1961-VIL-84-MAD-DT

Equivalent Citation: [1962] 46 ITR 1009

MADRAS HIGH COURT

T. C. No. 101 of 1958

Dated: 16.11.1961

TRANSPORT CO. (PRIVATE) LTD

Vs

COMMISSIONER OF INCOME-TAX, MADRAS

For the Assessee : S. Padmanabhan

For the Commissioner : S. Ranganathan

Bench

Ramachandra Iyer (CJ) And Srinivasan, JJ.

JUDGMENT

Srinivasan, J.

The questions referred to us are:

"1. Whether Rs 2,028, Rs 698, and Rs 1,496 incurred in connection with suits, O.S. No. 80 of 1946 and A.S. No. 306 of 1949, or any part thereof are deductible in the assessments of 1949-50, 1952-53 and 1953-54 respectively under section 10(2)(xv)?

2. Whether Rs 1,029, Rs 1,836, Rs 2,792 and Rs 5,987 incurred in the other five suits aforesaid on any part thereof are deductible in the assessment of 1945-50, 1950-51, 1952-53 and 1953-54 respectively under section 10(2)(xv)?"

The facts giving rise to these two question are briefly these. The assessee is a private limited company which was carrying on transport business. One of the objects of the company was also to invest by way of shares and securities in any other company which was engaged in transport business. Besides certain vehicles for the purpose of its transport operations, the company had also 36 fully paid-up shares in another company known as the Tirunelveli Motor Bus Co. Ltd. In 1942, the assessee company transferred 14 of its buses to the Tirunelveli Motor Bus Service Co. (hereinafter referred to as the T.M.B.S. Co.). Along with the vehicles, it transferred also its route rights. This transfer gave rise to series of disputes ending in several suits in which the assessee company figured as the plaintiff. During the calendar years relevant to the assessment years, 1949-50, 1950-51, 1952-53 and 1953-54, the assessee company incurred legal expenses, the eligibility of which expenses for deduction under section 10(2)(xv) is in question in the present reference. It is accordingly necessary to examine the scope of the legal actions concerned and to determine whether the expenses incurred in relation to those legal actions are of the nature covered by section 10(2)(xv).

The earliest of such suits is O.S. No. 80 of 1946. In this suit, which gave rise to A.S. No. 306 of 1949, the assessee company sought for the restoration and retransfer of the buses with the routes and permits, and for a decree for the profits made by the defendant company by the use of the buses or in the alternative, for a decree to direct the defendant company to perform the contract by allotting 410 shares as representing the value of the rights transferred to the company. It has to be mentioned here that the contract referred to was that the value of the 14 buses with their route rights was fixed at Rs 41,000 and the arrangement was that the plaintiff company, the assessees, should be allotted 410 shares in the T.M.B.S. Co. Ltd. It may also be mentioned that, earlier to this action, the plaintiff company had filed a suit, O.S. No. 35 of 1945, for a declaration of its title to the 410 shares in question. That suit had been dismissed as the shares had not been allotted and till such allotment the title of the plaintiff company to the shares did not come into existence. We may, however, mention that in a connected reference which was disposed of by this court, R.C. No. 82 of 1953, the legal expenses is connection with that suit, O.S. No. 35 of 1945, was in question and that was allowed in favour of the assessee. That decision of this court reported as Transport Co. Ltd. v. Commissioner of Income-tax [1957] 31 I.T.R. 259 also dealt with part of the expenses relating to O.S. No. 80 of 1946 incurred in the calendar year 1946-47 and a part of these expenses was allowed.

To the extent to which O.S. No. 80 of 1946 was concerned in the earlier decision of this court, the basis upon which the expenditure in relation to that suit was allowed by this court, will also govern the present reference.

We may accordingly dispose of the expenditure incurred in O.S. No. 80 of 1946 and in the appeal from the decree in that suit, A.S. No. 306 of 1949. In dealing with the principle to be applied in allowing expenditure incurred in civil litigation, as business expenditure, the learned judges laid down that, where the purpose of the litigation is to maintain an existing title to the assets of the business, it would be of a revenue nature but, if the purpose was to acquire or cure a defect in the assessee's title to the assets, it would be of a capital nature. It was held to be immaterial whether the assessee figured as a plaintiff or as a defendant in the action. It was also held to be immaterial whether the result of the suit was in favour of or against the assessee.

