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TMI Blog1980 (2) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... , the disallowance of Rs. 19,715 out of legal expenses is valid in law ? To take up the first question, the brief facts that are available on record are as follows: The assessee is carrying on business in the manufacture of sugar. The sugar factory is a seasonal one. The factory of the assessee worked triple shift during the manufacturing season. The assessee claimed that it was entitled to full extra shift allowance. The ITO was, however, of opinion that since the machinery had worked extra shifts for less than 300 days, the extra shift allowance had to be calculated only at a proportion of the normal depreciation, the proportion being that of the number of days during which the machinery actually worked extra shifts to 300 days. The exact details of the number of days of extra shifts worked by the machinery are not available from the record and it appears that the ITO, the AAC and the Appellate Tribunal rejected the assessee's claim for full allowance by their orders in the case of same assessee for the assessment year 1950-51. It is the correctness of this that, is challenged by the first question that has been referred to us. The same question arose for consideration in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 ITR 748 (All) and CIT v. Khedut Sahakari Khand Udyog Mandli [1976] 104 ITR 206 (Guj) in which also the same view has been taken. The first question is, therefore, answered accordingly. In regard to the second question again the relevant facts can be briefly stated. The assessee-company and the Raza Sugar Co. Ltd. (which were separate companies during the relevant previous year but which were subsequently amalgamated to form the Raza Buland Sugar Co. Ltd.) were equal partners in a partnership firm known as M/s. Agricultural Co. The Agricultural Co. was an unregistered firm. It had sustained a loss. The assessee claimed that its half share of the loss from this firm should be set off against its other income. This claim was rejected by the ITO, the AAC and the Appellate Tribunal following their orders in earlier years. The Tribunal has referred to an earlier decision taken by it in the case of the same assessee for the assessment year 1950-51 on this particular issue. This question is also covered by the decision of this court dated May 27, 1977 in ITR Nos. 9 and 31/69 (Raza Sugar Co. Ltd. v. CIT [1981] 130 ITR 421) earlier referred to. This court has pointed out that the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me assessment year. It will be seen from the above that this court has apparently taken contrary views on the above issue. While deciding ITR Nos. 9 31/69 [Raza Sugar Co. Ltd. v. CIT [1981] 130 ITR 421 (Delhi)], the attention of this court does not appear to have been invited to the earlier decision in CIT v. Ram Swarup Gupta [1973] 92 ITR 495 (Delhi). In view of this and in view of the conflict of other judicial decisions referred to above, we would normally have considered referring this issue to a larger Bench but this course is rendered unnecessary for the reason that the question appears to be concluded against the assessee for the following reason. The same question came up for consideration in the case of the assessee-company (in relation to the assessment years 1954-55 to 1956-57) before the Allahabad High Court which constituted a Full Bench to hear the case. The decision of the Full Bench is Raza Buland Sugar Co. Ltd. v. CIT [1976] 102 ITR 451 (All) [FB]. The Full Bench of the Allahabad High Court did not resolve the conflict of opinion (though one of the learned judges, Gulati J., was inclined to the view that the set-off was permissible) but answered the question ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Agricultural Co. This worked out to Rs. 10,000 which was disallowed by the ITO. This disallowance was confirmed by the AAC and the Appellate Tribunal. The Tribunal has pointed out that, to the extent the assessee had incurred expenditure for the running of the Agricultural Co. which was a separate entity, it could not be said to be expenditure incurred for the purposes of the assessee's business and, therefore, a disallowance was called for and that the amount disallowed was also reasonable. We see nothing wrong in this conclusion of the Tribunal. It has no doubt been held in some cases that where an assessee is running a business and expenses are incurred for the purposes of that business, the mere fact that a section of the activities might result in income which is not taxable would not justify the disallowance of expenditure incurred by the assessee for the purposes of its business. The present case, however, is totally different. This is a case where a portion of the expenditure incurred by the assessee is in relation to the business of another assessee. It is clear that the assessee is entitled to a deduction only in respect of expenditure incurred by it for the purposes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the dividends which could not be said to affect the running or earning of the profits of the business and, therefore, the expenditure was rightly disallowed. In our opinion the view taken by the Tribunal is correct. The legal expenses in question cannot be described as having been laid out wholly and exclusively for the purposes of the business carried on by the company. The expenses were not incurred by the company in carrying on the business and earning profits therefrom. The dispute in the present case, did not relate to any aspect of the carrying on of business or earning: of profits by the company. It was also not an expenditure incurred by the company with a view to preserve its, assets or defend itself so as to be in position to carry on the business better or earn more profits. The company having made profits decided to distribute a dividend. Under the law, the dividend could be in cash or in specie. The question was whether the dividends in specie were rightly distributed by the company or not. In other words, the dispute between the shareholders who filed the suit and the company related to an aspect of the proprietorship of the business and the " sharing " of profit ..... 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