Transport Company Limited v. Commissioner Of Income-Tax, Madras

The Judgment of the Court was delivered by

Rajagopalan, J.:— The assessee company, which engaged itself mainly in the business of motor transport, owned several buses and lorries. In 1942 it entered into a contract with another transport concern, the Tirunelveli Motor Bus Service Company Limited, Tirunelveli, under which fourteen of the assessee's buses with their route rights were transferred to the latter company. The Tirunelveli Motor Bus Service Company Limited would not implement the bargain. Litigation ensued. The assessee filed first O.S No. 35 of 1945 on 20th April, 1945. That suit was eventually dismissed. That was followed up with the institution of O.S No. 80 of 1946 on 1st November, 1946. Against the decision of the learned Subordinate Judge in O.S No. 80 of 1946, the assessee preferred A.S No. 306 of 1949 to this Court. The judgment in that appeal has been reported in Transport Company v. Tirunelveli Motor Bus Company 1955 2 M.L.J 141..

2. The accounting year of the assessee was the calendar year. In 1946 the assessee spent sums totalling Rs. 2,510-13-4 and Rs. 2,901 to meet the charges of litigation. Rs. 2,510-13-4 was made up of three heads : Rs. 108-4-0 spent for O.S No. 307 of 1945; Rs. 28 spent for conducting the proceedings in a claim petition in proceedings in execution of the decree in O.S No. 31 of 1940, and Rs. 2,374-9-4 spent in conducting O.S No. 35 of 1945. In the same year the assessee expended Rs. 2,901 for conducting O.S No. 80 of 1946, but these charges the assessee carried forward to the next accounting period when making up the profit and loss statement for 1946. This sum and the further sums expended in 1947 for conducting O.S No. 80 of 1946 totalled Rs. 4,994-8-0.

3. In the assessment year 1947–48 the assessee claimed Rs. 2,510-13-4 as a permissible deduction under section 10(2)(xv) of the Income-tax Act. The claim in the assessment year 1948–49 was for Rs. 4,994-8-0. These claims were disallowed by the Income-tax Officer. On appeal the Appellate Assistant Commissioner allowed them. The Department appealed to the Tribunal, which set aside the order of the Appellate Assistant Commissioner and restored that of the Income-tax Officer. Under section 66(2) of the Act the Tribunal referred the following question for the determination of this Court:

“Whether on the facts and in the circumstances of the case, the expenditure claimed by the company is permissible deduction under section 10(2)(xv) of the Act.”

4. Neither from the appellate order of the Tribunal nor from the statement of the case it submitted is it clear whether the Tribunal kept in view, that the litigation expenses claimed as a permissible deduction by the assessee came under four different heads, or of the fact that even the bulk of those expenses were under two different heads, O.S No. 35 of 1945 and O.S No. 80 of 1946. Nor did the Tribunal determine correctly the scope of the assessee's claim in each of the two suits, O.S No. 35 of 1945 and O.S No. 80 of 1946. The order leaves the impression, that the Tribunal dealt with the case as if the nature of the claim in O.S No. 35 of 1945 concluded the matter. If that were so, as we shall show later, the decision should be very much in favour of the assessee. The Tribunal did not at all consider the scope of the other two items of litigation, O.S No. 31 of 1940 and O.S No. 307 of 1945. The learned counsel for the respondent conceded, when the assessee's counsel placed the relevant material before the Court, that the expenses of Rs. 28 incurred in proceedings in execution of the decree in O.S No. 31 of 1940 and the sum of Rs. 108-4-0 expended in conducting the proceedings in O.S No. 307 of 1945 satisfied the test of section io(2)(xv) of the Act. That leaves for consideration the claims of the assessee with reference to the litigation expenses for conducting O.S No. 35 of 1945 and O.S No. 80 of 1946. Rs. 2,374-9-4 was spent in 1946 in O.S No. 35 of 1945. Rs. 4,994-8-0 in all was spent for conducting O.S No. 80 of 1946 in 1946 and in 1947. If only for purposes of convenience, we shall set out below what was recorded in the judgment of this Court in A.S No. 306 of 1949, Transport Co. v. Tirunelveli Motor Bus Co., about the scope of the two suits, in both of which the assessee was the plaintiff and the Tirunelveli Motor Bus Service Company was the defendant. If we may say so with respect, these passages give a correct picture of the scope of the two suits. At pages 144-45 of the report the learned Judge recorded:

