TMI Blog1976 (7) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, including an appeal before the Central Government under the Companies Act. The matter was not settled in the accounting year but ultimately the company had to register the transfer of shares. Rs. 9,500 were the legal expenses incurred in regard to these proceedings. The ITO disallowed the sum as not connected with the company's business. In the absence of any explanation by the assessee, that view was confirmed by the AAC. As a result of the report made by the Registrar of Companies, the Central Government appointed an inspector to investigate and report on the affairs of the company. The Government passed a requisite order under the provisions of the Indian Companies Act, 1913, which was in force at that time. The company incurred litigation expenses in resisting the appointment, but did not succeed. The expenses of Rs. 5,000 incurred in this connection were disallowed by the income-tax authorities as not laid out for the purposes of the business. The matter was considered in respect of both the items of Rs. 9,500 and Rs. 5,000, by the Tribunal. It was contended on behalf of the assessee before the Tribunal that the memorandum and articles of association of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of association conferred power to refuse transfer without assigning any reason, any expenditure incurred in starting such action on the part of the board of directors should be regarded as for the purpose of business and the sum of Rs. 9,500 should be regarded as permissible deduction. So far as the other item of Rs. 5,000 was concerned, his submission was that the sole object in incurring this expenditure was to preserve the fair name of the company and such an expenditure was fully justified in the interest and for the purpose of the business. Thus according to his submission the taxing authorities and the Tribunal were in error in disallowing both the items of expenditure even though they were permissible under s. 10(2)(xv) of the Indian I.T. Act, 1922. It is well settled that so far as expenses incurred in civil litigations are concerned the general tests are whether the legal expenses were incurred by the assessee in his character as a trader and the liability fell on him as a trader and whether the transaction in respect of which the proceedings are taken arose out of and was incidental to the assessee's business or profession. See CIT v. Maharajadhiraja Sir Kameshwar Singh o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his authority, and continued to deliver yarn to weavers until February 20, 1946. This yarn was seized. On February 20, 1946, the Provincial Textile Commissioner issued an order to the effect that the company should confine its delivery to (a) licensed yarn dealers, (b) certain consumers who purchased yarn directly from it, and (c) its own handloom factory. A note appended to the order provided that any other delivery of yarn which was not covered by a special order or permission would be a contravention of his order under cl. 18B of the Control Order. The Tribunal recorded that it was not disputed that the company did not deliver any yarn to weavers outside its premises after the order dated February 20, 1946. On March 4, 1946, the company filed a petition in the Madras High Court under s. 45 of the Specific Relief Act for an order directing the Provincial Textile Commissioner to desist from seizing the yarn supplied to weavers at or around Madurai and Rajapalayam in the usual course of business for the purpose of converting it into cloth and to restore to it the yarn already seized. The petition was dismissed by a single judge of the High Court and his order was confirmed in appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... civil proceeding depends upon the nature and purpose of the legal proceeding in relation to the assessee's business and cannot be affected by the final outcome of that proceeding. However, wrong-headed, ill-advised, unduly optimistic or over confident in his conviction the assessee might appear in the light of the ultimate decision, expenditure in starting and prosecuting a civil proceeding cannot be denied as a permissible deduction in computing the taxable income merely because the proceeding had failed, if otherwise the expenditure was laid out for the purpose of the business wholly and exclusively, that is, 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 is not a ground for disallowing the claim. In order that an expenditure may be admissible as a deduction under s. 10(2)(xv), it is not necessary that the primary motive in incurring it must be directly to earn income thereby. One thing is clear from the ratio of this decision that it must be established that the proceedings have any relation to the assessee's business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as satisfied that the affairs of the assessee-company were mismanaged and, therefore, submitted a report to the Government for investigating the affairs of the assessee-company. It is pursuant to this report that an investigator was appointed for investigating the affairs of the company. Actually if the idea of the assessee-company was to preserve its fair name, then naturally it ought to have satisfied the investigator that its affairs are clean and tidy and no case existed for making an adverse report as regards the affairs of the company. Instead of adopting such a course the assessee-company started proceedings so as to prevent investigation of its affairs. Such proceedings cannot be regarded as proceedings instituted for preserving the fair name of the assessee-company. On the contrary, the main underlying object of such proceeding is to save the skin of the persons who might have been guilty of acts of mismanagement of the affairs of the company. The expenses incurred for such litigation cannot, therefore, be regarded as permissible deduction under s. 10(2)(xv) of the Act. Reliance was placed by Mr. Munim on the decision of the Supreme Court in the case of CIT v. Birla Cott ..... X X X X Extracts X X X X X X X X Extracts X X X X
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