Citation Codes

Equivalent Citations

citation codes

Case Number

Tax Case No. 191 of 1962 (Ref. 107 of 1962)

Advocates

For the Appellant: T. Raghavan, Advocate.
For the Respondent: V. Balasubramaniam, Advocate.

Judges

Srinivasan
Venkatadri, JJ.

Acts

Section 153C of the Companies Act of 1913
Section 153-C of the Indian Companies Act.
Sub-section (4) of S. 153C

See more information ...

Smart Summary

Judicial Opinion Summary — Srinivasan, J.

Factual and Procedural Background

The assessee was a private limited company carrying on a transport business; the relevant accounting years ended 31 March 1954 and 1955. There were 13 shareholders. Towards the end of 1953 disputes among shareholders led to an application under Section 153C of the Companies Act, 1913. The High Court appointed an Interim Administrator and also directed an investigation by the firm Shri & Co., Chartered Accountants, for the period 1-4-1952 to 30-6-1953.

In the course of the High Court proceedings the court directed payment to auditors and other officials. The question referred to this court (quoted in the opinion) asked whether, in respect of the assessment years 1951–55 and 1955–1956, expenses of payment to the auditor and/or advocate — stated in the reference as Rs. 4,000 and Rs. 3,050 respectively — could be claimed as a proper charge on business income under Section 10(2) of the Income-tax Act or on general commercial principles.

The narrative in the opinion records: the High Court directed payment of Rs. 3,000 to the auditors (claimed in assessment year 1954–1955); an amount of Rs. 1,000 (comprising payments to an advocate for taking inventory and to a Commissioner) was also claimed as deductible in that year. In the succeeding year (assessment year 1955–1956) fees of Rs. 2,250 were paid to a Commissioner for presiding over general body meetings held on 9-9-1954 and 9-2-1956, and Rs. 800 was paid to the company's Advocate representing it in the Companies Act proceedings; these latter payments totalled Rs. 3,050 and were claimed under Section 10(2).

The Income-tax Officer disallowed the claims on the ground that the amounts were not laid out wholly and exclusively for the purpose of business but arose from special features and disputes; the Appellate Assistant Commissioner and the Tribunal upheld that view. An application under Section 66(1) failed, and under Section 66(2) this court was asked to answer the referred question.

Legal Issues Presented

Whether, in respect of the assessment years 1951–55 and 1955–1956, the expenses of payment to the auditor and/or advocate of Rs. 4,000 and Rs. 3,050 respectively can be claimed as a proper charge on business income under Section 10(2) of the Income-tax Act or on general principles of commercial expediency.

Arguments of the Parties

Assessee's Arguments (as advanced by Mr. T. Raghavan)

The expenses were incurred pursuant to orders of the court and for the purpose of carrying on the business; therefore they are allowable deductions.
If petitioners under Section 153C must establish grounds that would justify winding up, and if the company resists such a petition, the company is fighting for its existence — expenditure to preserve the company must be regarded as wholly and exclusively for the purposes of the business.
An analogy was drawn to the decision in Morgan (Inspector of Taxes) v. Tate and Lyle Ltd. (1954) 26 ITR 195, where the House of Lords held that expenditure to oppose threatened nationalization (aimed at preserving assets and enabling profit-earning) was wholly and exclusively for business purposes.

Department's Arguments (as advanced by Mr. Balasubramaniam)

Proceedings under Section 153C are not proceedings for winding up; subsection (4) of Section 153C effectively provides that an order for winding up shall not be made as part of those proceedings.
The applicant under Section 153C need only prove circumstances which would justify a winding-up order — the application itself is not a winding-up petition and the court's powers are limited to orders short of winding up.
Because the High Court could not and did not make a winding-up order (especially when all parties did not require it), the company could not have had a real and serious apprehension for its continued existence arising from that application; thus the Tate & Lyle analogy does not apply and the expenditures were not wholly and exclusively for business purposes.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
R.E.S. Corporation Ltd. v. Nageswara Rao, AIR 1956 SC 213	Consideration of the scope of an application under Section 153C; that Section (as amended) requires the court to be satisfied that facts would justify an order to wind up the company before it could make certain orders.	The court referred to this case to explain the statutory framework of Section 153C and to show that unless facts exist which would make out a case for winding up, no order could be made under Section 153C. The decision helped shape the court's understanding that Section 153C is not itself a winding-up proceeding.
Morgan (Inspector of Taxes) v. Tate and Lyle Ltd., (1954) 26 ITR 195 (House of Lords)	Held that expenditure incurred to oppose threatened nationalization — aimed at preserving the company's assets and enabling it to carry on and earn profits — could be regarded as money wholly and exclusively laid out for the purpose of the trade.	The court considered and distinguished this decision: it refused to accept the assessee's analogy because, under Section 153C, the judicial powers and the realistic threat to company existence were different (no winding-up order could be made there), so the Tate & Lyle principle was not applicable to justify allowing all contested expenditures.
Selvarajulu Chetty and Co. v. Commr. of Income-tax, 1964-1 ITJ 769 : AIR 1965 Mad 118	Held that legal expenses incurred by a family firm in defending a suit between family members seeking declaration of exclusive title were not allowable deductions under Section 10(2)(xv).	The court regarded the rationale of that decision as bearing analogy to the present case for the portion of legal and administration expenses that arose out of internal disputes; it used that ratio to support disallowance of remuneration to the Interim Administrator and legal fees paid to resist the Section 153C application.