“……The plaintiff (assessee) instituted on 20th April, 1945, Original Suit No. 35 of 1945 on the file of the Sub-Court, Tirunelveli, against the defendant for a declaration of the plaintiff's title to 410 fully paid-up shares in the defendant-company and for a decree against the defendant for a sum of Rs. 3,054-8-0 being the dividend together with interest at six per cent, per annum. The main defence of the defendant in that suit was that the buses were sold for a sum of Rs. 41,000 and the amount received by Natesa Ayyar (the managing director of the assessee company) (as loan) was not really a loan but represented the sale price of the vehicles with the routes, that the certificates in respect of the additional 410 shares was a forgery and was fabricated by the managing director of the plaintiff-company, Natesa Ayyar, and the managing director of the defendant-company without the knowledge and consent of the other directors of the company. There was no application for the allotment of shares to the board of directors and there was no allotment of shares.

“There was only one omnibus issue framed in the suit apart from the formal issues, which did not bring out however the real question for decision between the parties. The issue was:

‘Is the plaintiff entitled to 446 shares or only to 36 shares ?’

“……in conclusion he, the learned Subordinate Judge, found that no title vested in the plaintiff in respect of the 410 shares as there was no allotment of the shares by the directors but that there was allotment only by the managing director, which was insufficient in law to vest title to the shares and to make the allotment legal. He, however, also went into the question whether the case of the defendant that there was a sale of the buses for a sum of Rs. 41,000 or whether there was an agreement to exchange the buses for the shares was true and whether the sum of Rs. 41,000 was really a loan advanced to Natesa Aiyar. On this question he found that the case of the defendant that there was a sale was not true, but that there was an agreement to accept for the shares the buses and that the sum of Rs. 41,000 advanced to Natesa Ayyar was a loan and not the sale price of the buses. In the result, the suit was dismissed with costs on 15th July, 1946.” There was no appeal against the decision in O.S No. 35 of 1945 and, as we said, the assessee followed up the termination of O.S No. 35 of 1954 by instituting O.S No. 80 of 1946.

5. With reference to O.S No. 80 of 1946 the learned Judge recorded at page 145 of the report:

“In the plaint, as originally framed, a claim for specific performance was not included. The plaintiff made an application on 19th March, 1947, under Order VI, rule 17, of the Civil Procedure Code, for amendment of the plaint……Leave to amend was granted′…and the plaint was accordingly amended……The present suit therefore is one based upon a contract to allot shares in exchange for fourteen buses, which still remained executory, as the allotment in pursuance of it was declared to be invalid by the decree in Original Suit No. 35 of 1955. In other words, the plaintiff wishes to fall back upon what he claims to be the original executory contract concluded between the plaintiff and the defendant to exchange buses for 410 shares of the value of Rs. 41,000. Though it is not very precisely stated in the pleadings, it has been so understood both in the Court below and also in the argument before us. As a result of the existence of this contract, and its breach by the defendant, the plaintiff claims that he is entitled to enforce specific performance, or, in the alternative, to claim damages for its breach. If the contract is treated as having been rescinded, he claims that he is entitled to restitution for the benefits which the defendant derived under the contract as it is a proved fact that the plaintiff, in pursuance of the arrangement, not only delivered the buses but also concurred in the transfer of the routes and the buses to the defendant by joining in an application which was made to the Road Traffic Board.”

6. This passage sets out the scope of the two alternative reliefs the assessee asked for in O.S No. 80 of 1946. One was for specific performance of the agreement between the assessee and the Tirunelveli Motor Bus Service Company to allot 410 shares to the assessee company in the Tirunelveli Motor Bus Service Company. The alternative relief asked for was based on the plea that that contract had been rescinded, in which case the assessee's claim would be one based on his original title to the fourteen buses and their route rights.

