Sabyasachi Mukharji, J. - (1.) In this reference under Section 256(2) of the I.T. Act, 1961, the following two questions have been referred to this court as directed by this court : For the assessment year 1968-69 : "Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in holding that the legal expenses of Rs. 14,300 incurred by the assessee in connection with two suits were incurred for the purpose of the assessee's business and were as such allowable in computing the assessee's total income ?" For the assessment year 1969-70 : "Whether, on the facts and circumstances of the case, the Tribunal misdirected itself in law in holding that the legal expenses of Rs. 11,500 incurred by the assessee in connection with the suits being Nos. 1684 of 1967 and 1720 of 1967 were incurred for the purpose of the assessee's business and as such were allowable in computing the assessee's total income ?"
(2.) The assessee is a limited company and this reference relates to the assessment years 1968-69 and 1969-70. For these assessment years the assessee-company claimed deduction in working out the business income of legal expenses in connection with two suits, one of which was filed by two shareholders of the assessee company-against the then managing agents and others and the other of which was filed by the United Provinces Commercial Corporation Ltd. against the then managing agents and others, in which the assessee-company was also impleaded as a defendant. These expenses which were claimed as deduction amounted to Rs. 14,300 for the assessment year 1968-69 and Rs. 11,500 for the assessment year 1969-70. The ITO, however, did not accept the assessee's claim and disallowed these expenses while working out the income of the assessee-company. The assessee-company went up in appeal before the AAC. It would be helpful in view of the exhaustive manner in which the AAC dealt with the facts in this case to refer to the relevant portion of the order of the AAC. The AAC observed, inter alia, as follows : "The major items included, however, in this figure are a sum of Rs. 11.000 and Rs. 3,300 (total Rs. 14,300) incurred for Suit No. 1684 of 1967 and Suit No. 1720 of 1967, respectively. As far as the first suit is concerned, this was filed by two shareholders of the assessee-company, namely, Chandra Shekhar Burman and Sohanlal Chaturvedi, against M/s. Steel Brothers & Co. Ltd. (the then managing agents of the assessee-company) the assessee and the then director of the assessee-company. The allegations in this plaint revolve round the point that the funds or assets of the company were being frittered away and dissipated by unwise investments or by making commitments of unsound concerns. The second suit was filed by the United Provinces Commercial Corporation Ltd. against Steel Brothers & Co. Ltd., the assessee and chairman of the assessee-company and the allegations made in the plaint primarily relate to two points, namely, (1) alleged breach of contract in respect of sale of Steel Brothers & Co. Ltd.'s shareholding in the assessee-company, and (2) mismanagement of the funds of the assessee-company. Clearly these two suits are mainly against the managing agent and the board of directors of the appellant company. It is only incidentally that the appellant company has just been made a party to the suits. The second suit is clearly only against the managing agent for their breach of contract in respect of sale of some shares. The first suit is in the nature of a domestic quarrel between the shareholders and the management."
(3.) For the reasons recorded by him and for the proposition of law mentioned therein, he, however, did not accept the assessee's contention and upheld the ITO's orders. Thereafter, the assessee went up in appeal before the Tribunal. The Tribunal dealt with the claim of the assessee-company and referred to the submissions made by the parties, nature of the suit, and the decision on which reliance was placed. It was also noted that the first suit was primarily against the company and the other defendants were not basically interested in the subject-matter of the suit and, therefore, the entire expenses incurred were for the purposes of the assessee's business according to the Tribunal. Regarding the second suit the Tribunal noted the submission of the assessee that in this suit both Steel Brothers & Co. Ltd., the managing agents of the assessee-company and the assessee-company were interested parties and, therefore, 30% of the expenses incurred were borne by the assessee. After referring to the contentions of the parties the Tribunal came to the conclusion that both the suits were launched against the assessee-company because of its business activities and, therefore, the litigation expenses being revenue expenditure were fully allowable. The assessee obviously resisted the suit in order to protect its business according to the Tribunal. Therefore, the Tribunal held that the entire expenditure of Rs. 14,300 was allowable and directed accordingly. Thereupon, application was made for reference but the questions were disallowed but, as directed by this Hon'ble court, two questions indicated above have been referred to.;