Dipak Kumar Sen, J.
1. The facts leading up to the present reference as found or admitted or as are matter of record, are shortly, as follows:
M/s. Albert David Ltd., the assessee, was promoted in 1938 by one named Albert Judah Judah as a private limited company. In 1948, the assessee was converted into a public limited company. Judah and his wife owned more than 90 per cent. of the ordinary shares of the assessee till September, 1954. Judah was also the largest holder of the preference shares of the assessee and was appointed its managing director for life under its articles ratified by an agreement between him and the assessee. Judah inducted Dr. S. L. Mukherjee, a chemist, in the business of the assessee. Dr. Mukherjee was made a director of the assessee in July, 1940, when Judah made a gift of 1,000 ordinary shares of the assessee to Dr. Mukherjee.
2. Subsequently, by the middle of 1954, the relationship between Judah and Dr. Mukherjee became strained and disputes arose between them. Dr. Mukherjee ultimately contended that Judah had ipso facto vacated his office as director of the assessee. A number of important resolutions were passed at a meeting of the board of directors of the assessee held on the 10th September, 1954, including one by which Judah was deprived of the power of operating the assessee's bank accounts. A lien in favour of the assessee on all the shares registered in the name of Judah for a sum of over Rs. 4 lakhs alleged to be debts due by Judah to the assessee was declared. Judah and his group were forcibly ejected from the office and the factory of the assessee.
3. Thereupon, Judah filed a suit being Suit No. 3112 of 1954 against Dr. Mukherjee and his group claiming, inter alia, a declaration that he had a right to act as the managing director of the assessee, declaration that the issue and allotment of new shares by the assessee was invalid and various other reliefs. Subsequently, a representative suit, being Suit No. 3117 of 1954, was filed by Mrs. Judah and another shareholder against Dr. Mukherjee and his group. Certain interlocutory proceedings were heard in the said suits and in the latter suit a receiver was appointed. Against this order an appeal being Appeal No. 56 of 1956 was preferred. An injunction was also issued on an application of Judah in the first suit restraining the sale of the shares of the assessee registered in the name of Judah.
4. Ultimately, these two suits were withdrawn and on 24th January, 1956, the receiver made over possession of the assessee-company to Dr. Mukherjee pursuant to an order passed in Appeal No. 56 of 1956. On the same date, shares registered in the name of Judah were purported to be sold by the assessee to one Ramapada Gupta for a sum of Rs. 2,67,520 against an alleged payment of Rs. 1,80,000 by Ramapada Gupta on account of the price thereof. The balance amount was agreed to be paid after delivery of the share certificates. The name of Ramapada Gupta was entered in the share register of the assessee as the owner of the said shares.
5. Judah thereupon instituted another suit being Suit No. 487 of 1956 on the 14th February, 1956, claiming, inter alia, declarations that the plaintiff was the holder of a number of ordinary shares of the assessee and as such entitled to the rights and privileges attached thereto, that the transfer of the said shares in the name of Ramapada Gupta was illegal, void and inoperative, an injunction restraining Ramapada Gupta from exercising any right or privilege attached to the said shares, rectification of the share register and other reliefs. The assessee and Ramapada Gupta were impleaded as defendants in this suit. The parties went to trial on the following issues raised and settled in the said suit.
'1. Is this suit barred by Order 2, Rule 2(3) and/or Order 33, Rule 2(3) of the CPC?
2. Were any annual general meetings of the company held on January 6, 1955? Were the elections of directors in the said meetings invalid as alleged in the plaint ?
3. (a) Were there no directors or sufficient directors of the company as alleged in para. 14 of the plaint ?
(b) Did five members of the company convene an extraordinary general meeting as alleged in the said para ; if so, was it duly convened ?
(c) Was there any extraordinary general meeting of the company as alleged in the said para If so, was a new board of directors elected in the said meeting as alleged in the said para Was such election lawful ?
4. (a) Was there any money due by the plaintiff to the defendant-company for debts or liabilities If so, how much ?
(b) How much of the said amount is covered by the notice dated September 24, 1954 ?
(c) For what sum the company had a lien on the plaintiff's shares ?
(d) Was the defendant-company entitled to sell the shares in enforcement of such lien ?
