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TMI Blog1961 (11) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Besides certain vehicles for the purpose of its transport operations, the company had also 36 fully paid-up shares in another company known as the Tirunelveli Motor Bus Co. Ltd. In 1942, the assessee company transferred 14 of its buses to the Tirunelveli Motor Bus Service Co. (hereinafter referred to as the T.M.B.S. Co.). Along with the vehicles, it transferred also its route rights. This transfer gave rise to series of disputes ending in several suits in which the assessee company figured as the plaintiff. During the calendar years relevant to the assessment years, 1949-50, 1950-51, 1952-53 and 1953-54, the assessee company incurred legal expenses, the eligibility of which expenses for deduction under section 10(2)(xv) is in question in the present reference. It is accordingly necessary to examine the scope of the legal actions concerned and to determine whether the expenses incurred in relation to those legal actions are of the nature covered by section 10(2)(xv). The earliest of such suits is O.S. No. 80 of 1946. In this suit, which gave rise to A.S. No. 306 of 1949, the assessee company sought for the restoration and retransfer of the buses with the routes and permits, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There is no doubt that on the failure of the T.M.B.S. Co. to acknowledge the title of the assessee company in the 14 buses and the route rights transferred to it, or to the allotment of 410 shares in lieu of the sale price of those buses and the route rights, it was undoubtedly a legal action by which the assessee sought to maintain its existing title to the assets of the business. This was so found by this court in the decision referred to. But the difficulty which the learned judges felt was that where the suit was laid in the alternative, as was the case in O.S. No. 80 of 1946, whether the expenditure could be said to have been incurred wholly and exclusively for the purpose of the business. They observed in this regard after referring to the judgment in A.S. No. 306 of 1949 which is reported as Transport Co. Ltd. v. Tirunelveli Motor Bus Service Co Ltd. [1955] 2 M.L.J. 141, 266: This passage sets out the scope of the two alternative reliefs the assessee asked for in O.S. No. 80 of 1946. One was the specific performance of the agreement between the assessee and the Tirunelveli Motor Bus Service Co. to allot 410 shares to the assessee company in the Tirunelveli Motor Bus Ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been one to acquire title to capital assets. The expenditure incurred for maintaining that claim would be of a capital nature. It was accordingly the view of this court that in so far as O.S. No. 80 of 1946 was concerned, the claim that was put forward by the assessee was partly one to maintain a pre-existing title and partly one to acquire a new title to certain number of shares. The latter part of the assets, being an expenditure in the opinion of the learned judges, incurred for acquisition of a new title, was of a capital nature. It is somewhat difficult to follow this reasoning. The allotment of 410 shares sought for as an alternative relief in O.S. No. 80 of 1946, though it might amount to the acquisition of title to certain shares, which title did not exist previously, was undoubtedly nothing more than a difference in the form of the original capital asset itself. It represented the value of the buses sold by the assessee company to T.M.B.S. Co. that was in question. There could be no claim to the shares in question except on the basis of this sale transaction which was the very capital asset about which the dispute arose. Instead of being paid in cash, the arrange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholder in the defendant company accordingly sought a decree to declare the issue and allotment of additional shares to be invalid and in the alternative to direct the defendant company to offer and re-allot the shares in the proportion contemplated by section 105C of the Companies Act. The question is whether the expenditure incurred in the prosecution of the suit would fall within the scope of section 10(2)(xv). Taking the latter prayer first, it is obvious that in so far as the assessee sought to be allotted further shares in the defendant company on the basis of its share holding, it sought to acquire title to a new capital asset. The assessee company owned 36 shares in the defendant company at the material time and the earlier suit, O.S. No. 80 of 1946, which we have referred to related to its claim to be allotted a further 410 shares in lieu of the sale price of 14 buses. Contending that it was thus the owner of 446 shares in the company it claimed to be entitled by reason of section 105C of the Companies Act to be allotted further shares in proportion to the shares held by it, in any further issue of capital by the defendant company. Clearly then, the assessee company s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... item. The remaining four suits can all be dealt with under one head. O.S. No. 59 of 1951 was instituted by the assessee company challenging the action of the management of the defendant company in payment of salaries, bonuses, etc., to its employees. The allegation was that by incurring this enlarged expenditure, the directors of the defendant company prevented the assessee company from obtaining its legitimate dividend on the shares it held. According to the assessee company, the net profits available for distribution amount the shareholders was reduced by this device adopted by the defendant company. O.S. No. 107 of 1951 was another suit for a declaration that certain of the directors of the defendant company had become disqualified to be directors. It is not necessary to enter into the details of this litigation. But it was found that the assessee company had no case at all against the defendant company in the matter of internal administration of its affairs. The suit is O.S. No. 129 of 1951. Apparently, the defendant company sought to hold a meeting to amend its articles of association, and the suit was filed to restrain the holding of that meeting. The averment made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dant company purported to call for an extraordinary general meeting to be held on 25th September, 1952, and sought to amend article 2 of its articles of association. The complaint of the assessee company was that by means of the proposed amendment the defendant company was attempting to set at nought the decision given against it in O.S. No. 129 of 1951. The decision of the House of Lords in Morgan v. Tate and Lyle Ltd. [1954] 26 I.T.R. 195 (H.L.) was referred to. It was a case in which a company engaged in sugar refining incurred expenses in propaganda campaign to oppose the threatened nationalisation of the industry. The Commissioners for the General Purposes of Income-tax found that the sum in question was mainly, wholly and exclusively laid out for the purpose of the company's trade and was an admissible deduction. The House of Lords held that the object of the expenditure being to preserve the assets of the company from seizure and so to enable it to carry on and earn profits, there was no reason in law to prevent the Commissioners from so finding. On the basis of this decision, it has been argued that if by the amendment of the articles of association the defendant com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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