1966 (2) TMI 86 - HC - Income Tax

Summary

Issues:
Expenses of litigation claimed as allowable deduction under section 10(2)(xv) by the assessee-company disallowed by income-tax authorities and Tribunal.

Analysis:
The case involved the question of whether the expenses incurred by an assessee-company in defending a suit and appeal filed by a shareholder could be considered as a permissible deduction in the computation of the company's income for a specific assessment year. The shareholder, dissatisfied with the annual general meeting proceedings, filed a suit against the company and its board of directors. The court ruled in favor of the shareholder, declaring the president's ruling illegal but did not grant all the reliefs sought by the plaintiff. The company appealed against the decree but was unsuccessful. The total costs of litigation amounted to a specific sum, which the company sought to deduct in the assessment year. The Tribunal disallowed the deduction, stating that the expense did not relate to the preservation or protection of the company or its assets.

The Tribunal's view was that the litigation arose from a domestic quarrel between the management and shareholders, making it difficult to establish the expenses as wholly and exclusively laid out for the purpose of the company's business. However, the court noted that the suit threatened to interfere with the company's business operations, necessitating the company to defend itself. The court differentiated between the expenses incurred in defending the suit and those related to the appeal. While the expenses of defending the suit were considered to be for the purpose of the company's business, the expenses of the appeal were not. The appeal primarily concerned the correctness of a ruling at the annual general meeting, not directly impacting the company's business operations.

The court rejected the argument that expenses indirectly benefiting the business could be considered wholly and exclusively laid out for the purpose of the business. It emphasized that the connection between the expenses and the conduct of the company's business at the time of their incurrence was crucial. Consequently, the court held that only the expenses incurred by the company as costs of the trial court in the suit were permissible as a deduction in the computation of the company's income for the relevant assessment year. The expenses related to the appeal were deemed not to be incurred in connection with the company's business operations.

In conclusion, the court answered the question referred by stating that only the part of the expenses representing the costs of the trial court in the suit could be considered as a permissible deduction in the computation of the company's income for the specified assessment year, while the expenses related to the appeal were not deductible.