1974 (5) TMI 3 - HC - Income Tax

1. Whether the amount of Rs. 5, 256 deducted by Ails. Iron & Steel Stockists (Civil Supplies) Association Delhi is a proper deduction from the business income of the assessee as business loss bad debt or business expense ? 2. Whether legal expenses incurred by the assessee in defending a suit filed by its former managing director for a declaration that his removal was illegal and he continued as the managing director were admissible deduction from business income? 3. Whether the law charges incurred by the assessee-company in connection with criminal complaints against the former managing director for misappropriation of company s funds and efforts to take forcible possession of company s business premises respectively are a permissible deduction from business profits of the assesseec-ompany ?

Issues Involved:
1. Deduction of Rs. 5,256 as business loss, bad debt, or business expense.
2. Admissibility of legal expenses of Rs. 550 incurred in defending a suit filed by a former managing director.
3. Permissibility of law charges of Rs. 825 and Rs. 385 incurred in connection with criminal complaints against the former managing director.

Detailed Analysis:

Issue 1: Deduction of Rs. 5,256 as Business Loss, Bad Debt, or Business Expense
The first issue concerns whether the amount of Rs. 5,256 deducted by the Iron & Steel Stockists (Civil Supplies) Association, Delhi, is a proper deduction from the business income of the assessee as business loss, bad debt, or business expense.

The assessee, M/s. Iron Traders Private Ltd., along with other registered stockholders, formed an association for the purchase and sale of disposal goods from the Government of India. The association deposited a sum of Rs. 8.39 lakhs with the Government, but due to the partition, no allotment was made, and the amount was refunded with certain deductions. The assessee contributed Rs. 77,506 to the association, out of which Rs. 72,244 was refunded, and Rs. 5,256 was deducted for expenses or interest.

The Income-tax Officer disallowed the claim on two grounds:
1. The assessee failed to furnish complete details of the loss claimed.
2. The amount could be considered a share of loss from an unregistered firm.

The Appellate Assistant Commissioner and the Tribunal confirmed the disallowance, stating it was a loss of capital.

The court analyzed the documents and found that the contributions made by the members were not in the nature of the price of the goods paid in advance but were contributions of share capital. The amount of Rs. 5,256 was not considered revenue expenditure, and thus, the Tribunal was right in disallowing the claim.

Conclusion: The answer to the first question is in the negative, against the assessee and in favor of the revenue.

Issue 2: Admissibility of Legal Expenses of Rs. 550
The second issue pertains to whether legal expenses of Rs. 550 incurred by the assessee in defending a suit filed by its former managing director are an admissible deduction from business income.

The court noted that the expenditure was incurred in connection with a suit filed by the former managing director against the company, not against the directors personally. The company was bound to defend the suit, making the expenses revenue expenditure.

Conclusion: The second question is answered in the negative, against the revenue and in favor of the assessee.

Issue 3: Permissibility of Law Charges of Rs. 825 and Rs. 385
The third issue involves whether the law charges of Rs. 825 and Rs. 385 incurred in connection with criminal complaints against the former managing director for misappropriation of company funds and efforts to take forcible possession of company premises are permissible deductions from business profits.

The court reviewed the resolutions and documents showing that the former managing director had misappropriated Rs. 5,000. The company had to file a criminal complaint due to his failure to return the amount. The court cited the Supreme Court's decision in Commissioner of Income-tax v. Dhanrajgirji Raja Narasingirji, which held that expenditure incurred in connection with criminal litigation could be deducted as business expenditure if it was bona fide and wholly and exclusively for business purposes.

Conclusion: The third question is answered in the affirmative, in favor of the assessee and against the revenue.

Final Order: There shall be no order as to costs.

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