1. The question that stands referred to us is:
'Whether in respect of the assessment years 1954-55 and 1955-56, the expenses of payment to the auditor and/or advocate of Rs. 4,000 and Rs. 3,050 respectively can be claimed as a proper charge on the business income filed under S. 10(2) of the Act or on general principles of Commercial Expediency.'
(2) The assessee is a private limited company which carried on transport business. The relevant accounting years ended on the 31st of March 1954 and 1955. There were 13 shareholders in the company Towards the end of 1953, certain disputes arose which, resulted in an application being made under S. 153C of the Companies Act, 1913 and in the appointment by the High Court of an Interim Administrator. The High Court also appointed M/s. Suri and Co., a firm of Chartered Accountants, to investigate into the affairs of the company for the period form 1-4-1952 to 30-6-1953. In the course of these proceedings, the High Court directed the payment of Rs. 3,000 to the auditors towards their remuneration, and this sum was claimed as business expenditure in the assessment year 1954-55. In addition, a sum of Rs. 1,000 comprising payments to an advocate for taking inventory and to a Commissioner appointed by the Court was also claimed a deductible allowance. In the succeeding year relevant to the assessment year 1955-56, certain fees were paid to the Commissioner appointed by the Court for presiding over the general body meetings held on 9-9-1954 and 9-2-56. These came to Rs. 2,250. A sum of Rs. 800 was also paid to the Advocate of the assessee company who represented the company in all the proceedings connected with the application under the Companies Act. The total of Rupees 3,050 was claimed as allowance under S. 10(2).
(3) The view taken by the Income-tax Officer was that the amounts expended in the above fashion during the two years did not represent an expenditure laid out wholly and exclusively for the purpose of the business. The circumstances were not incidental to he business at all and they arose owing to certain special features. He accordingly disallowed the claim. On appeal, the Appellate Asst. Commissioner upheld this order. He was of the view that the dispute between two groups of shareholders arising out of differences between them did not envisage the possible liquidation of the company. The expenditure was really incurred in a dispute over the internal management of the company; that would not justify the allowance under the appropriate provision of the law. The further appeal to the Tribunal and an application by the assessee under section 66(1) failed. This court directed, under S. 66(2) of the Act, the reference to this court of the question set out earlier.
(4) The petitioner filed in the High Court was under S. 153-C of the Indian Companies Act. This section enables any member if a Company who complains that the affairs of the company have been conducted in a manner prejudicial to he interests of the company or in a manner oppressive to some part of the members to make an application to the court for an order under the section. It is not in dispute that two of the shareholders of the company made such an application, and they alleged that the liabilities of the company amounted to nearly Rupees 200000 which the directors did not appear to be anxious to discharge, that large sum of money which had to be remitted into the Bank were being wrongfully appropriated by the cashier, and that even tax arrears were not being arranged to be met. Special meetings, called for at the instance of the petitioners-share-holders, did not result in any solution. The petitioners did not agree to the proposal of the directors in their personal capacity, and they further alleged that this proposal was detrimental to the interests of the company and, for these reasons, they sought the appointment of an Administrator to take charge of the affairs of the company.
The alleged finally that, though there were sufficient grounds which disclosed that it would be equitably that he company should be wound up, the petitioners were interested in seeing that it was not so wound up and that it was properly administered under the directions of the court. It is not in dispute that the court directed the appointment of an Interim Administrator. In the course of those proceedings, a further order was made by the court appointing an Advocate Commissioner to hold a general body meeting of the body of the share holders and to conduct an election of the directors. It is these proceedings that have resulted in the items of expenses which are in dispute in the present reference.
(5) It is the short contention of Mr. T. Raghavan, on behalf of the assessee, that, since these expenses have been incurred as a result of the orders of the court and further for the purpose of carrying on the business of the company, they are all allowable. It is claimed that if the petitioners moving the court under Section 153C have to establish such grounds as would justify liquidation of the company and if the company resists such a petition, it is really fighting for its existence, and that expenditure incurred for that purpose cannot be otherwise than one expended wholly and exclusively for the purpose of the business. in R. E. S. Corporation Ltd., v. Nageswara Rao, : 2SCR1066 the scope of an application under S. 153C was considered. Their Lordships pointed out that S. 153C in its amended form (amended by Act of 1951) requires that the court should be satisfied that the facts would justify making an order to wind up the company. But if the winding up unfairly and materially prejudices the interest of the company, the court could make an order for its management. Unless facts exist which would make out a case for winding up, no order could be made under S. 153C.
