Protection of existing investments can qualify as revenue expenditure when legal costs do not create a new capital advantage.

Legal expenses incurred by an investment company in proceedings relating to liquidation of an investee company were held to be revenue expenditure because they were incurred to protect an existing investment and prevent further calls on share capital. The court applied the principle that expenditure laid out in the course of business for preservation of a business asset or protection of existing assets is deductible as revenue expenditure, unless it creates a new asset or enduring capital advantage. As the legal costs did not bring any such capital benefit, they were allowable and not to be treated as capital expenditure.

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Issues: Whether legal expenses incurred by an investment company in proceedings for liquidation of an investee company were allowable as revenue expenditure or were capital expenditure.

Analysis: The expenditure was incurred to prevent further calls on the assessee's share capital and to safeguard its existing investment in a company that was mismanaged and on the verge of liquidation. The steps taken were directed to protecting a capital asset, but the governing principle applied was that expenditure incurred for the preservation of business or the protection of assets forms part of revenue expenditure where it is incurred in the course of business. On that footing, the legal expenses did not bring into existence any new asset or enduring advantage of a capital nature.

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

Final Conclusion: The question referred was answered in the affirmative and in favour of the assessee, with costs awarded to the Revenue.

Ratio Decidendi: Expenditure incurred for the preservation or protection of an existing business asset is allowable as revenue expenditure, even if it is directed at avoiding a capital loss, so long as it does not create a new asset or enduring capital advantage.

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