1999 (9) TMI 55 - HC - Income Tax

Expenditure pursuing bank claim not deductible as revenue expense under Income-tax Act

The court held that the expenditure incurred by the assessee in pursuing a claim against the National Bank of Pakistan was capital in nature and not ... Capital Or Revenue Expenditure, Litigation Expenses, Expenditure Issues Involved: Determination of whether the expenditure incurred by the assessee in pursuing a claim against the National Bank of Pakistan before the International Chamber of Commerce is capital or revenue expenditure for the assessment years 1967-68 to 1972-73.Assessment Years 1967-70:The assessee, a public limited company engaged in cement manufacturing, incurred expenses in pursuing a claim against the National Bank of Pakistan for non-supply of cement as per a sale agreement. The Income-tax Officer disallowed the expenditure as capital in nature, considering it related to the sale of the company's factories. The Appellate Tribunal upheld this decision, stating the expenses aimed at recovering the sale proceeds of capital assets and were not for the running business. The Tribunal's view was that the expenditure was rightly disallowed as capital expenditure, leading to the dismissal of the assessee's appeals.Legal Arguments:The assessee contended that the expenditure was incurred to realize a debt and was allowable as revenue expenditure under section 37 of the Income-tax Act. The Revenue argued that since the assessee had sold its business in Pakistan, the litigation expenses could not be considered for the business's purpose and should be treated as capital expenditure.Judgment and Analysis:The court rejected the assessee's argument that the expenditure was allowable under section 37, emphasizing that for an expense to be deductible, it must be laid out wholly and exclusively for the business and not of a capital nature. The court held that the litigation expenses were not directly connected with the assessee's normal business activity, as the business operations in Pakistan had ceased after the sale of factories. Referring to precedent, the court concluded that the expenditure did not fulfill the conditions for deduction under section 37.Capital vs. Revenue Expenditure:The court deliberated on whether the expenditure was capital or revenue in nature, citing Supreme Court precedents. It was noted that the purpose of the payment determines its nature, and in this case, the expenditure aimed at realizing the sale consideration of fixed assets in Pakistan. Applying the principle from a Supreme Court case, the court held that the expenditure was of capital nature as it related to fixed assets. The court upheld the Tribunal's decision that the expenditure was capital in nature.Final Verdict:The court answered the question in favor of the Revenue, affirming that the expenditure was capital in nature. Each party was directed to bear its own costs in the case.