Business expenditure on litigation is deductible only when the dispute arises from or is incidental to carrying on trade.

Litigation expenses are deductible as business expenditure only where they are incurred in the assessee's character as trader and arise out of, or are incidental to, the carrying on of its business. Costs incurred in defending a shareholder's suit were treated as allowable because the suit sought reliefs that could threaten the company's business and affairs, making the dispute sufficiently connected with business operations. By contrast, expenses incurred in prosecuting the appeal were not allowable, as the appeal concerned internal shareholder-management procedure and was incurred only to support the chairman's ruling, without a real nexus to the company's business.

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Issues: Whether the litigation expenses incurred by the assessee-company in defending a shareholder's suit and in prosecuting the appeal were deductible as expenditure wholly and exclusively laid out for the purpose of its business under section 10(2)(xv) of the Income-tax Act, 1922.

Analysis: Expenditure on civil litigation is deductible only if it is incurred by the assessee in its character as a trader and the dispute arises out of, or is incidental to, the carrying on of its business. The suit, though originating in a shareholder dispute, went beyond a mere domestic quarrel and sought reliefs that threatened the company's business and the conduct of its affairs. On that footing, the costs incurred in defending the suit were treated as business expenditure. The appeal, however, related only to the correctness of the ruling given at the general meeting and concerned the relative rights of shareholders and management under the Companies Act in relation to internal procedure. That expenditure had no real connection with the company's business and was incurred only to sustain the ruling of the chairman.

Conclusion: The expenses incurred in defending the suit were allowable, but the expenses incurred in prosecuting the appeal were not allowable as business deduction.

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