Rastogi, J. - (1.) THIS is a reference under Section 256(1) of the I.T. Act, 1961 (hereafter "the Act") The assessment year involved is 1969-70, the relevant previous year ending on March 31, 1969. The following questions have been referred by the Income-tax Appellate Tribunal, Delhi Bench, New Delhi (hereafter "the Tribunal") for the opinion of this court: "1. Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in allowing as deductible business expenditure a sum of Rs. 35,000 being approximately equal to 2/3rds of the litigation expenses incurred by the assessee-company for contesting the Government's order terminating the managing agency of M/s. Govan Brothers (P.) Ltd. ?
(2.) WHETHER, on the facts and in the circumstances of the case, the Tribunal was legally correct in disallowing as a deductible business expenditure a sum of Rs. 15,000 being approximately equal to 1/3rd of the litigation expenses incurred by the assessee-company for contesting the Government's order terminating the managing agency of M/s. Govan Brothers (P.) Ltd. ? Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the expenditure of Rs. 24,022 was a capital expenditure and, therefore, not allowable in determining the assessee's total income ? Whether, on the facts and in the circumstances of the case, the Tribunal is legally correct in holding that the deduction under Section 80-I of the Income-tax Act, 1961, is not admissible on Rs. 2,74,880, being income computed before allowance of reliefs under Sections 80J and 80K of the above Act ?
(3.) WHETHER, on the facts and in the circumstances of the case, the Tribunal was correct in law in upholding the order of the Income-tax Officer deducting the borrowed funds amounting to Rs. 1,96,691 in computing the capital employed in the industrial undertaking for the purpose of allowing relief under Section 80J of the Income-tax Act, 1961 ?" 2. We may first take up questions Nos. 1 and 2 which are connected. The assessee, M/s. Rampur Distillery and Chemical Company Ltd., is engaged in the business of manufacture and sale of Indian made foreign liquor, industrial alcohol, etc. In its assessment for the assessment year under consideration the assessee had claimed deduction of Rs. 56,630 on account of legal expenses. M/s. Govan Brothers (P.) Ltd., had been appointed by the assessee as its managing agents in July, 1946, for a term of twenty years. After the expiry of that period the managing agency was extended for the period up to March 31, 1966, with the concurrence of the Company Law Board. After the expiry of that period the assessee sought permission from the Company Law Board for further extension of the managing agency agreement. That was refused and thereat the assessee appointed the aforesaid managing agents as its special officers in exercise of its power under Section 298 of the Companies Act, 1956. The assessee, however, contested the rejection of its application by the Company Law Board for extension of the term of the managing agents by making an application before the High Court at Delhi on June 10, 1967. That matter remained pending for quite some time and ultimately the court set aside the order of the Company Law Board and directed the Board to take into consideration the material circumstances of the case. Aggrieved, the Company Law Board preferred an appeal against that order before the Supreme Court but remained unsuccessful. The aforesaid expenses had been incurred during the relevant previous year by the assessee in connection with that litigation. 3. The claim to the extent of Rs. 50,000 was disallowed by the ITO for the reason that this expenditure did not relate to the assessee's business and, in the alternative, that it was a capital expenditure. When the matter came up in appeal before the AAC, he took the view that the managing agency system had outlived its utility and had been abolished and further that the entire expenditure had been borne by the assessee itself and no part of the same had been borne by M/s. Govan Brothers (P.) Ltd. Thus, according to the AAC also, the expenditure was not motivated by any business considerations. 4. On further appeal, it was submitted on behalf of the assessee before the Tribunal that the extension of the managing agency agreement was absolutely essential for the efficient conduct of the assessee's business and further that the primary purpose of incurring this expenditure was to protect its right to have the managing agency agreement and for the continuance of the benefits it had been enjoying. The Tribunal, agreeing with the assessee, took the view that so far as the assessee was concerned, it believed that this expenditure had to be incurred in the best interest of its business and that the expenditure incurred was mainly for the purpose of the assessee's business. It did not bring into existence any fresh benefit of an enduring nature to the assessee. However, it could not be ignored that M/s. Govan Brothers (P.) Ltd. also had high stakes in the outcome of the litigation and normal business prudence demanded that it should have shared a fair proportion of this expenditure. On this view, therefore, the Tribunal directed that a sum of Rs. 35,000 be treated as an allowable deduction and confirmed the disallowance to the extent of the remaining amount of Rs. 15,000 only. 5. It would appear that it has been found as a fact by the Tribunal that this expenditure had been incurred by the assessee mainly for the purpose of its business and, secondly, that this expenditure did not bring into existence any fresh benefit of an enduring nature to it. These findings of fact are binding on this court and the question that falls for consideration is as to whether the assessee was entitled for deduction of the entire amount or only of a part thereof. The question raised at the instance of the Revenue that the assessee was not entitled to claim any part of this expenditure could not arise on the findings recorded by the Tribunal and the controversy stands settled by the decisions of the Supreme Court and this court also. After hearing counsel for the parties, we find that the entire amount was liable to be treated as an allowable deduction. In Sree Meenakshi Mills Ltd. v. CIT [1967] 63 ITR 207 (SC), it was laid down that deductibility of expenditure incurred in prosecuting civil proceedings depend upon the nature and purpose of the legal proceedings in relation to the assessee's business and cannot be affected by the final outcome of that proceeding. However wrong-headed, ill-advised, unduly optimistic or over-confident in his conviction the assessee might appear in the light of the ultimate decision, expenditure in starting and prosecuting a civil proceeding cannot be denied as a permissible deduction in computing the taxable income merely because the proceeding had failed, if otherwise the expenditure was laid out for the purpose of the business wholly and exclusively, that is, reasonably and honestly incurred to promote the interest of the business.;