TMI Blog1984 (1) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... The said suit was a representative action filed by two shareholders of the assesseecompany, inter alia, seeking a declaration that special resolutions Nos. 1 and 2 passed at the extraordinary general meeting of the said company held on October 20, 1947, were void and inoperative. Certain other reliefs were sought which were broadly and substantially consequential in nature. The ITO held that the aforesaid amount of Rs. 41,411 which the assesseecompany incurred in defending the said suit was not allowable as a business expenditure under s. 10(2)(xv) of the old Indian I.T. Act, 1922. The said officer held that the said expenditure could not be said to have been laid out or expended wholly and exclusively for the purpose of the business of the assessee-company and, in any case, according to the view of the said officer, the expenditure, even if it was incurred for the business of the company, was of a capital nature and, therefore, it was not an allowable deduction under the said provision. The assessee went up in appeal before the AAC but did not succeed. Therefore, the dispute was taken to the Income-tax Appellate Tribunal in an appeal and the said Tribunal allowed the same. The res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany in substitution for and to the exclusion of all existing articles thereof. 2. Resolved that Indian Textile Syndicate Ltd. be appointed managing agents of the company for the period, at the remuneration and on the terms contained in the draft of an agreement, providing for the same, submitted to this meeting and signed in the margin by the chairman of the meeting by way of identification which said agreement be and the same is hereby approved and that the directors shall be and they are hereby authorised to carry the said agreement into effect as on and from the 1st day of October, 1947, with full liberty, subject nevertheless to the provisions of the Indian Companies Act, 1913, to agree to any modifications of such agreement before the same is executed." In brief, by the first resolution the company replaced its old articles of association by a new set of articles. By the second resolution, Indian Textile Syndicate Ltd. was appointed as the managing agent of the company on certain terms and conditions contained in the draft of an agreement which was submitted to the said extraordinary general meeting for approval. In the aforesaid suit, the validity of the said two resol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a capital nature, the Division Bench laid down as follows (p. 537): "The litigation did not involve any capital structure of the company either. In fact, though the ITO had expressed the opinion that the expenditure was of a capital nature, neither the AAC nor the Tribunal did advert to that position, presumably because the point was not stressed in those arguments. However, we are clear in our view that the expenditure was not of a capital nature in any case. " The pronouncement of the Supreme Court in CIT v. Bengal Assam Investors Ltd. [1969] 72 ITR 319, was distinguished on facts. Similarly the pronouncement of the Madras High Court in Swami Motor Transports Ltd. v. CIT [1966] 60 ITR 234, was also distinguished. The Division Bench concluded by observing as follows (p. 537): " Here the finding is, with which we agree, that the effect of the litigation was to put the conduct of the business affairs of the company in jeopardy. In order to save the business, the company was obliged to defend the suit." Section 10(2)(xv) of the old Indian I.T. Act, 1922, laid down as follows: "10. (1) The tax shall be payable by an assessee under the head 'Profits and gains of business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of the business of the company. No other purpose has been pointed out to us which motivated the company for defending the said resolutions. Learned counsel for the Department placed heavy reliance on the decision of this court in Ishwari Khetan Sugar Mills (P.) Ltd. v. CIT [1972] 86 ITR 635. The facts in the said case are clearly distinguishable. There were two sugar mills, Ishwari Khetan Sugar Mills Ltd. and Maheshwari Khetan Sugar Mills Ltd. These two companies owning separately the sugar mills were managed by managing agents. The managing agency firms were partnership firms. Broadly, the controlling partners in the two managing agency firms belonged to the family of the Khetans. In pursuance of a mutual arrangement between the partners of the two managing agency firms, Onkar Mal Khetan was entrusted with the management of Ishwari Khetan Sugar Mills (P.) Ltd., while Kedar Nath Khetan, who was the uncle of Onkar Mal Khetan, was entrusted with the management of Maheshwari Khetan Sugar Mills (P.) Ltd. The two mills continued to be so managed from 1945 onwards till April, 1951, when disputes arose between the partners of the two firms in regard to the management of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l for the two companies was Sri Jagdish Swarup whereas Sri Kanhaiya Lal Misra was the counsel for the respondents Nos. 2 and 5, namely, Kedar Nath Khetan and Sri Radhey Kishun Khetan. However, the law charges claimed and disallowed are mostly in respect of fees paid to Sri Kanhaiya Lal Misra and his juniors."' In view of this finding, it was obvious that the fees which were in question were not paid to the counsel for the assessee-company but were paid to the counsel who represented Radhey Kishun Khetan and Kedar Nath Khetan personally. It is true that the assessee-company questioned the correctness of the said finding of fact but the Appellate Tribunal did not allow it to be done. This court, therefore, observed (p. 640 of 86 ITR) "Apparently, this is a finding of fact. On this finding no question of law can really arise as to whether the litigation expenses were covered by the provisions of section 10(2)(xv) of the Act. Viewed in this light, the answer to question No. 1 must be in the negative. " The court, however, went on to consider the said question No. 1 even on the footing that the fees in question might have been paid to the counsel for the assessee-company. The Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture is allowable as a deduction under section 10(2)(xv), the essential requirement must in every case be as to whether the expenditure was either in reality or as a measure of business expediency necessary either for the purpose of earning profit or for protecting and safeguarding the business assets of the assessee including goodwill or in connection with some transaction or