1. This is a reference under Section 66(1) of the Indian Income-tax Act, 1922. The assessment year is 1958-59, the corresponding accounting year ended on the 30th June, 1957. On April 18, 1950, the respondent purchased 19,540 preference shares and 5,085 ordinary shares of Messrs. Muir Mills Ltd. for Rs. 87,05,000.00 at an auction sale held by the Hongkong & Shanghai Banking Corporation Ltd. During the relevant accounting year the respondent sold 4,402 preference shares and 549 ordinary shares. Since Section 12B of the Indian Income-tax Act, 1922, was operative with regard to sates of capital assets after the 31st March, 1956, the Income-tax Officer issued a notice requiring the assessee, that is the respondent, to furnish particulars of the shares sold and the capital gains made. The assessee, in reply, claimed a loss of Rs. 1,03,994.00 which included an expenditure of Rs. 1,00,721'00 incurred by the assessee in litigation in respect of 549 ordinary shares and 4,402 preference shares sold during the year. The Income-tax Officer disallowed the litigation expenses and computed the loss at Rs. 3,275.00. The Income-tax Officer was of the view that the litigation expenses claimed as a deduction could not be allowed under Section 12B inasmuch as they were not incurred either in connection with the sale or as expenses of a capital nature in making any addition or alteration to the capital assets.

2. The Appellate Assistant Commissioner reversed the finding of the Income-tax Officer. He held that the legal expenses for defending title to the shares sold constitute capital expenditure which would augment the cost of the shares in computing the capital gains or capital loss under Section 12B. The Appellate Assistant Commissioner directed that the capital loss computed by the Income-tax Officer be increased by the sum of Rs. 1,00,721.00 and carried forward. The Appellate Assistant Commissioner said :

...the legal expenses for defending title to a capital assets are capital expenditure and would go to add to the cost of the assets. Section 12B further provides that the expenditure to be added to the cost should not be such in respect of which allowance is admissible under Section 10 or Section 12. Since in the past assessments, the expenditure was disallowed under Section 10 as capital expenditure, the legal expenses incurred for defending title should be treated as additional cost. The Income-tax Officer is directed to increase the capital loss by Rs. 1,00,721'00 and to carry forward the same.

3. Before the Tribunal the departmental representative contended that the Appellate Assistant Commissioner was not justified in holding that the legal expenses of Rs. 1,00,721.00 were incurred for defending the title to the shares and that such expenses should be added to the cost of the shares in computing the capital loss. On behalf of the assessee, however, it was urged that the litigation expenses were expenses of a capital nature incurred by it " in making any additions or alterations " to the capital assets, namely, the shares, within the meaning of Section 12B(2)(ii) of the Indian Income-tax Act, 1922. The Tribunal considered the real object of the litigation sought out by the assessee and concluded that the legal expenses were incurred by the assessee with a view to defending its title to or maintaining the value of the block of shares purchased by it. The Tribunal held that the amount of the legal expenses should be included in the cost of the shares as an expenditure of a capital nature under section 12b(2)(ii). The Tribunal observed :

" The expenses were incurred by the assessee-company for defending its title to and maintaining the value of the block of shares purchased by it. As already said, the assessee-company had purchased 24,625 shares for a heavy sum, namely, Rs. 87,05,000.00. The shares purchased by the assessee-company represented nearly 60 per cent. of the total share capital of Messrs. Muir Mills Co. Ltd. and if the shares did not carry with them the corresponding voting power, they would not be worth the value paid therefor. In the circumstances, we hold that the legal expenses incurred, namely, Rs. 1,00,721, should be included in the actual cost of the shares as expenditure of a capital nature incurred and borne by the assessee-company 'in making any additions or alterations thereto' within the meaning of Section 12B(2)(ii) of the Indian Income-tax Act, 1922."

4. The following question of law has been referred to this court for its opinion :

" Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 1,00,721.00 incurred by the assessee as legal expenses was an expenditure of a capital nature incurred and borne by the assessee in making additions and alterations to the shares of Messrs. Muir Mills Co. Ltd. purchased by the assessee and should, therefore, be included in the actual cost of the said shares under the provisions of Section 12B(2)(ii) of the Indian Income-tax Act, 1922 ?"

