1951 (3) TMI 35 - HC - Income Tax

Court allows company's litigation expenses as business expenditure under Income-tax Act.

Commissioner of Income-Tax, Madras Versus Raman And Raman Ltd., Kumbakonam

The court held that the litigation expenses of Rs. 1,392 incurred by the company were allowable as business expenditure under Section 10(2)(xv) of the ... - Issues Involved:1. Whether the litigation expenses of Rs. 1,392 incurred by the assessee company are allowable as business expenditure under Section 10(2)(xv) of the Income-tax Act.Issue-wise Detailed Analysis:1. Allowability of Litigation Expenses as Business Expenditure:The primary issue referred to the court was whether the litigation expenses of Rs. 1,392 incurred by the assessee company could be considered as allowable business expenditure under Section 10(2)(xv) of the Income-tax Act. The assessee, a private limited company, had entered into an agreement to purchase five buses and related assets from an individual. However, disputes arose, leading to litigation, and the company incurred expenses defending its title to the buses.The Commissioner of Income-tax argued that the litigation expenses were capital expenditure, as they were incurred in the process of acquiring a capital asset (the buses and the right to ply them on specific routes). The Commissioner maintained that the expenses were part of the cost of acquiring the capital asset and thus not deductible under Section 10(2)(xv).The court examined the rights of the company under the contract and concluded that the title to the buses passed to the company on the date of the contract itself, despite the ongoing litigation. The court noted that the company had taken possession of the buses and was plying them on the specified routes, indicating that the property in the buses had indeed passed to the company.The court distinguished between capital expenditure and revenue expenditure. It held that while the purchase price of the buses was a capital expenditure, the litigation expenses were incurred to defend the company's title to an existing asset, not to acquire a new one. The court reasoned that expenses incurred to maintain or defend an existing capital asset are revenue in nature and thus deductible under Section 10(2)(xv).The court cited several precedents, including *Usher's Wiltshire Brewery, Ltd. v. Bruce* and *Southern v. Borax Consolidated Ltd.*, to support its conclusion. These cases established that legal expenses incurred to defend or maintain existing business assets are revenue expenditures.The court also referred to Indian decisions, such as *Mahabir Parshad and Sons v. Commissioner of Income-tax, Punjab* and *Central India Spinning, Weaving and Manufacturing Co. Ltd. v. Commissioner of Income-tax, C.P.*, which supported the view that legal expenses incurred in connection with the protection of business assets are deductible as revenue expenditure.In conclusion, the court held that the litigation expenses of Rs. 1,392 incurred by the company were allowable as business expenditure under Section 10(2)(xv) of the Income-tax Act. The reference was answered in the affirmative and in favor of the assessee, with the Commissioner of Income-tax directed to pay Rs. 250 as costs of the reference to the assessee.