AJIT K.SENGUPTA, J. - (1.) AT the instance of the CIT of West Bengal-IX, the following question of law has been referred to this Court under S. 256(1) of the IT Act, 1961 ('the Act') for the asst. yr. 1976-77: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the legal expenses of Rs. 17,709 incurred in connection with the protection of shares of Mysore Paper Mills Ltd. being the non-business capital asset of the assessee ?" The facts leading to this reference are that in the P&L a/c the asst. yr. 1976-77, the assessee claimed a sum of Rs. 17,709 as legal expenses. The ITO disallowed it after observing that the legal expenses related to Mysore Paper Mills shares and, therefore, were in the nature of capital expenses.
(2.) BEING aggrieved by the order of the ITO the assessee came up in appeal before the CIT(A). The CIT(A) deleted the addition of legal expenses after observing that the expenses were incurred for preservation of shares which were income-yielding in nature. The Tribunal, after considering the facts and circumstances of the case and after looking into the findings arrived at by the AAC, held that the addition was rightly deleted from the assessment. Hence, this reference.
(3.) THE assessee-company held shares of Mysore Paper Mills Ltd. In a suit filed by S.B. Jalan against and others the company was one of the defendants. The entire expenditure was incurred for defending the suit by the assessee in connection with the preservation of the rights in the shares of Mysore Paper Mills Ltd. In other words, such expenditure was incurred for preservation of the shares, which was income-yielding in nature. Reference may be made to the decision of the Supreme Court in the case of CIT vs. Birla Cotton Spg. & Wvg. Mills Ltd. (1971) 82 ITR 166 (SC) In that case, the question was whether law charges incurred in connection with the proceedings before the Investigation CIT were allowable as deduction. There the Supreme Court held: "It is well settled by now that the deductibility of expenditure incurred in prosecuting the civil proceedings to resist the enforcement of a measure, legislative or executive, which means restriction on the carrying on of a business or to obtain a declaration that the measure is invalid, would, if other conditions are satisfied, be admissible as a deduction under S. 10(2)(xv). Deductibility of such expenditure does not depend on the final outcome of those proceedings. However wrongheaded, ill-advised, unduly optimistic or over-confident in his conviction the assessee might appear in the light of the ultimate decision, expenditure in prosecuting a civil proceeding cannot be denied as a permissible deduction if it is reasonably and honesty incurred to promote the interest of the business." ;