Law:

Section:

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 - Assessee-company held several shares of a tea company - One of shareholders of tea company instituted a suit against assessee alleging that share-holding of assessee in tea company being in excess of 10 per cent of subscribed share capital of tea company contravened provisions of section 27A(4) of Insurance Act, 1938 and sought a perpetual injunction restraining assessee from exercising any votes or rights in respect shares held in excess of 10 per cent - Eventually suit was dismissed - Assessee's claim that litigation expenditure incurred in fighting said suit was allowable expenditure under section 10(2)(xv) of 1922 Act was rejected by ITO on ground that expenditure was capital in nature - Whether since relief claimed in plaint was such that even assessee's rights in respect of shares including right to exercise votes and right to receive dividends were jeopardised, litigation expenditure incurred by assessee was for protection of its business activity and, thus, allowable under section 10(2)(xv) of 1922 Act - Held, yes FACTS The assessee-company held several shares of a Tea Co. One shareholder of the Tea Co. instituted a suit against the assessee-company and some other defendants alleging that the shareholding of the assessee in the Tea Co., being in excess of 10 per cent of the subscribed share capital of the Tea Co., contravened the provisions of section 27A(4) of Insurance Act, 1938. The plaintiff in the suit prayed, inter alia, for a perpetual injunction restraining the defendants from exercising any votes or any rights in respect of the shares or any rights in respect of the shares held by the assessee in the Tea Co. in excess of 10 per cent of the subscribed share capital of the Tea Co. Eventually the suit was dismissed and the cost of the suit was claimed by the assessee as an expenditure incurred by it for allowance under section 10(2)(xv) of 1922 Act. The ITO disallowed the claim on the ground that the suit having been instituted for the purpose of restraining the controlling of voting power by…

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