There is no doubt that on the failure of the T.M.B.S. Co. to acknowledge the title of the assessee company in the 14 buses and the route rights transferred to it, or to the allotment of 410 shares in lieu of the sale price of those buses and the route rights, it was undoubtedly a legal action by which the assessee sought to maintain its existing title to the assets of the business. This was so found by this court in the decision referred to. But the difficulty which the learned judges felt was that where the suit was laid in the alternative, as was the case in O.S. No. 80 of 1946, whether the expenditure could be said to have been incurred wholly and exclusively for the purpose of the business. They observed in this regard after referring to the judgment in A.S. No. 306 of 1949 which is reported as Transport Co. Ltd. v. Tirunelveli Motor Bus Service Co Ltd. [1955] 2 M.L.J. 141, 266:

"This passage sets out the scope of the two alternative reliefs the assessee asked for in O.S. No. 80 of 1946. One was the specific performance of the agreement between the assessee and the Tirunelveli Motor Bus Service Co. to allot 410 shares to the assessee company in the Tirunelveli Motor Bus Service Co. 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 14 buses and their route rights."

They refer next to the earlier suit, O.S. No. 35 of 1945, and of the fact that it was certainly for a recognition of the pre-existing title which the assessee claimed in good faith existed in relation to the 410 shares. That the assessee failed to succeed in the suit does not alter the nature of the claim which was one to maintain the title asserted, a title to an item of capital asset of the assessee company. They proceed to point out that the claim of the assessee in O.S. No. 80 of 1946 was not the same as that put forward in O.S. No. 35 of 1945. They said at page 268:

"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 T.M.B.S. Co. Ltd., and alternative (2) to obtain relief on the bases that the contract of 1942 stood rescinded and that the assessee company had always retained to title to the 14 buses which it had transferred with their route rights to the Tirunelveli Bus Service.

The second of the claims we have mentioned above 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. That 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 14 buses which it 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.

It should be equally clear that if the very 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 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 the 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 capital assets. The expenditure incurred for maintaining that claim would be of a capital nature."

It was accordingly the view of this court that in so far as O.S. No. 80 of 1946 was concerned, the claim that was put forward by the assessee was partly one to maintain a pre-existing title and partly one to acquire a new title to certain number of shares. The latter part of the assets, being an expenditure in the opinion of the learned judges, incurred for acquisition of a new title, was of a capital nature. It is somewhat difficult to follow this reasoning. The allotment of 410 shares sought for as an alternative relief in O.S. No. 80 of 1946, though it might amount to the acquisition of title to certain shares, which title did not exist previously, was undoubtedly nothing more than a difference in the form of the original capital asset itself. It represented the value of the buses sold by the assessee company to T.M.B.S. Co. that was in question. There could be no claim to the shares in question except on the basis of this sale transaction which was the very capital asset about which the dispute arose. Instead of being paid in cash, the arrangement was that certain shares should be allotted. That the title of the assessee company to the items of assets in the shape of shares would arise only after allotment does not detract from the fact that the claim to be allotted the shares arose out of the title to the original capital asset, namely, the 14 buses and their route rights which were transferred to the other company. It was not therefore a new title which was acquired, but only the conversion of an existing capital asset and the assessee, in framing the suit in the alternative, sought either for the restoration of the original capital asset or for recognition of its title to the very same capital in its altered form, that is, the shares. Viewed from this perspective, we are unable to agree that any difference as suggested by the learned judges who decided the earlier reference exists. We respectfully disagree with the view that was taken that part of the expenditure incurred in O.S. No. 80 of 1946 could be said to have been incurred in relation to a claim which was for the acquisition to a new title to a capital asset. 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. In our opinion, it makes no difference in principle whether the claim was based in the alternative in the manner set out. The suit was in any view of the case only intended for the protection of title of the assessee company to a capital asset. That that title should be supported, whether in the form of the restoration of the capital asset itself or in the alternative of a different form of the asset, was immaterial and made no difference to the fact that it was still intended to maintain the pre-existing title of the assessee. In this view therefore we would hold that the expenditure incurred by the assessee in O.S. No. 80 to 1946 and A.S. No. 306 of 1949 would come with the scope of section 10(2)(xv).