Court's Reasoning and Analysis

The court began by analysing the nature and statutory scope of proceedings under Section 153C of the Companies Act. It noted that Section 153C provides a remedy to members who allege that the affairs of a company have been conducted in a manner oppressive or prejudicial to interests, and that the provision (read with the amendment in Section 153G) requires the court to be satisfied that facts exist which would justify a winding-up order before certain directions may be appropriate.

The court examined the factual matrix presented to the High Court: allegations of substantial liabilities, misappropriation by the cashier, unpaid tax arrears and a disputed proposal to transfer buses to directors in a personal capacity. The High Court found it appropriate to appoint an Interim Administrator and an Advocate Commissioner and to direct an audit. On 7 February 1955 the interim administration was handed to a Board of Directors elected at a general meeting called under Court orders.

Addressing the parties' competing submissions, the court accepted the department's contention that proceedings under Section 153C are not proceedings that themselves effectuate a winding up; the court's powers under that section are to resolve the complained-of difficulties and to make orders short of winding up. Because the court could not (and did not) make a winding-up order when the parties did not require it, the company could not be said to have had a serious apprehension for its existence as a result of the Section 153C application. Consequently the court concluded that the Tate & Lyle case (where expenditure was aimed at preventing seizure or nationalization and preserving the company’s assets) did not constitute a proper analogy for treating all the disputed expenditures as wholly and exclusively for business purposes.

Nevertheless, the court undertook a more granular assessment of the expenses. It reasoned that:

The audit ordered by the High Court, though arising in the context of the Section 153C proceedings, was an activity that the company could have undertaken in the normal course; therefore audit expenses are of a character properly described as normal business expenditure.
The expenditures connected with the general body meetings at which a new Board of Directors was elected (including the Commissioner’s remuneration for conducting those meetings) were incurred for a purpose vital to carrying on the company's business, and thus fall within the scope of allowance either under Section 10(2)(xv) or on general commercial principles.
By contrast, the remuneration paid to the Interim Administrator and the legal fees paid to the Advocate engaged to resist the Section 153C application were not shown to be of a character that could "conceivably" fall within an allowable deduction; the court found nothing presented to it that justified acceptance of the assessee's claim for those items.

The court also relied on the analogy to Selvarajulu Chetty and Co., where internal disputes producing legal expenses were held not deductible, to support the view that the legal expenses and Interim Administrator charges in the present matter should be disallowed.

Holding and Implications

Holding: The court answered the reference partly in favour of the assessee. It allowed certain items (audit expenses and the Commissioner’s remuneration for conducting general body meetings connected with electing a new Board of Directors) as deductible business expenditure either under Section 10(2)(xv) or on general commercial principles. It disallowed other items — specifically remuneration to the Interim Administrator and the Advocate's fees incurred in resisting the Section 153C proceedings.

Implications:

Direct effect: Some expenses arising from the court-directed administration (audit and meeting-related Commissioner fees) are deductible as business expenditure; legal fees and Interim Administrator remuneration incurred in resisting the Section 153C application are not deductible.
The court distinguished the Tate & Lyle principle (allowing expenditure aimed at preserving the company from seizure/nationalization) on the ground that Section 153C proceedings do not themselves constitute winding-up proceedings and did not, on the facts, pose a real threat to the company's continued existence.
The opinion does not announce a broader new precedent beyond the application of established principles to the facts; it adopts a fact-sensitive approach that allows ordinary business-type expenditure even when ordered by a court, but excludes expenditure that amounts to costs of internal management disputes or of resisting petitions under Section 153C.

The court also ordered that there would be no costs in the reference.

Show full summary ...

