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3. The assessee, Muir Mills Co. Ltd., during the relevant previous year, carried on business of manufacturing and selling textile goods. It was a public limited company. In the assessment year in question, i.e., 1954-55, the assessee claimed a deduction of Rs. 41,411 as litigation expenses incurred in defending a suit filed in the Calcutta High Court. The said suit was a representative action filed by two shareholders of the assessee-company, inter alia, seeking a declaration that special resolutions Nos. 1 and 2 passed at the extraordinary general meeting of the said company held on October 20, 1947, were void and inoperative. Certain other reliefs were sought which were broadly and substantially consequential in nature. The ITO held that the aforesaid amount of Rs. 41,411 which the assessee-company incurred in defending the said suit was not allowable as a business expenditure under Section 10(2)(xv) of the old Indian I.T. Act, 1922. The said officer held that the said expenditure could not be said to have been laid out or expended wholly and exclusively for the purpose of the business of the assessee-company and, in any case, according to the view of the said officer, the expenditure, even if it was incurred for the business of the company, was of a capital nature and, therefore, it was not an allowable deduction under the said provision. The assessee went up in appeal before the AAC but did not succeed. Therefore, the dispute was taken to the Income-tax Appellate Tribunal in an appeal and the said Tribunal allowed the same. The result was that the aforesaid litigation expenses were directed to be deducted in computing the net assessable income of the assessee-company. The Department felt aggrieved with the said decision and obtained a reference to this court under Section 66 of the said Act.

13. The learned counsel for the Department contended that the expenditure in question could not be said to have been incurred wholly and exclusively for the business of the assessee-company. In the alternative, he contended that, in any case, the expenditure was of the nature of a capital expenditure, and not a revenue expenditure. So far as the first contention is concerned, it has not been shown as to how the finding recorded by the Tribunal is vitiated in so far as it had been held that the expenditure was incurred by the company wholly and exclusively in respect of its business. Learned counsel's contention seems to be that it was not obligatory for the assessee-company to defend the suit, and its business was in no way likely to be affected even if the suit had not been defended. In our view, this contention cannot be accepted. There was no doubt that the impugned two resolutions had been passed by the shareholders of the company at the extraordinary general meeting held on October 20, 1947. The company was bound to defend the validity of the said resolutions, being a party to the same. The resolutions concerned the business of the company. The old set of articles of association was replaced by a new set. The articles of association, as is well known, governed the internal affairs and management of the company. The memorandum of association provides the framework but the articles are more detailed and regulate the conduct and affairs of the company. The appointment of the managing agents by the second resolution clearly related to the business of the company. The parent company was formerly managed by a board of directors but now managing agents were being appointed on certain terms and conditions. It is difficult to say how it can be said that the expenditure incurred in defending the validity of the two resolutions in question was unconnected with the business of the company or could be said to be not wholly and exclusively for the purpose of the business of the company. No other purpose has been pointed out to us which motivated the company for defending the said resolutions. Learned counsel for the Department placed heavy reliance on the decision of this court in Ishwari Khetan Sugar Mills (P.) Ltd. v. CIT [1972] 86 ITR 635. The facts in the said case are clearly distinguishable. There were two sugar mills, Ishwari Khetan Sugar Mills Ltd. and Maheshwari Khetan Sugar Mills Ltd. These two companies owning separately the sugar mills were managed by managing agents. The managing agency firms were partnership firms. Broadly, the controlling partners in the two managing agency firms belonged to the family of the Khetans. In pursuance of a mutual arrangement between the partners of the two managing agency firms, Onkar Mal Khetan was entrusted with the management of Ishwari Khetan Sugar Mills (P.) Ltd., while Kedar Nath Khetan, who was the uncle of Onkar Mal Khetan, was entrusted with the management of Maheshwari Khetan Sugar Mills (P.) 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. Onkar Mal Khetan instituted Suit No. 59 of 1951 in the court of the Civil Judge, Gorakhpur, against Kedar Nath Khetan and eleven other persons. The two companies were also impleaded as defendants in that suit. Onkar Mal Ketan alleged that Khedar Nath Khetan, in collusion with some other partners of the two managing agency firms and shareholders of the two companies, had ousted or had sought to oust the former from the management of the companies in question, and in particular, from the management of Ishwari Khetan Sugar Mills (P.) Ltd. One of the reliefs claimed was for the appointment of a receiver for the two sugar mills until such time as a 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 the High Court against the order appointing the interim receiver. One was filed by the two companies, and the other was filed by Kedar Nath Khetan and three others as directors of the two companies. These two appeals were dismissed by the High Court by a common judgment, dated November 27, 1951. The expenses incurred by the company in respect of the aforesaid litigation were disallowed by the ITO. This disallowance was questioned in the aforesaid reference by the first question which was referred to the court in the said reference. There was a second question which also was referred to the court in the said reference, and that was in connection with the disallowance of an expenditure which was incurred by the company in respect of a writ petition which had been filed by Onkar Mal Khetan against Khedar Nath Ketan who had been appointed as authorised controller of the assessee-company. These expenses were also disallowed by the ITO on the ground that the litigation expenses were not expenditure laid out or expended wholly or exclusively for the purpose of the business of the assessee-company. So far as the first question was concerned, the position was simple on the finding of fact recorded by the Tribunal. The Tribunal had found as follows (p. 639) :