Another suit was filed by the assessee which is O.S. No. 75 of 1948. In that suit, the assessee company as the plaintiff challenged the actions of the defendant company and its directors. The defendant company sought to issue additional shares and apparently the right of the members of the defendant company conferred by section 105C of the Companies Act was sought to be ignored by the defendant company. The assessee company as a shareholder in the defendant company accordingly sought a decree to declare the issue and allotment of additional shares to be invalid and in the alternative to direct the defendant company to offer and re-allot the shares in the proportion contemplated by section 105C of the Companies Act. The question is whether the expenditure incurred in the prosecution of the suit would fall within the scope of section 10(2)(xv). Taking the latter prayer first, it is obvious that in so far as the assessee sought to be allotted further shares in the defendant company on the basis of its share holding, it sought to acquire title to a new capital asset. The assessee company owned 36 shares in the defendant company at the material time and the earlier suit, O.S. No. 80 of 1946, which we have referred to related to its claim to be allotted a further 410 shares in lieu of the sale price of 14 buses. Contending that it was thus the owner of 446 shares in the company it claimed to be entitled by reason of section 105C of the Companies Act to be allotted further shares in proportion to the shares held by it, in any further issue of capital by the defendant company. Clearly then, the assessee company sought only to bring further assets into existence in the shape of more shares to be allotted to it. It was not to protect or maintain its existing title in respect of the assets which it held in that company, that is, the 446 shares. It should, therefore, follow on the principle laid down in Transport Co. Ltd. v. Commissioner of Income-tax [1957] 31 I.T.R. 259, that the expenditure incurred for the acquisition of the new assets would be of a capital nature.

But what has been argued in this case is that the defendant company embarked upon this further issue of capital only for the purpose of providing a screen for its unlawful activities and to conceal the various acts of misfeasance and malfeasance that the defendant had committed through its directors, and that the action which the defendant company contemplated by the issue of further capital in violation of the provisions of section 105C of the Companies Act was intended to defeat the rights of the assessee as a shareholder. It was suggested that the suit was launched for the purpose of protecting the interests of the assessee company as a member of the defendant company and to maintain its earnings from the shares that it held in the defendant company undiminished by any such action as was contemplated by the defendant company. It is on this basis that the admissibility of the expenditure under section 10(2)(xv) has been presented to us.

We are not satisfied that, on the facts stated, the expenditure can be said to have been incurred wholly and exclusively for the purpose of the business of the assessee company. Even assuming that the assessee company was entitled to a certain number of shares in the defendant company and sought on the basis of that shareholding to increase its holdings in the further issue of shares contemplated by the defendant company, we are unable to see any correlation between the expenditure incurred in the suit for that purpose with the business of the assessee company. What is even more important, the expenditure must be wholly and exclusively laid out for the purpose of the business of the assessee company. That this expenditure was so incurred is difficult to see. Further, undoubtedly, it was to acquire title to new assets, and in treat sense also the expenditure was clearly of a capital nature. It follows that the expenditure in relation to this suit is not an allowable item.

The remaining four suits can all be dealt with under one head. O.S. No. 59 of 1951 was instituted by the assessee company challenging the action of the management of the defendant company in payment of salaries, bonuses, etc., to its employees. The allegation was that by incurring this enlarged expenditure, the directors of the defendant company prevented the assessee company from obtaining its legitimate dividend on the shares it held. According to the assessee company, the net profits available for distribution amount the shareholders was reduced by this device adopted by the defendant company. O.S. No. 107 of 1951 was another suit for a declaration that certain of the directors of the defendant company had become disqualified to be directors. It is not necessary to enter into the details of this litigation. But it was found that the assessee company had no case at all against the defendant company in the matter of internal administration of its affairs. The suit is O.S. No. 129 of 1951. Apparently, the defendant company sought to hold a meeting to amend its articles of association, and the suit was filed to restrain the holding of that meeting. The averment made by the assessee company as plaintiff was that the defendant company sought so to amend its original articles as to get rid of and oust the plaintiffs from holding membership in the defendant company. Another suit, O.S. No. 113 of 1952, was also for the purpose of the issue of a perpetual injunction restraining the defendant company from holding its extraordinary general meeting and prevent any resolution adopting the amendment proposed to the existing articles of association.

