Calcutta H.C : The material facts on record and the proceedings leading up to this reference are, inter alia, that Darjeeling Dooars Plantations Ltd., the assessee, carries on the business of cultivation and manufacture of tea.

High Court Of Calcutta

Darjeeling Dooars Plantations Ltd. vs. CIT

Section 37(1)

Asst. Year 1979-80

Dipak Kumar Sen, Actg. C.J. & Shyamal Kumar Sen, J.

IT Ref. No. 130 of 1984

4th March, 1988

DIPAK KUMAR SEN, ACTG. C.J.:

The material facts on record and the proceedings leading up to this reference are, inter alia, that Darjeeling Dooars Plantations Ltd., the assessee, carries on the business of cultivation and manufacture of tea. At, the material time, it owned and ran a tea estate known as Zurrantee Tea Estate.

2. On March 19, 1975, an agreement in writing was entered into between the assessee, the United Bank of India and one Ramjhora Tea Co. Ltd., whereby the said Ramjhora Tea Co. Ltd. agreed to sell to the assessee a tea estate known as Bundapani Tea Estate (hereafter referred to as the said ” tea estate “) owned by the said Ramjhora Tea Co. Ltd. at a price of Rs. 25 lakhs on, inter alia, the following terms and conditions: (a) The sale would be effective as from January 1, 1975. (b) It was recorded that at the date of the execution of the agreement, the United Bank of India had received from the assessee a sum of Rs. 4 lakhs on behalf of Ramjhora Tea Co. Ltd. as earnest money and in part payment of the price of the said tea estate. (c) At the time of the execution of the conveyance of the said tea estate, the assessee would pay to the Ramjhora Tea Co. Ltd. the balance of the purchase price through the United Bank of India. (d) If the title of the Ramjhora Tea Co. Ltd. in the said tea estate was not marketable, then the assessee would be at liberty to rescind the agreement and the United Bank of India would thereupon refund to the assessee the said earnest money of Rs. 4 lakhs. (e) The management, possession and operational control of the said tea estate and the disposal of the crop thereof would, until the date of the conveyance, be in the hands of the assessee who would have absolute control over the same. (f) The assessee would be responsible for purchase of stores and other items necessary for the running of the said tea estate from January 1, 1975, including the wages of the labourers and the employees as also bonus, gratuity, pension and compensation. (g) All tea manufactured in the said tea estate on and from January 1, 1975, and the sale proceeds thereof as also the income arising from the said tea estate otherwise and compensation, if any, received from the State or Central Government or any other authority in respect of acquisition or requisition of the land in the said tea estate would, subject to other provisions of the agreement, belong to the assessee. (h) The assessee would be solely liable for payment of sales tax, income- tax and all other taxes imposed on taxable profits earned after December 31, 1974, in respect of the ownership or occupation of the said tea estate. (i) In the event the taxing authorities decided to assess the Ramjhora Tea Co. Ltd. in respect of the aforesaid taxes, the assessee would, without any objection, pay to the Ramjhora Tea Co. Ltd. the full amount of such taxes as demanded, whether such taxes would be assessed on the Ramjhora Tea Co. Ltd. or on the assessee or on both. (j) If, for any reason, Ramjhora Tea Co. Ltd. was compelled to pay and paid any such tax, then the assessee would, on demand, reimburse the Ramjhora Tea Co. Ltd. to the extent of such payment including all costs and charges incurred by the Ramjhora Tea Co. Ltd. in respect of the same. (k) The purchase by the assessee would be completed by a registered deed of conveyance to be executed by the Ramjhora Tea Co. Ltd. in favour of the assessee within 12 months from the date of the agreement. The assessee would, however, have the ight to extend such time for a further period of 12 months. Subsequent to the aforesaid, disputes arose between the assessee and the said Ramjhora Tea Co. Ltd. which led to several proceedings in this Court. Some of the sharehoders of Ramjhora Tea Co. Ltd. and the latter company disputed the agreement of sale of the said tea estate and a suit was filed in this Court for setting aside the same. As the Ramjhora Tea Co. Ltd. failed to execute the conveyance of its said tea estate in favour of the assessee within the stipulated time, the assessee also instituted a suit against the Ramjhora Tea Co. Ltd. for specific performance of the contract. The matter remained pending during the relevant assessment year and the assessee remained in possession of the said tea estate.

