Trade-mark defence costs are revenue expenditure when incurred to protect sales and profit-earning capacity.

Legal expenses incurred to defend and protect a trade-mark were treated as revenue expenditure because they were incurred in the ordinary course of business to preserve trading operations, sales, and profit-earning capacity. The outlay did not bring into existence any new asset, nor did it augment the capital structure or secure an enduring capital advantage. As the litigation was directed against a counterfeit trade-mark that impaired trading results and created an impediment to trade, the expense was held deductible in computing business income.

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Issues: Whether legal expenses incurred in defending and protecting the assessee's trade-mark were revenue expenditure deductible in computing business income, or capital expenditure.

Analysis: The decisive inquiry was whether the outlay was made to bring into existence or protect a capital asset with enduring benefit, or whether it was incurred in the ordinary course of carrying on the business to protect trading operations and profits. Applying the settled distinction between capital and revenue expenditure, the expenditure was held not to have created any new asset or added to the company's capital structure. The litigation was directed against a counterfeit trade-mark that affected sales and impaired trading results. The expense was therefore incurred to remove an impediment to trade, preserve the company's trading position, and protect its dividend-earning capacity, rather than to secure an enduring capital advantage.

Conclusion: The legal expense was revenue expenditure and was deductible in computing the assessee's taxable business income.

Ratio Decidendi: Expenditure incurred to protect and restore trading operations, sales, and profit-earning capacity, without bringing into existence or augmenting a capital asset, is revenue expenditure and not capital expenditure.

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