In so far as O.S. Nos. 59 of 1951 and 107 of 1951 are concerned, it seems to us that these are suits which are filed by a shareholder against the directors of the company in which he holds shares respecting matters of internal management of the company. It is true that remedying of the manner of working of a company to its best advantage would result in a larger dividend being obtained by the shareholders of the company. But where a person holds shares in a company and the investment of his moneys in such shares is a mode of his doing business, the question is whether legal expenditure incurred in litigation engaged in by such a person for the purpose of altering the affairs of the company in which he owns shares can be said to be expenditure "wholly and exclusively" for the purpose of his business. The mere circumstance that part of his business income is derived from dividends on shares held in other companies does not appear to us to justify all kinds of expenditure which such person may incur. It is difficult to accept such an enlarged construction of the requirements of section 10(2)(xv). The expenditure incurred in O.S. Nos. 59 of 1951 and 107 of 1951 were accordingly rightly negatived.

The question relating to O.S. Nos. 129 of 1951 and 113 of 1952 has to be separately considered. The claim of the assessee was that by the proposed amendment of the articles what the defendant company sought to do was to drive out the assessee company. In paragraph 20 of the plaint in O.S. No. 129 of 1951 it was stated:

"The proposed amendment of the articles of association is a clean and clear design and plan of the majority of the shareholders of the 11th defendant company, namely, defendants Nos. 1 to 7, get rid of and oust the plaintiffs from holding membership in the 11th defendant company."

Apparently, an injunction was obtained in O.S. No. 129 of 1951. Subsequently, however, the defendant company purported to call for an extraordinary general meeting to be held on 25th September, 1952, and sought to amend article 2 of its articles of association. The complaint of the assessee company was that by means of the proposed amendment the defendant company was attempting to set at nought the decision given against it in O.S. No. 129 of 1951.

The decision of the House of Lords in Morgan v. Tate and Lyle Ltd. [1954] 26 I.T.R. 195 (H.L.) was referred to. It was a case in which a company engaged in sugar refining incurred expenses in propaganda campaign to oppose the threatened nationalisation of the industry. The Commissioners for the General Purposes of Income-tax found that the sum in question was mainly, wholly and exclusively laid out for the purpose of the company's trade and was an admissible deduction. The House of Lords held that the object of the expenditure being to preserve the assets of the company from seizure and so to enable it to carry on and earn profits, there was no reason in law to prevent the Commissioners from so finding. On the basis of this decision, it has been argued that if by the amendment of the articles of association the defendant company sought to drive the assessee company from out of its membership it was justified in incurring the expenditure in order to maintain its membership and that that expenditure must therefore be allowed. We are conscious that the question is a difficult one to decide, particularly in a case where the shares are held in other companies; and the acts of internal management of those other companies are challenged by the shareholder and the expenditure incurred in the relevant litigation sought to be supported on the claim that it was only to protect either the shareholding itself or the quantum of income derived from those shares. There cannot be, in our opinion, any general rule in this regard and the facts of each litigation must be carefully looked into in order to see whether such an expenditure is an allowable item as expended wholly and exclusively for the business of the assessee. It is not a sufficient answer to the claim of the assessee to say that the capital asset in the form of shares is not in jeopardy and that it could always re-invest the value thereof in some other manner. If a minority shareholder is driven to the necessity of liquidating his interest in a company by reason of an unlawful action taken by the majority shareholders in that company and the investment in shares is in the course of the business of the minority shareholders, we see no reason why we should not hold that in questioning the propriety of the action of the company or the majority shareholders the minority shareholder is protecting the interest of his own business. Undoubtedly, any such action taken by the majority shareholders would detract considerably from the value of the shares held by the minority shareholder, that is to say, it would depreciate the capital assets of the minority shareholder in relation to his own business. It is accordingly the protection of his capital asset that is in question. In such a case and viewed in that manner, we are unable to see how the expenditure incurred in respect of these two suits does not come within the scope of section 10(2)(xv).

In the result, the answers to the questions will be as indicated earlier. Since the assessee has only partly succeeded, there will be no order as to costs.

Questions answered accordingly.