1968 (5) TMI 13 - HC - Income Tax

Whether the legal expenses incurred by the assessee were of a capital nature and should be included in the actual cost of the shares under the provisions of section 12B(2)(ii) of the IT Act, 1922 - Held, yes

Summary

Issues Involved:
1. Whether legal expenses incurred by the assessee for defending the title to shares and acquiring voting rights should be treated as capital expenditure.
2. Whether these expenses should be included in the actual cost of the shares under section 12B(2)(ii) of the Indian Income-tax Act, 1922.

Detailed Analysis:

Issue 1: Nature of Legal Expenses
Assessment Officer's View:
The Income-tax Officer disallowed the litigation expenses claimed by the assessee, stating that these expenses were not incurred in connection with the sale or as expenses of a capital nature in making any addition or alteration to the capital assets.

Appellate Assistant Commissioner's View:
The Appellate Assistant Commissioner reversed this finding, holding that the legal expenses for defending the title to the shares sold constitute capital expenditure. He directed that these expenses should augment the cost of the shares in computing the capital gains or capital loss under section 12B. The Commissioner stated, "the legal expenses for defending title to a capital asset are capital expenditure and would go to add to the cost of the assets."

Tribunal's View:
The Tribunal upheld the Appellate Assistant Commissioner's decision, stating that the legal expenses were incurred by the assessee to defend its title to and maintain the value of the block of shares. The Tribunal concluded that these expenses should be included in the cost of the shares as an expenditure of a capital nature under section 12B(2)(ii).

High Court's Analysis:
The High Court examined the facts in greater detail:
- The assessee had to incur litigation expenses for having the shares registered in its name and for acquiring voting rights for each share.
- The court noted that the assessee's title to the shares was not complete until the shares were registered in its name through rectification proceedings. Therefore, the expenses incurred for these proceedings were necessary for curing or perfecting the assessee's title to the shares, making them capital expenditure.
- The court also noted that the expenses incurred for acquiring voting rights enhanced the value of the shares, thus qualifying as capital expenditure.

Issue 2: Inclusion in Actual Cost under Section 12B(2)(ii)
Legal Framework:
Section 12B(2)(ii) of the Indian Income-tax Act, 1922, allows for the deduction of "the actual cost to the assessee of the capital asset, including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto."

High Court's Interpretation:
- The court emphasized that the expression "the actual cost to the assessee" is of wide amplitude and includes any expenditure of a capital nature incurred in making additions or alterations to the asset.
- The court found that the expenses incurred for rectification proceedings were necessary to complete the assessee's title to the shares, thus forming part of the actual cost of the asset.
- Similarly, the expenses incurred for acquiring voting rights were aimed at enhancing the value of the shares, qualifying as capital expenditure under section 12B(2)(ii).

Conclusion:
The High Court concluded that the legal expenses incurred by the assessee were of a capital nature and should be included in the actual cost of the shares under section 12B(2)(ii) of the Indian Income-tax Act, 1922. The court ruled in favor of the assessee and directed the applicant to pay the costs of the reference.

Separate Judgment:
K. L. Roy J. concurred with the judgment.

Summary:
The High Court ruled that the legal expenses incurred by the assessee for defending the title to shares and acquiring voting rights should be treated as capital expenditure. These expenses should be included in the actual cost of the shares under section 12B(2)(ii) of the Indian Income-tax Act, 1922. The court emphasized that the expenses were necessary for curing or perfecting the assessee's title to the shares and enhancing their value, thus qualifying as capital expenditure. The applicant was directed to pay the costs of the reference.