TMI Blog1988 (3) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement, the United Bank of India had received from the assessee a sum of Rs. 4 lakhs on behalf of Ramjhora Tea Company Ltd. as earnest money and in part payment of the price of the said tea estate. (c) At the time of the execution of the conveyance of the said tea estate, the assessee would pay to the Ramjhora Tea Company Ltd. the balance of the purchase price through the United Bank of India. (d) If the title of the Ramjhora Tea Company Ltd. in the said tea estate was not marketable, then the assessee would be at liberty to rescind the agreement and the United Bank of India would thereupon refund to the assessee the said earnest money of Rs. 4 lakhs. (e) The management, possession and operational control of the said tea estate and the disposal of the crop thereof would, until the date of the conveyance, be in the hands of the assessee who would have absolute control over the same. (f) The assessee would be responsible for purchase of stores and other items necessary for the running of the said tea estate from January 1, 1975, including the wages of the labourers and the employees as also bonus, gratuity, pension and compensation. (g) All tea manufactured in the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding on March 31, 1979. In the said assessment, the assessee claimed deduction of a sum of Rs. 1,14,015 which was claimed to have been spent by the assessee by way of legal expenses in the said legal proceedings by and between the assessee and the said Ramjhora Tea Company Ltd. and its shareholders. The Income-tax Officer noted that in its return the assessee had stated that the income from the said tea estate was not taxable in its hands as the conveyance for the said tea estate had not been executed in favour of the assessee and disputes between the parties were pending adjudication in court. The Income-tax Officer held that the legal expenses incurred in connection with the acquisition of any investment were capital expenditure. The Income-tax Officer held further that to sustain a claim for deduction of any amount on account of business expenditure, the same was required to be shown to have been incurred for the purposes of an existing business in the year of accounting, the profits of which would be under assessment. The Income-tax Officer found that there was no business of the assessee in respect of the said tea estate, disallowed the deduction claimed and added back the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee related to the said tea estate and did not relate to the existing business of the assessee. As tile income from the said tea estate was claimed not to be taxable in the assessee's hands, the assessee could not claim any expense relating to the said tea estate. The Tribunal further held that under sections 28 and 29 of the Income-tax Act, 1961, if on(, of the business of an assessee was assessee able to income-tax while the other was not, the allowance referable to the non-taxable business could not be deducted in computing the profits of the taxable business. The Tribunal expressed its doubt as to whether the assessee was entitled to contend that the income of the said tea estate was not taxable in its hands under section 60 of the Income-tax Act, 1961, and observed that the assessee could run a business though not as an owner but would still be liable to pay tax on income arising out of such business. If the income of the said tea estate was not the assessee's income, then the expenses incurred on account of the said tea estate also could not be said to be the expenses of the assessee. The Tribunal noted that the conveyance had not been executed in respect of the said t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess expenditure ? (2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in reversing the order of the Commissioner of Income-tax (Appeals) with a direction to the Incometax Officer to probe into the matter further and to find out to what extent the borrowed funds have been utilised for the purchase of Bundapani Tea Estate instead of deciding the issue itself on the basis of submissions made before it and the facts already on its record (3) Whether, on the facts and in the circumstances of the case, the disposal by the Tribunal of ground No. 2 in the appeal filed by the Incometax Officer was in accordance with law ? (4) Whether, on the facts and in the circumstances of the case, the order passed by the Tribunal reversing the order of the Commissioner of Income-tax (Appeals) as to the addition of Rs 60,000 made by the income-tax Officer and remanding the matter back to the Income-tax Officer was legal and valid ? " At the hearing, learned advocate for the assessee submitted that it has been found as a fact that the assessee at the material time had been engaged in the business of cultivation and manufacture of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax Officer that the said advance had been paid by the assessee out of the amounts borrowed from the bank. The Income-tax Officer had proceeded on the basis that if the said amount of Rs. 4 lakhs had been utilised in the business of the assessee, the debit balance in the overdraft account of the assessee could have been reduced and the assessee would have had to pay lesser interest to the bank. It was accepted by the Commissioner of