5. Was the sale of 26,752 ordinary shares of the company, belonging to the plaintiff, to defendant No. 1 bad, illegal or void as alleged in para. 21 of the plaint ?
6. Did defendant No. 1 connive and/or otherwise conspire with Dr. Mukherjee and Dr. Neogy in effecting the sale of the said shares to defendant No. 1 and in entering the name of defendant No. 1 in the share register of the company ?
7. Is the plaintiff entitled to rectification of the share register ?
8. Did the plaintiff continue to be the owner of the shares in suit after the date of the alleged sale ?
9. Did Dr. S. L. Mukherjee or Dr. Neogy vacate their office of directors or cease to be directors of the company as alleged in para. 9 read with paras. 7 and 8 of the plaint ?
10. Is the suit bad for non-joinder of Dr. S. L. Mukherjee and Dr. Neogy ?
11. To what relief or reliefs, if any, is the plaintiff entitled ?'
6. Judah succeeded in the said suit. It was, inter alia, held that on the 10th September, 1954, Judah was indebted to the assessee-company in a sum of only Rs. 57,797. It was further held that at the material time Dr. Mukherjee and his group had vacated their offices as directors and that the resolution determining the liability of Judah to the assessee at over Rs. 4 lakhs passed on 10th September, 1954, and those passed on 23rd September, 1954, to enforce such lien were not warranted in law and were illegal. It was also held that the assessee sought to sell the shares for the recovery of the alleged debts which were far in excess of what was actually due by Judah and to that extent the demand for payment of the alleged debts and the sale pursuant thereto were wrongful. It was found that the motive of Dr. Mukherjee and his group in selling Judah's shares was to deprive Judah of his voting rights so that he may not have control over the assessee.
7. In its income-tax assessments for the assessment years 1958-59, 1959-60 and 1962-63 for which the relevant previous years ended on the 31st October of the calendar years 1957, 1958 and 1961, respectively, the assessee claimed deduction of expenses incurred in the said litigations being Rs. 2,60,619, Rs. 1,09,271 and Rs. 6,25,000, the last relating only to Suit No. 487 of 1956.
8. In the assessment year 1958-59, the ITO found that Rs. 2,60,619 represented legal expenses in connection with Suit No. 487 of 1956. This suit, he held, was instituted on account of disputes between two groups of directors of the assessee and as such was an expenditure on account of the said directors and could not be said to have been incurred for carrying on the business of the assessee or incidental thereto. Accordingly, he disallowed the same.
9. In the assessment year 1959-60 the ITO found that the sum of Rs. 1,09,271, deduction of which was claimed by the assessee as law charges incurred, also related to the said Suit No. 487 of 1956. The ITO again found that this suit was the result of a litigation between two factions and the directors of the assessee and had been filed by Judah against the then directors of the assessee alleging that they had collusively maneuvered to oust him from his position in the assessee and had no direct or indirect relation with the business of the assessee. As such the expenditure could by no stretch of imagination be claimed to be expenditure for the furtherance of the business interests of the assessee. The claim for deduction of the said amount was accordingly disallowed.
10. In the assessment year 1962-63, the sum of Rs. 6,25,000 shown as payable to the solicitor in connection with the said suit and deduction thereof was claimed. For the same reasons as in the earlier assessment years the claim was disallowed.
11. Being aggrieved by the said disallowances the assessee preferred appeals. Reading the judgment of the High Court in Suit No. 487 of 1956, the AAC found that the said suit was not one which arose in the course of the assessee's trading activities. There were disputes between the directors of the assessee and one of the directors was ousted. The shares of the ousted director were sold by the others on the allegation that the former was indebted to the assessee. The director who was ousted instituted the suits. The AAC held that the expenditure claimed as deductible in the assessment years concerned had been incurred by the ousted director, Judah, and his wife in the course of regaining possession of the assessee. The expenditure was not incurred for or in connection with the business activities of the assessee and was directly connected with the disputes as to the control of the assessee by different groups of shareholders and directors. Accordingly, the disallowances in each of the said assessment years were confirmed.