5. Before we proceed further, it would be necessary to examine the facts in greater detail. From paragraph 4 of the Tribunal's order, at pages 15 and 16 of the paper-book, it appears that the assessee after its purchase of the aforesaid shares, sent to the company 2,536 ordinary shares and 5,473 preference shares for registration. The company was then under the control of what was known as the Dhanuka group and refused to register the shares without assigning any reasons. The assessee thereupon filed an application under Section 38 of the Indian Companies Act, 1913, before the District Judge, Kanpur, for rectification of the share register by inserting the came of the assessee in place of the previous registered holders. And expenses had to be incurred for this application in which, we were told, the assessee ultimately succeeded. Then again, after the purchase of the shares on the 18th April, 1950, the assessee discovered that by a special resolution passed at a meeting of the shareholders of the company on the 20th October, 1947, the articles of association of the company were changed in an illegal manner and the company was converted from a company managed by a managing director to a company managed by a managing agent. The managing agent appointed at the meeting was Messrs. Indian Textiles Syndicate Ltd. And at this meeting Article 99 of the articles of association was also amended and it was provided that every member would have one vote only irrespective of the number of shares held by him. In view of this amendment, the assessee, even after its purchase of 60% of the shares on the 18th April, 1950, had only one vote. The assessee, thereupon, decided to a file a suit in this court for setting aside the said illegal alterations and the invalid appointment of the managing agent. Bat the shares which the assessee had purchased were refused registration. That is why the assessee filed Suit No. 2648 of 1950 in this court in which Bimal Singh Kothari and Harikissen Shroff were the plaintiffs. Both Kothari and Shroff were the assessee's benamidars. Another suit was also instituted at Kanpur with R. S. Bhartia and Anandilal Bhartia as the plaintiffs and these two persons also were the assessee's benamidars. The expenses of both the suits were borne by the assessee. The litigation in this court succeeded and it was held that every member of the company would have one vote for every share held by him. There is no dispute that as a result of this decision the assessee acquired 60% of the voting power of Messrs. Muir Mills Co. Ltd.

6. It appears, therefore, that the assessee had to incur litigation expenses (1) for having the shares registered in its name, and (2) for acquiring the voting right in respect of each and every share (instead of a shareholder having only one vote irrespective of his holding). The question is whether these were expenses of a capital nature.

7. Mr. Dipankar Gupta, learned counsel for the revenue, submits that the litigation expenses in the instant reference were expenses incurred for defending the assessee's title to the shares or maintaining the value of a capital asset and, as such, they should be treated as revenue expenditure. He says that when a transfer takes place and the formalities prescribed by the articles of association are complied with, the company is bound to register the shares. In this context an application for rectification of share register under the Companies Act is purely a procedural matter and the applicant by adopting this procedure merely tries to establish an antecedent title. With regard to the expenses incurred for acquiring voting rights, Mr. Gupta says that the same principles would apply. The voting rights were there under the law ; but were illegally taken away. And by trying to have an illegal article declared invalid by a court of law, the assessee was only trying to assert the title which he lawfully possessed. In any event, says Mr. Gupta, even if we assume that the expenses were of a capital nature, they were not incurred in making any additions or alterations to the shares within the meaning of Section 12B(2)(ii) of the Indian Income-tax Act, 1922.

8. Reliance was placed on Southern v. Borax Consolidated Ltd., [1942] 10 I.T.R. (Suppl.) 1 In this case Lawrence J. laid down the test to be applied to the point under consideration in these words :

.........where a sum of money is laid out for the acquisition or the improvement of a fixed capital asset it is attributable io capital, but that if no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital assets of the company.

9. There can be no dispute that these are the correct propositions to be applied to the facts of each case. These principles have been repeatedly followed by our courts as we shall presently see. In G. Veerappa Pillai v.

Commissioner of Income-tax, [1955] 28 I.T.R. 636, Borax case was considered and followed by the Madras High Court. In Veerappa's case, B, in whose name the " G "

permits for motor buses and the route permits in respect thereof stood, transferred these five buses and the route rights to R and handed over possession of the buses to R. A few days later, B resiled from the agreement and, purporting to act under the direction of the real owner of the buses, sold them to the assessee, and B and the assessee made a joint application to the transport authority for transfer of the " G " permits and the route rights for the five buses to the assessee. The assessee also instituted a suit against R to establish his title to the buses and to recover possession of them. The litigation terminated in the Supreme Court by a compromise under which the assessee recognised the title of R to the buses but retained the route rights. The assessee claimed a sum of Rs. 12,429.00 which he had spent in the year of account in conducting the litigation, as business expenditure, but the income-tax authorities disallowed the claim on the ground that the expenditure was incurred for the acquisition of a capital asset and was therefore of a capital nature. The Madras High Court held that the expenditure was not incurred either for the acquisition of a capital asset (as the right to the buses had already been acquired) or to cure a defective title to the asset or to improve a capital asset, but to establish and maintain the title to capital assets which had been acquired by the assessee and was, therefore, not of a capital nature, but of a revenue nature. It was also incurred, according to the Madras High Court, solely and exclusively for the purposes of the business of the assessee and was, therefore, allowable as business expenditure.

