Satish Chandra, C.J.

1. THE assessee is a limited company doing business in the manufacture and sale of sugar. In respect of the assessment year 1957-58, the Tribunal has at its instance, referred to us the following questions of law :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal is right in disallowing the legal expenses of Rs. 11,069 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the amount of Rs. 66,194 incurred in connection with the litigation before the Allahabad High Court is not an allowable deduction or an outgoing ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in not allowing Rs. 2,04,273 in respect of the cane purchase price ?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in not allowing Rs. 32,004 in respect of Molasses Fund Quarters ? "

2. IN respect of the first question, the position is that the company paid a sum of Rs. 11,069 to lawyers in connection with the amalgamation of the Raza Sugar Company with the Buland Sugar Co. Ltd., Rampur. After amalgamation, the Buland Sugar Co. Ltd., Rampur, merged in Raza Sugar Company and the amalgamated company came to be called Raza Buland Sugar Co. Ltd. The company's contention was that these expenses were incurred as an incident to the business and were wholly and exclusively laid out for those purposes. The Tribunal repelled the submission. It held that there can be no dispute that by amalgamation the company made substantial changes in its profit earning structure. The framework of the profit earning operation underwent changes. The expense was capital in nature.

We have heard learned counsel and we see no reason to disagree with the view taken by the Tribunal. The expenses were incurred prior to the coming into existence of the present assessee, namely, Raza Buland Sugar Co. Ltd. They were expenses integrally connected with the creation of the assessee-company. They were clearly capital in nature.

3. IN respect of the second question, the position is that the assessee-company paid Rs. 66,194 as legal expenses to certain shareholders who had challenged the declaration of dividend by Buland Sugar Co. in January, 1952. The declaration of dividend was in relation to the shares in Dalmia Cement Ltd. held by Buland Sugar Co. Ltd. A group of shareholders filed an application in the High Court against the managing agents and directors of the two companies, alleging mismanagement and misuse of funds. The High Court passed an injunction order on February 28, 1952, staying the declaration of dividends. In January, 1957, the matter was compromised. One of the terms of the compromise was that the petitioners would refrain from challenging the declaration of the dividends provided they are paid expenses of litigation. They came to Rs. 66,194 which the assessee-company paid. It is clear that neither of the two companies was a party to the litigation. The litigation commenced long prior to the coming into existence of the present company, namely, Raza Buland Sugar Co. Ltd. The litigation was between the managing agents and directors on the one hand and the shareholders on the other. The company was not directly concerned or interested. The litigation was not incidental to the carrying on of the business by the assessee. It was caused by internal quarrels between the shareholders and the directors and managing agents which related to the administration of the affairs of the company. We agree with the Tribunal that this item was not an allowable expense.

4. THE third question relates to a sum of Rs. 2,04,273. In the year 1957-58, the assessee-company purchased sugarcane for which it was liable to pay an amount of Rs. 1,47,38,577 computed in accordance with the price for the sugarcane fixed by statutory orders. The company, however, retained a sum of Rs. 2,04,273 by way of provisions for low recovery of su