TMI Blog1968 (5) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... culars of the shares sold and the capital gains made. The assessee, in reply, claimed a loss of Rs. 1,03,994.00 which included an expenditure of Rs. 1,00,721.00 incurred by the assessee in litigation in respect of 549 ordinary shares and 4,402 preference shares sold during the year. The Income-tax Officer disallowed the litigation expenses and computed the loss at Rs. 3,275.00. The Income-tax Officer was of the view that the litigation expenses claimed as a deduction could not be allowed under section 12B inasmuch as they were not incurred either in connection with the sale or as expenses of a capital nature in making any addition or alteration to the capital assets. The Appellate Assistant Commissioner reversed the finding of the Income-tax Officer. He held that the legal expenses for defending title to the shares sold constitute capital expenditure which would augment the cost of the shares in computing the capital gains or capital loss under section 12B. The Appellate Assistant Commissioner directed that the capital loss computed by the Income-tax Officer be increased by the sum of Rs. 1,00,121.00 and carried forward. The Appellate Assistant Commissioner said : "...the legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any additions or alterations thereto ' within the meaning of section 12B(2)(ii) of the Indian Income-tax Act, 1922. " The following question of law has been referred to this court for its opinion : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 1,00,721.00 incurred by the assessee as legal expenses was an expenditure of a capital nature incurred and borne by the assessee in making additions and alterations to the shares of Messrs. Muir Mills Co. Ltd. purchased by the assessee and should, therefore, be included in the actual cost of the said shares under the provisions of section 12B(2)(ii) of the Indian Income-tax Act, 1922 ? " Before we proceed further, it would be necessary to examine the facts in greater detail. From paragraph 4 of the Tribunal's order, at pages 15 and 16 of the paper-book, it appears that the assessee after its purchase of the aforesaid shares, sent to the company 2,536 ordinary shares and 5,473 preference shares for registration. The company was then under the control of what was known as the Dhanuka group and refused to register the shares without assigning any reasons. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of a capital nature. Mr. Dipankar Gupta, learned counsel for the revenue, submits that the litigation expenses in the instant reference were expenses incurred for defending the assessee's title to the shares or maintaining the value of a capital asset and, as such, they should be treated as revenue expenditure. He says that when a transfer takes place and the formalities prescribed by the articles of association are complied with, the company is bound to register the shares. In this context an application for rectification of share register under the Companies Act is purely a procedural matter and the applicant by adopting this procedure merely tries to establish an antecedent title. With regard to the expenses incurred for acquiring voting rights, Mr. Gupta says that the same principles would apply. The voting rights were there under the law ; but were illegally taken away. And by trying to have an illegal article declared invalid by a court of law, the assessee was only trying to assert the title which he lawfully possessed. In any event, says Mr. Gupta, even if we assume that the expenses were of a capital nature, they were not incurred in making any additions or alteratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been acquired by the assessee and was, therefore, not of a capital nature, but of a revenue nature. It was also incurred, according to the Madras High Court, solely and exclusively for the purposes of the business of the assessee and was, therefore, allowable as business expenditure. Mr. Gupta states that this decision of the Madras High Court should be applied to the facts of this case. In this reference also, according to counsel for the revenue, the expenditure was not incurred either for acquisition of a capital asset or to improve a capital asset but was an expenditure incurred to establish and maintain that asset and was obviously of a revenue nature. Now, to appreciate the reasoning of the Madras High Court it is necessary to refer to a passage at pages 647 to 648 of the judgment. There, it is stated : " The main question at issue in the suit was whether it was the title of the assessee, founded on the contract dated the 19th April, 1944, or that of the rival claimant Raman Raman Ltd. based on the earlier contract of the 9th March, 1944, that should prevail. The Tribunal never doubted the claim of the assessee that he had paid Rs. 35,001.00 as the purchase price of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ach case. If the object or purpose was to defend or maintain an existing title to capital assets of the assessee's business, the expenditure would be of a revenue nature ; but if the object or purpose was to acquire or cure a defect in the assessee's title, or to complete the assessee's title, the expenditure would be of a capital nature. It is in the light of these principles that we have to approach the facts of the instant reference. But before we do so, it would be useful to set out the relevant provisions of section 12B(2)(ii) of the Indian Income-tax Act, 1922. The provisions are as follows : " The amount of a capital gain shall be computed after making the following deductions from the full value of the consideration for which the sale, exchange, relinquishment or transfer of the capital asset is made, namely : (ii) the actual cost to the assessee of the capital asset, including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto, but excluding any expenditure in respect of which any allowance is admissible under any provision of sections 8, 9, 10 and 12." Mr. Gupta, incidentally, mentioned to us that, if we did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the legal owner until his name is entered on the register in respect of the shares transferred to him. But delay in registration involves danger to him, for some prior equity may come to light, as in Ireland v. Hart, where a husband had mortgaged shares of which he was trustee for his wife ; or a second transfer may be passed and registered, and thus the prior transfer may be defeated. (The rule on this point is that), as between two persons claiming title to shares in a company like this which are registered in the name of a third party, priority of title (that is equitable title) prevails, unless the claimant, second in point of time, can show that, as between himself and the company, before the company received notice of the claim of the first claimant, he, the second claimant, has acquired the full status of a shareholder, or, at any rate that all formalities have been complied with, and that nothing more than some purely ministerial act remains to be done by the company, which, as between the company and the second claimant, the company could not have refused to do forthwith ; so that, as between himself and the company, he may be said to have acquired, in the words of Lord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r shares were practically of no value to it. By incurring expenses on suits aimed at acquiring the voting right for each share the assessee, on the facts of this case, was trying to enhance the value of the said shares and the assessee ultimately succeeded in its attempt. The expenditure in these circumstances was, in our view, an expenditure of a capital nature incurred and borne by the assessee in making additions or alterations to its assets within the meaning of section 12B(2)(ii) of the Indian Income-tax Act, 1922. It is well-settled that any expenditures incurred for acquisition or improvement of a capital asset or for enhancement of its value is attributable to capital. In our opinion, the expenditure which the assessee incurred in the present case on suits to have the altered article declared illegal or void, was an expenditure for improvement or enhancement of the value of the assets that the assessee had held. In this view of the matter, the answer to the question referred to us is that the legal expenses incurred by the assessee were of a capital nature and should be included in the actual cost of the shares under the provisions of section 12B(2)(ii) of the Indian Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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