The assessee was assessed to income-tax in the asst. yr. 1979-80, the relevant accounting year ending on March 31, 1979. In the said assessment, the assessee claimed deduction of a sum of Rs. 1,14,015 which was claimed to have been spent by the assessee by way of legal expenses in the said legal proceedings by and between the assessee and the said Ramjhora Tea Co. Ltd. and its sharehoders. The ITO noted that in its return the assessee had stated that the income from the said tea estate was not taxable in its hands as the conveyance for the said tea estate had not been executed in favour of the assessee and disputes between the parties were pending adjudication in Court. The ITO held that the legal expenses incurred in connection with the acquisition of any investment were capital expenditure. The ITO held further that to sustain a claim for deduction of any amount on account of business expenditure, the same was required to be shown to have been incurred for the purposes of an existing business in the year of accounting, the profits of which would be under assessment. The ITO found that there was no business of the assessee in respect of the said tea estate, disallowed the deduction claimed and added back the said amount to the taxable income of the assessee.

The ITO noted the said amount of Rs. 4 lakhs advanced by the assessee to the Ramjhora Tea Co. Ltd. by way of earnest money for acquiring the said tea estate. He held that the advance of the said Rs. 4 lakhs towards acquisition of the said tea estate was not for the purpose of, nor necessary for the working of, the existing tea estate of the assessee, the income of which was taxable. The ITO noted further that the assessee had paid over Rs. 5 lakhs by way of interest to the bank on an overdraft amount. He held that an amount of Rs. 60,000, being interest calculated at the rate of 15 per cent on the said advance of Rs. 4 lakhs, could have been avoided if the said payment was either withdrawn or not incurred and he added a further sum of Rs. 60,000 to the taxable income of the assessee.

Being aggrieved, the assessee preferred an appeal before the CIT (A) from the said assessment. The CIT (A), following a decision of the Gauhati High Court in CIT vs. Abhoyjan Tea Estate (P) Ltd. (1977) 110 ITR 251 (Guj), held that the disallowance of the said amount of Rs. 1,14,015 on account of legal expenses incurred and the addition of Rs. 60,000 on account of interest were not justified. The CIT (A) accepted the contention of the assessee that the business of the assessee was cultivation and manufacture of tea in which the assessee had sought to purchase the said tea estate and that the said advance of Rs. 4 lakhs by the assessee to the Ramjhora Tea Co. Ltd. by way of earnest money for, the purchase of the said tea estate had been paid out of a fresh issue of shares and not out of borrowed funds. The CIT (A) deleted the said additions.

Being aggrieved, the Revenue preferred an appeal from the order of the CIT (A) to the Tribunal. The Tribunal held that the assessee in Abhoyjan Tea Estate (P) Ltd. (1977) 110 ITR 251 (Gau) had been carrying on the business of growing and manufacturing tea and purchase of another tea estate was intended to extend its existing business. In that case, no income had been derived by the assessee from the estate sought to be purchased in the relevant assessment year. The Tribunal noted that in the instant case, the expenses sought to be deducted by the assessee related to the said tea estate and did not relate to the existing business of the assessee. As the income from the said tea estate was claimed not to be taxable in the assessee’s hands, the assessee could not claim any expense relating to the said tea estate. The Tribunal further held that under ss. 28 and 29 of the IT Act, 1961, if one, of the businesses of an assessee was assessable to income-tax while the other was not, the allowance referable to the non- taxable business could not be deducted in computing the profits of the taxable business. The Tribunal expressed its doubt as to whether the assessee was entitled to contend that the income of the said tea estate was not taxable in its hands under s. 60 of the IT Act, 1961, and observed that the assessee could run a business though not as an owner but would still be liable to pay tax on income arising out of such business. If the income of the said tea estate was not the assessee’s income, then the expenses incurred on account of the said tea estate also could not be said to be the expenses of the assessee.

The Tribunal noted that the conveyance had not been executed in respect of the said tea estate in favour of the assessee and that the profit and loss account of the said tea estate, the assets and liabilities thereof and all transactions relating thereto had not been incorporated in the accounts of the assessee. Separate books of account and separate bank accounts for the said tea estate were being maintained which had not been audited. As such, it was held that the expenses relatable to the business of the said tea estate could not be debited against the existing business of the assessee.

On the addition of the said amount of Rs. 60,000 to the taxable income of the assessee, the Tribunal noted the contention of the assessee that this amount could not be added as the assessee had utilised its own resources for making the said advance of Rs. 4 lakhs for purchase of the said tea estate. The contention of the assessee that the said amount could have been returned to the bank so as to reduce the liability of the assessee for interest was not a sufficient ground for adding back the amount of interest calculated on the said amount unless it was proved that the money borrowed by the assessee had been diverted for the acquisition of the tea estate was also noted by the Tribunal.

