1965 (12) TMI 9 - HC - Income Tax

Legal expenses - expenditure incurred in resisting an application by shareholders of the assessee-company under s. 153C of the Companies Act questioning the appointment of some of the directors of the assessee-company cannot be considered to be an expenditure laid out or expended wholly and exclusively for the purpose of the business of the company - not allowed as a deduction under s. 10(2)(xv)

Summary

Issues Involved:

1. Whether the legal expenses amounting to Rs. 250 could be allowed as a deduction under section 10(2)(xv) of the Income-tax Act, 1922.
2. Interpretation of section 10(2)(xv) of the Income-tax Act, 1922, and section 153C of the Indian Companies Act, 1913.

Detailed Analysis:

1. Legal Expenses Deduction under Section 10(2)(xv) of the Income-tax Act, 1922:

The primary issue in these income-tax references was whether the legal expenses amounting to Rs. 250, incurred by the assessee company, could be allowed as a deduction under section 10(2)(xv) of the Income-tax Act, 1922. The assessee, a private limited company, had claimed these expenses as legal fees, including a sum of Rs. 250 paid to Shri K. C. Malhotra for consultation in litigation among its directors. The Income-tax Officer disallowed this amount, and the Appellate Assistant Commissioner confirmed this order. The Appellate Tribunal, however, allowed the appeals, observing that the appointment of a receiver would have affected the company's smooth running and its ability to make profits or gains.

2. Interpretation of Section 10(2)(xv) of the Income-tax Act, 1922, and Section 153C of the Indian Companies Act, 1913:

To understand the precise scope of clause (xv) of section 10(2), the court read section 10, which states that tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits and gains of any business, profession, or vocation carried on by him. Section 10(2)(xv) specifies that any expenditure laid out or expended wholly and exclusively for the purpose of such business, profession, or vocation, and not being in the nature of capital expenditure or personal expenses of the assessee, shall be allowed.

The court also considered section 153C of the Indian Companies Act, 1913, which provides an alternative remedy to winding up in cases of mismanagement or oppression. This section allows members of a company to make an application to the court if they believe the affairs of the company are being conducted in a manner prejudicial to the interests of the company or oppressive to some members.

Case Law Analysis:

The court referred to several judgments to support the rival contentions. In Van den Berghs Ltd. v. Clark, the House of Lords dealt with whether a sum received by the assessee as damages for termination of agreements could be considered an income receipt. The court found that the facts of this case did not bear close similarity to the present case.

In Morgan v. Tate & Lyle Ltd., the House of Lords considered whether expenses incurred in anti-nationalisation propaganda were deductible. The General Commissioners found that the expenses were wholly and exclusively laid out for the purpose of the company's trade. The House of Lords affirmed this view, emphasizing that the expenses were incurred to protect the company's business from nationalisation.

The Supreme Court's decision in Commissioner of Income-tax v. Malayalam Plantations Ltd. was also considered. The court held that estate duty payments were not allowable as business expenditure under section 10(2)(xv) because they were not incurred for the purpose of the business. The Supreme Court emphasized that the expenditure must be for carrying on the business and incurred in the capacity of a person carrying on the business.

Conclusion:

After considering the various decisions and arguments, the court concluded that the expenditure incurred in resisting an application by shareholders under section 153C of the Indian Companies Act, questioning the appointment of some directors, could not be considered as expenditure laid out or expended wholly and exclusively for the purpose of the business of the company. The expression "wholly and exclusively" restricts and limits the operation of the clause. The court found the Appellate Tribunal's decision to be sketchy and unconvincing.

As a result, the court answered the question in the negative, disallowing the deduction of the legal expenses. Similar answers were recorded for the other two cases, and no order as to costs was made in all three cases.