Litigation expenditure not deductible when incurred to resist past claims and protect against future liability

Litigation expenditure incurred to defend a suit arising from an earlier transaction was not allowable as a deduction under Section 10(2)(ix) of the Indian Income Tax Act, 1922, because the statutory allowance was confined to expenditure incurred solely for earning profits or gains of the relevant previous year. Expenses laid out to resist a claim, avert future liability, or protect the business from possible future claims did not satisfy that test, and the amount was also treated as capital in character. The reference was answered against the assessee and in favour of the Revenue.

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Issues: Whether litigation expenditure incurred in defending a suit brought against the assessee was an allowable deduction under Section 10(2)(ix) of the Indian Income Tax Act, 1922.

Analysis: The expenditure was incurred not for earning profits or gains of the relevant previous year, but to resist a claim arising out of an earlier transaction and to prevent future liability. The statutory allowance was confined to expenditure incurred solely for the purpose of earning such profits or gains, and did not extend to expenses incurred to avert future losses or to preserve the business from possible future claims. On the facts, the amount was also treated as having a capital character.

Conclusion: The expenditure was not deductible under Section 10(2)(ix) and the answer to the reference was in the negative, in favour of the Revenue.

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