The Tribunal held that this contention of the assessee needed further examination as the ITO had not specifically found that the money paid as advance for the purchase of the said tea estate was out of borrowed funds. The Tribunal held that it was necessary to probe into the matter further to ascertain to what extent the borrowed funds had been utilised by the assessee for making the said advance of Rs. 4 lakhs. Subject to such clarification, the Tribunal accepted the contention of the Revenue and reversed the decision of the CIT (A).

On an application of the assessee under s. 256(1) of the IT Act, 1961, the following questions stated to be questions of law arising out of the order of the Tribunal have been referred for the opinion of this Court : ” (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that in computing the assessee’s income from its present business of cultivation, manufacture and sale of tea, the legal expenses of Rs. 1,14,051, incurred in connection with Bundapani Tea Estate, were not admissible as a deductible business expenditure ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in reversing the order of the CIT (A) with a direction to the ITO to probe into the matter further and to find out to what extent the borrowed funds have been utilised for the purchase of Bundapani Tea Estate instead of deciding the issue itself on the basis of submissions made before it and the facts already on its record ? (3) Whether, on the facts and in the circumstances of the case, the disposal by the Tribunal of ground No. 2 in the appeal filed by the ITO was in accordance with law ? (4) Whether, on the facts and in the circumstances of the case, the order passed by the Tribunal reversing the order of the CIT (A) as to the addition of Rs 60,000 made by the ITO and remanding the matter back to the ITO was legal and valid ? “

At the hearing, learned advocate for the assessee submitted that it has been found as a fact that the assessee at the material time had been engaged in the business of cultivation and manufacture of tea. In its said business, the assessee owned and possessed the Zurrantee Tea Estate. In the same business, the assessee sought to acquire the said tea estate and at the material time was in the process of acquiring the same. The assessee had entered into an agreement for purchase of the said tea estate and had paid a substantial earnest money to the seller. Under the terms of the said agreement, the assessee was in possession of the said tea estate, transfer of which to the assessee remained to be completed by the execution of the necessary conveyance. Therefore, at the material time, the assessee had acquired a right to acquire the said tea estate and to claim specific performance of the agreement. This right was a valuable right and was an asset in the existing business of the assessee. The assessee was compelled to incur legal expenses to protect its asset in proceedings where the agreement between the assessee and the seller had been impugned. Further, expenses were incurred by the assessee in instituting a suit against the seller for specific performance of the agreement. Such legal expenses must be held to be expenditure incurred for preservation of a business asset of the assessee for the purpose of the assessee’s business and allowed as a deduction.

It was submitted further that the fact that the income of the said tea estate at the relevant time was not taxable in the hands of the assessee under s. 60 of the IT Act, 1961, made no difference to the legal position. It was submitted that the ITO had erred in holding that there was no business of the assessee in respect of the said tea estate. The Tribunal also erred in holding that the legal expenses sought to be deducted by the assessee related to the said tea estate and not to its existing business. The Tribunal erred further in holding that as the income of the said estate was not the income of the assessee, the expenses incurred on account of the said tea estate could not also be said to be expenses of the assessee in its business.

Learned advocate for the assessee next submitted that the Tribunal was not justified in the facts and circumstances to initiate a further enquiry as to whether the money paid by the assessee to the seller of the tea estate in advance by way of earnest money had been paid out of the funds borrowed from the bank. It had not been found by the ITO that the said advance had been paid by the assessee out of the amounts borrowed from the bank. The ITO had proceeded on the basis that if the said amount of Rs. 4 lakhs had been utilised in the business of the assessee, the debit balance in the overdraft account of the assessee could have been reduced and the assessee would have had to pay lesser interest to the bank. It was accepted by the CIT (A) that the said Rs. 4 lakhs advanced by the assessee by way of earnest money to the seller was out of the funds obtained from a fresh issue of shares and not out of borrowed funds. It was not the case of the Revenue nor did the Revenue seek to prove before the Tribunal that the said Rs. 4 lakhs had been paid by the assessee to the seller out of borrowed funds and not from its own resources. The Tribunal erred in holding that the ITO proceeded on the basis that the said advance was paid out of the funds borrowed from the bank but had not specifically pin-pointed the position. The ITO did not proceed on the basis that the said advance was paid by the assessee out of borrowed funds. In support of his contentions, learned advocate for the assessee relied on and cited the following decisions : (a) CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC). This decision of the Supreme Court was cited for the following observations (headnote) :

” The expression ‘ for the purpose of the business ‘ is wider in scope than the expression ‘ for the purpose of earning profits ‘. Its range is wide ; it may take in not only the day to day running of the business but also the rationalisation of its administration and modernisation of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a pre- condition to commence or for the carrying on of a business ; it may comprehend many other acts incidental to the carrying on of a business.” (b) State of Madras vs. G. J. Coelho (1964) 53 ITR 186 (SC). In this case, it was held by the Supreme Court that interest paid by an assessee on money borrowed for the purpose of purchasing agricultural plantations was an expenditure laid out or spent wholly and exclusively for the purpose of the plantations and was allowable as a deduction under s. 5(e) of the Madras Plantations Agrl. IT Act, 1955.

