Litigation expenses incurred to defend title to shares and acquire voting rights are capital expenditure incurred in making additions or alterations to capital assets under Section 12b(2)(ii) of the Indian Income-tax Act, 1922.

SANKAR PRASAD MITRA, J.

( 1 ) THIS is a reference under Section 66 (1) of the Indian Income-tax Act, 1922. The assessment year is 1958-59, the corresponding accounting year ended on the 30th June, 1957. On April 18, 1950, the respondent purchased 19,540 preference shares and 5,085 ordinary shares of Messrs. Muir Mills Ltd. for Rs. 87,05,000. 00 at an auction sale held by the Hongkong and Shanghai Banking Corporation Ltd. During the relevant accounting year the respondent sold 4,402 preference shares and 549 ordinary shares. Since Section 12b of the Indian Income-tax Act, 1922, was operative with regard to sates of capital assets after the 31st March, 1956, the Income-tax Officer issued a notice requiring the assessee, that is the respondent, to furnish particulars of the shares sold and the capital gains made. The assessee, in reply, claimed a loss of Rs. 1,03,994. 00 which included an expenditure of Rs. 1,00,721'00 incurred by the assessee in litigation in respect of 549 ordinary shares and 4,402 preference shares sold during the year. The Income-tax Officer disallowed the litigation expenses and computed the loss at Rs. 3,275. 00. The Income-tax Officer was of the view that the litigation expenses claimed as a deduction could not be allowed under Section 12b inasmuch as they were not incurred either in connection with the sale or as expenses of a capital nature in making any addition or alteration to the capital assets.

( 2 ) THE Appellate Assistant Commissioner reversed the finding of the Income-tax Officer. He held that the legal expenses for defending title to the shares sold constitute capital expenditure which would augment the cost of the shares in computing the capital gains or capital loss under Section 12b. The Appellate Assistant Commissioner directed that the capital loss computed by the Income-tax Officer be increased by the sum of Rs. 1,00,721. 00 and carried forward. The Appellate Assistant Commissioner said :". . . the legal expenses for defending title to a capital assets are capital expenditure and would go to add to the cost of the assets. Section 12b further provides that the expenditure to be added to the cost should not be such in respect of which allowance is admissible under Section 10 or Section 12. Since in the past assessments, the expenditure was disallowed under Section 10 as capital expenditure, the legal expenses incurred for defending title should be treated as additional cost. The Income-tax Officer is directed to increase the capital loss by Rs. 1,00,721'00 and to carry forward the same. "

( 3 ) BEFORE the Tribunal the departmental representative contended that the Appellate Assistant Commissioner was not justified in holding that the legal expenses of Rs. 1,00,721. 00 were incurred for defending the title to the shares and that such expenses should be added to the cost of the shares in computing the capital loss. On behalf of the assessee, however, it was urged that the litigation expenses were expenses of a capital nature incurred by it " in making any additions or alterations " to the capital assets, namely, the shares, within the meaning of Section 12b (2) (ii) of the Indian Income-tax Act, 1922. The Tribunal considered the real object of the litigation sought out by the assessee and concluded that the legal expenses were incurred by the assessee with a view to defending its title to or maintaining the value of the block of shares purchased by it. The Tribunal held that the amount of the legal expenses should be included in the cost of the shares as an expenditure of a capital nature under Section 12b (2) (ii ). The Tribunal observed :" The expenses were incurred by the assessee-company for defending its title to and maintaining the value of the block of shares purchased by it. As already said, the assessee-company had purchased 24,625 shares for a heavy sum, namely, Rs. 87,05,000. 00. The shares purchased by the assessee-company represented nearly 60 per cent. of the total share capita

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