, Shri Shiv Saran Lal. The claim for the allowance of this expenditure was also disallowed by the income-tax authorities as well as by the Tribunal on the ground that the criminal complaint had no connection with the carrying on of the business of the company and arose out of the personal ill-feelings between the former managing director and the present directors of the assessed-company. Annexure 'L' is the copy of the resolution of the board of directors of the assessed-company passed on February 2, 1956. From this resolution, it would appear that it was brought to the notice of the directors of the assessed-company that an amount of Rs. 5,000 had been withdrawn from the account of the assessed-company with the Punjab National Bank Ltd., Kanpur, on October 1, 1955, through the branch manager of the assessed-company at Kanpur and this amount was handed over to Shri Shiv Saran Lal on the same date. It would further appear that Shri Shiv Saran Lal did not deposit this amount at the head office of the assessed-company nor did he utilise this amount for the business of the company. The directors of the assessed-company had called upon Shri Shiv Saran Lal to deposit this amount but the latter had failed to do so. Annexure 'M' is the copy of a resolution of the board of directors of the assessed-company passed on August 6, 1966. This resolution noted that Shri Shiv Saran Lal had failed to deposit the amount of Rs. 5,000 and, thereforee, the managing director was authorised to file a criminal complaint as well as a civil suit against Shri Shiv Saran Lal in respect of this amount. Annexure 'N' is the copy of the complaint filed against Shri Shiv Saran Lal under Section 409, Indian Penal Code. Neither the income-tax authorities nor the Tribunal have recorded any finding that the facts stated in any of the above documents were not true. These documents, thereforee, show that Shri Shiv Saran Lal had misappropriated the sum of Rs. 5,000, belonging to the assessed-company. As Shri Shiv Saran Lal had failed to return this amount to the assessed-company in spite of being called upon to do so, the assessed-company had to file a criminal complaint against him. Under these circumstances, it cannot be said that the filing of the criminal complaint against Shri Shiv Saran Lal was not connected with the business of the assessed-company. There is no dispute that the expenditure claimed by the assessed-company was in fact incurred in prosecuting this complaint. In Commissioner of Income-tax v. Dhanrajgirji Raja Narasingirji, : 91ITR544(SC) , the Supreme Court held on similar facts that:
'It is not correct to say that expenditure incurred in connection with a criminal case cannot be deducted as business expenditure under Section 10(2)(xv): that provision does not make any distinction between civil litigation and criminal litigation. It makes no difference whether the proceedings are civil or criminal. All that the court has to see are whether the transaction in respect of which proceedings are taken arose out of and was incidental to the assessed's business and whether the expenditure was bona fide incurred wholly and exclusively for the purpose of the business.'
15. The assessed was, thereforee, entitled to claim deduction of the expenditure incurred by it in prosecuting the criminal complaint filed against Shri Shiv Saran Lal. The third question is, thereforee, answered in the affirmative, i.e., in favor of the assessed and against the revenue. There shall be no order as to costs.