12. The assessee preferred further appeals before the Income-tax Appellate Tribunal. The judgment in the said Suit No. 487 of 1956 was again cited and relied on by both the parties before the Tribunal. It was contended on behalf of the assessee that apart from expenses which were relatable to the proceedings instituted by the wife of Judah, other expenses incurred were directly referable to the business activities of the assessee and had been incurred to safeguard the assessee's business interests so that the assessee could carry on the same effectively. It was contended on behalf of the revenue on the other hand that the said claims for deduction were not tenable. It was submitted that the High Court had found that the litigation was nothing but a fight to establish the title of the ousted director to his shares in the assessee.
13. The Tribunal, after considering the respective submissions of the parties and various decisions cited before it, held that it could not be inferred nor established that the expenditure in question were incurred by the assessee bona fide and exclusively for its business. The Tribunal held further that the immediate and ultimate reason for incurring such expenditure was the litigation between the rival groups which did not jeopardise the business of the assessee. The quarrel between the two groups of directors did not interfere nor threatened to interfere with the business of the assessee. The Tribunal accordingly upheld the decision of the authorities below and dismissed the appeals.
14. On an application of the assessee under Section 256(2) of the I.T. Act, 1961, this court directed the Tribunal to draw up a consolidated statement of case and refer the following questions of law for the opinion of this court:
Assessment year 1958-59
'1. Whether, on the facts and in the circumstances of the case, the findings of the Tribunal that litigation expenses of Rs. 2,60,619 incurred by the assessee-company in Suit No. 87 of 1955 were not incurred bona fide and solely and exclusively for its business were based on any evidence and material and not perverse in law ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in disallowing the litigation expenses of Rs. 2,60,619 incurred by the assessee-company during the previous year relevant to assessment year 1958-59 on the ground that the same were not connected with business carried on during the said previous year and were not incurred for the purposes of earning the income of that previous year ?' Assessment year 1959-60
'1. Whether, on the facts and in the circumstances of the case, a sum of Rs. 1,09,271 incurred by the assessee-company by way of litigation charges in defending Suit No. 487 of 1956, was a business expenditure allowable as a deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922 ?
2. Whether, on the facts and in the circumstances of the case, the findings of the Tribunal that litigation expenses of Rs. 1,09,271 incurred by the assessee-company in Suit No. 487 of 1956, were not incurred bona fide and solely and exclusively for its business were based on any evidence and material and not perverse in law ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in disallowing the litigation expenses of Rs. 1,09,271 incurred by the assessee-company during the previous year relevant to the assessment year 1959-60 on the ground that the same were not connected with the business carried on during the said previous year and were not incurred for the purpose of earning the income of that previous year ?'
Assessment year 1962-63
'1. Whether, on the facts and in the circumstances of the case, the findings of the Tribunal that the expenses of Rs. 5,84,000 was not incurred bona fide and solely and exclusively for its business were based on any evidence and material and not perverse in law ?
2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 46,667 only paid by the assessee-company to Mr. A. J. Judah was an allowable expenditure under Section 37 of the Income-tax Act, 1961 ?'
At the hearing learned counsel for the assessee confined his submissions only to the expenditure incurred in Suit No. 487 of 1956. He, inter alia, contended that in this suit the denial by the ousted director, Judah, of his indebtedness to the assessee was specific and absolute. One of the issues tried and determined in the suit was whether any money was due by Judah to the assessee by way of debts or liabilities and if so, how much. As a juristic person carrying on business, the assessee was bound to resist this suit and to establish that the plaintiff was indebted to it. In fact it was held in the said suit that Judah was liable to the plaintiff for a sum of over Rs. 57,000. This part of the dispute, learned counsel submitted, had no connection with the personal quarrel between the directors. On account of such allegation in the plaint, the assessee had no other alternative but to defend the suit for protection of its assets and rights. The disputes between the directors might have precipitated the suit but what was in fact decided in the suit was the quantum and the extent of indebtedness of Judah to the assessee. These facts were before the Tribunal and no reasonable person could come to the conclusion that so far as the expenses in Suit No. 487 of 1956 were concerned, they were referable only to the personal quarrels between the two groups of directors and had no connection with the business activities or business assets of the assessee.