The Supreme Court held further that the interest paid by the assessee was not a capital expenditure as no new asset was acquired or an enduring benefit obtained as a result of the payment of such interest. In principle, there was no distinction between interest paid on capital borrowed for the purpose of acquisition of a plantation and interest paid on capital borrowed for the purpose of an existing plantation, since both were for the purposes of the plantation. (c) CIT vs. Indian Bank Ltd. (1965) 56 ITR 77 (SC). In this case, the assessee, a bank, invested in securities, interest on some of which was exempt from income-tax. In the assessment year involved, the ITO disallowed deduction of interest payable on money borrowed for purchase of securities, the interest from which was exempt from income- tax. The AAC and the Tribunal upheld the assessment. On a reference, the Madras High Court opined that the interest paid by the bank for investment in securities was a Permissible deduction under s. 10(2)(iii) of the Indian IT Act, 1922. In further appeal by the Revenue to the Supreme Court, construing s. 10 of the Act of 1922, it was held that all that was required to be ascertained was whether the expenditure had been laid out or expended wholly and exclusively for the purpose of the business. It was necessary to enquire further and ascertain whether such expenditure produced or would produce taxable income. It was held that the entire interest paid by the assessee on the borrowed amount for investment in securities was allowable as business expenditure including the part thereof which related to the investment in tax free securities. (d) CIT vs. Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom). In this case, a Division Bench of the Bombay High Court laid down that in order to enable the assessee to claim deduction of interest on borrowed capital under s. 10(2)(iii) of the Indian IT Act, 1922, it had to be established that money had been borrowed by the assessee, that such money had been borrowed for the purpose of the business and further that the assessee had paid interest on the said amount and claimed the same as deduction. The assessee was not required to show that the borrowing was necessary for its business. Even if it was established that the assessee had sufficient resources of its own, deduction of interest on borrowed capital could not be disallowed. The resources available to the assessee at the relevant time would not be a relevant matter for consideration. (e) CIT vs. Abhoyjan Tea Estate (P) Ltd. (1977) 110 ITR 251 (Gau). The assessee in this case carried on business in growing and manufacturing tea. The assessee purchased a tea estate at a Court auction for which it obtained a loan from the bank against its deposits and deposited the prescribed amount of bid money in Court. The auction sale was ultimately set aside at the instance of the owners of the tea estate and the amount deposited by the assessee in Court was refunded. The assessee also incurred travelling and litigation expenses in connection with the said auction sale. In its assessment to income-tax, the assessee claimed deduction of the interest paid to the bank on its out of which the bid money had been paid and the other expenses which were disallowed by the ITO as capital expenditure.

