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TMI Blog1968 (10) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... ajor General Madan Shamsher Jung Bahadur Rana and Shri Hanuman Prasad Dhanuka. They also purchased some more shares in the open market and by May, 1947, they possessed 5,085 ordinary shares and 19,540 preference shares of the said company. Thereafter, they floated two private companies, viz., the Indian Textile Syndicate Ltd, and the Cotton Textile Corporation Ltd. The Indian Textile Syndicate Ltd. was appointed as the managing agents and the Cotton Textile Corporation Ltd. as the selling agents of the Muir Mills. Subsequently, there were differences between them and the entire lot of shares, which had been pledged with M/s. Hongkong and Shanghai Banking Corporation Ltd., as security for certain advances taken from that bank, were sold in auction on April 18, 1950. The bidders at the auction were M/s. Bengal and Assam Investors Ltd., represented by their director, Shri Lakshmipat Singhania, and one Shri Hari Shankar Bagla. Ultimately, the highest bid of Shri Lakshmipat Singhania for Rs. 87,05,000 was accepted and thereupon M/s. Bengal and Assam Investors Ltd. came to be the owners of those 5,085 ordinary shares and 19,540 preference shares of the Muir Mills Ltd. Although by the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected to rectify the register of members by registration of the transfer of the preference and ordinary shares held by M/s. Bengal and Assam Investors Ltd. Another relief prayed for was that the managing agency agreement entered into by M/s. Muir Mills Ltd. with M/s. Indian Textile Syndicate (Private) Ltd. and the sole selling agency agreement with M/s. Kanpur Agencies (Private) Ltd. be terminated. An ad interim order was passed by the court whereby the existing board of directors was suspended and a committee of management was appointed with the late Dr. N. P. Asthana, as the chairman. The court also directed the suspension of the existing managing agents for a period of six months and the assessee-company was ordered to run the Muir Mills Ltd. under the supervision of the committee of management. These interim orders were made by the court on March 1, 1957, and October 27, 1957. Before the orders aforesaid had been made by this court, the directors of the assessee-company held a meeting on August 30, 1955. In that meeting the report of the financial adviser submitted to the directors was considered. The financial adviser pointed out that the assessee-company had a substantial s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e litigation was to oust the Baglas from the management of the Muir Mills and acquire control over the Muir Mills Ltd. by the Singhanias. As such, the expenses were of capital nature. Accordingly, I agree with the Income-tax Officer that the expenses were not allowable either under section 10(2)(xv) or section 12(2) of the Income-tax Act." In second appeal, the Appellate Tribunal took a different view. The Tribunal found that the expenses in question were incurred by the assessee-company for the purpose of protecting its shares in the Muir Mills Co. Ltd. and to ensure its prospective dividend earning capacity. The Tribunal, therefore, held that the expenditure was admissible under section 12(2) of the Income-tax Act. As regards the quantum of allowance, the Tribunal took the view that the whole of the expenditure was not a permissible deduction. The Tribunal took into consideration the fact that the investment of M/s. Bengal and Assam Investors Ltd. in M/s. Muir Mills Ltd. amounted to Rs. 87,05,000 out of which the assessee-company had purchased from it only 750 ordinary shares and 3,625 preference shares for a sum of Rs. 15,01,250. The Tribunal, therefore, held that, roughly 1/6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a case of mere protection or maintenance of the investments but it was a case in which the investments were sought to be improved. The expenditure incurred in that connection, it was argued, cannot be regarded as an expenditure of revenue nature but it should be regarded as a capital expenditure. If the expenses were regarded as capital in nature they were, clearly, excluded from the purview of section 12(2). Sri Shanti Bhushan also pointed out that the assessee-company was itself not a party to the company case and, at all events, its shareholding was much less than that of M/s. Bengal and Assam Investors Ltd., which was the party to the company case. It was, therefore, incumbent on the part of M/s. Bengal and Assam Investors Ltd. to bear the major part of the legal expenses. Considered from this point of view, it must be held that the expenditure incurred by the assessee cannot be regarded as having been expended solely for the purpose of earning dividend. Finally, the learned standing counsel contended that even if the expenditure is regarded as having been incurred for the purpose of protection of the shares in question, it would not be allowable under section 12(2) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire legal expenses, the Tribunal said as follows in paragraph 14 of its order : " In the light of the above finding, we must uphold the contention of the assessee that the expenditure was incurred for the purpose of protecting its shares in the Muir Mills Co. Ltd., and to ensure its prospective dividend earning capacity. As such, the expenditure would be admissible under section 12(2) of the Income-tax Act." Thus, according to the Tribunal, the objectives which induced the assessee to finance the litigation were two-fold, namely, to protect the shares, and, secondly, to insure the prospective dividend earning capacity of the shares. In either case, the expenditure would be an allowable deduction. Shri Shanti Bhushan's contention that the litigation was financed by the assessee-company with a view to improve the quality of its shares and, therefore, it is capital in character has to be considered in the background of contemporaneous events. The assessee had invested a sum of Rs. 15 lakhs in the purchase of the shares and it had to safeguard the investment and ensure realisation of dividends therefrom. The Baglas were frittering away the assets of the Muir Mills Ltd. and showi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted with approval by the House of Lords in Morgan v. Tate and Lyle Ltd. and also by the Supreme Court in Commissioner of Income-tax v. Finlay Mills Ltd. and in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax. In the case of Finlay Mills, the Supreme Court, referring to the decision in Southern (H. M. Inspector of Taxes) v. Borax Consolidated Ltd., said that where a sum of money is laid out for the acquisition or the improvement of a fixed capital asset, it is attributable to capital, but if no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital asset of the company. In the present case, we have found that the expenses were incurred by the assessee not for any improvement of the investments but for protection and preservation of the shares. The fact that as a result of such expenses the assessee expected to earn better dividends is an additional argument for their allowance under section 12(2) of the Income-tax Act, 1922. The learned standing counsel then contended that the expenses were not incurred by the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of their business as brewers. These premises were let out to tenants who were " tied " to purchase the been manufactured by the assessee-company. The assessee claimed, inter alia, that in computation of their profits for assessment under Schedule D the following expenses should be allowed: (i) expenses for repairs to the tied houses incurred by the assessee ; (ii) fire and licence insurance premiums ; (iii) rates and taxes, and (iv) legal and other costs. The tenants of the tied houses were bound to pay some of these moneys themselves in terms of their leases. The House of Lords held that the entire expenditure was a proper debit in the computation of the assessable income of the brewery company notwithstanding the fact that " it enures also to the benefit of the tenant's separate trade in the tied house ". In the present case, as in the case of Eastern Investments Ltd., there is no allegation of fraud and the expenses were incurred voluntarily by the assessee on grounds of commercial expediency. The fact that it was not necessary for the assessee to bear the entire expenditure or that the expenditure also enured to the benefit of the other concerns of the Singhanias or that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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