DIVAN, J. - (1.) IN this matter at the instance of the revenue the following question had been referred to us for our opinion : 'Whether, on the facts and in the circumstance of the case, the co nclusion reached by the Tribunal that the sum of Rs. 92,308 being legal expenses incurred by the assessee was admissible as a revenue deduction is correct in law ?'
(2.) THE facts leading to this reference are as follows. We are concerned with assessment year 1960 -61. The assessee is public limited company. It owns three textile mills known as Mills Nos. 1,2 and 3. Mill No. 3 is situated at Board and is known as 'Jagdish Mills'. The relevant previous year was calender year 1959. In the course of the assessment proceedings the assessee -company claimed a deduction of the sum of Rs. 92,308 being expenditure incurred but the assessee towards court expenses and other expenses in connection with liquidation proceedings which the assessee -company had initiated against Lalbhai Trikamlal Mills Ltd. (hereinafter referred to as 'the Lal Mills'). This amount of Rs. 92,308 represented court expenses incurred during the year out of provision made in calendar year 1958. So far as the income in calendar year 1958 was concerned, the amount of Rs. 92,308 was disallowed in that year and was lift for consideration in the assessment year 1960 -61. The major portion of the expenses was incurred towards liquidation proceedings of the Lal Mills. At this stage it is necessary to set out some facts which have been found by the Tribunal and which are now established byu the two additional documents brought on the record of the proceedings before us. The Lal Mills was incorporated on July 9, 1929. The managing agents of the Lal Mills were Ramachandra Lalbhai, Jasubhai Lalbhai and one Chinubhai Lalbhai. After the death of Chinubhai, his son, Bharatkumar, seems to have been taken up as one of the managing agents. In the year 1953, the Lal Mills was in financial difficulties and a winding -up petition was field by one of the creditors against the Lal Mills in the District Court at Ahmedabad. That petition was pending when an arrangement was arrived at between the assessee and the Lal Mills. This arrangement was ultimately recorded in the form of an agreement dated August 20, 1953, between the Lal Mills and the managing agents on the one hand and the assessee -company on the other. Under this financial agreement, the assessee agreed to advance Rs. 25 lakhs against first mortgage debentures. The assessee -company also agreed to advance a further sum of Rs. 10 lakhs which was to be secured by charge subject to the first mortgage over the plant, machinery, etc., of the Lal Mills. On December 3, 1953, the debenture trust deed for Rs. 25 lakhs was executed and subsequently a further sum of Rs. 31 lakhs was advanced against the second mortgage. The second mortgage was executed on May 14, 1954, and the limit of the advance under the second mortgage was Rs. 41 lakhs. It appears that as on December 9, 1954, the assessee -company was a creditor of Lal Mills to the extent of Rs. 67 lakhs and out of this amount, an amount of Rs. 65 lakhs was secured by the first and the second mortgages above. It may also be pointed out that tinder the financial agreement of August 20, 1953, the assessee -company become entitled to be in the sole management of Lal Mills for a period of seven years, that being the period for which the debentures were to remain in force and it also became entitled to a share of seven annas in the rupee in the managing agency commission that the managing agents of Lal Mills were to receive under their managing agency agreement with Lal Mills. It appears from the record that the managing agents of Lal Mills were entitled to receive a commission of 14 1/2 annas and out of this managing agency commission seven ann as share was to be paid to the assessee -company. Various other terms to secure the sole management of the company to the assessee were a lso incorporated in this agreement of August 20, 1953. It appears from the order of the Appellate Assistant Commissioner in these assessment proceedings that after the agreement was entered into, a litigation had to be undergone by the assessee -company against the Lal Mills and Chinubhai Lalbhai and others who were the managing agents for prevention of interference by the previous managing agents of Lal Mills in the day to day management by the assessee -company and its nominees. An amount of Rs. 11,750 had to be spent by the assessee -company towards litigation exoenses in connection with that disput and ultimately the matter had gone to the High Court at Bombay in appeal in respect of those proceedings. That sum of Rs. 11,750 by