Law: Income Tax Act, 1961

Section: 37(1)

Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] - Business expenditure - Allowability of - Assessment years 1957-58 and 1958-59 - Assessee-company incurred expenditure in defending itself in winding up petition filed by one of its shareholders - Whether expenditure incurred by company was to enable it to run business and earn profits by running its business and therefore, such expenditure was wholly and exclusively laid out for purpose of business and, as such, was allowable under section 10(2)(xv) of 1922 Act - Held, yes FACTS One of the shareholders of the assessee-company filed a petition to wind up the assessee on the ground that the managing director of the company was managing the affairs of the company in such a way as to monopolise the company's affairs for the individual benefit of himself and the members of his family. The assessee-company contested this petition for winding up and in defending itself had incurred certain expenditure. For the assessment years 1957-58 and 1958-59, the assessee claimed deduction of this expenditure in computation of its income. The ITO rejected this claim of the assessee. On appeal, the AAC allowed the claim on the ground that the expenditure was incurred wholly and exclusively for the purpose of the business. On appeal by the revenue, the Tribunal held that the expenditure incurred by the assessee related to a proceeding, which affected the whole structure of the assessee's profit making apparatus, which affected not a part or entirety of the assets of the business but on the other hand it affected the whole existence of the assessee as such and, therefore, it was not allowable as a deduction. On reference: HELD An expenditure bona fide incurred by a businessman either in conducting a litigation or otherwise for the purpose of defending its title to its stock-in-trade or capital assets or to prevent the seizure of its capital assets or the stock-in-trade, would be an expenditure wholly and exclusively laid out for the purpose of its business. For a businessman to run his business, he must have his stock-in-trade as well as the capital asset, If there is…

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