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TMI Blog1975 (12) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... ction with liquidation proceedings which the assessee-company had initialed against Lalbhai Trikamlal Mills Ltd. (hereinafter referred to as " the Lal Mills This amount of Rs. 92,308 represented court expenses incurred during the year out of provision made in calendar year 1958. So far as the income in calendar year 1958 was concerned, the amount of Rs. 92,308 was disallowed in that year and was left for consideration in the assessment year 1960-61. The major portion of the expenses was incurred towards liquidation proceedings of the Lal Mills. At this stage it is necessary to set out some facts which have been found by the Tribunal and which are now established by the two additional documents brought on the record of the proceedings before us. The Lal Mills was incorporated on July 9, 1929. The managing agents of the Lal Mills were Ramachandra Lalbhai, Jasubhai Lalbhai and one Chinubhai Lalbhai. After the death of Chinubhai, his son, Bharatkumar, seems to have been taken up as one of the managing agents. In the year 1953, the Lal Mills was in financial difficulties and a winding-up petition was filed by one of the creditors against the Lal Mills in the District Court at Ahmedabad. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11,750 had to be spent by the assessee-company towards litigation expenses in connection with that dispute and ultimately the matter had gone to the High Court at Bombay in appeal in respect of those proceedings. That sum of Rs. 11,750, was claimed as an item of expenditure by the assessee so far as assessment year 1956-57 was concerned. The Income-tax Officer had disallowed that amount of Rs. 11,750 by way of expenditure but the matter was taken in appeal and the Appellate Assistant Commissioner allowed the claim as revenue expenditure. On December 10, 1954, the assessee-company sent a notice of demand to Lal Mills claiming repayment of Rs. 31 lakhs and unsecured amount of Rs. 2 lakhs and it also claimed interest on the debentures of Rs. 25 lakhs since the interest was not paid. A reply to this notice was sent by the Lal Mills on December 27, 1954, and ultimately, on January 15, 1955, the assessee-company presented a, winding-up petition in the District Court at Ahmedabad since that court had jurisdiction under the Indian Companies Act, 1913. After the passing of the Indian Companies Act, 1956, the winding-up proceedings were transferred to the High Court of Bombay. Ultimately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t aspect was concerned. Thereafter, at the instance of the revenue, the question set out hereinabove has been referred to us for our opinion. We may also point out that the relevant portion of the remand report called for by the Appellate Assistant Commissioner has been produced and by the consent of the parties marked as exhibit 1 on the record of this reference. The agreement dated August 20, 1953, is annexure " D " on the record of this reference and it sets out how the entire arrangement for the assessee-company to advance moneys to Lal Mills was arrived at and what were the terms and conditions of that arrangement. One of the recitals in the agreement is as follows: " Whereas Lalbhai Mills having come into financial difficulties, a petition for winding up of Lalbhai Mills was presented at the instance of one of the creditors to the District Court at Ahmedabad, for winding up of Lalbhai Mills, which petition is still pending in the said District Court AND WHEREAS by their order dated 24th July, 1953, the Central Government, under the powers vested in them have caused an investigation to be made into the affairs of Lalbhai Mills under the provisions of the Industries (Deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charge or management of the business of Lal Mills and if at the end of seven years Lal Hills Mills had not paid back in full the mortgage debentures of Rs. 25 lakhs or other advance or advances made by Ambica Mills to Lal Mills for carrying on its business, then the agreement was to continue for such further period until the whole of the amount due under the said debentures and also the advance or advances which might have been made by Ambica Mills to Lal Mills had been paid off in full. It was also agreed that the period of seven years could be extended by a, further period of two years at the option of Lal Mills. The assessee-company became entitled under the terms of the agreement, clause 13, to appoint four directors, one of whom was to be the chairman of Lal Mills: the managing agents between themselves, that is, the Lalbhai group were to appoint three directors on the board of directors including the ex-officio directors and the Lalbhai group were to exercise their voting strength in any general meeting of the Lal Mills in favour of the appointment of the said four directors to be appointed by Ambica Mills and an irrevocable power of attorney was also to be executed in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were contested bitterly and during the pendency of those proceedings, it appears that it was agreed between Lalbhai group on the one hand and Harivallabh group on the other that the Harivallabh group should buy from the Lalbhai group majority shareholding so as to enable the Harivallabh group to have complete majority shareholding in Lal Mills and after that arrangement was arrived at, the winding-up petition was withdrawn and no other creditor of the Lal Mills had come forward to support the winding-up proceedings. It was urged by Mr. Kaji, on behalf of the revenue before us, that the assessee-company was properly secured so far as its advances to the extent of Rs. 65 lakhs were concerned by the debenture mortgage deed to the extent of Rs. 25 lakhs and by the second mortgage deed to the extent of the remaining amount out of Rs. 65 lakhs and it had security over the entire assets of the Lal Mills. It was urged that the assessee-company could have filed a civil suit to rent over its outstandings if it was entitled in law to do so and instead it adopted liquidation proceedings with a view to obtain ultimate control over the Lal Mills. It was urged in this connection that liquidat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts are concerned, that even after the assessee-company had entered into the management under the terms of agreement of August 20, 1953, it had to fight a litigation to ensure its complete management over the affairs of Lal Mills. Even after the period of management of one year by Lal Mills and even after nearly Rs. 67 lakhs were secured by one or the other mortgage and Rs. 2 lakhs unsecured had been sunk by the assessee-company in the Lal Mills, that company was still in financial difficulties and the financial difficulties were such that it is alleged by the assessee-company in the winding-up petition and in the correspondence which preceded the winding-up petition that Lal Mills was not even in a position to pay recurring interest on the amount of Rs. 25 lakhs secured by the debentures. The learned Advocate-General appearing for the assessee-company is right when he contends that no secured creditor would take a risk of initiating winding-up proceedings unless he felt that the situation was so hopeless that winding-up proceeding was the only way out for him to safeguard his own security. In the scheme of winding-up proceedings under the Companies Act, 1956, as envisaged, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mary motive in incurring it must be directly to earn income thereby. In the present case it cannot be disputed that if the litigation expenditure is incurred by the assessee-company in order to safe guard the loans advanced by it, it would be revenue expenditure. In the instant case nobody could have predicated in advance when the winding-up petition was started in the District Court at Ahmedabad on January 15, 1955, that ultimately the Lalbhai group of shareholders would be prepared to surrender their shareholding to the Harivallabh group, that is, the group controlling and holding the majority in the assessee-company. What was the original object with which the financial arrangement was entered into and the subsequent winding-up proceedings were launched by the assessee-company ? In view of the litigation which required an expenditure of Rs. 11,750 and in view of the bitter fight which has been noticed by Mody J., in exhibit 2, it is not possible for us to say that the winding-up petition was a collusive proceeding between the two groups and that this was a part of the prearranged plan or a pre-arranged scheme so that through the machinery of the winding-up petition the comple ..... X X X X Extracts X X X X X X X X Extracts X X X X
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