7. To decide the questions at issue before us, it may not be necessary to embark on any extensive examination of the case law on the subject of what constitutes revenue expenditure (it is for that that section 10(2)(xv) of the Act provides) and what constitutes capital expenditure. There was an elaborate discussion in Commissioner of Income-tax v. Raman and Raman Limited, the principles laid down in which we followed in G. Veerappa Pillai Periyar…Applicant; v. Commissioner Of Income-Tax, Madras…. [1955] 28 I.T.R 636.. In Veerappa Pillai v. Commissioner of Income-tax we held at page 649 of the report:

“……The suit was to maintain title to the buses claimed to Have been acquired as capital assets, and the expenditure incurred in maintaining that claim of title was not of a capital nature but of a revenue nature.” It is the same principle that we should apply to determine the questions at issue now before us with reference to the assessee's claim.

8. Whether the assessee figured as a plaintiff or as a defendant is immaterial. Equally immaterial, in normal circumstances, is the ultimate result of the suit. Wha.t was the real nature of the claim of the assessee in the suit is the deciding factor in considering whether the expenses incurred in that suit were of a revenue or capital nature. If it is of a revenue nature, the further question arises, are the other requirements of section 10(2)(xv) of the Act satisfied. If the assessee preferred in good faith a claim of title to one or more items of the capital assets of his business and incurred litigation expenses for maintaining that claim of title, the expenditure would be of a revenue nature. That was the principle laid down in Commissioner of Income-tax v. Raman and Raman Limited and followed in Veerappa Pillai v. Commissioner of Income-tax, If the claim of title succeeds, the decree does not add anything to the title. If the claim of title fails, that would not make the expenditure one of capital nature, because the expenditure would have been still one to maintain a title and not expenditure to supplement a defective title by something to be secured as a result of the litigation. It should be obvious that every challenged title is not necessarily a defective title. If the assessee seeks something in the suit which has to cure a defective title, whether he ultimately succeeds or fails in that suit, the expenditure in such a suit would be of a capital nature. It would be expenditure incurred to acquire a capital asset, among other things, by curing a defect in title. It is from that point of view we have to consider the claim of the assessee in the proceedings before us.

9. From what we have set out above it should be clear that what the assessee claimed in good faith in O.S No. 35 of 1945, was, that it had acquired title to 410 shares in Tirunelveli Motor Bus Service Company. If that claim had been upheld by the Court, it would certainly have been a recognition of a pre-existing title. The decree in the suit itself would not add anything to that title. It could only have been a recognition of and preservation of the title that the assessee asserted. That the assessee failed did not alter the nature of the claim. The suit was one to maintain a title asserted, title to an item of the capital assets of the assessee company. That the fourteen buses with their route rights which the assessee owned constituted a part of the capital assets could not be in doubt. The assessee claimed that in substitution of that asset it acquired 410 shares in the Tirunelveli Motor Bus Service Company. No doubtthe main line of business the assessee company conducted was motor transport. The memorandum of association of the assessee company did not however limit the assessee company to that line of business. Clause 3(n) of the memorandum of association specifically authorised the assessee company to take or otherwise acquire shares and securities of any other company carrying on any business or transaction which the assessee company was authorised to carry on or engage in or any business or transaction capable of being conducted so as directly or indirectly to benefit the assessee company. The acquisition of the 410 shares in the Tirunelveli Motor Bus Service Company, therefore, came well within clause 3(n) of the memorandum of association. It was an authorised business transaction of the assessee company. The claim of title in O.S No. 35 of 1945 was that business asset was so acquired, the 4×0 shares in the Tirunelveli Motor Bus Service Company. If the claim of title had been good, and if the letter of allotment on which the assessee based his claim of title had been valid, the declaration of the Court, that the assessee had acquired a valid title, would not have added anything to the title claimed by the assessee. No doubt the claim failed. But as we said, that did not alter the nature of the claim. O.S No. 35 of 1945 was instituted by the assessee to maintain a claim of title to a capital asset. The assessee claimed that the expenses incurred in that suit, despite the ultimate failure of the suit, constituted revenue expenditure. That claim is well founded. Once that point is established, there should be no difficulty in holding that the further requirements of section 10(2)(xv) were established in this case. It was an expenditure laid out wholly and exclusively for the purposes of the business of the assessee company.