Swami Motor Transports Ltd. v. Commissioner Of Income-Tax

Srinivasan, J.:— The question that stands referred to us is:

“Whether in respect of the assessment years 1951–55 and 1955–1956, the expenses of payment to the auditor and/or advocate of Rs. 4,000 and Rs. 3,050 respectively can be claimed as a proper charge on the business income filed under S. 10(2) of the Act or on general principles of Commercial. Expediency.”

2. The assessee is a private limited company which carried on transport business. The relevant accounting years ended on the 31st of March 1954 and 1955. There were 13 share-holders in the company. Towards the end of 1953, certain disputes arose which resulted in an application being made under Section 153C of the Companies Act of 1913 and in the appointment by the High Court of an Interim Administrator. The High Court also appointed Shri and Co., a firm of Chartered Accountants, to investigate into the affairs of the company for the period from 1-4-1952 to 30-6-1953. In the course of these proceedings, the High Court directed the payment of Rs. -3,000 to the auditors towards their remuneration, and this sum was claimed as business expenditure in he assessment year 1954–1955. In addition, a sum of Rs. 1,000 comprising payments to an advocate for taking inventory and to a Commissioner appointed by the Court was also claimed as deductable allowance. In the succeeding year relevant to the assessment year 1955–1956, certain fees were paid to the Commissioner appointed by the Court for presiding over the general body meetings held on 9-9-1954 and 9-2-56. These came to Rs. 2,250. A sum of Rs. 800 was also paid to the Advocate of the assessee company who represented the company in all the proceedings connected with the application under the Companies Act. The total of Rupees 3,050 was claimed as allowance under S. 10(2). The view taken by the Income-tax Officer was that the amounts expended in the above fashion during the two years did not represent an expenditure laid out wholly and exclusively for the purpose of the business. The circumstances were not incidental to the business at all and they arose owing to certain special features. He accordingly disallowed the claim. On appeal, the Appellate Asst. Commissioner upheld this order. He was of the view that the dispute between two groups of shareholders arising out of differences between them did not envisage the possible liquidation of the company. The expenditure was really incurred in a dispute over the internal management of the company; that would not justify the allowance under the appropriate provision of the law. The further appeal to the Tribunal and an application by the assessee under section 66(1) failed. This court directed, under S. 66(2) of the Act, the reference to this court of the question set out earlier.

3. The petition Hied in the High Court was under Section 153-C of the Indian Companies Act. This section enables any member of a Company who complains that the affairs of the company have been conducted in a manner Prejudicial to the interests of the company or in a manner oppressive to some part of the members to make an application to the court for an order under the section. It is not in dispute that two of the shareholders of the company made such an application, and they alleged that the liabilities of the company amounted to nearly Rupees 20,0000 which the directors did not appear to he anxious to discharge, that large sums of money which had to he remitted into the Rank were being wrongfully appropriated by the cashier, and that even tax arrears were not being arranged to be met. Special meetings called for at the instance of the petitioners-share-holders did not result in any solution. The petitioners did not agree to the proposal of the directors that the buses should be transferred to the Directors in their personal capacity, and they further alleged that this proposal was detrimental to the interests of the company; and, for these reasons, they sought the appointment of an Administrator to take charge of the affairs of the company.

4. They alleged finally that, though there were sufficient grounds which disclosed that it would be equitable that the company should be wound up, the petitioners were interested in seeing that it was not so wound up and that it was properly administered under the directions of the court. It is not in dispute that the court directed the appointment of an Interim Administrator. In the course of those proceedings, a further order was made by the court appointing an Advocate Commissioner to hold a general body meeting of the body of the shareholders and to conduct an election of the directors. It is these proceedings that have resulted in the items of expenses which are in dispute in the present reference.

5. It is the short contention of Mr. T. Raghavan, on behalf of the assessee that, since these expenses have been incurred as a result of the orders of the court and further for the purpose of carrying on the business of the company, they are all allowable. It is claimed that if the petitioners moving the court under Section 153C have to establish such grounds as would justify liquidation of the company and if the company resists such a petition, it is really fighting for its existence, and that expenditure incurred for that purpose cannot he otherwise than one expended wholly and exclusively for the purpose of the business. In R.E.S Corporation Ltd. v. Nageswara Rao, AIR 1956 SC 213 the scope of an application under S. 153C was considered. Their Lordships pointed out that S. 153G in its amended form (amended by Act 52 of 1951) requires that the court should be satisfied that the facts would justify making an order to wind up the company. But if the winding up unfairly and materially prejudices the interests of the company, the court could make an order for its management. Unless facts exist which would make out a case for winding up no order could be made under S. 153C.

