Protection of income-yielding assets: legal expenses incurred to preserve share rights were treated as deductible.

Legal expenses incurred to defend litigation for the preservation of rights in shares held as an income-yielding capital asset were treated as deductible. The decisive test was the purpose of the outlay: expenditure reasonably and honestly incurred to protect business interests or preserve an income-producing asset retains its allowable character, even though the underlying shares are capital in nature. On that basis, the litigation cost connected with protecting the shareholder's interest in the shares was allowed as a revenue deduction.

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Issues: Whether legal expenses incurred in connection with the protection of shares held by the assessee, being an income-yielding capital asset, were allowable as a deduction.

Analysis: The expenditure was incurred by the assessee in defending litigation directed to the preservation of its rights in the shares of Mysore Paper Mills Ltd. The decisive consideration was the purpose of the outlay. Applying the principle that expenditure reasonably and honestly incurred to protect business interests or preserve an income-yielding asset is deductible, the character of the expense was treated as allowable notwithstanding that the shares were capital in nature.

Conclusion: The legal expenses were deductible and the question was answered in favour of the assessee.

Ratio Decidendi: Expenditure incurred to protect or preserve an income-yielding asset or business interest is allowable as a deduction if it is reasonably and honestly incurred for that purpose.

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