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TMI Blog1982 (3) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of the assessee's business and as such were allowable in computing the assessee's total income ? " The assessee is a limited company and this reference relates to the assessment years 1968-69 and 1969-70. For these assessment years the assessee-company claimed deduction in working out the business income of legal expenses in connection with two suits, one of which was filed by two shareholders of the assessee-company against the then managing agents and others and the other of which was filed by the United Provinces Commercial Corporation Ltd. against the then managing agents and others, in which the assessee-company was also impleaded as a defendant. These expenses which were claimed as deduction amounted to Rs. 14,300 for the assessment year 1968-69 and Rs. 11,500 for the assessment year 1969-70. The ITO, however, did not accept the assessee's claim and disallowed these expenses while working out the income of the assesseecompany. The assessee-company went up in appeal before the AAC. It would be helpful in view of the exhaustive manner in which the AAC dealt with the facts in this case to refer to the relevant portion of the order of the AAC. The AAC observed, inter alia, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee-company and the assessee-company were interested parties and, therefore, 30% of the expenses incurred were borne by the assessee. After referring to the contentions of the parties the Tribunal came to the conclusion that both the suits were launched against the assessee-company because of its business activities and, therefore, the litigation expenses being revenue expenditure were fully allowable. The assessee obviously resisted the suit in order to protect its business according to the Tribunal. Therefore, the Tribunal held that the entire expenditure of Rs. 14,300 was allowable and directed accordingly. Thereupon, application was made for reference but the questions were disallowed but, as directed by this Hon'ble court, two questions indicated above have been referred to. We have noted the nature of the suit. The first suit, as it is apparent, boils down to the allegations that funds or assets of the company were being fittered away and dissipated by "unwise investments" or "by making commitments for the benefit of unsound concerns ". The second suit, however, was filed by the United Provinces Commercial Corporation Ltd. against Steel Brothers Co. Ltd., the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rayer alone was granted by the trial court. The company appealed against the decree. It was held that with regard to the expenses incurred by the company in defending the suit in the trial court, these were allowable under s. 10(2)(xv) as the plaintiff had claimed for reliefs which, if granted, would have affected the carrying on of the business of the company. The expenses of the appeal were not allowable as the appeal related only to matter which concerned the shareholder and the board, i.e., whether the ruling given by the president, not permitting the plaintiff to put questions, was legal and was not incurred for carrying on the business of the company. As we have noted it would have to be found out whether the expense that has been incurred had any relation to the carrying on of the business of the company. Reliance was also placed on the decision of the Punjab High Court in CIT v. Shiwalik Talkies Ltd. [1967] 63 ITR 83. There, it was held that expenditure incurred in resisting an application to the court by the shareholders of the assessee-company under, s. 153C of the Companies Act, 1913, questioning the appointment of some of the directors of the company, could not be con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reme Court granted a decree for damages and the question was whether the litigation expenses constituted expenditure laid out wholly and exclusively for the purpose of the business. It was held by the Supreme Court that the assessee resisted the suit in order to protect its business and not to safeguard its prospects of getting a new lease. It did not initiate the proceedings. It merely defended the claim made against it. The suit was launched against it because of one of its business activities and, therefore, the litigation expenses were revenue expenditure laid out wholly and exclusively for the purpose of the business. The Supreme Court reiterated that where litigation expenses were incurred by the assessee for the purpose of creating, curing or completing the assessee's title to the capital, then the expenses incurred must be considered as capital expenditure. But if the litigation expenses were incurred to protect the business of the assessee, they must be considered as revenue expenditure. The position was again reviewed by the Supreme Court in the case of CIT v. Delhi Safe Deposit Co. Ltd. [1982] 133 ITR 756. There, V, L and the assessee-company (which had also other busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of an expenditure laid out wholly and exclusively for the purposes of trade or business was that it was incurred by the assessee as incidental to its trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader. The expenditure incurred on the preservation of a profit-earning asset of business was always, according to the Supreme Court, deductible expenditure. Our attention was also drawn to a decision of this court in respect of a litigation which was slightly in a different context. This was the case of Albert David Ltd. v. CIT [1981] 131 ITR 192 (Cal). There the expenditure incurred in connection with the suit was the subject-matter of consideration by this court. It was a fight between the two groups of directors as to who would have the controlling block of shares. In this case, as we have mentioned before, the true test is to find out the purpose and the object of the expenses at the time when it was incurred and whether the expenditure incurred had any relation to the carrying on of the business of the assessee-company. In the instant case before us, as we have noted from the order of the AAC, the suit was prim ..... X X X X Extracts X X X X X X X X Extracts X X X X
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