Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1960-61 - Assessee company was a creditor of a company and on repayment of amount initiated liquidation proceedings against that company - Ultimately shareholders of that company agree to sell their shares to group of majority shareholders of assessee company - Assessee company claimed deduction of expenses incurred in these proceedings - Whether expenditure incurred by assessee company in connection with liquidation proceeding would be deductible as revenue expenditure - Held, yes FACTS The assessee-company was a creditor of a company to the extent of Rs. 67 lakhs and out of this amount, an amount of Rs. 65 lakhs was secured by the first and the second mortgages. Under the financial agreement, the assessee-company became entitled to be in the sole management of that company for a period of seven years and it also become entitled to a share in the managing agency commission that the managing agents of that company were to receive under their managing agency agreement with that company. After the agreement was entered into a litigation had to be undergone by the assessee-company against the company and the managing agents for prevention of interference by the previous managing agents of the company in the day to day management by the assessee-company and its nominees-. Certain amount had to be spent by the assessee-company towards litigation expenses in connection with that dispute. The assessee-company sent a notice of demand to the said company claiming repayment of unsecured amount and interest on debentures since the interest was not paid. Ultimately, the assessee company started liquidation proceedings against that company. The matter was contested quite a good deal. Ultimately the shareholders of that company agreed to sell their shares to the group of majority shareholder of the assessee company. The winding up proceedings came to an end after the shares were bought over in the above manner. The assessee company claimed deduction of expenses incurred in these proceedings. The ITO held that this amount was spent as capital expenditure as in his view the…

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