10. The claim of the assesspe in O.S No. 80 of 1946 was certainly not the same that it put forward in O.S No. 35 of 1945. It could not be. The claims in O.S No. 80 of 1946, as we have pointed out above, were in the alternative: (1) to obtain specific performance of the contract of 1942 to effect a valid allotment of 410 shares in the Tirunelveli Motor Bus Service Company, and in the alternative, (2) to obtain relief on the basis, that the contract of 1942 stood rescinded and that the assessee company all along retained the title to the fourteen buses which it had transferred with their route rights to the Tirunelveli Motor Bus Service.

11. The second of the claims we have mentioned above was obviously to maintain a title asserted to an item of the capital assets of the assessee's business. If that claim succeeded, it was a pre-existing title that the Court could have recognised. The assessee did not call upon the Court to cure any defect in that title, or to supplement that title which the assessee asserted to the fourteen buses which it had owned. Had that been the only relief the assessee had asked for in O.S No. 80 of 1946, the expenses incurred in maintaining that claim of title would have come within the scope of section 10(2)(xv) of the Act.

12. It should be equally clear that, if the only relief the assessee had asked for in O.S No. 80 of 1946 was the specific performance of the agreement of 1942, the claim of the assessee in the suit would have been to acquire title to a capital asset of 410 shares. There was no pre-existing title. There was only an executory contract. The contract had to be executed and a valid allotment of shares had to be effected before the assessee could acquire a valid title to the 410 shares. The claim would therefore have been one to acquire title to a capital asset. The expenditure incurred for maintaining that claim would be of a capital nature.

13. The assessee's trouble was that he mixed up both the claims in O.S No. 80 of 1946. That he originally preferred only the second of the claims we have mentioned above, and that it was only by a subsequent amendment of the plaint carried out with the leave of the Court that he asked for specific performance of the agreement of 1942 do not alter the position. The assessee conducted the suit to get one or the other of the two reliefs he claimed, to maintain one or the other set of contentions, only one of which could properly be viewed as a claim to maintain a preexisting title.

14. From the memorandum of accounts, the correctness of which was not challenged by the respondent, produced before us by the assessee, it was seen that when O.S No. 80 of 1946 was instituted, a sum of Rs. 2,500 was paid to the assessee's counsel for purchasing stamps for the payment of the court-fee payable on the plaint in O.S No. 80 of 1946. Out of that, however, only a sum of Rs. 2,324-14-0 was spent in the payment of the court-fee. Once again we should point out that in the plaint as it was originally presented the claim was one of title to the fourteen buses and, their route rights. There was also a claim for the profits the Tirunelveli Motor Bus Service Company had earned with the aid of these fourteen buses, title to which the assessee asserted. It was on the value of these two reliefs that the assessee paid court-fee of Rs. 2,324-14-0, which was clear from the copy of the plaint in O.S No. 80 of 1946 which was produced before us. When the plaint was subsequently amended to provide for the alternative relief of specific performance of the agreement, the plaint showed that the court-fee payable on that relief was less than what had been paid on the reliefs already disclosed in the plaint. So, no additional court-fee was paid. The position was that to maintain the claim of title to the fourteen buses which was put forward in O.S No. 80 of 1946 the assessee had to spend and did spend Rs. 2,324-14-0. The other expenses incurred in conducting that suit were recorded in the books of the assessee. But it is not possible to verify how much of it was spent for maintaining the claim of title and how much for obtaining the alternative relief of specific performance of the agreement. It is with reference to these facts that we have to decide whether any portion of the money expended in conducting O.S No. 80 of 1946 would fall within the scope of section 10(2)(xv) of the Act.