On appeals, the assessee succeeded before the AAC and the Tribunal. On a reference at the instance of the Revenue, it was held by a Division Bench of the Gauhati High Court that on the evidence on record, it, could be held that the assessee had attempted to purchase the said tea estate in Court auction for expansion of its existing business though the sale was ultimately set aside. The finding of the Tribunal was that there was one unit of management and control and the business which the assessee sought to acquire at the auction sale. The High Court accepted the conclusion of the Tribunal that interest paid to the bank on the loan and the travelling and litigation expenses incurred in the aforesaid transaction of the assessee were allowable as revenue expenditure even though the transaction did not ultimately materialise. (f) CIT vs. Rajendra Prasad Moody (1978) 115 ITR 519 (SC). In this case, it was held by the Supreme Court that where the assessee had borrowed money for the purpose of investment in shares and paid interest thereon during the relevant accounting period, the same would be admissible as a deduction under s. 57(iii) of the IT Act, 1961, in computing the assessee’s income from dividend under the head ” Income from other sources “, though the assessee may not have received any dividend on the shares purchased with the borrowed capital. All that the assessee had to establish was that the expenditure was laid out or spent wholly and exclusively for the purpose of earning income. The assessee was not required to establish that the said purpose was fulfilled, i.e., income in fact resulted from the expenditure in order to be entitled to claim deduction of such expenditure. (g) CIT vs. Tata Services Ltd. (1980) 122 ITR 594 (Bom). This is a decision of a Division Bench of the Bombay High Court. It was held in this case that a contract for sale of land which was capable of specific performance and assignable and included a right to obtain conveyance of immovable property, was property within the meaning of s. 2(14) of the IT Act, 1961. The same could be transferred from one person to another by way of assignment. (h) CIT vs. Metal Corporation of India Ltd. (1982) 30 CTR (Cal) 106:(1982) 133 ITR 130 (Cal). In this case, the assessee, to purchase a zinc smelter factory for the purpose of its business, obtained a loan from the Industrial Finance Corporation and also furnished a guarantee for deferred payment against such purchase and for interest accruing on the deferred payment. On these facts, it was held by a Division Bench of this Court that acquisition of the zinc smelter factory was connected with the profit-earning process of the assessee and though the assessee had acquired an asset of enduring advantage, the guarantee commission and the interest for deferred payment were expenses of a revenue nature and allowable as such. (i) United Commercial Bank vs. CIT (1982) 27 CTR (Cal) 284:(1982) 137 ITR 434 (Cal). This decision of a Division Bench of this Court was cited for the following propositions laid down therein : “. . . while the Tribunal’s power of remanding an appropriate case to investigate fresh facts cannot be disputed, it must be borne in mind that the power must be exercised with proper discretion. It should not be exercised if all the basic facts required for disposal of the matter are already on record and these appear from the order of the ITO and the AAC and if on these facts found by the ITO and the AAC the conclusion for which the Revenue authority was contending cannot be accepted, then in such circumstances, there cannot be any question of remand.” (j) Addl. CIT vs. Aniline Dyestuffs & Pharmaceuticals (P) Ltd. (1982) 27 CTR (Bom) 222:(1982) 138 ITR 843 (Bom). In this case, the assessee carried on the business of manufacturing dyestuffs. Commencing a new undertaking for manufacture of certain intermediate dyes required for production of dyestuffs, the assessee purchased land for the factory and machinery was under installation during the relevant assessment year. The assessee claimed a deduction of the interest paid by it on the capital borrowed for the project. It was not disputed that the project had not gone into production during the relevant year. On these facts, it was held by a Division Bench of the Bombay High Court affirming the decision of the Tribunal that the project of the assessee could not be said to be a separate and entirely new undertaking or a totally independent venture unconnected with its existing business. Therefore, the interest paid on capital borrowed was an allowable deduction. (k) CIT vs. O. P. N. Arunachala Nadar (1983) 36 CTR (Mad) 282:(1983) 141 ITR 620 (Mad). In this case, it was held by a Division Bench of the Madras High Court that legal expenditure incurred by an assessee to protect the source of his income or the title to his business or to preserve or maintain his business assets must be regarded as expenditure incurred wholly and exclusively for the purpose of his business and allowable as a deduction. It was held further that there was a distinction between expenditure incurred for the acquisition of a capital asset or for substantial expansion or improvement thereof on the one hand, and expenditure incurred for merely protecting and maintaining the title to an existing capital asset on the other. The former expenditure would be capital in nature, whereas the latter expenditure was of a revenue character.

Learned advocate for the Revenue contended to the contrary. He submitted that in the relevant assessment year as the income from the said tea estate could not be treated as income arising in the hands of the assessee, it could not be held that the assessee was carrying on any business in respect of the said tea estate and, therefore, was not entitled to any deduction by way of business expenditure of any amount spent in respect of the said tea estate. It was further submitted that the legal expenditure incurred by the assessee was not relatable only for the preservation of its assets but also for other extraneous purposes and, therefore, were not deductible as business expenditure.

Learned advocate for the Revenue next submitted that, admittedly, during the relevant accounting period, the assessee had a large outstanding debit balance in its overdraft account with the bank in spite whereof the assessee had paid by way of advance the said amount of Rs. 4 lakhs for acquisition of the said tea estate. In the facts and circumstances, the Tribunal was justified in directing an enquiry as to the source of the said Rs. 4 lakhs.

In support of his submissions, learned advocate for the Revenue relied on and cited the following decisions : (a) A.V. Thomas & Co. Ltd. vs. CIT (1963) 48 ITR (SC) 67. In this case, the assessee, a public company, financed another private company, which was promoting a textile mill. In its accounts, tile amount financed by the assessee as advance was described as advance for the purchase of shares in the textile mill. The project of promoting the textile mill failed and the private company paid back to the assessee part of the amount advanced. The assessee wrote off the balance in a particular accounting year and claimed the same as bad debt or alternatively as business expenditure. On these facts, it was held by the Supreme Court that the assessee was not entitled to claim the said amount as business expenditure under s. 10(2)(xv) of the Indian IT Act, 1922, as the amounts had been advanced in earlier assessment years. It was held further that the assessee not being either a bank or a money-lender, its advances to the private company could not be said to be incidental to its trading activities. It was a mere advance meant to be returned. The amount due from the private company could not also be described as a debt or allowed as a bad debt. (b) CIT vs. Lahore Electric Supply Co. Ltd. (1966) 60 ITR 1 (SC). In this case, the assessee was an electricity supply undertaking and generation and supply of electricity was its only business. The undertaking of the assessee including all its assets was acquired by the State Government and in lieu thereof, the assessee received a part of the compensation payable. The assessee also possessed other assets not appertaining to its electric supply undertaking. The said assets had been invested in securities and shares and subsequent to the acquisition of its electric supply undertaking, the income from such other investment became the sole income of the assessee.

