1982 PLP 396 (PTD)

V, BALASUBRAHMANYAN, J.‑‑This reference sent by the Income‑tax Appellate Tribunal, Madras, raises a question as to the admissibility of legal and Court expenses in the computation of the business income of a limited company. The expenses were incurred in the course of amalgamation. There were two companies, one called Messrs A. Boake Roberts and Company (India) Ltd. and another called W. J. Bush Products Ltd. Both of them were engaged in the manufacture and marketing of perfumery compounds, aromatic chemicals and essences. The companies wanted to amalgamate. The process of amalgamation involved W. J. Bush Products Ltd. going into liquidation with all its assets being taken over by the other company, viz. A. Boake Roberts and Company (India) Ltd., the latter emerging under a new name, Messrs Bush Boake Allen (India) Ltd., Madras, after the amalgamation. The merger of the two business and the amalgamation of the two companies in the manner aforesaid involved legal expenses and Court expenses, amount ing in al[ to Rs. 30,905 in the year ended December 27, 1970, relating to the assessment year 1971‑

72. The break up of the expenses are set out in the assessment order as under :‑ Rs. Appearance in Court 6.000 General expenses 679 Liquidators' fees 2,000 Fees to an advocate and provision for expenses 22,226 Total 30,905 When the company which emerged after the amalgamation, viz., Messrs Bush Boake Allen (India) Ltd. (which is the assessee which figures in this reference) claimed to deduct the amount of Rs. 30,905 as an item of busi ness expenditure, the I. T. O. disallowed it on the ground that the expenditure had been incurred in connection with an amalgamation which had resulted in a substantial expansion of the company and also had given the assessee a substantial benefit of an enduring nature for its future business. On appeal, the A. A. C. took the same view and disallowed it as an item of capital expenditure. The matter was taken up in further appeal by the assessee before the Tribunal, who observed that though the expenditure :vas incur red in connection with the amalgamation of the two companies, since it was to effect savings and economy and eliminate the duplication of overhead expenses and thus achieve greater profits, the expenditure must be regarded as one deductible in the computation of the income of the assess‑Company. It may, however, be observed that the Tribunal disallowed a small portion of the expenditure, viz., Rs. 1,934.50 and allowed only the balance of Rs. 28,970.50. In this reference, at the instance of the department, the Tribunal's decision is challenged on the following question of law :‑ "Whether RE. 28,970.50 being the expenses incurred by the assessee in connection with the amalgamation of Messrs W. J. Bush Products Ltd. with it, should be allowed as a revenue expenditure for the assessment year 1971‑72 ?" Learned counsel for the department, Mr. J. Jayaraman, submitted that the nature of the legal and Court expenses, which are claimed to be deductible in this case, must be considered in the light of the transaction to which that expenditure related, viz., amalgamation of two companies and the merger of two business concerns in one. Learned counsel submitted that even as the expenditure incurred for the purchase of a business at a valuation is an item of capital outgoing, any expenditure incurred for the merging of the two businesses and the amalgamation of the two companies must also be regarded as being under capital account, not allowable as an item of revenue outgoing. Learned counsel submitted that this would be the position under the law even though the merger of the business, or the amalgamation of the companies is resorted to only with a view to carrying on the business more efficiently or increasing the profits or ensuring econo my in the running of the business. According to Mr. Jayaraman, the pro per principle to be adopted for testing whether the expenditure relating to an amalgamation or a merger of business is a deductible item is to find out whether the transaction with reference to which the expenditure has‑been incurred is itself of a capital nature or whether it is of a revenue character. Learned counsel submitted that the Tribunal's finding that the expenditure was to eliminate duplication of overhead expenditure and to achieve greater profits cannot really determine the character of the legal and Court expenses. The problem of deciding whether any given item of business expenditure is capital or revenue would depend for its solution on a consideration of and depends upon a multitude of factual and other circumstances. As an elementary proposition it may be said that where a business is acquired or where there is a substantial addition to the capital equipment of a business or where there is an increase in the capital structure of an existing business, then the outgoing in all these cases, must be regarded as capital outlay and not as revenue expenditure. On the other side, again as an elementary proposition, it may be said that all current or day to day or running expenses in a business must be regarded as items of revenue expenditure. The proposition advanced by Mr. Jayaraman was that the legal and Court expenses should not be examined in isolation to decide whether they are capital or revenue item, but their character must be judged in relation to the particular legal transac tions or Court proceedings to which those expenses relate. He seemed to suggest that if legal fees and Court expenses were incurred for the purpose of aiding a tax‑payer to acquire a capital assets, such a business or to bring about the merger of two business, as in this case, then on the principle that the expenditure directly involved of the business concerns would be capital expenditure, so too the legal expenses connected therewith must be held to assume the same character and wile have to be determined as capital expenditure. To put it in other words, Mr. Jayaraman's argument in short was that legal expenses are tarred with the same brush as the transaction to which those legal expenses relate. If the transaction is capital in nature, the legal expenses will also be capital in nature. On the contrary, if the transaction in question to which the legal expenses relate is a revenue item, the outgoing must be allowed as an item of revenue expenditure. We think that the only merit of this argument is the apparent logical simplicity of it. But abstract logic has seldom conditioned the evolution of principles in tax law, as in other laws. Recent judgments of Courts have tended to regard the nature and allowability of legal expenses not as derivative expense taking the colour from the transactions to which they relate, but as items which are entitled to be judged in their own character. This line of approach may be said to have been firmly established as part of the law relating to allowance of expenditure, by the decision which the Supreme Court rendered in India Cements Ltd. v. C. I. T. ((1966) 60 I T R 52). In that case, a company went in for a substantial loan of Rs. 40 lakhs from a financial house for a major expansion of its undertaking. The loan was secured by a charge on the company's fixed assets. The amount was advanced by the financial house on certain terms as to interest. For putting through this transaction the company had to incur vakil's fees for drafting the mortgage bond, other legal expenses, charges for stamps, registration charges for obtaining the certified copy of the mortgage deed, charges for preparing an indemnity bond and the like.. The expenses incurred for legal charges amounted to Rs. 84,

