1967 (6) TMI 16 - HC - Income Tax

Expenditure incurred by the assessees in collecting proxies from the shareholders cannot be regarded as expenditure incurred for the purpose of earning directors fees - hence allowable as a deduction under s. 12(2)

Summary

Issues Involved:
1. Permissibility of deduction under Section 12(2) of the Income-tax Act, 1922.
2. Applicability of Section 10(2)(xv) of the Income-tax Act, 1922.

Analysis:

1. Permissibility of Deduction under Section 12(2) of the Income-tax Act, 1922:
The principal question in this case was whether the expenditure incurred by the assessees could be considered as solely for the purpose of earning directors' fees, making it a permissible deduction under Section 12(2) of the Income-tax Act, 1922. The court examined the nature of the expenditure, emphasizing that the purpose must be solely to earn the income, not mixed with any other purpose.

The Tribunal had allowed the deduction under Section 12(2) based on the finding that the expenditure was incurred to bring the mismanagement of the company to the shareholders' notice, not for personal gain. The court upheld this view for the expenditure on issuing circulars dated 11th July, 1960, and 5th September, 1960, stating that these actions were taken voluntarily on grounds of commercial expediency to indirectly facilitate the earning of directors' fees.

However, the court did not allow the deduction for the expenditure incurred in collecting proxies from shareholders. It was determined that this action was not connected, even indirectly, with earning directors' fees and did not fall within the scope of commercial expediency related to the director's duties.

2. Applicability of Section 10(2)(xv) of the Income-tax Act, 1922:
The assessees also based their claim for deduction on Section 10(2)(xv), which allows deductions for any expenditure laid out wholly and exclusively for the purposes of the business. The court expressed doubt about the applicability of Section 10(2)(xv) in this case but concluded that even if it were applicable, the disallowed expenditure under Section 12(2) would also not be allowable under Section 10(2)(xv). This is because there was no indirect connection between the disallowed expenditure and the carrying on of the activity of a director.

Conclusion:
The court concluded that the expenditure incurred by the assessees in issuing the circulars dated 11th July, 1960, and 5th September, 1960, was an allowable deduction under Section 12(2) of the Income-tax Act, 1922. However, the rest of the expenditure, particularly for collecting proxies, was not allowable under either Section 10(2)(xv) or Section 12(2). Each party was ordered to bear its own costs.