TMI Blog1979 (1) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... een Judah and Dr. Mukherjee became strained and disputes arose between them. Dr. Mukherjee ultimately contended that Judah had ipso facto vacated his office as director, of the assessee. A number of important resolutions were passed at a meeting of the board of directors of the assessee held on the 10th September, 1954, including one by which Judah was deprived of the power of operating the assessee's bank accounts. A lien in favour of the assessee on all the shares registered in the name of Judah for a sum of over Rs. 4 lakhs alleged to be debts due by Judah to the assessee was declared. Judah and his group were forcibly ejected from the office and the factory of the assessee. Thereupon, Judah filed a suit being Suit No. 3112 of 1954 against Dr. Mukherjee and his group claiming, inter alia, a declaration that he had a right to act as the managing director of the assessee, declaration that the issue and allotment of new shares by the assessee was invalid and various-other reliefs. Subsequently, a representative suit, being Suit No. 3117 of 1954, was filed by Mrs. Judah and another shareholder against Dr. Mukherjee and his group. Certain interlocutory proceedings were heard in the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the defendant company for debts or liabilities ? If so, how much? (b) How much of the said amount is covered by the notice dated September 24, 1954 ? (c) For what sum the company had a lien on the plaintiff's shares? (d) Was the defendant-company entitled to sell the shares in enforcement of such lien ? 5. Was the sale of 26,752 ordinary shares of the company, belonging to the plaintiff, to defendant No. 1 bad, illegal or void as alleged in para. 21 of the plaint;' 6. Did defendant No. 1 connive and/or otherwise conspire with Dr.Mukherjee and Dr. Neogy in effecting the sale of the said shares to defendant No. 1 and in entering the name of defendant No. 1 in the share register of the company ? 7. Is the plaintiff entitled to rectification of the share register ? 8. Did the plaintiff continue to be the owner of the shares in suit after the date of the alleged sale ? 9. Did Dr. S. L. Mukherjee or Dr. Neogy vacate their office of directors or cease to be directors of the company as alleged in para. 9 read with paras. 7 and 8 of the plaint ? 10. Is the suit bad, for non-joinder of Dr. S. L. Mukherjee and Dr. Neogy ? 11. To what relief or reliefs, if any, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld by no stretch of imagination be claimed to be expenditure for the furtherance of the business interests of the assessee. The claim for deduction of the said amount was accordingly disallowed. In the assessment year 1962-63, the sum of Rs. 6,25,000 shown as payable to the solicitor in connection with the said suit and deduction thereof was claimed. For the same reasons as in the earlier assessment years the claim was disallowed. Being aggrieved by the said disallowances the assessee preferred appeals. Reading the judgment of the High Court in Suit No. 487 of 1956, the AAC found that the said suit was not one which arose in the course of the assessee's trading activities. There were disputes between the directors of the assessee and one of the directors was ousted. The shares of the ousted director were sold by the others on the allegation that the former was indebted to the assessee. The director who was ousted instituted the suits. The AAC held that the expenditure claimed as deductible in the assessment years concerned had been incurred by the ousted director, Judah, and his wife in the course of regaining possession of the assessee. The expenditure was not incurred for o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in disallowing the litigation expenses of Rs. 2,60,619 incurred by the assessee-company during the previous year relevant to assessment year 1958-59 on the ground that the same were not connected with business carried on during the said previous year and were not incurred for the purposes of earning the income of that previous year ?" Assessment year 1959-60 " 1. Whether, on the facts And in the circumstances of the case, sum of Rs. 1,09,271 incurred by the assessee-company by way of litigation charges in defending Suit No. 487 of 1956, was a business expenditure allowable as a deduction under section 10(2)(xv) of the Indian, Income-tax Act, 1922 ? 2. Whether, on the facts and in the circumstances of the case, the findings of the Tribunal that litigation expenses of Rs. 1,09,271 incurred by the assessee-company in Suit No. 487 of 1956, were not incurred bona fide and solely and exclusively for its business were based on any evidence and material and not perverse in law ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers of the Tribunal had found as a fact that the expenditure in question had been incurred not for the purposes of the business activities of the assessee, but was primarily the result of domestic quarrels between the directors. On the facts on record including those found in the judgment in Suit No. 487 of 1956, the conclusion arrived at by the Tribunal could not be said to be unreasonable or perverse. Even if two views were possible on facts there was no reason why the view taken by the Tribunal should be struck down in a reference. It was found in the said suit that the alleged indebtedness of Judah to the assessee was determined not honestly but with the object of taking over or utilising the shares held by Judah in the said company. The persons in control at the material time were anxious to cook up a liability so that the shares of Judah could be transferred; out of an alleged claim of over Rs. 4,00,000, only a paltry sum of over Rs. 57,000 was ultimately found to be due. It was found not only by the revenue authorities but also by this court in the said suit that an important motive of the persons in control of the assessee was to oust Judah from the assessee and deprive him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conviction and imprisonment of the assessee observing that the final outcome of the proceedings would not affect the question. (c) Premier Construction Co. Ltd. v. CIT [1966] 62 ITR 176 (Bom). In this case, a shareholder who was shut out from raising certain queries at the annual general meeting of the assessee, a public limited company, filed a suit against the assessee and its board claiming, inter alia, a declaration that the ruling given by the president at the general meeting was illegal and invalid and that the subsequent resolutions passed at the said meeting were also invalid. A consequential relief of injunction restraining the assessee