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Commissioner of Income-tax Vs. Macneill and Berry Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 58 of 1976
Judge
Reported in[1986]158ITR385(Cal)
ActsIncome Tax Act, 1961 - Section 37
AppellantCommissioner of Income-tax
RespondentMacneill and Berry Ltd.
Appellant AdvocateA.N. Bhattacharjee, Adv.
Respondent AdvocateD. Pal and ;Seal, Advs.
Cases ReferredInland Revenue Commissioners v. Carron
Excerpt:
- .....lost its financial stability.6. the government of india purchased 5 lakhs ordinary shares of the debtor company at a nominal value of 1. this showed that the assessee had no prospect at all of the recovery of its debt from the company. to secure its debt, the assessee planned to arrange financial assistance to the company from the government of india to make the company a viable commercial unit. only in the event of the success of this plan, the assessee could be in a position to recover its debt. the assessee persuaded the government of india to enter into the aforesaid agreement, on the basis of which the assessee also purchased shares worth rs. 30 lakhs in lieu of its debt. the value of the shares was practically nothing at the time of the purchase and the only hope of the assessee.....
Judgment:

Dipak Kumar Sen, J.

1. Macneill & Berry Ltd., the assessee, was assessed to income-tax for the assessment year 1967-68, the corresponding accounting year ending on December 31, 1967. In the said assessment year, the assessee had incurred an expenditure of Rs. 49,367 on account of legal charges paid to its solicitors. Out of the said Rs. 49,367, the assessee initially claimed before the Income-tax Officer a deduction only of Rs. 2,250. But during the course of the assessment, the assessee by its letter dated July 31, 1971, also claimed a deduction of the balance Rs. 47,117.

2. The Income-tax Officer did not at all consider the claim for deduction of the balance of Rs. 47,117. In respect of Rs. 2,250, the Income-tax Officer held that as the amount had been paid for legal services in connection with the reconstruction and transfer of capital of Rivers SteamNavigation Co. Ltd. (hereinafter referred to as 'the company'), a debtor to the assessee and for which the assessee acted as an agent. He found that the assessee had been considering writing off the debt of the company with a view to acquire shares of the latter by converting the loan. He, accordingly, disallowed the deduction as claimed.

3. On an appeal by the assessee, it was found by the Appellate Assistant Commissioner that a substantial amount was outstanding as debt from the company on account of remuneration payable by the latter to the assessee and also for expenditure incurred by the assessee on behalf of the company in the usual course of business. He also found that the company had been incurring heavy losses over a number of years, that the prospect of recovery of outstanding debt was doubtful, that the assessee had approached the Government of India for financial assistance to the company and that ultimately the Government was persuaded to buy shares of the company under an agreement entered into amongst the Government, the assessee and a number of other companies. The assessee had incurred legal charges for the negotiations for legal opinion and for execution of the said agreement. The contention of the assessee was rejected on the basis of the above findings.

4. From the order of the Appellate Assistant Commissioner, the assessee preferred a further appeal to the Income-tax Appellate Tribunal.

5. The Tribunal found that Rs. 33,49,366 was due to the assessee from the company which had suffered heavy loss and lost its financial stability.

6. The Government of India purchased 5 lakhs ordinary shares of the debtor company at a nominal value of 1. This showed that the assessee had no prospect at all of the recovery of its debt from the company. To secure its debt, the assessee planned to arrange financial assistance to the company from the Government of India to make the company a viable commercial unit. Only in the event of the success of this plan, the assessee could be in a position to recover its debt. The assessee persuaded the Government of India to enter into the aforesaid agreement, on the basis of which the assessee also purchased shares worth Rs. 30 lakhs in lieu of its debt. The value of the shares was practically nothing at the time of the purchase and the only hope of the assessee for recovering something out of the shares was if the debtor company succeeded in regaining its financial stability. The assessee incurred the expenses in executing its plan for getting the assistance of the Government of India. It could not be said that the purpose of incurring the law charges was only to get shares, as the value thereof was practically nothing when acquired. The purpose was to recover as much as possible of the debt.

7. The Tribunal accepted the assessee's claim for deduction of legal charges of Rs. 49,367 and allowed the appeal.

8. On an application of the Revenue under Section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following question as a question of law arising out of its order for the opinion of this court:

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure of Rs. 47,367 was incurred wholly and exclusively for the purpose of the assessee's business and was an allowable one under Section 37 of the Income-tax Act, 1961 ?'

9. At the hearing, learned advocate for the Revenue submitted that the entire transaction between the assessee, its principal, the company and the Government was acquisition of shares of the company by way of an investment. Therefore, the expenses incurred must be held to be capital expenditure. By compounding the debt, the assessee obtained the shares. The expenditure was also incurred to persuade the Government of India to take over the shares of the company. The assessee took part in the said arrangement with the Government as an agent of the company and same cannot be treated as part of the normal business activity of an agent.

10. Learned advocate for the assessee contended on the other hand that it was the finding of the Tribunal that the legal expenses were incurred by the assessee to recover as much as possible of the debt and that the shares of the company were acquired only to secure the recovery of the debt of which there was no alternative prospect of recovery. He contended that the legal expenses were incurred not to bring into existence any asset or advantage of enduring nature but to secure a trading debt, the transaction was entered into in the usual course of the business of the assessee and the expenditure was incidental thereto.