It was contended, on the other hand, on behalf of the revenue that both the members of the Tribunal had found as a fact that the expenditure in question had been incurred not for the purposes of the business activities of the assessee, but was primarily the result of domestic quarrels between the directors. On the facts on record including those found in the judgment in Suit No. 487 of 1956, the conclusion arrived at by the Tribunal could not be said to be unreasonable or perverse. Even if two views were possible on facts there was no reason why the view taken by the Tribunal should be struck down in a reference. It was found in the said suit that the alleged indebtedness of Judah to the assessee was determined not honestly but with the object of taking over or utilising the shares held by Judah in the said company. The persons in control at the material time were anxious to cook up a liability so that the shares of Judah could be transferred ; out of an alleged claim of over Rs. 4,00,000, only a paltry sum of over Rs. 57,000 was ultimately found to be due. It was found not only by the revenue authorities but also by this court in the said suit that an important motive of the persons in control of the assessee was to oust Judah from the assessee and deprive him of his voting rights.
The suit was provoked by the setting up of a fantastic claim on alleged debts which could not be sustained. The sale of the shares were effected on the basis of such claim and Judah had no other alternative but to file the suit and challenge the sale. In the course of such challenge Judah might have overstated his case and denied all liabilities. But even then it could not be said that the expenses incurred in the said litigation were wholly or exclusively for the purpose of the assessee's business.
In support of the respective contentions of the parties various decisions were cited at the Bar. The decisions cited on behalf of the assessee are considered hereafter in their chronological order.
(a) CIT v. Maharajadhiraja Sir Kameshwar Singh of Darbanga  10 ITR 214 (PC). In this case, certain shareholders of a company instituted a suit against the assessee's father who had lent money to the company in the course of his business alleging breach of agreement by the creditor in failing to furnish necessary finance causing loss to the company. The creditor filed a suit for recovery of the money lent. During the pendency of the suits the creditor died and the assessee was substituted in his place. The suit by the shareholders was ultimately dismissed. The assessee claimed deduction of the expenses incurred in defending the suit in the computation of his income from money-lending business. On these facts, the Privy Council held that the suit was instituted against the creditor primarily in his capacity as a money-lender and the expenditure incurred in defending a false claim was a necessary part of his business of money-lending and deduction was allowable.
(b) CIT v. H. Hirjee : 23ITR427(SC) . In this case, the assessee, the selling agent of a company, was prosecuted on a charge of selling goods at prices in contravention of the Hoarding and Profiteering Ordinance, 1943, and a part of its stocks was seized and taken away. The prosecution terminated in an acquittal of the assessee who claimed deduction of expenses incurred in defending the case in its income-tax assessment. The Tribunal, as also this court on a reference, upheld the claim of the assessee. On further appeal the Supreme Court, however, held that the decision of the Tribunal was vitiated by its refusal to consider the possibility proceedings terminating in the conviction and imprisonment of the assessee observing that the final outcome of the proceedings would not affect the question.
(c) Premier Construction Co. Ltd. v. CIT : 62ITR176(Bom) . In this case, a shareholder who was shut out from raising certain queries at the annual general meeting of the assessee, a public limited company, filed a suit against the assessee and its board claiming, inter alia, a declaration that the ruling given by the president at the general meeting was illegal and invalid and that the subsequent resolutions passed at the said meeting were also invalid. A consequential relief of injunction restraining the assessee and its board from giving effect to or acting in accordance with the said resolutions were also claimed. The court granted only a declaration that the ruling given by the president at the annual general meeting was illegal and the costs of the suit. The appeal of the assessee and its board against the said decree was dismissed with costs. The costs of the assessee in the said litigation was claimed as a deduction in the relevant assessment year. On a reference, the Bombay High Court held on the facts that the expenses incurred by the assessee in defending the suit in the trial court were allowable under Section 10(2) of the Indian I.T. Act, 1922, as the reliefs claimed by the plaintiff if granted would have affected the carrying on of the business of the company. It was held, however, that the appeal was a matter which concerned only the shareholder and the board of the assessee, namely, whether a particular ruling given by the president of the board was legal or not. The expenses of this appeal, therefore, were held as not having been incurred for the carrying on of the business of the assessee. The Bombay High Court observed as follows (p. 181):