6. What all can be said with regard to the proceedings an the High Court is that the High Court found that an interim Administrator should be appointed pending final examination of the question. In its order dated 28-5-1953, this court observed that, at this stage, there is nothing to go upon except the allegations and counter allegations and it thereafter proceeded to appoint an Administrator. The final stage was reached on the 7th February, 1955 when this court directed the interim Administrator to hand over the administration to the Board of Directors who had been elected at the general body meeting conducted under the orders of this court. Presumably the petition before this court came to an end on that day. Learned counsel has referred to Morgan (Inspector of Taxes) v. Tate and Lyle Ltd., (1954) 26 ITR 195. That was a case where the company engaged in sugar refining incurred expenses in a propaganda campaign to oppose the threatened nationalization of the industry. The question was whether the expenditure was money wholly and exclusively laid out for the purpose of the company's trade.

7. The House of Lords took the view that, since the object of the expenditure was to preserve the assets of the company from seizure and to enable it to carry on and earn profits, the expenditure could reasonably be held to he wholly and exclusively laid out for the purpose of the business. Learned counsel for the assessee purports to draw an analogy and claims that the application under S. 153C could have successfully put an end to the life of the company and where the company was opposing such petition it was seeking to preserve its existence.

8. On the other hand, it is the contention of the department that, in a proceeding under S. 153C of the Act, an order for winding up is not one that can be passed at all. Sub-section (4) of S. 153C which enables the court to make such order in relation thereto as it thinks fit with a view to bringing to an end the matters complained of, really provides that an order for winding up shall not be made. What is required to be proved by the applicant, under S. 153C is that a set of circumstances which would justify the making of a winding up order exist. But the application is not one for winding up. The court is only called upon to take note of the existing circumstances and to resolve the difficulties complained of and to make such order as may be necessary, short of winding up affairs of the company. We are in agreement with this argument of Mr. Balasubramaniam, learned counsel for the department. What, in effect, was complained of in the application under S. 153C was that the majority of the shareholders of the company purported to direct the affairs of the company in disregard of the interests of the minority of the share-holders and that was how the application was presented to this court and dealt with. There was hardly any justification for the company feeling that its very existence was threatened by this application.

9. The court could not, when all the parties to the application did not require it, make an order for winding up the affairs of the company. It is, therefore, too much to say that the company could have had any serious apprehension about its continued existence as a result of the application. The present case does not, therefore, form a parallel to that in (1954) 26 ITR 195 and the expenditure cannot be regarded as having been expended wholly and exclusively for the purpose of the business on the basis of the principle of that decision.

10. It seems to us however that certain items of expenditure are nevertheless allowable as normal business expenditure. The audit of the company directed by the court, though it arose in the context of the application under S. 153C of the Act, was nevertheless one which could have been undertaken by the company itself in the normal course. Equally, it seems to us that the expenditure incurred in connection with the general body meetings at which a new Board of Directors was elected would be of that description. Though these were not ordinary or regular meetings, the meetings were conducted for a purpose vital to the carrying on the business of the company. The audit expenses and the remuneration paid to the Commissioner for conducting these meetings would thus appear to be within the scope of allowance either under S. 10(2)(xv) of the Act or on general principles of commercial requirements.

11. We are not, however, satisfied that the remuneration paid to the Interim Administrator or to the Advocate engaged by the company for resisting the application under S. 153C of the Act could conceivably come within the scope of the allowance. Nothing has been stated before us which inclines us to accept the case of the assessee in this regard.

12. The decision of this court in Selvarajulu Chetty and Co. v. Commr. of Income-tax, 1964-1 ITJ 769 : (AIR 1965 Mad 118) to which one of us was a party has been cited. That was a case where a family was carrying on a business. There was a suit between the members of the family seeking a declaration of exclusive title of one of them to the business. The question was whether the legal expenses incurred by the firm in defending the suit would be an allowable deduction under S. 10(2)(xv). It was held that it was not. Though this decision is not directly applicable, the circumstances in the present case bear some analogy to the facts of that decision. To the extent to which the legal expenses and charges for the Interim Administration were incurred by the company in the present case, they appear to fall in the ratio of the above decision and would, therefore, be not allowable items of expenditure. We answer the question partly in favour of the assessee on the lines indicated above. In the circumstances, there will be no order as to costs.

HI/VRB/R.G.D

13. Answer accordingly.

Swami Motor Transports Ltd. v. Commissioner Of Income-Tax

Judicial Opinion Summary — Srinivasan, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments (as advanced by Mr. T. Raghavan)

Department's Arguments (as advanced by Mr. Balasubramaniam)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Swami Motor Transports Ltd. v. Commissioner Of Income-Tax

Comments