Business expenditure on partnership litigation is deductible when proceedings primarily protect and preserve firm assets.

Litigation expenses incurred in partnership proceedings were held allowable as business expenditure where the suit was substantially directed to protecting, preserving, and recovering firm assets, including allegations of mismanagement, misappropriation, and fraudulent transfer. The decisive test applied was whether the expenditure was laid out wholly and exclusively for the purpose of the assessee's business. On the facts, the litigation was not treated as a mere private dispute between partners, and the assessee's group also obtained a larger share of assets. The expenses were therefore connected with the business and deductible under section 10(2)(xv).

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Issues: Whether litigation expenses incurred in a suit for dissolution and accounts, coupled with allegations of mismanagement, misappropriation, fraudulent transfer of assets, and a prayer for protection of firm assets, were allowable as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The decisive test was whether the expenditure was laid out wholly and exclusively for the purpose of the assessee's business. The suit was not confined to winding up or adjustment of partnership accounts; its substance also included recovery, preservation, and protection of the firm's assets, appointment of a receiver, and redress of alleged mismanagement and diversion of assets. The legal expenses were incurred in connection with that litigation, and the Tribunal had also found that the assessee's group substantially benefited by obtaining a larger share than it would otherwise have received. On these facts, the expenditure was treated as connected with the business and not as a mere private dispute between partners.

Conclusion: The litigation expenses were deductible as expenditure wholly and exclusively incurred for the purpose of business; the disallowance was incorrect.

Ratio Decidendi: Litigation expenses incurred in partnership proceedings are allowable where, on the facts, the suit is substantially directed to protecting, preserving, or retrieving business assets and is therefore incurred wholly and exclusively for the purposes of the assessee's business.

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