'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.' (d) Sree Meenakshi Mills Ltd. v. CIT : 63ITR207(SC) . Here the assessee carried on the business of cotton spinning and weaving. An order passed by the Textile Commissioner under the Cloth and Yarn (Control) Order, 1945, whereby the Commissioner seized some yarn delivered by the assessee to weavers outside its factory and directed the assessee to confine delivery of its yarn to the person as specified by the Commissioner was challenged by the assessee in the Madras High Court in an application under Section 45 of the Specific Relief Act praying for an order directing the Commissioner to desist from seizing the yarn supplied and to restore that already seized. The application was dismissed by the trial court. An appeal to the High Court was unsuccessful and a further appeal to the Privy Council was also dismissed with costs which had to be paid to the Government. The expenditure incurred by the assessee was claimed to be deductible as being wholly and exclusively laid out for the purpose of its business. This claim was rejected by the revenue authorities, the Tribunal and by the High Court on a reference. On a further appeal to the Supreme Court, it was, however, held that the object of the litigation initiated by the assessee was to secure a declaration that the order of the Textile Commissioner restricting the right of the assessee to carry on its business was unauthorised and to prevent enforcement of such order so that its business could be carried on without interference. Expenditure incurred in that behalf would, therefore, be expenditure laid out wholly and exclusively for the purpose of the business of the assessee. The Supreme Court in its judgment observed as follows (p. 213):
'It may be granted that the company was, in starting the proceeding, ill-advised. However wrong-headed, ill-advised, unduly optimistic or overconfident in his conviction the assessee may appear in the light of the ultimate decision, expenditure in starting and prosecuting the proceeding may not be denied admission as a permissible deduction in computing the taxable income, merely because the proceeding has failed, if otherwise the expenditure is laid out for the purpose of the business wholly and exclusively, i. e., reasonably and honestly incurred to promote the interest of the business. Persistence of the assessee in launching the proceeding and carrying it from court to court and incurring expenditure for that purpose again cannot be a ground for disallowing the claim......
Expenditure incurred to resist in a civil proceeding the enforcement of a measure--legislative or executive--which imposes 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, in our judgment, under Section 10(2)(xv) as a permissible deduction in the computation of taxable income.'
(e) CIT v. Shiwalik Talkies Ltd. . Here, during the pendency of litigation amongst the directors of the assessee, a private limited company, some of its shareholders filed an application in the High Court under Section 153C of the Indian Companies Act, 1913, questioning the appointment of some of the directors. This application was ultimately compromised. The assessee claimed a deduction of a sum of Rs. 531 being expenditure incurred in the said application. On a reference, the Punjab High Court held that the expenditure cannot be considered to be an expenditure laid out or expended wholly or exclusively for the purpose of the business of the company.
(f) Dalmia Jain and Co. Ltd. v. CIT : 1988CriLJ116 . In this case, in respect of a quarry, a suit for specific performance of an agreement to grant a lease and in the alternative for damages was filed by one Kalyanpur Lime Co. against the State of Bihar and the assessee as its agent. The assessee was in fact working the quarry in the expectation of a lease in its favour. The suit was tried and dismissed. An appeal to the High Court was also dismissed but on a further appeal to the Supreme Court the suit was decreed against both the defendants for only damages. The assessee claimed deduction of its expenses incurred in such litigation as having been incurred for the purpose of protecting its business. The revenue authorities rejected such claim holding that such expenditure had been incurred for acquiring a new asset. The Tribunal accepted the contentions of the assessee but on a reference the High Court upheld the contention of the revenue. On a further appeal to the Supreme Court, it was held that as the assessee did not initiate the litigation and as in the course of its business it was working the said quarry, it could be reasonably inferred that the assessee resisted the suit to protect its business as was found by the Tribunal and as such entitled to claim deduction of such expenditure.
(g) CIT v. Birla Cotton Spg. and Wvg. Mills Ltd. : 82ITR166(SC) . In this case the assessee, a public limited company, spent diverse sums of money, inter alia, in conducting proceedings before the Investigation Commission appointed to investigate the affairs of the assessee in an earlier assessment year. Expenses were also incurred in challenging the vires of the Taxation of Income (Investigation Commission) Act, 1947. The question arose whether such expenses should be deducted in computing the business profits of the assessee. The Supreme Court observed, inter alia, as follows: (pp. 171, 172):
'The essential test which has to be applied is whether the expenses were incurred for the preservation and protection of the assessee's business from any such process or proceedings which might have resulted in the reduction of its income and profits and whether the same were actually and honestly incurred......
