1971 (2) TMI 30 - HC - Income Tax

Claim for deduction under section 10(2)(xv) - Litigation Expenses on appointments of receiver and authorised controller - it was not shown that the expenditure was necessary or that it was spent for the safeguard of assessee s business assets or for preventing or removing any hindrance in the way of the smooth functioning of assessee s business expenditure are not deductible

Issues Involved:

1. Whether the legal fees paid to counsel for respondents Nos. 2 and 5 for the assessment year 1953-54 could be considered as expenditure covered by section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Whether the expenditure incurred in a writ petition by Onkar Mal Khetan against Kedar Nath Khetan for the assessment year 1954-55 could be claimed as a deduction under section 10(2)(xv) of the Act.

Issue-wise Detailed Analysis:

Issue 1: Legal Fees for Assessment Year 1953-54

The primary question was whether the legal fees paid to counsel for respondents Nos. 2 and 5 (Kedarnath Khetan and Radhey Kishun Khetan) for the assessment year 1953-54 could be considered as expenditure covered by section 10(2)(xv) of the Indian Income-tax Act, 1922. The assessee, Ishwari Khetan Sugar Mills (P.) Ltd., claimed a deduction of Rs. 50,087 for legal expenses, out of which Rs. 37,734 was disallowed by the Income-tax Officer. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld this disallowance.

The Tribunal observed that the main relief sought in Suit No. 59 of 1951 was the appointment of a receiver, which would not have adversely affected the assessee-company's business but would have impacted the personal interests of Kedar Nath Khetan and his group. The Tribunal concluded that the expenditure was incurred to safeguard the interests of the managing agents rather than the business of the assessee-company. Therefore, it was not laid out wholly and exclusively for the purpose of the business.

The High Court agreed with the Tribunal's finding, stating that there was no material evidence showing that the company's business was hampered or faced any obstacle due to the internal disputes among the partners of the managing agency firms. Consequently, the court answered the first question in the negative, affirming that the legal fees were not deductible under section 10(2)(xv).

Issue 2: Expenditure in Writ Petition for Assessment Year 1954-55

The second issue concerned whether the expenditure of Rs. 14,335 incurred in a writ petition by Onkar Mal Khetan against Kedar Nath Khetan, who had been appointed as the authorized controller of the assessee-company, could be claimed as a deduction under section 10(2)(xv) for the assessment year 1954-55. The Tribunal noted that the writ petition was filed by Onkar Mal Khetan, with the assessee-company also listed as a petitioner. The Tribunal observed that there was no evidence showing that the company's business faced any actual obstacle or hindrance necessitating the expenditure.

The High Court emphasized that for an expenditure to be deductible under section 10(2)(xv), it must be laid out wholly and exclusively for the purpose of the business. The court found no material indicating that the expenditure was necessary for protecting the company's business assets or ensuring the smooth running of its business. The court also noted that the litigation primarily arose from disputes among the partners of the managing agency firms, which did not directly concern the company's business.

The court further reasoned that the expenses incurred in the writ petition could not be considered as laid out wholly and exclusively for the company's business, as they were related to internal disputes within the managing agency firms. Therefore, the second question was also answered in the negative, confirming that the expenditure was not deductible under section 10(2)(xv).

Conclusion:

Both questions were answered in the negative, indicating that the legal expenses claimed by the assessee for the assessment years 1953-54 and 1954-55 were not deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922. The income-tax department was entitled to costs assessed at Rs. 400, with counsel's fee assessed at Rs. 300.

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