and its board from giving effect to or acting in accordance with the said resolutions were also claimed. The court granted only a declaration that the ruling given by the president at the annual general meeting was illegal and the costs of the suit. The appeal of the assessee and its board against the said decree was dismissed with costs. The costs of the assessee in the said litigation was claimed as a deduction in the relevant assessment year. On a reference, the Bombay High Court held on the facts that the expenses incurred by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture incurred in that behalf would, therefore, be expenditure laid out wholly and exclusively for the purpose of the, business of the assessee. The Supreme Court in its judgment observed as follows (p. 213): " It may be granted that the company was, in starting the proceeding, ill-advised. However wrong-headed, ill-advised, unduly optimistic or overconfident in his conviction the assessee may appear in the light of the ultimate decision, expenditure in starting and, prosecuting the proceeding may not be denied admission as a permissible deduction in computing the taxable income, merely because the proceeding has failed, if otherwise the expenditure is laid out for the purpose of the business wholly and exclusively, i. e., reasonably and honestly incurred to promote the interest of the business. Persistence of the assessee in launching the proceeding and carrying it from court to court and incurring expenditure for that purpose again cannot be a ground for disallowing the claim ...... Expenditure incurred to resist in a civil proceeding the enforcement of a measure-legislative or executive-which imposes restrictions on the carrying on of a business, or to obtain a declaration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Investigation Commission appointed to investigate the affairs of the assessee in an earlier assessment year. Expenses were also incurred in challenging the vires of the Taxation of Income (Investigation Commission) Act, 1947. The question arose whether such expenses should be deducted in computing the business profits of the assessee. The Supreme Court observed, inter alia, as follows: (pp. 171, 172). "The essential test which has to be applied is whether the expenses were incurred for the preservation and protection of the assessee's business from any such process or proceedings which might have resulted in the reduction of its income and profits and whether the same were actually and honestly incurred ...... To preserve the business from an investigation which, according to the assessee, was unlawful, the assessee was justified in taking proper steps and spending monies therefor. Such an expenditure was no doubt not for earning profits but was aimed at preservation of business from the inroads of a piece of legislation which, it was maintained, was unconstitutional and was so held by this court later in certain decisions that have already been mentioned. The expenditure which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of an advocate appointed to take inventory, Rs. 2,250 as remuneration of the Commissioner for presiding over two general meetings, Rs. 800 as fees of the advocate appearing for the assessee in the court proceedings. The assessee claimed deduction of the aforesaid amounts as allowable expenditure. On a reference the Madras High Court held that the expenses incurred for the audit and for the general meetings, though directed by the court, could be held to form part of the normal activities of the assessee and necessary for the carrying an of its business and as such could be deducted under s. 10(2)(xii) of the Indian I.T. Act, 1922, and also on general principles of commercial expediency. But the remuneration paid to the interim administrator or to the advocate engaged by the company for resisting the proceedings in court did not come within the scope of the said section. By the said application alleging oppression by the majority of the shareholders neither, the existence of the assessee was threatened nor was its business otherwise affected and as such the deduction of the said expenses could not be allowed. (e) Ishwari Khetan Sugar Mills (P.) Ltd. v. CIT [1972] 86 ITR 635 (All). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in his character as a trader, in other words, whether the transaction in respect of which proceedings are taken arose out of and was, incinental to the assessee's business. Further, we have to see whether the expenditure in question was bona fide incurred wholly and exclusively for the purpose of business ...... It was for the assessee to decide how best to protect his own interest. It was the duty of the assessee to see that the prosecution was properly conducted. He was interested in successfully prosecuting the case. The fact that he did not leave the carriage of the case in the hands of the prosecuting agency of the Government is no ground for disallowing the expenditure. It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best. " (g) Swadeshi Cotton Mills Co. Ltd. v. CIT [1975] 100 ITR 59 (All) [FB]. Here certain directors, officers and employees of the assessee were prosecuted under the Essential Supplies (Temporary Powers) Act, for having stamped on the cloth produced at the assessee's mill, prices in contravention of a Textile Control Ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee being a pawn in the hands of different persons at different times had very little say in the course of conduct either of the litigation or of its business. In resisting the said suit, the company went far beyond establishing its legitimate dues. It, in fact, fought a battle for Ramapada Gupta, the purchaser of the shares of Judah, who did not at all appear in the said proceedings. It does not appear to us that the business exigencies required the assessee to fight the suit on all issues and perfect the title of Ramapada Gupta in the disputed shares. For the above reasons, this reference has to be decided in favour of the revenue. We answer the questions referred as follows Assessment year 1958-59. Question No. 1 is answered in the affirmative and in favour of the revenue. Question No. 2 is also answered in the affirmative and in favour of the revenue. Assessment year 1959-60. Question No. 1 is answered in the negative and in favour of the revenue. Questions Nos. 2 and 3 are both answered in the affirmative and in favour of the revenue. Assessment year, 1962-63. Question No. 1 is answered in the affirmative and in favour of the revenue. Question No. 2 is answer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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