Premier Construction Co. Ltd. v. Commissioner Of Income-Tax, Bombay.

V.S Desai, J.:— The question raised in this reference relates to the expenses of the litigation of a suit and appeal filed by a shareholder of the assessee-company against the assessee and its board of directors. The assessee-company claimed the said expenses as an allowable deduction under section 10(2)(xv). Its claim, however, has been disallowed by the income-tax authorities and also by the Tribunal. The assessee is a public limited company. It has large shareholdings of several other companies and it holds controlling interest in some of them. Its business consists of investing its moneys in other companies and deriving income from dividends from those subsidiary companies and distributing the same amongst the shareholders. One of the shareholders of the assessee-company was Ratanchand Khimchand Motishaw. On the 14th of April, 1952, he wrote a letter to the managing agents of the assessee-company intimating to them his intention of raising certain queries with regard to some of the subsidiary companies of the assessee-company at the time of the annual general body meeting of the assessee-company, which was scheduled to be held on the 28th April, 1952. It appears that at the time of the general body meeting, Motishaw tried to raise the several queries to which he had referred in his earlier letter but he was not permitted to do so. He then made an attempt to read the letter which he had written to the managing agents but he was not permitted to do that either. It appears that the queries, which he wanted to raise, related to the financial and other matters of the subsidiary companies. Being aggrieved by the ruling given by the president of the said meeting against Motishaw preventing him from raising his queries, he filed a suit, being Suit No. 549 of 1952, against the assessee-company and its board of directors praying for a declaration that the ruling given by the president was illegal and invalid and the subsequent resolutions passed at the said meeting were also invalid and asking for the consequential relief of several injunctions restraining the assessee-company and its board of directors from giving effect to and acting in accordance with the resolutions passed at the said meeting. The plaintiff, it appears, had also asked for interim reliefs during the pendency of the suit. The suit was resisted by the assessee-company and the board of directors both on preliminary points as well as on merits. The court held in favour of the plaintiff and against the defendants both on the preliminary point as well as on merits: It, however, granted the plaintiff only a declaration declaring that the ruling given by the second defendant, i.e, the president, at the annual general meeting was illegal. As to the other reliefs, the court took the view that in the circumstances of the case they could not be given to the plaintiff. The court, however, gave the plaintiff the costs of the suit. The defendants including the assessee-company appealed against the decree of the trial court, but the appeal failed and was dismissed with costs. The decision in appeal was given on the 20th of August, 1957. The total costs of the litigation to the assessee-company was a sum of Rs. 18,050, which the assessee-company claimed as a deduction in the assessment year 1958-59, for which the corresponding accounting period was the calendar year 1957. As we have already pointed out earlier, the claim of the assessee-company was disallowed by the income-tax authorities and the Appellate Tribunal. At the instance of the assessee, the Tribunal has referred the following question of law as arising out of its order:

“Whether, on the facts and circumstances of this case, the sum of Rs. 18,050 is a permissible deduction in the computation of the assessee-company's income for the assessment year 1958-59?”

2. Now, in disallowing the assessee's claim the view taken by the Tribunal is that the expense was not for the preservation or protection of the company or of any of its assets as such. According to the Tribunal the transaction out of which the legal proceedings arose was in the nature of a domestic quarrel between the management and some of its shareholders and it was, therefore, difficult to say that the litigation was incidental to the carrying on of the business or that the expenses were wholly and exclusively laid out for the purpose of carrying on the business of the company. Now in order that the expense of a civil litigation could be permissible as an expense wholly and exclusively laid out for the purpose of the business of the assessee, the expense must have been incurred by the assessee in its character as a trader and the transaction in respect of which the proceedings were taken must have arisen out of, or must have been incidental to, the assessee's business. An assessee could be said to have incurred the expenditure in his character as a trader if the litigation was necessary to be carried on by the assessee or defended by it to protect its trade or business or to avert a danger or threat to its carrying on of its business. If the present litigation was purely in relation to a domestic quarrel between the shareholders and the board of directors as held by the Tribunal, it could readily be said that the company would not be justified in claiming the expense incurred by it in the said litigation as expense of its business.

