Kirty, J. - (1.) PURSUANT to an order of this court dated July 28, 1964, under Section 66(2) of the Indian Income-tax Act, 1922, the Income-tax Appellate Tribunal, Allahabad Bench, has referred the following two questions along with the statement of the case : "(1) Whether upon the facts found by the Tribunal and/or admitted by and between the parties before the Tribunal in respect of the litigation in question for the assessment year 1953-54, it could be said that fees paid to counsel for respondents Nos. 2 and 5 (Kedarnath Khetan and Radhey Kishun Khetan) was expenditure which was covered by the provisions of Section 10(2)(xv) of the Act? (2) Whether, on the facts found by the Tribunal and/or admitted by and between the parties before the Tribunal in respect of the assessment year 1954-55 the expenditure incurred in a writ petition by Onkar Mal Khetan against Kedar Nath Khetan, who had been appointed authorised controller of the assessee-company could be claimed as deduction under Section 10(2)(xv) of the Act ?"
(2.) THE aforesaid questions have been referred at the instance of the assessee, Ishwari Khetan Sugar Mills (P.) Ltd. For the assessment year 1953-54 the assessee had claimed a deduction of Rs. 50,087 on account of legal expenses and Rs. 14,335 for the assessment year 1954-55. THE Income-tax Officer disallowed a sum of Rs. 37,734 for the assessment year 1953-54 and the entire sum of Rs. 14,335 for the assessment year 1954-55, Two appeals were preferred by the assessee-company which were dismissed by the Income-tax Appellate Commissioner by a common order dated July 31, 1959. THE matter was then taken up in appeal to the Income-tax Appellate Tribunal by the assessee-company. THE Tribunal, however, by its judgment and order dated August 5, 1961, dismissed both the appeals. THEreafter, the assessee filed an application under Section 35 of the Act which was dismissed on February 20, 1962. THE assessee then filed an application under Section 66(1) of the Act requiring the Appellate Tribunal to refer to the High Court questions of law arising out of the order of the Appellate Tribunal dated August 5, 1961. THE Tribunal refused to state the case being of the opinion that no question of law arose. THE assessee then filed two applications in this court under Sub-section (2) of Section 66, as a result of which the aforesaid questions have come up for decision. The material facts about which there is no controversy may be briefly stated. Ishwari Khetan Sugar Mills (P.) Ltd. and Maheshwari Khetan Sugar Mills (P.) Ltd. are two companies of which the managing agents respectively were M/s. Devi Dutt Sura] Mal and M/s. Devi Dutt Chaturbhuj. The two managing agency firms were partnership firms. In M/s. Devi Dutt Chaturbhuj, the Khetans held no less than 0-12-0 share as partners. In the other firm Onkar Mal Khetan had a one-fourth share while the remaining three-fourth shares were owned by other members of the Khetan family. It may here be mentioned that Onkar Mal Khetan is the nephew of Kedar Nath Khetan. In pursuance of a mutual arrangement between the partners of the two firms Onkar Mal Khetan was entrusted with the management of Ishwari Khetan Sugar Mills (P.) Ltd., while Kedar Nath Khetan and other members of his group were entrusted with the management of Maheshwari Khetan Sugar Mills Ltd. The two mills continued to be so managed from 1945 onwards till April, 1951, when disputes arose between the partners of the two firms in regard to the management of the two mills. The internal dissensions between the partners gave rise to a number of legal proceedings in courts of law. Suit No. 59 of 1951 was instituted on May 3, 1951, in the court of the Civil Judge, Gorakhpur, against Kedar Nath Khetan and eleven other persons. The two companies were impleaded as defendants Nos. 6 and 7 in that suit. It appears that it was, inter alia, pleaded by Onkar Mal Khetan that Kedar Nath Khetan in collusion with some of the partners of the two managing agency firms and the shareholders of the two companies had ousted or had sought to oust Onkar Mal Khetan from the management of the two companies and, in particular, Ishwari Khetan Sugar Mills (P.) Ltd. One of the reliefs, which has been treated by the Tribunal to be the main relief, was for appointment of receiver of the two sugar mills until such time as proper arrangement for the protection of the rights of Onkar Mal Khetan and his group were made by the court. On an ex parte motion of the plaintiffs of Suit No. 59 of 1951, an interim receiver was appointed by the court. Two appeals were filed in this court against the order appointing receiver--F.A.F.O. No. 127 of 1951 was by the two companies and the other appeal (F.A.F.O. 133/1951) was filed by Kedar Nath Khetan and three other persons as directors of the two companies. These two appeals were dismissed by this court by a common judgment and order dated November 27, 1951. Question No. 1 is in respect of the expenses alleged to have been incurred in the aforesaid litigation during the assessment year 1953-54. It appears that Kedar Nath Khetan was appointed as authorised controller of the assessee-company by the Central Government under the Essential Supplies Act. Writ Petition No. 126 of 1952 was filed in the Supreme Court of India by Onkar Mal Khetan against Kedar Nath Khetan challenging the appointment of Kedar Nath Khetan as authorised controller. The assessee-company was also arrayed as a petitioner in the said writ petition. The second question is in respect of expenses alleged to have been incurred by the assessee-company for defending the appointment of the authorised controller during the assessment year 1954-55. In respect of deductions claimed for both the assessment years the Income-tax Officer, the Appellate Assistant Commissioner of Income-tax and the Income-tax Appellate Tribunal have held that the litigation expenses in respect of which deductions have been claimed were not expenditure laid out or expended wholly and exclusively for the purpose of the business of the assessee-company.
(3.) SECTION 10(1) provides that tax shall be payable by an assessee in respect of the profits or gains of any business carried on by him. Subsection (2) provides that such profits or gains shall be computed after making the allowances mentioned in Clauses (i) to (xv). To come under SECTION 10(2)(xv) the expenditure must have been laid out or expended wholly and exclusively for the purpose of such business. The asscssee's contention is that in disallowing the litigation expenses the income-tax authorities misapplied the law and that they also failed to appreciate that the expenses in respect of which deductions had been claimed were expenses incurred in connection with the management and the working of the assessee-company. In regard to the assessment year 1953-54 the Appellate Tribunal in its order dated August 5, 1961, inter alia, said : "It is interesting to note from the copy of the judgment filed by the assessee's counsel that the counsel for the two companies was Sri Jagdish Swarup whereas Sri Kanhaiya Lal Misra was the counsel for the respondents Nos. 2 and 5, namely, Kedar Nath Khetari and Sri Radhey Kishun Khetan. However, the law charges claimed arid disallowed are mostly in respect of fees paid to Sri Kanhaiya Lal Misra and his juniors. " ;