11. In support of the respective contentions of the parties, the following decisions were cited at the Bar:

(a) Southern (H.M. Inspector of Taxes) v. Borax Consolidated Ltd. [1942] 10 ITR (Supp) 1 . In this case, a British company acquired land in America for the purpose of its business. Subsequently, an action was brought in the American court challenging the title of the assessee to the said land. In defending the action, the assessee incurred costs and claimed deduction of the same in computing its taxable profits. The Revenue contended that the amount was laid out not wholly and exclusively for the purpose of the assessee's trade but was spent in the interests of the assessee as the owner of a property. On these facts, it was held by a learned judge of the King's Bench Division that the legal expenses incurred by the assessee did not create any new asset at all but were expenses incurred inthe ordinary course to maintain its assets. The fact that the title to the property and not the business of the assessee was being defended in court did not make any difference.

(b) Sree Meenakshi Mills Ltd. v. CIT : [1967]63ITR207(SC) . This decision was cited for the observations made by the Supreme Court in construing Section 10(2)(xv) of the Indian Income-tax Act, 1922, as amended in 1939. The Supreme Court held that under the said section, expenditure, even though not directly related to the earning of income, may be admissible for deduction. In particular, expenditure on civil litigation commenced or carried on by an assessee for protecting its business was admissible as expenditure under the said section, provided other conditions were fulfilled, though the expenditure did not directly relate to the earning of income. Expenditure incurred for commercial expediency and indirectly to facilitate the carrying on of the business was also expenditure laid out wholly and exclusively for the purpose of trade.

(c) Dalmia Jain & Co. Ltd. v. CIT : 1988CriLJ116 . In this case, the Supreme Court reiterated the principles laid down earlier in Sree Meenakshi Mills Ltd. : [1967]63ITR207(SC) .

(d) CIT v. Ambika Mills Ltd. : [1976]104ITR669(Guj) . In this case, the assessee, a limited company, advanced money to another company in consideration of becoming the sole managing agent of the latter and for earning commission as managing agents. Thereafter, the assessee had to incur expenditure in litigation to prevent the previous managing agents of the managed company from interfering with the day to day affairs of the latter. Ultimately, the assessee claimed repayment of the amount lent to the managed company and initiated proceedings for winding up of the latter. On contest, the winding up proceeding was settled and the shareholders of the assessee agreed to buy up the majority shares in the managed company. The assessee claimed deduction of the entire amount spent in the legal proceedings as business expenditure. The Tribunal held that the amount was deductible as business expenditure as the proceedings had been resorted to in order to safeguard the outstanding loan advanced by the assessee. The decision of the Tribunal was upheld by a Division Bench of the Gujarat High Court. It was held by the High Court that the final outcome of the proceedings, namely, transfer of the shares of the debtor company to the shareholders of the assessee, would not affect the initial nature and purpose of the legal proceedings. It was held further that the assessee had to embark upon litigation initially to prevent interference by the erstwhile managing agents in the affairs of the debtor company and later to safeguard the loan advanced by the assessee.

(e) Amarchand Sobhachand v. CIT : [1971]82ITR591(SC) . In this case, the assessee, a partnership firm, had dealings and transactions for several years with another firm under which money became due from the firm to the assessee. Ultimately, the firm became insolvent. One of the partners of the debtor firm was the father of one of the partners of the assessee and also the father of two minors who had been admitted to the benefits of partnership of the assessee. The assessee wrote off the amount due as irrecoverable and claimed deduction thereof as bad debt. The claim was rejected by the Tribunal on the ground that the money advanced by the assessee to the debtor firm was not lent in the course of money-lending or any other business of the appellant. The Supreme Court ultimately disposed of the matter and the decision of the Tribunal was upheld on facts.

(f) Empire Jute Co. Ltd. CIT : [1980]124ITR1(SC) . In this case, the Supreme Court approved and quoted a decision of the House of Lords in Inland Revenue Commissioners v. Carron & Company [1968] 45 TC 18. In the case before the House of Lords, certain expenditure was incurred by the assessee for obtaining a supplementary charter altering its constitution with the object of putting its management on sound commercial footing and removing restrictions on its borrowing power. It was held by the House of Lords that the expenditure so incurred was in the nature of revenue expenditure since it was incurred for facilitating the day to day trading operations of the assessee and to enable the management and conduct of the business of the assessee to be carried on more efficiently.

12. From the facts as found it appears that the expenditure in dispute was incurred by the assessee initially for the purpose of negotiations with the Government of India with the object of persuading the Government either to finance the principal of the assessee or to take over the management. The negotiations were successful. Later, the assessee also came to acquire certain shares of its principal. It has been found by the Tribunal that the legal expenses incurred was to secure recovery of the debt of the assessee and that the shares when ultimately acquired had little value. The findings of the Tribunal on facts have not been challenged and have become final.

13. It is also to be noted that in Income-tax Reference No. 88 of 1978 and Income-tax Reference No. 98 of 1981 (Macneill & Barry Ltd. v. CIT : [1986]158ITR374(Cal) ) a judgment has been delivered on August 16, 1985, in the case of the same assessee where it has been held that the assessee was ultimately allotted the said shares of the company under an order of a court and not under the said agreement by and amongst the assessee, the Government of India and the other companies.

14. For the above reasons, we answer the question in the affirmative andin favour of the assessee.

15. There will be no order as to costs.

G.N. Ray, J.

15. I agree.


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