Money-lending business expenses were treated as revenue expenditure when incurred to defend claims tied to the lending transaction.

A money-lending transaction connected with advances made in the course of business was held not to be outside the scope of the lender's business, because taking steps to protect sums advanced was treated as part of the lending activity. Legal expenses incurred in defending a suit arising directly from that transaction were held to be revenue expenditure, not capital expenditure, because money used in the business was treated as stock-in-trade and the defence was a necessary incident of protecting that trading asset. The claimed deduction was therefore allowable as a business deduction.

---

---

Issues: (i) Whether the transaction out of which the suit arose was within the scope of the assessee's money-lending business; (ii) whether the legal incurred in defending the suit was expenditure laid out solely for the purpose of earning the profits of the business and not capital expenditure.

Issue (i): Whether the transaction out of which the suit arose was within the scope of the assessee's money-lending business.

Analysis: The transaction was connected with the advance of money made in the course of the assessee's lending activities. Taking over management or property to protect sums advanced was treated as having no essential difference from advancing loans to safeguard the lender's interest. The suit was founded on the lending relationship and on alleged breach of a money-lending transaction.

Conclusion: The transaction was not foreign to the assessee's money-lending business.

Issue (ii): Whether the legal expenses incurred in defending the suit were allowable as business expenditure under the income-tax law.

Analysis: The governing test was whether the expenditure was incurred solely for earning business profits and whether it was capital in nature. Money employed by a money-lender was treated as stock-in-trade, and expenditure incurred to protect that stock-in-trade, including defending an actual attack upon it, was regarded as revenue expenditure. The defence of a claim arising directly from the lending transaction was viewed as a necessary incident of the business and not as expenditure to protect fixed capital.

Conclusion: The legal expenses were allowable as business expenditure and were not capital expenditure.

Final Conclusion: The reference was answered in favour of the assessee, and the claimed deduction was held allowable as a business deduction.

Ratio Decidendi: Expenditure incurred to defend a claim arising directly out of a money-lending transaction is revenue expenditure, not capital expenditure, where the money involved forms the lender's stock-in-trade and the defence is a necessary incident of the business.

---