15. In Simon's Income Tax, Second edition, Volume II, page 211, paragraph 233-F, the learned authors observed:

“In Lochgelly Iron and Coal Company Limited v. I.R Commissioners, the company paid a levy to an association of coal-owners and the association spent its levies on a variety of objects. The Court held that the association's computations should be analysed, and the portion of the company's levy, corresponding to the allowable portion of the association's total levy, could be deducted by the company.”

16. If that principle applies, and in our opinion it should, Rs. 2,324-14-6 expended towards payment of court-fees to maintain the claim of title to the fourteen buses which the assessee asserted in O.S No. 80 of 1946 constitutes an item of revenue expenditure. It would also be an expenditure incurred wholly and exclusively for the business of the assessee company.

17. The learned counsel for the respondent referred to Commissioner Of Income-Tax v. Sir Homi M. Mehta where it was held that it was not possible to say that the payment in question there was, made solely for the purpose of earning profits or gains. That does not touch the question of severability of items of expenditure, the principle to govern which we have indicated above.

18. In Commissioner Of Income Tax, West Bengal v. Mr H. Hirjee the assessee incurred expenditure in defending the firm in a criminal case on a charge that the assessee had contravened section 13 of the Hoarding and Profiteering Ordinance, 1943. The learned Judges of the Supreme Court held that in the circumstances of the case the sum spent in defending a criminal proceeding was not expenditure laid out or expended solely and exclusively for the purpose of the business, and it was therefore not an allowable deduction under section 10(2)(xv). The learned Chief Justice observed at page 431:

“If, as the High Court realised, in every criminal prosecution where the matter is defended to protect the good name of a business or a professional man, the fear of possible fine or imprisonment must always be there, it must ordinarily be difficult for any Court to say, that the expenses incurred for the defence, even if they are not to be regarded as the ‘personal expenses’ of the person accused, constituted ‘expenditure laid out or expended wholly and exclusively for the purpose of the business.’”

19. After referring to Commissioner of Income-tax v. Maharajadhiraja of Darbhanga [1942] 10 I.T.R 214. the learned Chief Justice observed:

“In that class of case, no question could arise as to the primary or secondary purpose for which the legal expenses could be said to have been incurred as in the case of a criminal prosecution where the defence cannot easily be dissociated from the purposes of saving the accused person from a possible conviction and imposition of the prescribed penalty.”

20. The whole expenditure was disallowed. Where more than one purpose has to be served, one of which alone is solely and exclusively that of the business of the assessee, it could not be said that the multi-purpose expenditure was solely and exclusively incurred for the business.

21. The learned counsel for the assessee referred to Lachminarayan Modi v. Commissioner of Income-tax where the learned Judges of the Orissa High Court applied the principle the Supreme Court laid down in Commissioner Of Income Tax, West Bengal v. Mr H. Hirjee and held that no distinction could be made between a primary and secondary purpose for which expenses were incurred in civil litigation, and allowed the whole of the claim. With all respect to the learned Judges, we are not quite sure whether the principle laid down in Commissioner Of Income Tax, West Bengal v. Mr H. Hirjee was correctly applied. But it is not necessary for us to express any final opinion on that to dispose of the assessee's claim before us.

22. In our opinion the expenditure of Rs. 2,324-14-0 incurred in O.S No. 80 of 1946 to maintain the assessee's claim of title to the fourteen buses and their route rights is allowable under section 10(2)(xv) of the Act.

23. Our answer to the question is, that the whole of the amount of Rs. 2,374-9-4 claimed as deduction in the year of assessment 1947–48 and Rs. 2,324-14-0 out of the amount of Rs. 4,994-8-0 claimed by the assessee in the year of assessment 1948–49 are permissible deductions under section 10(2)(xv) of the Act. As the assessee has substantially succeeded in this reference he will be entitled to his costs. Counsel's fee Rs. 250.

24. Reference answered accordingly.