JUDGMENT C. S. P. Singh, J. - The Income tax Appellate Tribunal, Allahabad Bench has under section 256(1) of the Income Tax Act, 1961 referred the following question for our opinion :
"Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 23,838/- was an allowable deduction under section 28(1) or section 37 of the Income Tax Act, 1961 ?"
2. The facts leading to the reference are these :
The assessee is a Private Ltd. Company. During the assessment year 1964-65, the assessee claimed a deduction of Rs. 23,838/- paid by it to M/s. Dutta & Sons, Solicitors at Calcutta. The payment was made in the following circumstances :
"One Sri Raghunandan Navatia filed a suit in the High Court Calcutta being suit No. 573 of 1966 challenging the resolution passed by the "assessee in regard to the withdrawal of certain amounts from provision of taxation and declaration of dividend from these reserves. The dividends declared for the calendar year 1961 amounted to Rs. 51,100/- and for 1962 Rs. 4,72,800/-".
The High Court of Calcutta held that the resolution withdrawing the amount from taxation reserves and the declaration of dividends therefrom could only be passed at the Annual General Meeting and not at an Extraordinary General Meeting. It as such held the resolution to be ultra vires. An appeal was preferred against this decision but failed. The amount claimed represented the litigation expenses incurred by the Company in connection with the suit. The Income-tax Officer did not allow the claim. An appeal filed before the Assistant Appellate Commissioner failed. The Tribunal on appeal held that the resolution was passed by the Company in good faith and as the declaration of dividend was associated with the business activity of the assessee, the expenditure was incurred for business. In this view of the matter it allowed the claim.
3. The question is whether expenditure of the nature referred to above is allowable as a business expenditure. It is now settled after the pronouncement of the Supreme Court in the case of Minakshi Mills vs. Commissioner of Income tax, Madras, (63 I.T.R. 207) that the deductibility of an expenditure does not depend on the merits of the claim. The mere fact that the resolution of the Company was struck down as ultra vires, is not decisive of the matter. In all such cases one has to see whether the litigation expenses were incurred by the assessee in his character as a trader, and was incidental to the assessees business. Now, a Company which does business is in the course of his business to declare dividends and to pay it to it shareholders. In the present case it has been found by the Tribunal that the resolution passed was bona fide. The Company was a defendant to the suit, and was called upon to defend its resolution declaring the dividends and the payment there of. Both the declaration of the dividends and payment were incidental to the assessees business and likewise was the act of defending the suit, for the company having passed the resolution and declared the dividend bona fide had to depend upon its action when called upon to do so. The amount in question was as such clearly allowable as a deduction.
4. We accordingly answer the question in the affirmative, in favour of the assessee and against the department. The department to pay the cost which we assess at Rs. 200/-.