Income-tax (Appeals) that the said Rs. 4 lakhs advanced by the assessee by way of earnest money to the seller was out of the funds obtained from fresh issue of shares and not out of borrowed funds. It was not the case of the Revenue nor did the Revenue seek to prove before the Tribunal that the said Rs. 4 lakhs had been paid by the assessee to the seller out of borrowed funds and not from its own resources. The Tribunal erred ill holding that the Income-tax Officer proceeded on the basis that the said advance was paid out of the funds borrowed from the bank but had not specifically pin-pointed the position. The Income-tax Officer did not proceed on the basis that the said advance was paid by the assessee out of borrowed funds. In support of his co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issible deduction under section 10(2)(iii) of the Indian Income-tax Act, 1922. In further appeal by the Revenue to the Supreme Court, construing section 10 of the Act of 1922, it was held that all that was required to be ascertained was whether the expenditure had been laid out or expended wholly and exclusively for the purpose of the business. It was necessary to enquire further and ascertain whether such expenditure produced or would produce taxable income. It was held that the entire interest paid by the assessee on the borrowed amount for investment in securities was allowable as business expenditure including the part thereof which related to the investment in tax free securities. (d) CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723. In this case, a Division Bench of the Bombay High Court laid down that in order to enable the assessee to claim deduction of interest on borrowed capital under section 10(2)(iii) of the Indian Income-tax Act, 1922, it had to be established that money had been borrowed by the assessee, that such money had been borrowed for the purpose of the business and further that the assessee had paid interest on the said amount and claimed the same as deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1961, in computing the assessee's income from dividend under the head "Income from other sources", though the assessee may not have received any dividend on the shares purchased with the borrowed capital. All that the assessee had to establish was that the expenditure was laid out or spent wholly and exclusively for the purpose of earning income. The assessee was not required to establish that the said purpose was fulfilled, i.e., income in fact resulted from the expenditure in order to be entitled to claim deduction of such expenditure. (g) CIT v. Tata Services Ltd. [1980] 122 ITR 594. This is a decision of a Division Bench of the Bombay High Court. It was held in this case that a contract for sale of land which was capable of specific performance and assignable and included a right to obtain conveyance of immovable property, was property within the meaning of section 2(14) of the Income tax Act, 1961. The same could be transferred from one person to another by way of assignment. (h) CIT v. Metal Corporation of India Ltd. [1982] 133 ITR 130 (Cal). In this case, the assessee, to purchase a zinc smelter factory for the purpose of its business, obtained a loan from the Indu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adras High Court that legal expenditure incurred by an assessee to protect the source of his income or the title to his business or to preserve or maintain his business assets must be regarded as expenditure incurred wholly and exclusively for the purpose of his business and allowable as a deduction. It was held further that there was a distinction between expenditure incurred for the acquisition of a capital asset or for substantial expansion or improvement thereof on the one hand, and expenditure incurred for merely protecting and maintaining the title to an existing capital asset on the other. The former expenditure would be capital in nature, whereas the latter expenditure was of a revenue character. Learned advocate for the Revenue contended to the contrary. He submitted that in the relevant assessment year as the income from the said tea estate could not be treated as income arising in the hands of the assessee, it could not be held that the assessee was carrying on any business in respect of the said tea estate and, therefore, was not entitled to any deduction by way of business expenditure of any amount spent in respect of the said tea estate. It was further submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The said assets had been invested in securities and shares and subsequent to the acquisition of its electric supply undertaking, the income from such other investment became the sole income of the assessee. In the assessment years involved, the assessee prayed for deduction of various amounts under section 10(2)(xv) of the Indian Income-tax Act, 1922, contending that it continued to carry on its business and that the deductions claimed were on account of expenses incurred for the purpose of the business. On these facts, it was held by the Supreme Court that after its electric supply undertaking was acquired by the Government, the assessee did not carry on any business. Investment of the assessee was not a business activity and it could not be inferred that the assessee intended to resume its earlier business. The fact that the assessee had to pay