M/S. Aegis Chemical Industries Ltd v. The Commissioner Of Income Tax

IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICGTION INCOME TAX REFERENCE NO. 33 of 1989 M/s. Aegis Chemical Industries Ltd. ... Applicant. vs. The Commissioner of Income Tax ..... Respondent Mr. Md. Ahir Farooqui i/b. M/s. M.K. Ambalal forApplicant. Mr. Ashok Kotangale, Sr. Counsel for Respondent. CORAM: V. C. DAGA AND A. S. AGUIAR JJ. Date:July, 26, 2005. P. C.: 1. By this reference under section 256 (1) of the Income Tax Act , 1961, the Income Tax Appellate Tribunal has referred the followingquestions of law for the opinion of this court: “Whether on the facts and circumstances of the caseand the material on records , the Tribunal was correct inlaw in holding that the disputes between the majorityshareholders and the minority shareholders were in thenature of only a domestic quarrel between them and, therefore , the expenditure of Rs.1,15,186/- incurred onlitigation was not allowable as a revenue deduction incomputing the total income of the assessee – companyunder the Income Tax Act ?”litigation was not allowable as a revenue deduction incomputing the total income of the assessee – companyunder the Income Tax Act ?” 2. The factual matrix reveals that there was an internal disputebetween the minority and majority shareholders. This dispute led tofiling three proceedings i.e. Company Petition no. 6 of 1971,Company Petition no. 53 of 1969 and appeal no. 1 of 1970 arisingtherefrom. The expenses incurred in respect of each proceedingswere in the sum of Rs.1,93,494.45, Rs.27,800.00 and Rs.64,750.00,respectively, total amounting to Rs.2,86,044.45; out of which anamount of Rs.31,300.00 were recovered from the shareholders.Out of balance of Rs.2,55,044.45, a sum of Rs.1,39,858.05 wereallowed by the Income Tax Officer, as business expenditure;whereas the remaining amount of Rs.1,15,186.40 were disallowed,said to be litigation expenses incurred on internal dispute of theshareholders. between the minority and majority shareholders. This dispute led tofiling three proceedings i.e. Company Petition no. 6 of 1971,Company Petition no. 53 of 1969 and appeal no. 1 of 1970 arisingtherefrom. The expenses incurred in respect of each proceedingswere in the sum of Rs.1,93,494.45, Rs.27,800.00 and Rs.64,750.00,respectively, total amounting to Rs.2,86,044.45; out of which anamount of Rs.31,300.00 were recovered from the shareholders.Out of balance of Rs.2,55,044.45, a sum of Rs.1,39,858.05 wereallowed by the Income Tax Officer, as business expenditure;whereas the remaining amount of Rs.1,15,186.40 were disallowed,said to be litigation expenses incurred on internal dispute of theshareholders. 3. One fails to understand as to on what basis this bifurcation wasmade by the ITO. The dispute right from the initiation till finaldecision was a dispute with the company. Expenditure incurredthereon would be the expenditure incurred for the entire litigation.One cannot bifurcate litigation in different stages for the purposes ofmade by the ITO. The dispute right from the initiation till finaldecision was a dispute with the company. Expenditure incurredthereon would be the expenditure incurred for the entire litigation.One cannot bifurcate litigation in different stages for the purposes of allowing or disallowing the litigation expenditure. 4. The Tribunal has rightly held that the expenses were incurred tofacilitate smooth running of the business by getting rid of minorityshareholders as such it was the expenditure incurred out ofbusiness expediency. facilitate smooth running of the business by getting rid of minorityshareholders as such it was the expenditure incurred out ofbusiness expediency. allowing or disallowing the litigation expenditure. 4. The Tribunal has rightly held that the expenses were incurred tofacilitate smooth running of the business by getting rid of minorityshareholders as such it was the expenditure incurred out ofbusiness expediency. facilitate smooth running of the business by getting rid of minorityshareholders as such it was the expenditure incurred out ofbusiness expediency. 5. The view taken by the Tribunal is a reasonable and possible view .Considering the finding of facts recorded by the Tribunal, we holdthat the expenditure in the sum of Rs. 1,15,186.40 incurred in thelitigation was allowable as a revenue deduction in computing thetotal income of the assessee – Company. Considering the finding of facts recorded by the Tribunal, we holdthat the expenditure in the sum of Rs. 1,15,186.40 incurred in thelitigation was allowable as a revenue deduction in computing thetotal income of the assessee – Company. 6. In this view of the matter question referred to us for opinion isanswered in the negative i.e., in favour of the assessee and againstthe Revenue. answered in the negative i.e., in favour of the assessee and againstthe Revenue. 7. Reference stands disposed of with no order as to costs. (V. C. DAGA J. ) -x- (A. S. AGUIAR J.)