1985 (9) TMI 61 - HC - Income Tax

Summary

Issues:
Admissibility of legal expenditure as a deduction under the Income-tax Act, 1961.

Analysis:
The case involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the admissibility of legal expenditure incurred by the assessee for conducting an appeal before the Company Law Board. The assessee had acquired shares in a company, but the board of directors refused to register the shares in the assessee's name. Legal proceedings were initiated to compel the company to register the shares, ultimately reaching the Supreme Court, which held the directors' actions as arbitrary and unjustifiable.

The Income-tax Officer disallowed the deduction claimed by the assessee for legal fees, a decision upheld by the Appellate Assistant Commissioner. However, the Income-tax Appellate Tribunal concluded that the expenditure was capital in nature as it was incurred for acquiring a new asset, i.e., perfecting the assessee's rights in the shares through registration. The Tribunal reasoned that without registration, the transfer of shares would fail, and the assessee's title would only be complete upon registration.

The assessee argued that its title to the shares was complete upon receiving transfer deeds and share certificates, and registration by the company did not create new rights. Citing a judgment of the Madras High Court, the assessee contended that the transfer was complete between the parties upon handing over the necessary documents, even if not yet recorded by the company. The Madras High Court had allowed setting off capital loss against gains in a similar case.

The Tribunal found that the legal proceedings were initiated to protect the assessee's investment, voting rights, and dividend receipts, which were affected by the refusal to transfer shares. Until registration, the assessee could not receive dividends directly, exercise voting rights, or acquire bonus/right shares. The expenditure was deemed capital as it was necessary to perfect the legal title for direct receipt of dividends and voting rights.

The court rejected the assessee's arguments that no new income-earning asset was acquired and that the expenditure only removed an obstacle. It held the expenditure to be capital in nature, disallowing it as a deduction under the Income-tax Act. The question was answered in the negative, favoring the Revenue, and the assessee was directed to pay the costs of the reference.