way of expenditure by the assessee so far as assessment year 1956 -57 was concerned. The income -tax Officer had disallowed that amount of Rs. 11,750 by way of expenditure but the matter was taken in appeal and the Appellate Assistant Commissioner allowed the claim as revenue expenditure. On December 10,1954, the assessee -company sent a notice of demand to Lal Mills claiming repayment of Rs. 31 lakhs and unsecured amount of Rs. 2 lakhs and it also claimed interest on the debentures of Rs. 25 lakhs since the interest was not paid. A reply to this notice was sent by the Lal Mills on December 72, 1954, and ultimately, on January 15, 1955, the assessee -company presented a winding -up petition in the District Court at Ahmedabad since that court had jurisdiction under the indian Companies Act, 1913. After the passing of the Indian Companies Act, 1956, the winding -up proceedings were transferred to the High Court of Bombay. Ultimately, an order was passed by Mody J. of the Bombay High Court, on April 20, 1958, granting permission to withdraw the winding -up petition. From the judgment of Mody J., which is brought on the record by the consent of the parties as exhibit 2, it appears that the matter was contested quite a good deal. The proceedings had gone on before the learned judge for four to five days and a lot of contest had developed. Ultimately, it was agreed between what was been referred to by Mody J. as the Lalbhai Trikamalal group, to sell 12,525 shares of Lal Mills to what is known as Harivallabh family who were the majority shareholders in the assessee -company before us. The total number of ordinary shares of Lal Mills was 17,500 and it was agreed that the shares of Lalbhai group should be sold to the members of Harivallabh group or their nominees. Utimatel y, as mentioned above, the winding -up proceedings came to an end after the shares were brought over or agreed to be brought over in the above manner and that order was passed on April 25, 1958. In connection with these proceedings an aggregate sum of Rs. 92,308 was spent by the assessee -company as legal expeses and the question which has been canvassed before the departmental authorities, before the Tribunal and also before us is whether amount was revenue expenditure or capital expenditure. The Income -tax Officer held that this amount was spent as capital expenditure as in his view the liquidation proceedings had been initiated with a view to acquire control over the Lal Mills. Against this decision of the Income -tax Officer, the assessee -company took the matter inappeal. The Appellate Assistant Commissioner remanded the matter and after the remand report was submitted by the income -tax Officer, the Appellate Assistant Commissioner considered the matter and held that this expenditure was revenue expenditure. According to the Appellate Assistant Commissioner the winding -up proceedings were resorted to by the assessee in order to safeguard the outstanding amount of loan which had been advanced by the assessee -company to Lal Mills. Against this decision of the Appellate Assistant Commissioner and dismissed the appeal so far as that aspect was concerned. Thereafter, at the instance to us for our opinion.
(3.) WE may also point out that the relevant portion of the remand report called for by the Appellate Assistant Commissioner has been produced and by the consent of the parties marked as exhibit 1 on the record of this reference. The agreement dated August 20, 1953, is annexure 'D' on the record of this reference and it sets out how the entire arrangement for the assessee -company at advance money to Lal Mills was arrived at and what were the terms and conditions of that arrangement. One of the recitals in the agreement is as follows : 'Whether Lalbhai Mills having come into financial difficulties, a petition for winding up of Lalbhai Mills was presented at the instance of one of the creditors to the District Court at Ahmedanad, for winding up of Lalbhai Mills, which petition is still pending in the said Di strict Court AND WJEREAS by their order dated 24th July, 1953, the Central Government, under the powers vested in them have caused an investigation to be made into the affairs of Lalbhai Mills under the provisions of the Industries (Development and Regulation) Act, 1951, and whereas the managing agents, with the consent and privity of the confirming parties requested Ambica Mills to take over the sole charge and management of the business of Lalbhai Mills including manufacture, sale and distribution of its products and also including purchase of cotton, stores, spare parts, etc., which Ambica Mills has agreed to do upon the terms and conditions hereinafter contained.' ;