In the assessment years involved, the assessee prayed for deduction of various amounts under s. 10(2)(xv) of the Indian IT Act, 1922, contending that it continued to carry on its business and that the deductions claimed were on account of expenses incurred for the purpose of the business. On these facts, it was held by the Supreme Court that after its electric supply undertaking was acquired by the Government, the assessee did not carry on any business. Investment of the assessee was not a business activity and it could not be inferred that the assessee intended to resume its earlier business. The fact that the assessee had to pay a share of the profits of its undertaking for earlier periods and that the assessee had to return to the consumers their deposits did not establish that the assessee was carrying on any business. It was held further that business as contemplated in s.10 of the Act of 1922 was an activity capable of producing profit which could be taxed. Mere payment of outstanding liabilities would not be such an activity. (c) Swami Motor Transports Ltd. vs. CIT (1966) 60 ITR 234 (Mad). In this case, on an application of the sharehoders of the assessee under s. 153C of the Indian Companies Act, 1913, an interim administrator over the assessee was appointed by the Court. The Court also appointed a firm of chartered accountants to audit the accounts and investigate the affairs of the assessee. A commissioner was appointed to preside over the general meetings of the assessee.

17. On these facts, it was held by a Division Bench of the Madras High Court that the expenditure incurred for the audit and for holding general meetings for election of a new board of directors, though held under orders of the Court and not in the usual course of the business of the assessee was allowable as deduction under s. 10(2)(xv) of the Indian IT Act, 1922, or under the general principles of commercial requirements. But the remuneration paid to the interim administrator appointed by the Court or to the advocate engaged by the assessee for contesting the said application of the sharehoders were held as not allowable. (d) CIT vs. Dhanrajgirji Raja Narasingirji (1973) CTR (SC) 445:(1973) 91 ITR 544 (SC). In this case, the assessee had instituted a civil suit for his reinstatement as the chairman of a company alleging that he had been wrongfully ousted from the said office at the instance of a financier, who had assumed control of the company. The assessee claimed that he was entitled to resume the selling agency of the company which had been assigned to the said financier. Pending the said suit, the assessee lodged a criminal complaint against the financier alleging misappropriation of funds and other fraudulent acts in respect of the said company.

The financier gave up the managing agency of the company and accepted the claim of the assessee to the selling agency. In his assessment to income-tax, the assessee claimed deduction of the amounts spent in both the civil and criminal proceedings as business expenditure under s. 10 of the Indian IT Act, 1922.

19. The Tribunal held that the expenditure incurred by the assessee in the criminal proceedings had been incurred bona fide for the purpose of the business of the assessee as the criminal proceedings were instrumental in bringing about a compromise between the assessee and the financier. The Tribunal, however, estimated that only 1/3rd of the amount spent in the criminal proceedings was wholly and exclusively for the purpose of the business of the assessee and only the said part was allowable as deduction. This estimate was not challenged by the assessee.

20. On a reference initiated by the Revenue, it was held by the High Court that the expenses incurred in the criminal proceedings were for the purpose of the business of the assessee but took the view that the entire expenditure should be deductible. The Tribunal was directed to re-examine the quantum of expenditure for the purpose of deduction. On appeal to the Supreme Court by the Revenue, it was held that no distinction could be made between civil and criminal litigation in complying with s. 10(2)(xv) of the Indian IT Act, 1922. All that was required to be decided was as to whether the transaction in respect of which such proceedings had been taken arose out of or was incidental to the business of the assessee and whether such expenditure was incurred bona fide wholly and exclusively for the purpose of the business of the assessee.

21. In the facts, it was held by the Supreme Court that the assessee had incurred expenditure in the criminal proceedings wholly for the purpose of his business. It was the duty of the assessee to ensure that the criminal proceedings were properly conducted and the assessee was not bound to leave the prosecution in the hands of the Government.

22. The Revenue could not prescribe as to in what circumstances and in what amounts expenditure may be incurred by the assessee.

