MASUD, J. - The short point to be decided in this reference under section 66(1) of the Indian Income-tax Act, 1922, is whether the litigation expenses amounting to Rs. 3,98,631 should be allowable as an expenditure under section 10(2) (xv) of the Act. The relevant facts underlying this reference as set out in the statement of case are briefly stated as follows :
The assessee held several shares of the New Tea Co. Ltd. (hereinafter referred to as the Tea Co.), the face value of which at the material time amounted to Rs. 7,480. One Sudhangsu Mohan Choudhury, a shareholder of the Tea Co., instituted a suit against the respondent-company and some other defendants in the Calcutta High Court alleging that the shareholding of the assessee in the Tea Co., being in excess of 10 per cent. of the subscribed share capital of the Tea Co., contravened the provisions of section 27A(4) of the Insurance Act, 1938. The plaintiff in the suit prayed, inter alia, for a perpetual injunction restraining the defendants from exercising any votes or any rights in respect of the shares or any rights in respect of the shares held by the assessee in the Tea Co. in excess of 10 per cent. of the subscribed share capital of the Tea Co. Eventually the suit was dismissed and the said amount was claimed by the assessee as an expenditure incurred by it for allowance under section 10(2) (xv). The Income-tax Officer disallowed the claim on the ground that the suit having been instituted for the purpose of restraining the controlling of voting power by the assessee-company in the Tea Co., the costs of the suit were capital expenditure. The assessees appeal to the Appellate Assistant Commissioner was unsuccessful but, on further appeal to the Appellate Tribunal, the Tribunal came to the conclusion that the litigation expenses were allowable under section 10(2) (xv) and allowed the appeal. On these facts, the following question of law has been referred to us :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 3,98,631 was allowable as an expenditure under section 10(2) (xv) of the Indian Income-tax Act ?'
Mr. Gouri Mitter, learned counsel for the Commissioner of Income-tax, has referred us to prayer (b) of the plaint in the High Court suit which reads as follows :
'Plaintiff claims :...
(b) perpetual injunction restraining the defendants or any of them or their servants or agents from exercising any votes or any rights in respect of the shares held by the Insurance Co. in the Tea Co. in excess of 10 per cent. of the subscribed share capital of the Tea Co.'
and has wanted us to hold that the said expenditure was of a capital nature and, as such, cannot be allowed as a valid deduction from the gross income of the assessee inasmuch as the suit had really been instituted in respect of controlling the management of the Tea Co. and the expenses incurred cannot be said to be incidental to the assessees life insurance and other business. He has drawn our attention to page 27 of the paper-book, where Mr. Justice Sarkar in his judgment has stated :
'The substance of the dispute, however, is who should control New Tea, i.e., whether the group controlling Hindusthan, who are the controlling defendants, or the group siding with the plaintiff. If votes can be cast on all the shares held by Hindusthan, the group supporting the plaintiff cannot control New tea.'
In support of his contention he has cited Liberty Cinema v. Commissioner of Income-tax where the Calcutta High Court at page 167 has stated :
'The position on the authorities, therefore, is that if the legal expenses are incurred in creating, curing or completing title to the capital, then it is capital expenditure. The question in each case, however, turns on the point whether the legal expenses in question were incurred for purposes of creating, curing or completing title. The facts, therefore, in this reference may be reviewed in the light of this principle.'
The only other case he has referred to us is N. Selvarajulu Chetty & Co. (India) v. Commissioner of Income-tax. He, in particular, laid stress of the following observations of the Madras High Court at page 120 :
'These observations make it clear that whether the ownership of the business is in the hands of A or B, it makes no difference to the business, and it is not a case whether the business itself or any of its asset is jeopardised, so that the expenditure incurred in maintaining that asset can be said to be a revenue expenditure. It accordingly seems abundantly clear to us that, in the present case, expenditure was not one which was incurred wholly or exclusively for the purpose of the business.'
In our opinion, Mr. Mitterss contention cannot be accepted in the facts and circumstances of this case. The Income-tax Tribunal in its order has come to the following conclusions :
'(a) We think the Appellate Assistant commissioner is not quite correct in view of the fact that the investments were not in jeopardy.
(b) The suit was therefore defended by the insurance company not only to maintain and retain their existing voting powers but also to protect the investments.
(c) In the present case, as already observed, the expenses of litigation were incurred to maintain and protect investments as well as voting rights of the insurance company which is a valuable right; no new asset was however acquired as a result of such expenditure. It was not therefore an expenditure of a capital nature.'
It seems to us that the principle in the Calcutta case have no application in the instant case inasmuch as there is no question here as to whether the legal expenses in question were incurred for purposes of creating, curing or completing title. Similarly, the principles decided in the Madras case cannot be applied because the suit was not framed in such a way that two groups of persons have been impleaded to fight out their individual rights. On the contrary, the plaint shows that the reliefs claimed are of such general nature that even the assessees rights in respect of shares including the right to exercise votes and the right to receive the dividends were sought to be jeopardised. It is common knowledge that the insurance company often deals in investments acquired out of the insurance premium and naturally any expenditure for protection of the assessees business activity cannot but be considered as a revenue expenditure.
For the reasons stated above, the answer to the question is in the affirmative and in favour of the assessee who will have its costs of the reference from the applicant.
MITTER J. - I agree.
Question answered in the affirmative.