1968 (10) TMI 6 - HC - Income Tax

Legal expenses and travelling expenses - for the purpose of protecting its shares in the MM Ltd., and to ensure its prospective dividend earning capacity - allowable u/s 12(2)

Summary

Issues Involved:
1. Whether the legal and traveling expenses incurred by the assessee-company were allowable under section 12(2) of the Income-tax Act, 1922.
2. Whether the entire amount of expenses should be allowed or only a proportionate part thereof.

Issue-Wise Detailed Analysis:

1. Allowability of Expenses under Section 12(2) of the Income-tax Act, 1922:

The assessee-company incurred legal charges of Rs. 77,158 and traveling expenses of Rs. 11,891 in connection with litigation to protect its shareholding in Muir Mills Ltd. The primary contention was whether these expenses were allowable under section 12(2) of the Income-tax Act, 1922, which permits deductions for expenditures incurred solely for the purpose of earning income from other sources, excluding capital expenditures.

The Income-tax Officer and the Appellate Assistant Commissioner disallowed the expenses, arguing that the real purpose of the litigation was to acquire control over Muir Mills Ltd., making the expenses capital in nature. The Tribunal, however, found that the expenses were incurred to protect the shares and ensure their prospective dividend-earning capacity, thus allowable under section 12(2).

The court examined whether the expenses were capital or revenue in nature. It was established that the expenses were incurred to protect and preserve the investment, not to improve it. Citing precedents like Southern (H. M. Inspector of Taxes) v. Borax Consolidated Ltd. and Commissioner of Income-tax v. Finlay Mills Ltd., the court concluded that expenses for protecting a capital asset are revenue in nature. Therefore, the entire amount was allowable under section 12(2).

2. Proportionate Allowance of Expenses:

The Tribunal allowed only a proportionate part (Rs. 15,000) of the total expenses, considering that the assessee-company held only a fraction of the total shareholding in Muir Mills Ltd. The court, however, found this approach flawed. It noted that the expenses were incurred voluntarily by the assessee on grounds of commercial expediency and for the legitimate needs of the company, benefiting all shareholders equally.

The court emphasized that the test for allowability is not what a prudent businessman would do but whether the expenditure was incurred solely for earning income. Referencing cases like Eastern Investments Ltd. v. Commissioner of Income-tax and Usher's Wiltshire Brewery Ltd. v. Bruce (Surveyor of Taxes), the court held that the entire expenditure was allowable, as it was incurred for the protection and preservation of the shares, ensuring their dividend-earning capacity.

The standing counsel's argument that the Tribunal could allow only a part of the expenses under section 12(5), read with section 10(4A), was dismissed. The court found no evidence that the expenditure was excessive or unreasonable or that it provided undue benefit to the Singhanias to the exclusion of other shareholders.

Conclusion:

The court concluded that the entire legal and traveling expenses incurred by the assessee, amounting to Rs. 77,158 and Rs. 11,891, respectively, were allowable under section 12(2) of the Income-tax Act, 1922. The Tribunal was not justified in disallowing a substantial portion thereof. The assessee was awarded a consolidated cost of Rs. 300 from the department.