633. The question in the relevant assessment of the company was whether the expenses can be allowed as revenue items. The stand taken by the I. T. Deptt. was that since the sum of Rs. 40 lakhs was obtained as a loan for the expansion of the company's business, the expense by way of legal fees, stamps and the like must also be similarly regarded as on the capital account, not allowable in the computation of the company's business profits. This contention, however, was negatived by the Supreme Court. They referred to an express provision in the I. T. Act under which interest' on capital borrowed for the purpose of the assessee's business was allowable as an item of deduction in the computation of profits under the head "Business". On the same analogy they held that any legal expenses incurred by the assessee for borrowing money, irrespective of whether the borrowing went in for a revenue purpose or for a capital purpose, must be necessarily regarded as an item of revenue outgoing. In coming to that conclusion the Supreme Court stated the principle thus (at p. 58) "On the facts of this case, the money secured by the loan was the thing for the use of which this expenditure was made. In principle, apart from any statutory provisions, we see no distinction between interest in respect of a loan and an expenditure incurred for obtaining the loan." . This decision of the Supreme Court has been followed in innumerable decisions of the courts since then. As an example may be cited a decision of a Bench of this Court in C. I. T. v. Kisenchand Chellaram (India) P. Ltd. ((1981) 130 I T R 385). That case too related to the claim of an assessee company for the allowance of legal charges representing the fees paid to the Registrar of Companies for increasing the company's capital. The argument addressed before the Court on behalf of the I. T. Deptt. in that case was that the legal expenditure contributed to the increase in the capital of the company and, therefore, it could not be allowed as a revenue item. This Court rejected that contention, following the decision of the Supreme Court in India Cements Ltd. v. C. I. T. ((1966) 60 I T R 52). The Court held that the money was spent only ‑for the purpose of the business and there was no capital element in the expenditure. They took the view that merely because the fees paid to the Registrar of Companies related to a raising of the company's capital, the amount could not be classified as capital expenditure. Mr. Subramaniam, the assessee's learned counsel ; cited a case which he described as a direct decision on the point, in Addl. C. I. T. v. W. A. Beardsell & Co. (P.) Ltd. ((1981)130 I T R). In that case, a company which was the managing agent of another company, applied to the High Court for the approval of a scheme of amalgamation and after obtaining the Court's orders, effected the amalgamation. The assessee‑Company's share of the legal expenses which were incurred in the process was claimed as an admissible deduction being in the nature of revenue expenditure. This claim was negatived by the I. T. authorities on the ground that it was only capital in nature. This Court, on a reference, disagreed with the department's view and held that the expenditure was allowable as a revenue item. We may observe that in rendering their decision the learned judges of this Court did not rely on the facts that the expenditure had to be incurred with the object of getting more profits. They did not refer particularly to the principles enunciated by the Supreme Court in India Cements Ltd. v. C. I. T. This decision, therefore, has only an illustrative value. However, having regard to the principle laid down by the Supreme Court, in India Cement's case which has been followed in Kisenchand Chellarain's case and other cases, we must hold that the legal and Court expenses claimed by the assessee in the present case must, as rightly held by the Tribunal, be regarded as constituting (revenue/business) expenditure. Learned standing counsel for the department cited. in the course of his argument, the decision of the Supreme Court in Sitalpur Works Ltd. v. C.I. T. ((1963) 49 I T R (S C) 160). That was a case where an assessee, who had a sugar factory in one place, incurred considerable expenditure in shifting the situs of the factory to another place. In claiming the expenditure as revenue expenditure the company contended' that the shifting itself was for the purpose of increasing its profits in a better location, and a mere change of place did not bring about any new capital asset in existence. The Supreme Court, however, took a different view of the expenditure, and held that it was capital in nature, and must be disallowed in the computation of the profits. The Court regarded the expenditure as incurred for putting up the factory although in the process of shifting the location, and held, that it cannot be regarded as incurred merely for earning the profits. According to the Supreme Court, the expenditure effected a permanent improvement of the company's capital assets. In that view, the Supreme Court regarded the outgoing as purely capital in nature. The Supreme Court in that case had addressed itself directly to the expenditure incurred in the transplantation of a factory from one place to another. In that context the Court, with respect, rightly equated those expenses to the expenses of installation of a factory in the first instance. The Supreme Court, in that case, did not have to deal with legal charges and expenses. By way of contrast, what we have in the present case is not a direct item of expenditure connected with any such capital item such as acquisition of a capital asset or its expansion. What we have is an item of expenditure which was no doubt connected with the amalgamation of the two business concerns, but was directly incurred in meeting legal charges and Court expenses. In such a situation, the claim for allowance in our judgment has got to be dealt with on the different test laid down by the Supreme Court in India Cements Ltd. v. C. I. T. As we earlier observed, after the enunciation of the special principle, if we may call it so, in India Cement's case it is no longer open to the revenue to tar the legal expenses with the same brush which they apply to the particular transactions to which those legal expenses relate. For all the above reasons, we answer the question of law in the affirmative and against the department. The assessee will be entitled to its costs. Counsel's fee Rs.

500. Question answered in the affirmative.