COMMISSIONER OF INCOME TAX Vs. KASTURBHAI LALBHAI

JUDGEMENT

(1.) THE principal question which arises for determination in this reference is whether a certain expenditure incurred by the assessees can be said to be expenditure incurred solely for the purpose of making or earning fees as directors so as to be a permissible deduction within S. 12(2) of the IT Act, 1922. Lord MacMillan pointed out in Tata Hydro Electric Agencies Ltd vs. CIT (1937) 5 ITR 202 (PC) :

(2.) AND this reference is no exception. The facts giving rise to the reference are a little important and in order to arrive at a proper determination of the question, it is necessary to state them in some detail.

(3.) IT appears that thereafter a circular dated 12th August, 1960, was issued by A. H. Haksar in reply to the circular dated 11th July, 1960, and certain statements were made in that circular which according to the assessees did not represent the correct facts. The assessees, therefore, issued another circular dated 5th September, 1960, pointing out the incorrect statements made in the circular of A. N. Haksar. In the meantime, it appears a notice requisitioning a general meeting of the shareholders of the managed company was filed and resolutions were proposed to be moved for removal of newly appointed directors, appointment of other directors in their place and cancellation of the agreement appointing Nixon Forest and Company Limited as agents of the managed company in U. K. The assessees thereupon started collecting proxies and collected proxies from about 3,25,000 shareholders. Before, however, the general meeting of the share holders was held, the disputes in regard to the management of the managed company were settled as a result of the intervention of Shri Morarji Desai and the resolutions sought to be moved at the general meeting were withdrawn. The general meeting was thereafter held on 29th November, 1960, and at this meeting the board of directors of the managed company was reconstituted as suggested by the assessees. The first assessee had already attained the age of 65 years on 19th December, 1959, but he was again elected as director after complying with the provisions of S. 281 of the Companies Act, 1956, and on 26th April, 1961, he was elected Chairman of the board of directors. Now, in issuing the circulars dated 11th July, 1960, and 5th September, 1960, and collecting proxies from the shareholders, the assessees jointly spent an aggregate sum of Rs. 33,299 and each of the assessees claimed 1/2 of this amount as a deduction in his assessment for the asst. year 1961 2. The claim for deduction was founded both under S. 12(2) and S. 10(2)(xv). The ITO disallowed the claim and on appeal the view taken by the ITO was confirmed by the AAC. Each of the two assessee thereupon preferred an appeal to the Tribunal and the two appeals were heard together by the Tribunal. The Tribunal rejected the claim of the assessee in so far as it was based on S. 10(2)(xv) but upheld the claim based on S. 12(2) and allowed the expenditure as a permissible deduction under S. 12(2). This view taken by the Tribunal is challenged by the CIT in the present reference.