a share of the profits of its undertaking for earlier periods and that the assessee had to return to the consumers their deposits did not establish that the assessee was carrying on any business. It was held further that business as contemplated in section 10 of the Act of 1922 was an activity capable of producing profit which could be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee claimed deduction of the amounts spent in both the civil and criminal proceedings as business expenditure under section 10 of the Indian Income-tax Act, 1922. The Tribunal held that the expenditure incurred by the assessee in the criminal proceedings had been incurred bona fide for the purpose of the business of the assessee as the criminal proceedings were instrumental in bringing about a compromise between the assessee and the financier. The Tribunal, however, estimated that only 1/3rd of the amount spent in the criminal proceedings was wholly and exclusively for the purpose of the business of the assessee and only the said part was allowable as deduction. This estimate was not challenged by the assessee. On a reference initiated by the Revenue, it was held by the High Court that the expenses incurred in the criminal proceedings were for the purpose of the business of the assessee but took the view that the entire expenditure should be deductible. The Tribunal was directed to re-examine the quantum of expenditure for the purpose of deduction. On appeal to the Supreme Court by the Revenue, it was held that no distinction could be made between civil and criminal l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his shares by exercise of a lien on account of debt alleged to be due by the said director to the assessee. The question arose as to whether the expenses incurred by the assessee which participated in the said suit were allowable as deduction. On such facts, it was held by a Division Bench of this court that in the litigation, the assessee was not only seeking to preserve its book debts as business asset but in fact fought a battle for the transferee of the disputed shares who did not appear in the proceedings. The business exigencies did not require the assessee to fight the suit on all issues and perfect the title of the transferee in the disputed shares. It was held that the expenses incurred in the suit were not allowable as business expenditure. In the facts found, it is established that the assessee at all material times was carrying on the business of cultivation and manufacture of tea. In such business, the assessee already owned and possessed the tea estate known as the Zurrantee Tea Estate. The assessee at the material time was in the process of acquiring another tea estate known as the Bundapani Tea Estate from Ramjhora Tea Co. Ltd. There is no evidence on record tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee as not taxable in its hands under section 60 of the Income-tax Act, 1961. But this stand of the assessee, in no way, militates against its other contention, namely, that the assessee had acquired a valuable right to obtain conveyance of the said tea estate and legal expenses were incurred to maintain and protect such asset. There is no finding that the assessee had set up two different units of management and control for the two tea estates or that the acquisition of the Bundapani Tea Estate was totally independent venture of the assessee unconnected with its existing business. We respectfully agree with the principles laid down in the decisions of the Bombay High Court in Tata Services Ltd. [1980] 122 ITR 594 and Aniline Dyestuffs and Pharmaceuticals P. Ltd. [1982] 138 ITR 843 and those of the Gauhati and Madras High Courts in Abhoyjan Tea Estate (P.) Ltd. [1977] 110 ITR 251 and 0. P. N. Arunachala Nadar [1983] 141 ITR 620. We hold that the assessee incurred the said expenditure on litigation for protection of an asset which it was seeking to acquire in its existing business and was entitled to claim deduction of the same. We note that one of the litigations in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal was that it had utilised its own resources for payment of the said earnest money of Rs. 4 lakhs and that there was no evidence that the money borrowed by the assessee had been diverted for making the said payment. There was no specific finding by any of the authorities below that the said amount of Rs. 4 lakhs had been paid by the assessee out of borrowed funds. The Tribunal did not examine or deal with the contention of the assessee that the said amount of Rs. 4 lakhs had been procured by the assessee by issue of fresh shares. The Tribunal appears to have proceeded on the basis that the assessee utilised funds borrowed on overdraft for making the said payment and directed the Income-tax Officer to ascertain the extent to which the assessee had utilised such borrowed funds and the quantum thereof. There was no material to come to the conclusion that the borrowed funds had at all been utilised for making the payment of the said Rs. 4 lakhs. The Income-tax Officer could only make this examination on the assumption that the funds borrowed by the assessee had actually been utilised. In our view, the Tribunal erred in coming to the aforesaid conclusion. There was no finding i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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