Business defence litigation expenses are revenue deductible when incurred to protect company resolutions and preserve existing business arrangements.

Litigation expenses incurred by a company in defending suits challenging resolutions affecting its articles of association and managing agency were treated as deductible revenue expenditure. The court reasoned that the defence was directed to protecting the continuance and smooth running of the business, and that expenses incurred to preserve an existing business arrangement fall within expenditure wholly and exclusively for business purposes. They were not capital in nature because they did not create a new asset, secure an enduring advantage, or cure title to capital. The assessee was therefore entitled to deduct the expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

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Issues: Whether the litigation expenses incurred in defending a suit challenging two resolutions of the company were allowable as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922, or were capital in nature.

Analysis: The expenditure was incurred in defending the validity of the company's own resolutions, one substituting new articles of association and the other appointing managing agents. The challenge went to the structure and conduct of the company's business, and the defence was undertaken to protect the continuance and smooth running of that business. Expenditure incurred to resist an attack on the business structure and on rights integral to the running of the company falls within the expression wholly and exclusively for the purposes of the business. The expenditure did not bring into existence any new asset or enduring advantage, nor was it incurred to cure or perfect title to capital; it was incurred to preserve an existing business arrangement. The cases relied upon by the Department were distinguished on the ground that they involved disputes of a different character, including internal dissension or creation of capital assets.

Conclusion: The expenditure was allowable as revenue expenditure and was not capital expenditure; the answer to the reference was in the affirmative, in favour of the assessee.

Ratio Decidendi: Litigation expenses incurred by a company to defend the validity of resolutions integral to its articles of association and management are deductible if they are incurred to preserve and protect the business, and are not capital expenditure unless they create or improve a capital asset or enduring advantage.

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