23. But the Supreme Court held that the finding of the Tribunal as to the amounts spent in the criminal proceedings wholly and exclusively for the purpose of the business was a finding of fact and it not having been challenged by the assessee had become final and the High Court could not direct examination of the case afresh as a Court of appeal. (e) S.P.V. Bank Ltd. vs. CIT (1981) 20 CTR (Ker) 31:(1980) 126 ITR 773 (Ker). In this case, the banking business of the assessee was taken over by the Canara Bank Ltd. with certain selected assets and liabilities.

Thereafter, the assessee did not carry on any banking business but took steps for realisation of some outstanding advances made prior to the take-over and utilised the amounts realised to reduce the liability of the Canara Bank Ltd. In the assessment year concerned, the assessee had realised some interest on advances but had incurred expenditure, part of which was interest due to the Canara Bank Ltd. On these facts, it was held by a Division Bench of the Kerala High Court, which affirmed the order of the Tribunal, that during the relevant assessment year the assessee did not carry on any business and was not entitled to any deduction by way of business expenditure on account of interest paid to the Canara Bank Ltd. or to carry forward any loss. (f) Albert David Ltd. vs. CIT (1982) 31 CTR (Cal) 165:(1981) 131 ITR 192 (Cal). The assessee, in this case, was a public company. There was a dispute between the directors and one of the directors filed a suit against the other challenging, inter alia, the sale of his shares by exercise of a lien on account of debt alleged to be due by the said director to the assessee. The question arose as to whether the expenses incurred by the assessee which participated in the said suit were allowable as deduction.

24. On such facts, it was held by a Division Bench of this Court that in the litigation, the assessee was not only seeking to preserve its book debts as a business asset but in fact fought a battle for the transferee of the disputed shares who did not appear in the proceedings. The business exigencies did not require the assessee to fight the suit on all issues and perfect the title of the transferee in the disputed shares. It was held that the expenses incurred in the suit were not allowable as business expenditure.

25. In the facts found, it is established that the assessee at all material times was carrying on the business of cultivation and manufacture of tea. In such business, the assessee already owned and possessed the tea estate known as the Zurrantee Tea Estate. The assessee at the material time was in the process of acquiring another tea estate known as the Bundapani Tea Estate from Ramjhora Tea Co. Ltd. There is no evidence on record that the assessee intended to carry on a separate business with the said Bundapani Tea Estate. On the other hand, it has been found that the assessee had paid the said Ramjhora Tea Co. Ltd. earnest money of Rs. 4 lakhs out of its own funds in its existing business. The balance consideration was payable on the execution of the conveyance. The Tribunal appears to have rejected the contention of the assessee on the sole ground that as the income of the said Bundapani Tea Estate was claimed by the assessee not to be taxable in its hands, the expenditure incurred was not

in the business of the assessee and as such not deductible.

26. This conclusion of the Tribunal appears to be fallacious. There are two aspects of the matter. The said tea estatewhich the assessee was proceeding to acquire is property within the meaning of the Transfer of Property Act and assuch it can be considered to be an asset. The right to acquire such property was also an asset in the hands of the assessee. If income was earned by running the said tea estate, it would assume the character of a business. The question whether the Bundapani Tea Estate would be a part of the existing business of the assessee in the other tea estate owned by the assessee, namely, Zurrantee Tea Estate, would arise only after the acquisition of the said Bundapani Tea Estate was complete and not before that. But, in the interim stage, to the extent the assessee acquired a right to the transfer of the said Bundapani Tea Estate to itself under the agreement of transfer with Ramjhora Tea Co. Ltd, the same would be an asset in the hands of the assessee. The Tribunal proceeded on the basis that in such interim stage and even before the assessee acquired the said Bundapani Tea Estate, the same constituted a business of the assessee and also a new business.

27. The expenses incurred by the assessee in the litigation where the assessee sought to resist the proceedings initiated by the shareholders of Ramjhora Tea Co. Ltd. for setting aside the sale of the said Bundapani Tea Estate to the assessee and in the suit filed by the assessee for specific performance of the said agreement of sale cannot besaid to be expenses incurred for a new business in the said tea estate which had till then not been acquired by the assessee finally. The income of the Bundapani Tea Estate, during the interim period, no doubt, was claimed by the assessee as not taxable in its hands under s. 60 of the IT Act, 1961. But this stand of the assessee, in no way, militates against its other contention, namely, that the assessee had acquired a valuable right to obtain conveyance of the said tea estate and legal expenses were incurred to maintain and protect such asset. There is no finding that the assessee had set up two different units of management and control for the two tea estates or that the acquisition of the Bundapani Tea Estate was a totally independent venture of the assessee unconnected with its existing business.

