Revenue deduction for winding-up litigation costs where proceedings protected business advances and were not a device to gain control.

Legal expenses incurred in winding-up proceedings against a debtor-company were held to be revenue expenditure where the purpose was to protect loans advanced in the ordinary course of business. Deductibility depended on the nature and object of the litigation when initiated, not on its eventual result. On the facts, the winding-up petition was contested, there was no material to show a collusive or pre-arranged device to acquire control of the debtor-company, and the assessee had a legitimate business interest in safeguarding its advances and security. The later compromise did not change the original business purpose of the proceedings, so the expenditure was admissible as a revenue deduction and not capital expenditure.

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Issues: Whether legal expenses of Rs. 92,308 incurred in winding-up proceedings against a debtor-company were admissible as a revenue deduction, or were capital expenditure incurred to obtain complete control over the company.

Analysis: The deductibility of litigation depends on the nature and purpose of the proceeding in relation to the assessee's business, and not on the ultimate outcome of the proceeding. Expenditure incurred to safeguard loans advanced in the ordinary course of business is revenue expenditure. On the facts, the winding-up petition was not shown to be a collusive or pre-arranged device to secure control over the debtor-company. The proceedings were contested, the debtor remained in financial difficulty, and the assessee had a legitimate business interest in protecting its advances and security. The subsequent compromise in the winding-up proceedings did not determine the original object for which they were initiated.

Conclusion: The expenditure was admissible as revenue expenditure and not capital expenditure.

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