10. Mr. Gupta states that this decision of the Madras High Court should be applied to the facts of this case. In this reference also, according to counsel for the revenue, the expenditure was not incurred either for acquisition of a capital asset or to improve a capital asset but was an expenditure incurred to establish and maintain that asset and was obviously of a revenue nature. Now, to appreciate the reasoning of the Madras High Court it is necessary to refer to a passage at pages 647 to 648 of the judgment. There, it is stated :

" The main question at issue in the suit was whether it was the title of the assessee, founded on the contract dated the 19th April, 1944, or that of the rival claimant Raman & Raman Ltd. based on the earlier contract of the 9th March, 1944, that should prevail. The Tribunal never doubted the claim of the assessee that he had paid Rs. 35,001.00 as the purchase price of the 5 buses. That was to acquire a capital asset for his business, the transport business. Both parties to the suit bona fide litigated their respective claims of title. In the case of neither of them was the expenditure incurred in conducting the suit of a capital nature. Each party could and did claim that the expenditure was of a revenue nature, incurred to sustain the claim of title that party had put forward bona fide. The expenditure was not incurred by either of them to add to the title it claimed. It could not be revenue expenditure for one party and capital expenditure for another......"

11. The grounds on which, therefore, the Madras High Court came to its conclusion were (a) there was no dispute that the assessee had paid considerations for the shares and (b) that the assessee claimed that the expenditure was of a revenue nature incurred to sustain the claim of title that the assessee had put forward bona fide. This case, in our view, does not assist us, as urged by Mr. Gupta, in deciding the present reference.

12. The Madras High Court, if we may say so with great respect, has rightly pointed out in Transport Company (Private) Ltd. v. Commissioner of Income-tax, [1962] 46 I.T.R. 1009, 1018, 1019 that

" in considering the nature of the expenditure, we have to look at the reality of the situation rather than the form in which the suit claim was presented"

.

13. Our court in Liberty Cinema v. Commissioner of Income-tax, [1964] 52 I.T.R. 153 points out that the position on the authorities is that :

"... if the legal expenses are incurred in creating, curing or completing title to the capital, then it is capital expenditure. The question in each case, however, turns on the point whether the legal expenses in question were incurred for purposes of creating, curing or completing title."

14. Similar principles were also invoked in Commissioner of Income-tax v. Life Insurance Corporation of India, [1966] 62 I.T.R. 827. In this case it was held that an insurance company often dealt in investments required out of the insurance premia. Therefore, expenses incurred by it in defending its rights in respect of shares held in a company, including the right to exercise votes and to receive dividends, would be expenditure for protection of its business activity and must be allowed as a revenue expenditure.

15. The position, therefore, appears to be that in these cases, the object or purpose of the litigation has to be ascertained from the facts of each case. If the object or purpose was to defend or maintain an existing title to capital assets of the assessee's business, the expenditure would be of a revenue nature ; but if the object or purpose was to acquire or cure a defect in the assessee's title, or to complete the assessee's title, the expenditure would be of a capital nature. It is in the light of these principles that we have to approach the facts of the instant reference. But before we do so, it would be useful to set out the relevant provisions of Section 12B(2)(ii) of the Indian Income-tax Act, 1922. The provisions are as follows :

"The amount of a capital gain shall be computed after making the following deductions from the full value of the consideration for which the sale, exchange, relinquishment or transfer of the capital asset is made, namely : ......

(ii) the actual cost to the assessee of the capital asset, including any expenditure of a capital nature incurred and borne by him in making any additieris or alterations thereto, but excluding any expenditure in respect of which any allowance is admissible under any provision of Sections 8, 9, 10 and 12."

16. Mr. Gupta, incidentally, mentioned to us that, if we did not accept his principal argument, we should hold that the expenses which, in the present case, the assessee had incurred, were allowable expenses under Section 10(2)(xv)or Section 12(2), We are not impressed by this argument- It does not seem to us, on the facts herein, that the expenditure incurred can come within the scope either of Section 10(2)(xv) or of Section 12(2); but it is not necessary in this judgment to deal with this contention on behalf of the revenue. The Appellate Assistant Commissioner in his order has pointed out that, in the past assessments of the respondent, the expenditure in question was disallowed under Section 10. Since the department had already taken the view that the expenses concerned were not admissible allowances under any other provision of the Indian Income-tax Act, it is idle for the department to contend before this court for the first time that these are allowable deductions either under Section 10(2)(xv) or under Section 12(2).

17. Now, coming back to Section 12B(2)(ii), we find that capital gain is to be computed after making deduction from the full value of the consideration, inter alia, of "the actual cost to the assessee of the capital asset". The expression "the actual cost to the assessee " appears to be of wide amplitude. The court has to determine, on the facts of each case, whether a particular item of cost can come within the meaning of this expression. Ancl this actual cost includes any expenditure of a capital nature in making "any additions or alterations" to the asset.