28. We respectfully agree with the principles laid down in the decisions of the Bombay High Court in TataServices Ltd. (supra) and Aniline Dyestuffs & Pharmaceuticals (P) Ltd. (supra) and those of the Gauhati and Madras High Courts in Abhoyjan Tea Estate (P) Ltd. (supra) and CIT vs. O. P. N. Arunachala Nadar (supra). We hold that the assessee incurred the said expenditure on litigation for protection of an asset which it was seeking to acquire in its existing business and was entitled to claim deduction of the same.

29. We note that one of the litigations involved was the suit filed by the sharehoders of Ramjhora Tea Co. Ltd. for setting aside the transaction whereby the assessee was seeking to acquire the Bundapani Tea Estate. The assessee defended the said litigation.

30. The other litigation was the suit filed by the assessee for specific performance of the contract of sale. In defending the above suit filed by the sharehoders of Ramjhora Tea Co. Ltd., it cannot be disputed that the assessee was seeking to uphold the agreement of sale and preserve the rights which had enured to the assessee under the said agreement. But the expenses incurred by the assessee by instituting a suit against the vendor, Ramjhora Tea Co. Ltd., for the specific performance of the agreement of sale was a litigation whereby the assessee sought to acquire fully the said tea estate. The success of the assessee in the said litigation would have resulted in a lawful conveyance of the said Bundapani Tea Estate in favour of the assessee and would have conferred an enduring benefit on the assessee who would thereby acquire a fresh capital asset.

In our view, the assessee is not entitled to claim deduction of the expenses incurred in the suit filed by it against the vendor for specific performance as a revenue expenditure incurred by it. By the expenses incurred by the assessee in defending the suit filed by the sharehoders of the Ramjhora Tea Co., the assessee was seeking solely to preserve an existing right and there is no reason why this expenditure incurred in the said litigation should not be considered to be a revenue expenditure.

So far as question No. (2) is concerned, it has only been found by the ITO that if the said earnest money of Rs. 4 lakhs was not paid by the assessee, the overdraft account of the assessee would have been reduced by the said amount and the assessee would have to pay less interest on the overdraft account. Accordingly, interest calculated at the rate of 15 per cent on the said amount of Rs. 4 lakhs, being Rs. 60,000, was added back to the income of the assessee. It was not found by the ITO that the said Rs. 4 lakhs had been borrowed by the assessee.

The CIT (A), on the other hand, accepted the case of the assessee that the said Rs. 4 lakhs was obtained by the assessee on issue of fresh shares and not out of borrowed funds.

The contention of the assessee before the Tribunal was that it had utilised its own resources for payment of the said earnest money of Rs. 4 lakhs and that there was no evidence that the money borrowed by the assessee had been diverted for making the said payment. There was no specific finding by any of the authorities below that the said amount of Rs. 4 lakhs had been paid by the assessee out of borrowed funds. The Tribunal did not examine or deal with the contention of the assessee that the said amount of Rs. 4 lakhs had been procured by the assessee by issue of fresh shares. The Tribunal appears to have proceeded on the basis that the assessee utilised funds borrowed on overdraft for making the said payment and directed the ITO to ascertain the extent to which the assessee had utilised such borrowed funds and the quantum thereof. There was no material to come to the conclusion that the borrowed funds had at all been utilised for making the payment of the said Rs. 4 lakhs. The ITO could only make this examination on the assumption that the funds borrowed by the assessee had actually been utilised.

In our view, the Tribunal erred in coming to the aforesaid conclusion. There was no finding in the records of the basic fact that the assessee had in fact utilised funds borrowed for the purpose of making the said payment of Rs. 4 lakhs. Following the principles laid down by this Court in the case of United Commercial Bank vs. CIT (supra), we hold that the Tribunal was not justified in remanding the matter to the ITO for further investigation to determine to what extent the borrowed funds had been utilised by the assessee. In any event, we have held that the expenditure in dispute had been incurred by the assessee for the acquisition of an asset.

For the reasons as aforesaid, we answer the questions referred as follows : We answer question No. (1) by stating that the legal expenses incurred by the assessee in defending the suit filed by the sharehoders of the Ramjhora Tea Co. Ltd. to set aside the agreement of sale of the Bundapani Tea Estate is admissible as revenue expenditure for the purpose of the assessee’s business. But the expenses incurred by the assessee in the suit filed by it against Ramjhora Tea Co. Ltd. for the specific performance of the contract is in the nature of capital expenditure and not deductible.

37. We answer question No. (2) in the negative and in favour of the assessee. Consequently, questions Nos. (3) and (4) have to be answered in the negative and in favour of the assessee. The reference is disposed of as aforesaid.

There will be no order as to costs.

SHYAMAL KUMAR SEN, J.:

I agree.

[Citation : 174 ITR 37]

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