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Issues involved: The admissibility of legal and court expenses in the computation of business income of a limited company u/s amalgamation.
Comprehensive details of the judgment: The judgment pertains to a reference sent by the Income-tax Appellate Tribunal, Madras, regarding the admissibility of legal and court expenses in the computation of business income of a limited company involved in an amalgamation process. The two companies, M/s. A. Boake Roberts and Company (India) Ltd. and W. J. Bush Products Ltd., engaged in the manufacture and marketing of perfumery compounds, decided to amalgamate. The legal and court expenses incurred during this process amounted to Rs. 30,905 for the assessment year 1971-72. The expenses included appearance in court, general expenses, liquidators' fees, and fees to an advocate. The company, M/s. Bush Boake Allen (India) Ltd., claimed this amount as a business expenditure, which was disallowed by the Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) on the grounds of substantial expansion and enduring benefit. However, the Tribunal allowed a portion of the expenses, disallowing only Rs. 1,934.50 and allowing Rs. 28,970.50. The main question of law challenged in this reference was whether the expenses incurred in connection with the amalgamation should be allowed as a revenue expenditure for the assessment year 1971-72. The department argued that such expenses should be considered capital in nature, as they related to the merger of two businesses. The department contended that legal expenses should be judged in relation to the specific legal transactions or court proceedings they relate to, and if incurred for acquiring a capital asset or bringing about a merger, they should be treated as capital expenditure. However, recent court judgments have established that legal expenses should be judged based on their own character, rather than being automatically classified as capital expenditure based on the transaction they are connected to. The Supreme Court's decision in India Cements Ltd. v. CIT [1966] 60 ITR 52 set a precedent that legal expenses incurred for borrowing money, whether for revenue or capital purposes, should be treated as revenue expenditure. This principle has been consistently followed in subsequent court decisions, including a case where legal charges for increasing a company's capital were allowed as revenue expenditure. The court in the present case held that the legal and court expenses claimed by the assessee should be regarded as constituting revenue/business expenditure, as rightly determined by the Tribunal. The court differentiated this case from Sitalpur Sugar Works Ltd. v. CIT [1963] 49 ITR 160 (SC), where expenditure for shifting a factory was considered capital in nature, as the expenses in the present case were directly related to legal charges and court expenses, not to the acquisition or expansion of a capital asset. In conclusion, the court answered the question of law in the affirmative, in favor of the assessee, allowing the legal and court expenses as revenue/business expenditure. The assessee was awarded costs, including counsel's fee of Rs. 500.
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