What all can be said with regard to the proceedings in the High Court is that the High Court is that he High Court found that an interim Administrator should be appointed pending final examination of the question. In its order dated 28-5-1953, this court observed that, at hi stage, there is nothing to go upon except the allegations and counter allegations and it thereafter proceeded to appoint an Administrator. The final stage was reached on the 7th February 1955 when this court directed the interim Administrator to hand over the administration to the Board of Directors who had been elected at the general body meeting conducted under the orders of this court. Presumably the petition before this court came to an end on that day. Learned counsel has referred to Morgan (Inspector of Taxes) v. Tate and Lyle Ltd., (1954) 26 IT 195. That was a case where the company engaged to sugar refining incurred expense in a propaganda campaign to oppose the threatened nationalisation of the industry. The question was whether the expenditure was money wholly and exclusively laid out for the purpose of the company's trade.
The House of Lords took the view that, since the object of the expenditure was to preserve the assets of the company from seizure and to enable it to carry on and earn profits, the expenditure could reasonable beheld o the wholly and exclusively laid out for the purpose of the business. Learned counsel for the assessee purports to draw an analogy and claims that the application under S. 153C could have successfully put an end to the life of the company and where the company was opposing such petition it was seeking to preserve its existence.
(6) On the other hand, it is the contention of the department that, in a proceeding under S. 153C of the Act, an order for winding up is not one that can be passed at all. Sub-section (4) of S. 153C which enables the court to make such order in relation thereto as it thinks fit with a view to bringing to an end the matters complained of, really provides that an order for winding up shall not be made. What is required to be proved by the applicant, under S. 153 C is that a set of circumstances which would justify the making of a winding up order exist. But the application is not one for winding up. The court is only called upon to take note of the court is only called upon to take note of the existing circumstances and to resolve the difficulties complained of and to make such order as may be necessary, short of winding up of affairs of the company. We are in agreement with this argument of Mr. Balasubramaniam, learned counsel for the department. What, in effect, was complained of in the application under S. 153C was that the majority of the shareholders of the company purported to direct the affairs of the company disregard of the interests of the minority of the share-holders and that was how the application was presented to this court and dealt with. There was hardly any justification for the company feeling that its very existence was threatened by this application.
The court could not, when all the parties to the application did not require it, make an order of winding up the affairs of the company. It is, therefore, to much to say that the company could have had any serious apprehension about its continued existence as a result of the application. The present case does not, therefore, form a parallel to that in (1954) 26 IT 195 and the expenditure cannot be regarded as having been expended wholly and exclusively for the purpose of the business on the basis of the principle of that decision.
(7) It seems to us however that certain items of expenditure are nevertheless allowable as normal business expenditure. The audit of the company directed by the court, though it arose in the context of the application under S. 153C of the Act, was nevertheless one which could have been undertaken by the company itself in the normal course. Equally, it seems to us that the expenditure incurred in connection with the general body meetings at which a new Board of Directors was elected would be of that description. Though these were not ordinary or regular meetings, the meetings were conducted for a purpose vital to the carrying on the business of the company. The audit expenses and the remuneration paid to the Commissioner for conducting these meetings would thus appear to be within the scope of allowance either under S. 10(2)(xv) of the Act or on general principles of commercial requirements.
(8) We are not, however, satisfied that the remuneration paid to the Interim Administrator or to the Advocate engaged by the company for resisting the application under S. 153C of the Act could conceivably come within the scope of the allowance. Nothing has been stated before us which inclines us to accept the case of the assessee in this regard.
(9) The decision of this court in Selvarajulu Chetty and Co., v. Commr., of Income-tax 1964 1 ITJ 769: AIR 1965 Mad 18 to which one of us was a party has been cited. That was a case where a party has been cited. That was a case where a family as carrying on a business. There was a suit between the members of the family seeking a declaration of exclusive title of one of them to he business. The question was whether the legal expenses incurred by the firm in defending the suit would be an allowable deduction under S. 10(2)(xv). It was held that it was not. Though this decision is not directly applicable, the circumstances in the present case bear some analogy to the facts of that decision. To the extent to which the legal expenses and charges for the Interim Administration were incurred by the company in the present case, they appear to fall in the ratio of the above decision and would, therefore, be not allowable items of expenditure.
(10) We answer the question partly in favour of the assessee on the lines indicated above. In the circumstances, there will be no order as to costs.
(11) Answer accordingly.