activity which is directly and substantially connected with the running of the business of the assessee or is intimately connected with the assessee's business activities. Such expense must necessarily pertain to the business itself and must not be an expenditure merely connected with any activity, however remote or ancillary. It has to be shown in every case that not only the expenditure was wholly and exclusively laid out, but it was so laid out for the purpose of the business of the assessee, that is, some purpose directly connected with or attributable to the assessee's normal business activities or the protection of its business interest. In the instant case the expenses incurred in connection with the writ petition cannot be said to be expenditure incurred wholly and exclusively for the purpose of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the business " has been the subject-matter of many reported decisions. The Division Bench in the earlier decision relating to this assessee (reported in [1980] 123 ITR 534 (All) CIT v. Muir Sugar Mills Co. Ltd.) noted two of such decisions, the one in CIT v. Bengal Assam Investors Ltd. [1969] 72 ITR 319 (Cal) and the other in Swamy Motor Transports Ltd. v. CIT [1966] 60 ITR 234 (Mad), which was a case of litigation expenses in respect of the proceedings under s. 153(C) of the repealed Indian Companies Act, 1913. In our view, the said two cases are also distinguishable from the present case. In CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971] 82 ITR 166 (SC), the Supreme Court was again called upon to examine the controversy regarding the disallowance of litigation expenses incurred by the assessee-company. Certain proceedings were taken against the assessee-company before the Income-tax Investigation Commission, and the assessee-company incurred litigation expenses in respect of the said proceedings in engaging lawyers and in the conduct of the said proceedings. The question was whether the law charges so incurred in connection with the proceedings before the Investi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le or not, namely, (i) whether the expenditure was incurred for the purpose of carrying on of the business and for removing obstacles and impediments in the conduct of the business, and (ii) whether the assessee paid the amount in his capacity as businessman or in his personal capacity." Thereafter, the learned judge noticed some of the Indian decisions and, in particular, referred to the decision of Kapur J. in Haji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 (SC). There, the legal position was laid down in the following words (p. 150 of 53 ITR) : " The aforesaid discussion leads to the following result: The expression ' for the purpose of the business' is wider in scope than the expression ' for the purpose of earning profits'. Its range is wide, it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly and exclusively laid out for the purpose of the business of the assessee, the expense must have been incurred by the assessee in its character as a trader and the transaction in respect of which the proceedings were taken must have arisen out of, or must have been incidental to, the assessee's business. An assessee could be said to have incurred the expenditure in his character as a trader if the litigation was necessary to be carried on by the assessee or defended by it to protect its trade or business or to avert a danger or threat to its carrying on of its business. If the present litigation was purely in relation to a domestic quarrel between the shareholders and the board of directors as held by the Tribunal, it could readily be said that the company would not be justified in claiming the expense incurred by it in the said litigation as expense of its business. We find, however, that the suit, which Motishaw had filed against the assessee-company and the board of directors, did not confine itself merely to the settlement of the quarrel between himself and the president of the assessee-company, but went far beyond and threatened to interfere with the business of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has set up, whether the same is strong or weak. These are not the considerations. The test is whether the expenditure was incurred in the character of the assessee as a trader, and not in some non-trading capacity, for example, as held in the aforesaid decision in CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), the payments made by company in respect of the estate duty concerning some of the deceased shareholders were held to be not an expenditure for the purpose of the business of the company. In the facts of the instant case, it cannot be contended that the assessee-company incurred the expenses in question in any non-trading capacity. Accordingly, we hold that the expenditure in question was incurred wholly and exclusively for the business of the company as envisaged in s. 10(2)(xv) of the old Indian I.T. Act, 1922. Now, adverting to the second contention of the learned counsel for the Department, namely, that even if it was an expenditure incurred for the business of the company, it was a capital expenditure, and, therefore, could not be allowed under the aforesaid provision, reliance has been placed on three decisions Travancore-Cochin Chemicals Ltd. v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creating, curing or completing the assessee's title to capital or whether it was for the purpose of protecting its business. If it is the former then the expenses incurred must be considered as capital expenditure. But on the other hand if it is held that the expenses were incurred to protect the business of the assessee, then it must be considered as a business loss. The principle which has to be deduced from decided cases is that, where the expenditure laid out for the acquisition or improvement of a fixed capital asset is attributable to capital, it is a capital expenditure but if it is incurred to protect the trade or business of the assessee then it is a revenue expenditure. In deciding whether a particular expenditure is capital or revenue in nature, what the courts have to see is whether the expenditure in question was incurred to create any new asset or was incurred for maintaining the business of the company. If it is the former, it is capital expenditure; if it is the latter, it is revenue expenditure. " Applying the said test, it should be seen that the expenditure in question was incurred for defending the validity of the two resolutions which had come into operation ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
