1989 (3) TMI 93 - HC - Income Tax

Court rules legal fees as revenue expenditure, disallows surtax deduction.

The court held in favor of the assessee regarding the disallowance of expenditure of Rs. 7,732, ruling that the legal fee was of revenue nature and not ... Business Expenditure Issues: The judgment involves two main issues: 1. Disallowance of expenditure of Rs. 7,732, and 2. Entitlement to deduction of surtax payable under the Companies (Profits) Surtax Act, 1964, in arriving at taxable income.Issue 1 - Disallowance of Expenditure:The assessee sought to purchase land for expansion and paid Rs. 7,732 for legal advice from B. C. Das Gupta and Co. The Income-tax Officer and the Appellate Assistant Commissioner disallowed the deduction, considering it as capital expenditure. The Tribunal also ruled against the assessee.Shri G. C. Sharma argued that since the land was not purchased due to feasibility issues, the expenditure did not result in enduring benefit, making it revenue expenditure. He also contended that the legal fee was in the course of business, citing India Cements Ltd. v. CIT [1966] 60 ITR 52.On the other hand, counsel for the Revenue relied on Rajasthan Construction Co. (P.) Ltd. v. CIT [1984] 148 ITR 61, stating that legal expenses, even if no asset is acquired, could be capital in nature.After considering the arguments, the court held that the fee for legal advice, in this case, was of revenue nature. Citing India Cements' case, the court found the fee to be revenue expenditure, distinguishing it from the decision in Rajasthan Construction Co.'s case. Therefore, the court answered question No. 1 in favor of the assessee, holding that the disallowance of the expenditure of Rs. 7,732 was not justified.Issue 2 - Deduction of Surtax Payable:The Tribunal had to decide whether the assessee was entitled to deduction of surtax payable under the Companies (Profits) Surtax Act, 1964, in calculating taxable income. The court referred to a previous decision in a similar case and ruled in favor of the Revenue, upholding that the assessee was not entitled to the deduction of surtax payable. The court based this decision on the previous ruling and lack of fresh material to warrant a different view.Therefore, the court answered question No. 2 in favor of the Revenue, affirming that the assessee was not entitled to the deduction of surtax payable under the Companies (Profits) Surtax Act, 1964, in arriving at taxable income.