Commissioner of Income Tax vs Raigarh Jute Mills Ltd.

Sengupta, J.—At the instance of the Commissioner of West Bengal-IX, the following question of law has been referred to this Court u/s 256(1) of the income tax Act, 1961 (''the Act'') for the assessment year 1976-77:

"Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal was justified in law in deleting the legal expenses of Rs. 17,709 incurred in connection with the protection of shares of Mysore Paper Mills Ltd. being the non-business capital asset of the assessee ?"

The facts leading to this reference are that in the profit and loss account for the assessment year 1976-77, the assessee claimed a sum of Rs. 17,709 as legal expenses. The ITO disallowed it after observing that the legal expenses related to Mysore Paper Mills shares and, therefore, were in the nature of capital expenses. Being aggrieved by the order of the ITO the assessee came up in appeal before the Commissioner (Appeals). The Commissioner (Appeals) deleted the addition of legal expenses after observing that the expenses were incurred for preservation of shares which were income-yielding in nature.

The Tribunal, after considering the facts and circumstances of the case and after looking into the findings arrived at by the AAC, held that the addition was rightly deleted from the assessment. Hence, this reference.

The assessee-company held shares of Mysore Paper Mills Ltd. In a suit filed by S.B. Jalan against M.L. Jalan and others the company was one of the defendants. The entire expenditure was incurred for defending the suit by the assessee in connection with the preservation of the rights in the shares of Mysore Paper Mills Ltd. In other words, such expenditure was incurred for preservation of the shares, which was income-yielding in nature. Reference may be made to the decision of the Supreme Court in the case of Commissioner of Income Tax, West Bengal I Vs. Birla Cotton Spinning and Weaving Mills Ltd., . In that case, the question was whether law charges incurred in connection with the proceedings before the Investigation Commissioner were allowable as deduction. There the Supreme Court held:

"It is well settled by now that the deductibility of expenditure incurred in prosecuting the civil proceedings to resist the enforcement of a measure, legislative or executive, which means restriction on the carrying on of a business or to obtain a declaration that the measure is invalid, would, if other conditions are satisfied, be admissible as a deduction u/s 10(2)(xv). Deductibility of such expenditure does not depend on the final outcome. of those proceedings. However wrongheaded, ill-advised, unduly optimistic or over-confident in his conviction the assessee might appear in the light of the ultimate decision, expenditure in prosecuting a civil proceeding cannot be denied as a permissible deduction if it is reasonably and honestly incurred to promote the interest of the business." (p. 170)

Having regard to the purpose for which the expenditure was made we are of the view that principles laid down by the Supreme Court in the aforesaid decision will govern the instant case.

We, therefore, answer this question in this reference in the affirmative and in favour of the assessee. There will be no order as to costs.

Hore, J.

I agree.