1939 (10) TMI 13 - HC - Income Tax

Court allows deduction for legal expenses in money-lending business under Income Tax Act

The court ruled in favor of the assessee, holding that the legal expenses incurred in defending the suit were deductible under Section 10(2)(ix) of the ... - Issues Involved:1. Deductibility of legal expenses under Section 10(2)(ix) of the Indian Income Tax Act.2. Nature of the legal expenses as capital expenditure or revenue expenditure.3. Relationship between the legal expenses and the assessee's money-lending business.Issue-wise Detailed Analysis:1. Deductibility of Legal Expenses under Section 10(2)(ix) of the Indian Income Tax Act:The primary issue is whether the sum of Rs. 2,07,018, expended by the assessee in defending a suit, qualifies as a deductible expense under Section 10(2)(ix) of the Indian Income Tax Act. Section 10(2)(ix) allows the deduction of 'expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains.' The assessee contends that the legal expenses were incurred solely for the purpose of earning the profits which have been assessed to tax. The court had to determine if the expenses were indeed incurred for earning profits and if they were not capital in nature.2. Nature of the Legal Expenses as Capital Expenditure or Revenue Expenditure:The court examined whether the legal expenses were capital expenditure, which is not deductible, or revenue expenditure, which is deductible. The Revenue argued that the expenditure was primarily for repelling allegations affecting the late Maharaja's honor and for protecting his business against loss of capital. They contended that if the suit had succeeded, the assessee would have had to part with a large portion of his capital, making the expenditure capital in nature. The court, however, concluded that the money employed in the money-lending business, while capital in one sense, is also the stock-in-trade. Thus, expenditure incurred for securing the assessee against possible loss of his business stock and stores (i.e., his stock-in-trade) is considered revenue expenditure and incurred solely for earning the profits of the business.3. Relationship Between the Legal Expenses and the Assessee's Money-lending Business:The court had to decide if the legal expenses were connected to the assessee's money-lending business. The Commissioner initially opined that the money-lending business did not include the transaction with the United Agra Mills Ltd. However, the court found no essential difference between taking over the debtor's property to prevent the loss of sums advanced and taking over the management of the debtor's business for the same purpose. The court concluded that the alleged transaction with the United Agra Mills Ltd. was not foreign to the money-lending business of the assessee and his father. It was determined that the suit against the late Maharaja was primarily due to his role as a money-lender and not merely because he was a wealthy nobleman. The relationship of money-lender and borrower provided the foundation for the allegations, and the main purpose of the suit was to obtain damages for the breach of an alleged money-lending transaction.Separate Judgments:- Agarwala, J.: Concluded that the deduction claimed falls within Section 10(2)(ix) of the Act. The expenditure was deemed to be revenue expenditure incurred for the purpose of earning the profits of the business. The court held that the suit was primarily against the Maharaja in his capacity as a money-lender and not merely as a rich nobleman.- Meredith, J.: Agreed with Agarwala, J., and emphasized that defending a false claim arising out of the same transaction as the original loan should be treated on the same basis as the expenses incurred in suing for recovery of the loan. The expenditure in defending the suit was not capital expenditure but rather revenue expenditure, as it involved the money-lender's stock-in-trade.Conclusion:The court answered the reference in favor of the assessee, holding that the legal expenses incurred in defending the suit were deductible under Section 10(2)(ix) of the Indian Income Tax Act. The assessee was entitled to his costs and the refund of the deposit for the reference.