TMI Blog1962 (9) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... r or some other fit and proper person be appointed liquidator of the company with all necessary powers under the provisions of the Companies Act; that pending the hearing and final disposal of the petition the court liquidator may be appointed the provisional liquidator of the company to take charge and possession of, collect and protect the assets of the company with all necessary powers under the Companies Act. The petition was founded on the allegations that Mr. V.V. Chitaley, the managing director of the company, was managing the affairs of the company in such a way as to monopolise the company's affairs for the individual benefit of himself and the members of his family; that Shri V.V. Chitaley, in gross abuse of his fiduciary position as the managing director, had fraudulently taken out of the funds of the company a sum of ₹ 10 lakhs for transferring to his own pocket under cover of an investment in the shares of another concern of his own. The assessee company contested this petition for winding up and in defending itself had incurred an expenditure of ₹ 23,236 in the relevant previous year to the assessment year 1957-58 and a sum of ₹ 12,250 in the rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olly and exclusively laid out for the purpose of its business and is allowable as a deduction under section 10(2)(xv) of the Income-tax Act. He placed reliance on decisions, Commissioner of Income-tax v. Jagatjit Distilling Allied Industries Ltd.( 1961] 41 I.T.R. 328); Morgan (Inspector of Taxes) v. Tate Lyle Ltd.( 1954] 26 I.T.R. 195 (H.L.)); Van den Berghs Ltd. v. Clark (H.M. Inspector of Taxes)( 1935] 3 I.T.R. (Suppl.) 17); Southern (Inspector of Taxes) v. Borax Consolidated Ltd.( 1942] 10 I.T.R. (Suppl.) 1); Commissioner of Income-tax v. Raman and Raman Ltd.( 1951] 19 I.T.R. 558); Mahabir Parshad Sons v. Commissioner of Income-tax(1945] 13 I.T.R. 340) and B.W. Noble Limited v. Mitchell (H.M. Inspector of Taxes(1926] 11 Tax Cas. 372). Mr. Joshi, appearing for the revenue, on the other hand, contends that the expenditure incurred by a company in defending a petition for winding up is not an expenditure laid out for the purpose of the business. Winding up proceedings are for purposes of putting an end to the company, in other words, putting an end to the entire capital structure and organisation of the company. Expenditure incurred to prevent that is capital expenditure and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssible deduction from its profits for income-tax purposes . The decision of the Commissioners for General Purposes of the Income Tax was upheld in the House of Lords. It was held following the aforesaid test laid down by Lord Davey: That the object of the expenditure being to preserve the assets of the company from seizure and so to enable it to carry on and earn profits there was no reason in law to prevent the Commissioners from so finding. At page 200 of the report Lord Morton in his speech said: Applying that statement to the facts of the present case, the 'person' to whom Lord Davey refers is surely the person who seeks to deduct the sum in question, i.e., the company, and it seems to me that money expended to prevent seizure of the company's assets is accurately described as money expended 'for the purpose of enabling the company to carry on and earn profits in the trade', since without its assets it could not carry on its business. We may now refer to some of the decisions where expenditure incurred in defending title to the assets of the business has been allowed as an expenditure incurred for the purpose of the business. In Southern (H.M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal expenditure is that laid down by Lord Cave, namely, whether the expenses were incurred in acquiring a new capital asset or in improving or altering an existing capital asset. In Commissioner of Income-tax v. Raman and Raman Ltd. [1951] 19 I.T.R. 558 the assessee company carrying on business of plying transport buses entered into an agreement for the purchase of certain buses running on specific routes with one B, in whose name the buses were registered and the permits for running the buses stood. After the buses had been acquired by the assessee and the assessee had started running the buses, one V filed a suit against the assessee claiming title to the buses and seeking to recover possession of them. The assessee company defended the suit and claimed to deduct the litigation expenses incurred by it as expenditure wholly and exclusively laid out for the purpose of the business under section 10(2)(xv) of the Indian Income-tax Act. The claim of the assessee was allowed. In this case also a contention was raised that the expenditure incurred was capital in nature. But that contention was not accepted. It was held: Litigation is often conducted by businessmen in order to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (page 205): This proposition is wholly unsupported by authority and is difficult to reconcile with the case of Southern v. Borax Consolidated Ltd. [1942] 10 I.T.R. (Suppl.) 1 already cited. If expense for the purpose of preserving the ownership of one asset of a company is deductible, why is not expense for the purpose of preserving the ownership of all the assets also deductible? Further, the proposition is, in my opinion, contrary to the view of Lord Davey, already quoted, as to the meaning of rule 3(a)--a view which has been accepted more than once by this House. The proposition places a wholly unnecessary and unwarranted restriction upon the meaning of the words of rule 3(a). They are not technical words and ought not to be given a narrow or technical construction. The other decisions to which reference was made by Mr. Samarth are not directly in point and it is, therefore, not necessary for us to discuss them here. Now, here the expenditure incurred by the assessee company is for the purpose of defending itself in an application for winding up filed by one of the shareholders. The application was for compulsory winding up of the company by the court. It is not in di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legal proceeding in relation to the business whose profits are under computation, and cannot be affected by the final outcome of that proceeding. Now the argument advanced was that the expenditure had to be incurred to save the seized goods from being sold at an undervalue in the event of the prosecution succeeding and to maintain his reputation as a good businessman. This contention was not accepted by their Lordships. In their Lordships' view, that was not the primary purpose of the expenditure incurred. Here the sole object of defending the petition is to save the business from being wound up. In Van den Berghs' case [1935] 3 I.T.R. (Suppl.) 17, the assessee and the Dutch company were competitors in the business of manufacture and dealing in margarine. In order to put an end to the competition, both the assessee and the company entered into certain agreements, under which they bound themselves to work in friendly alliance and to share the profits and losses in accordance with a certain elaborate scheme specified in those agreements. That agreement was later modified by two other agreements. In 1927, three other agreements were made between the assessee and the Dutch ..... X X X X Extracts X X X X X X X X Extracts X X X X
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