18. Our task, therefore, is to analyse the facts of this case with a view to find out whether the items of expenditure with which we are concerned, can be described as actual cost to the assessee as defined in section 12b(2)(ii). We find that after the assessee purchased the shares and sent the shares for registration, the company refused to register them. The assessee had to move the court for rectification of the share register. It had to incur expenses in connection with the rectification proceedings. The question is whether these expenses can be said to be "actual cost to the assessee of the capital asset". In. Palmer's Company Law, 19th edition, at page 110, it is stated : " A transfer is incomplete until registered. Pending registraiion, the transferee has only an equitable right to the shares transferred to him. He does not become the legal owner until his name is entered on the register in respect of the shares transferred to Mm. But delay in registration involves danger to him, for some prior equity may come to light, as in Ireland, v. Hart, [1902] 1 Ch. 522 where a husband had mortgaged shares of which he was trustee for his wife; or a second transfer may be passed and registered, and thus the prior transfer may be defeated.

' (The rule on this point is that), as between two persons claiming title to shares in a company like this which are registered in the name of a third party, priority of title (that is equitable title) prevails, unless the claimant, second in point of time, can show that, as between himself and the company, before the company received notice of the claim of the first claimant, he, the second claimant, has acquired the full status of a shareholder, or, at any rate that all formalities have been complied with, and that nothing more than some purely ministerial act remains to be done by the company, which, as between the company and the second claimant, the company could not have refused to do forthwith; so that, as between himself and the company, he may be said to have acquired, in the words of Lord Selborne, " a present, absolute, unconditional right to have the transfer registered before the company was informed of the existence of a better title ".' "

19. Similar views were expressed by the Supreme Court in Howrah Trading Co. Lid. v. Commissioner of Income-tax, [1959] 36 I.T.R. 215, [1959] 29 Comp. Cas. 282, [1959] Supp. 2 S.C.R. 448 and by our court in Commissioner of Income-tax v. Tona Jute Co. Ltd., [1963] 48 I.T.R. 902.

20. The position, therefore, is that the assessee's title to the shares was not complete until the assessee succeeded in having the shares registered in its name through the rectification proceedings that the assessee had instituted. And the expenses incurred for conducting the rectification proceedings were necessary, on the facts of this case, for curing or perfecting or completing the assessee's title to the shares. It was a capital expenditure which forms part of the actual cost of the asset to the assessee.

21. Let us now consider the expenses that the assessee incurred in conducting suits (in the benami of others) for gaining the voting right for every share held by a shareholder in the company instead of a shareholder having only one vote irrespective of his holding. From the facts found by the revenue authorities, it appears that on the 20th October, 1947, the relevant articles of association of the company were altered to provide that each shareholder would have only one vote irrespective of his holding. The assessee purchased the shares in the instant reference on the 18th April, 1950, when this altered article was already in force. A share is a right to a specified amount of share capital of a company carrying with it certain rights and liabilities while the company is a going concern and in its winding up : 3 Halsbury, volume 6, page 234, Article 488. The statutory rights of an individual member include his right to receive the statutory report before the statutory meeting of the company, to attend and vote at the meeting : 3 Halsbury, volume 6, page 222, Article 457. A shareholder's vote is a right of property which he may use as he pleases : Palmer's Company Law, 19th edition, page 150. The value of a share, therefore, is dependent to a large extent on the enjoyment of the right to vote. When the assessee purchased a large block of shares representing 60% of the total share capital of the company, the fact that the assessee could exercise only one vote irrespective of its holding meant that except one share all the other shares were practically of no value to it. By incurring expenses on suits aimed at acquiring the voting right for each share the assessee, on the facts of this case, was trying to enhance the value of the said shares and the assessee ultimately succeeded in its attempt. The expenditure in these circumstances was, in our view, an expenditure of a capital nature incurred and borne by the assessee in making additions or alterations to its assets within the meaning of Section 12B(2)(ii) of the Indian Income-tax Act, 1922. It is well-settled that any expenditures incurred for acquisition or improvement of a capital asset or for enhancement of its value is attributable to capital. In our opinion, the expenditure which the assessee incurred in the present case on suits to have the altered article declared illegal or void, was an expenditure for improvement or enhancement of the value of the assets that the assessee had held.

22. In this view of the matter, the answer to the question referred to us is that the legal expenses incurred by the assessee were of a capital nature and should be included in the actual cost of the shares under the provisions of Section 12B(2)(ii) of the Indian Income-tax Act, 1922, The applicant will pay to the respondent the costs of this reference.

K.L. Roy, J.

23. I agree.