Revenue deduction for litigation expenses depends on whether the suit protects existing title or acquires a new capital asset

Litigation expenses incurred to defend or assert an existing title to business assets are revenue in nature and deductible if laid out wholly and exclusively for the business. By contrast, expenditure incurred to obtain specific performance of an executory agreement and thereby acquire a new capital asset is capital in nature and not deductible as revenue expenditure. Where a suit contains severable claims, the portion of court-fee attributable to the title claim may be allowed, while the part referable to acquisition of capital rights must be excluded. On the stated facts, the expenses relating to maintenance of title were deductible, but the expenditure linked to acquisition of a capital asset was not.

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Issues: Whether litigation expenses incurred by the assessee in civil suits for asserting title to business assets or for obtaining specific performance of an executory contract were allowable deductions under section 10(2)(xv) of the Income-tax Act, 1922.

Analysis: The test is whether the expenditure was laid out wholly and exclusively for the business and whether it was incurred to maintain a pre-existing title or to acquire a new capital asset. Expenses incurred in defending or asserting an existing title to a capital asset are revenue in nature, even if the claim ultimately fails. By contrast, expenditure incurred to obtain specific performance of an executory agreement and thereby acquire title to a capital asset is capital in nature. On the facts, the expenses relating to the suits that merely maintained title to assets were deductible. In the mixed suit, the court-fee attributable to the claim for title to the fourteen buses and route rights was severable and allowable, but the portion referable to the claim for specific performance could not be treated as revenue expenditure.

Conclusion: The assessee was entitled to deduction of the litigation relating to maintenance of title, including the full amount claimed for one suit and the severable court-fee portion in the mixed suit, but not the expenditure referable to acquisition of a capital asset. The question was answered partly in favour of the assessee.

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