20. The facts of the present case are clearly distinguishable. Here the litigation expenses were incurred by the company in meeting an attack which had been made by certain shareholders on the two resolutions which had been passed at the extraordinary general meeting of the company held on October 20, 1947. It was not a litigation which could be said to have been necessitated on account of personal rivalries in the managing agency company. A clear finding has been recorded that the Baglas were in firm management till 1950 whereafter the litigation started. The company had changed its articles of association by the first resolution, and by the second resolution had appointed the Indian Textile Syndicate Ltd. as its managing agents. There were acts of the company, and the company was bound to defend the validity of the said acts. It has been rightly emphasised by the Appellate Tribunal in the impugned order that a lot of complications could have been caused if the plaintiffs would have succeeded in the suit because the payments and disbursements made by the managing agents on behalf of the parent company could have been then shown to have been unauthorised. Further, the entire conduct of the parent company on the basis of the new set of articles of association which had been brought into existence on the basis of the first resolution passed at the extraordinary general meeting on October 20, 1947, would have been put into jeopardy on the ground that in law the old set of articles of association did not stand changed or replaced by a valid resolution passed in the general meeting. In our view, the decision in Ishwari Khetan Sugar Mills (P.) Ltd. v. CIT [1972] 86 ITR 635 (All) is clearly distinguishable from the present case. The expression " wholly and exclusively for the purposes of the business " has been the subject-matter of many reported decisions. The Division Bench in the earlier decision relating to this assessee (reported in [1980] 123 ITR 534 (All)--CIT v. Muir Sugar Mills Co. Ltd.) noted two of such decisions, the one in CIT v. Bengal Assam Investors Ltd. [1969] 72 ITR 319 (Cal) and the other in Swamy Motor Transports Ltd. v. CIT [1966] 60 ITR 234 (Mad), which was a case of litigation expenses in respect of the proceedings under Section 153(C) of the repealed Indian Companies Act, 1913. In our view, the said two cases are also distinguishable from the present case. In CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971] 82 ITR 166 (SC), the Supreme Court was again called upon to examine the controversy regarding the disallowance of litigation expenses incurred by the assessee-company. Certain proceedings were taken against the assessee-company before the Income-tax Investigation Commission, and the assessee-company incurred litigation expenses in respect of the said proceedings in engaging lawyers and in the conduct of the said proceedings. The question was whether the law charges so incurred in connection with the proceedings before the Investigation Commission could be deducted in computing the profits of the business of the assessee. The Supreme Court laid down as follows (p. 169):

24. There are certain cases of disallowance of litigation expenses in connection with the infringement of trade mark or patent rights. For example, CIT v. Rohtas Industries Ltd. [1968] 68 ITR 174 (Pat), Income-tax Appellate Tribunal v. Chhaganmal Mangilal [1946] 14 ITR 206 (Nag); certain cases which arose out of the disallowance of litigation expenses incurred in relation to proceedings under Section 153C of the old Indian Companies Act, 1913. We have already referred to the decision in Swami Motor Transports Ltd. v. CIT [1966] 60 ITR 234 (Mad) and there is another one, CIT v. Shiwalik Talkies Ltd. [1967] 63 ITR 83 (Punj). It is not necessary to advert to the details of these cases. However, it may be observed that the nature of the dispute in the proceedings under Section 153C of the old Indian Companies Act, 1913 was a different one, and it was held that the expenses which were incurred in defending the attack on certain directors could not be said to be expenses concerning the purpose of the business of the company. Admittedly, the present is not a case which can be said to be analogous to such a situation. However, we would like to refer to the decision of the Bombay High Court in Premier Construction Co. Ltd. v. CIT [1966] 62 ITR 176. The Bombay High Court was dealing with the disallowance of expenses which the assessee had incurred in defending a suit, and, thereafter, incurred in filing and prosecuting an appeal. It was held that while the expenses incurred in defending the suit were allowable deduction, the expenses incurred in prosecuting the appeal were not allowable deduction. V. S. Desai J. laid down as follows (p. 181);