To preserve the business from an investigation which, according to the assessee, was unlawful, the assessee was justified in taking proper steps and spending monies therefor. Such an expenditure was no doubt not for earning profits but was aimed at preservation of business from the inroads of a piece of legislation which, it was maintained, was unconstitutional and was so held by this court later in certain decisions that have already been mentioned. The expenditure which was incurred by the assessee in opposing a coercive governmental action with the object of saving taxation and safeguarding business was justified by commercial expediency and was, therefore, allowable under Section 10(2)(xv) of the Act.'
The following cases were cited and relied on by the revenue.
(a) Mask & Co. v. CIT : 11ITR454(Mad) . In this case, a decree for Rs. 5,000 with costs was passed in a suit for damages for breach of an undertaking given by the assessee, a firm, to co-traders to sell goods at certain specified rates. The assessee claimed deduction of the amount paid under the decree as business expenditure under Section 10(2)(xii) of the Indian I.T. Act, 1922. On a reference, the Madras High Court held that the assessee's action in disregarding the undertaking was palpably dishonest and damages consequentially awarded was not incidental to the assessee's trade and did not constitute a deductible expenditure under the said section:
(b) Transport Company Ltd. v. CIT : 31ITR259(Mad) . This decision was cited for the following observation in the judgment of the Madras High Court (p. 266) :
'Whether the assessee figured as a plaintiff or as a defendant is immaterial. Equally immaterial, in normal circumstances, is the ultimate result of the suit. What was the real nature of the claim of the assessee in the suit is the deciding factor in considering whether the expenses incurred in that suit were of a revenue or capital nature.' (c) A. V. Thomas and Co. Ltd. v. CIT : 48ITR67(SC) . In this case, the assessee, a company, had made large payments to another private limited company with the intention of acquiring its shares. The Supreme Court held that as the asseessee was neither a banker nor a money-lender such advances could not be said to be incidental to its trading activities and could not be either allowed as business expenditure or written off as a bad debt.
(d) Swami Motor Transports Ltd. v. CIT : 60ITR234(Mad) . In this case, on an application by two shareholders of the assessee, a private limited company, under Section 153C of the Indian Companies Act, 1913, alleging mismanagement, the High Court appointed an interim administrator and also a firm of chartered accountants to investigate the affairs of the assessee. The assessee incurred expenditure respectively of Rs. 3,000 as auditors' remuneration, Rs. 1,000 as fees of an advocate appointed to take inventory, Rs. 2,250 as remuneration of the Commissioner for presiding over two general meetings, Rs. 800 as fees of the advocate appearing for the assessee in the court proceedings. The assessee claimed deduction of the aforesaid amounts as allowable expenditure. On a reference the Madras High Court held that the expenses incurred for the audit and for the general meetings, though directed by the court, could be held to form part of the normal activities of the assessee and necessary for the carrying on of its business and as such could be deducted under Section 10(2xxii) of the Indian I.T. Act, 1922 and also on general principles of commercial expediency. But the remuneration paid to the interim administrator or to the advocate engaged by the company for resisting the proceedings in court did not come within the scope of the said section. By the said application alleging oppression by the majority of the shareholders neither the existence of the assessee was threatened nor was its business otherwise affected and as such the deduction of the said expenses could not be allowed.
(e) Ishwari Khetan Sugar Mills (P.) Ltd. v. CIT : 86ITR635(All) . The facts in this case were that following disputes between the partners of two firms which were the managing agents of the assessee and another company a number of proceedings were instituted. The assessee was impleaded as a defendant in a suit and on an application in the suit an interim receiver was appointed over it. Appeals were filed against the order appointing the receiver both by the assessee and also by the person managing the assessee. Expenses were incurred and the assessee claimed deduction of the same under Section 10(2)(xv) of the Indian I.T. Act, 1922. On a reference, the Allahabad High Court held that it was not found that the litigation hampered the assessee from carrying on its business or that there was any serious threat to the working or management of the assessee. Expenditure to be deductible had to be for or by way of business expediency, either to earn profit or for protecting or safeguarding the business assets of the assessee. Expenses merely connected with a remote or ancillary activity was not so deductible.
