Satish Chanpra, C.J. - (1.) The assessee is a public limited company carrying on business of manufacture and sale of textile goods. For the assessment year 1953-54, it claimed a deduction of Rs. 1,37,387 on account of legal charges incurred in connection with defending a suit filed by two of its shareholders against the company. The suit was filed to challenge the validity of the two special resolutions passed at the extraordinary general meeting of the company held on 20th October, 1947. The ITO repelled the claim. He held that the expenditure was not revenue in nature. In the alternative he held that the expenditure was of a capital nature because it was incurred for the purpose of defending the articles and memorandum of association of the company. The assessee went up in appeal but the AAC dismissed it. The assessee then went up to the Tribunal. The Tribunal held that by the first impugned resolution the said articles of association of the company was recast. The articles of association dealt with the day-to-day conduct of business. It is virtually the constitution of the company. The expenditure incurred in defending the articles of association was incurred for the purpose of carrying on the business and was hence an allowable revenue expenditure. In respect of the second resolution it held that the suit was not a result of in-fighting between two groups of the company's shareholders because when the suit was filed in 1950, the Bagla group was firmly in saddle. The suit, if allowed to succeed, would have set at naught the transactions, contracts, etc., which would have been entered into by the managing agents. Future transactions and contracts would also have been affected and the consequences would have been to throw the business out of gear. Therefore, by defending the suit the assessee was trying to keep intact the normal running of the business and, as such, the expenditure was one which was laid out or expended wholly for the purpose of business. The suit was against the company's management as a whole and, therefore, had a direct bearing on the conduct of its business. It accordingly allowed the appeal and held that the claimed expenditure was allowable.
(2.) At the instance of the Commissioner, the Tribunal has referred the following question of law for our opinion: "Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,37,387 comprised of litigation expenses, consultation fees, travelling expenses, etc., is an allowable deduction under section 10(2){xv) of the Indian Income-tax Act, 1922, in computing the assessee's income for the assessment year 1953-54?"
(3.) The two resolutions, which were challenged in the suit, were passed at the extraordinary general meeting of the company on 20th October, 1947. They provided: "(1) That the regulations contained in the document submitted to this meeting and for the purpose of identi6cation subscribed by the chairman thereof, be and the same are hereby approved and that such regulations be and they are hereby adopted as the articles of association of the company in substitution for and to the exclusion of all existing articles thereof; (2) that Indian Textile Syndicate Ltd. be appointed managing agents of the company for the period at the remuneration and on the terms contained in the draft of an agreement, providing for the same, submitted to this meeting and signed in the margin by the chairman of the meeting by way of identification, which said agreement be and the same is hereby approved and that the directors shall be and they are hereby authorised to carry the said agreement into effect as on and from the 1st day of October, 1947, with full liberty, subject nevertheless to the provisions of the Indian Companies Act, 1913, to agree to any modification of such agreement before the same is executed.";