3. We find, however, that the suit, which Motishaw had filed against the assessee-company and the board of directors, did not confine itself merely to the settlement of the quarrel between himself and the president of the assessee-company, but went far beyond and threatened to interfere with the business of the assessee-company itself. The reliefs, which were prayed for in the suit, were that all proceedings of the meeting subsequent to the ruling given by the president of the meeting against Motishaw should be declared as null and void; all the resolutions passed at the said meeting should be declared as illegal and all conduct of the business of the assessee-company should also be declared illegal and the company should be restrained from acting in pursuance of the said resolutions. As we have already pointed out earlier, the plaintiff had also prayed for interim reliefs on the same lines during the pendency of the suit as well. These reliefs, which the plaintiff had prayed for, threatened seriously the whole of the business of the assessee-company and the assessee-company, in order to protect its business and in the interest of carrying on its business, had necessarily to come forward and contest the litigation. It is no doubt true that one part of the relief, which was asked for by the plaintiff, concerned the validity of the ruling, but that was not the whole of the relief asked for by the plaintiff and in view of the other reliefs asked for, it was necessary and essential for the assessee-company, in the interest of its business and for the purpose of its being able to carry on its business without impediment, to defend the suit. In our opinion, therefore, so far as the expenditure incurred by the assessee-company in defending the suit itself was concerned, it could be said that the said expense was wholly and exclusively laid out for the purpose of its business. We do not, however, think that the same could be said about the expenses of the appeal. In the suit the only relief, besides the relief of costs, which was given to the plaintiff, related to the legality of the ruling of the president. No other relief was given which affected the assessee-company adversely so far as its carrying on its business was concerned. The appeal, therefore, which was filed against the decree of the trial court, was only with regard to the correctness or legality of the ruling given by the president. That ruling, it may be pointed out, was with reference to the relative rights of the shareholders and the board of directors under the Companies Act with reference to the annual general meeting of the company. It had nothing to do with the business of the assessee-company, nor could the company be said to be interested in that matter in the interest of its trade or business. The assessee-company, therefore, in so far as it incurred the expense of the appeal, which related merely to the correctness or the legality of the ruling given by the president of its annual general meeting, was not incurring any expense in relation to its trade or business. That expense could at the most be said to be an expense incurred for the purpose of obtaining from the court a ruling relating to the procedure to be adopted at the meeting of the shareholders of the company itself, that is, with regard to a matter relating to the internal management of the company itself.

4. Mr. Mehta, learned counsel for the assessee, has argued that the annual general meeting of the company is a regular feature and it is desirable for the company to know what the proper procedure to be followed in relation to the rights claimed by the shareholders at such meetings was, and the expense, therefore, could be said to have been incurred by the company in the course of its business and for the purpose of its business. The learned counsel argued that the smooth working of the affairs of the company is essential for the proper conduct of its business and this is an expense which could be regarded as incurred for facilitating such smooth course in regard to the conduct of the business of the assessee-company and, therefore, permissible as an expenditure incurred in the course of its business.

5. We are not impressed by this submission of Mr. Mehta. That an expense may in some indirect way be conducive to the benefit of the business or to the better management of the business would not make it an expenditure wholly and exclusively laid out for the purpose of its business. What must be considered is the purpose for and the object of the expense at the time when it is incurred and whether the expense that has been incurred has any relation to the carrying on of the business of the company. As we have already pointed out, there is no such connection between the expenditure incurred in connection with the appeal filed by the assessee-company and the conduct of its business. The only purpose and object of that appeal was to maintain the correctness of the ruling given by the president and perhaps to maintain his prestige and dignity. In our opinion, therefore, the assessee-company will be only entitled to the expenses incurred by it by way of costs of the trial court in respect of the suit. It will, however, not be entitled to any part of the expenses which it has incurred in connection with the appeal.

6. Accordingly, our answer to the question referred to us will be that such part of the sum of Rs. 18,050 as represents the expenditure incurred by the assessee-company by way of costs of the trial court in Suit No. 549 of 1952 will be a permissible deduction in the computation of the assessee-company's income for the assessment year 1958-59. There will be no order as to costs.

7. Question answered accordingly.