(f) CIT v. Dhanrajgirji Raja Narasingirji : 91ITR544(SC) . In this case, disputes arose between the assessee, who was the promoter, the ex-managing agent and also the chairman of a public limited company and a financier to whom the managing agency and the selling agency of the company was assigned on condition that on the termination of either the selling or the managing agency the assessee would be entitled to resume the same. The financier wrongfully assigned the agencies to private companies and had the assessee removed from his office as chairman. The assessee instituted civil and criminal proceedings to establish and protect his rights. The prosecution ended in conviction. Further proceedings were settled whereby the financier gave up the managing agency and also affirmed the assessee's right to the selling agency. The question arose whether the amounts spent by the assessee in the litigation were allowable business expenditure under Section 10(2)(xv) of the Indian I.T. Act, 1922. On these facts, the Supreme Court held that Section 10(2)(xv) of the Act did not make any distinction between civil and criminal litigation and observed as follows (p. 549) :
'In our opinion, it makes no difference whether the proceedings are civil or criminal. All that the court has to see is whether the legal expenses were incurred by the assessee in his character as a trader, in other words, whether the transaction in respect of which proceedings are taken arose out of and was incidental to the assessee's business. Further, we have to see whether the expenditure in question was bona fide incurred wholly and exclusively for the purpose of business......It was for the assessee to decide how best to protect his own interest. It was the duty of the assessee to see that the prosecution was properly conducted. He was interested in successfully prosecuting the case. The fact that he did not leave the carriage of the case in the hands of the prosecuting agency of the Government is no ground for disallowing the expenditure. It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best.' (g) Swadeshi Cotton Mills Co. Ltd. v. CIT : 100ITR59(All) . Here certain directors, officers and employees of the assessee were prosecuted under the Essential Supplies (Temporary Powers) Act, for having stamped on the cloth produced at the assessee's mill, prices in contravention of a Textile Control Order in force. The assessee incurred expenditure in defending the accused persons and claimed deduction of the same under Section 10(2)(xv) of the Indian I.T. Act, 1922. On these facts, the Allahabad High Court held that the assessee was under no legal obligation to defend the accused persons but still could do so to protect its business reputation and goodwill or to save its stock from confiscation. There being no material on record to show that the motive or intention of the assessee was to save its own reputation and goodwill the deduction claimed could not be allowed. On a due consideration of the respective submissions of the parties before us and the decision cited, we are unable to hold as contended on behalf of the assessee that the finding of the Tribunal to the effect that the expenses incurred by the assessee in Suit No. 487 of 1956 was not wholly or exclusively for the purpose of the business of the assessee, but in aid of or in connection with the private and personal quarrels between the different groups to take over control of the assessee, is perverse or not based on any evidence or material. The Tribunal had the benefit of a well considered decision of this court in the said suit and both the parties strongly relied on the same. The AAC as also the Tribunal have considered the said decision and have proceeded on the basis of the findings recorded therein. Reading the said decision which sets out the background of the said litigation as also the method and manner in which the same was conducted, 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 spring board. 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. The assessee being a pawn in the hands of different persons at different times had very little say in the course of conduct either of the litigation or of its business. In resisting the said suit, the company went far beyond establishing its legitimate dues. It, in fact, fought a battle for Ramapada Gupta, the purchaser of the shares of Judah, who did not at all appear in the said proceedings. It does not appear to us that the business exigencies required the assessee to fight the suit on all issues and perfect the title of Ramapada Gupta in the disputed shares.
For the above reasons, this reference has to be decided in favour of the revenue. We answer the questions referred as follows :
Assessment year 1958-59.
Question No. 1 is answered in the affirmative and in favour of the revenue. Question No. 2 is also answered in the affirmative and in favour of the revenue. Assessment year 1959-60.
Question No. 1 is answered in the negative and in favour of the revenue. Questions Nos. 2 and 3 are both answered in the affirmative and in favour of the revenue. Assessment year 1962-63.
Question No. 1 is answered in the affirmative and in favour of therevenue. Question No. 2 is answered in the negative and in favour of therevenue. The reference is disposed of accordingly. There will be noorder as to costs.
C.K. Banerji, J.