Litigation defence costs can be revenue expenditure when incurred honestly and reasonably to protect business interests.

Litigation expenses incurred in defending a civil suit were held to be revenue expenditure where, judged by their nature and purpose, they were honestly and reasonably incurred to protect or promote the assessee's business. The assessee was drawn into the dispute because it was working the quarry as part of its business, and the claim for damages arose from that activity. The expenditure was connected with the conduct and protection of the business and was not incurred to acquire or improve a capital asset. Failure of the litigation did not alter its character, and the was allowable as wholly and exclusively for business purposes.

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Issues: Whether litigation expenses incurred by the assessee in defending a civil suit concerning Murli Hills were capital expenditure incurred to acquire or protect a capital asset, or revenue expenditure laid out wholly and exclusively for the purpose of its business.

Analysis: The expenditure had to be judged by the nature and purpose of the litigation in relation to the assessee's business. The assessee did not institute the proceedings on its own; it was brought into the dispute because it was working the quarry as part of its business activities and a damages claim was made against it. On the facts found, the litigation was connected with the conduct and protection of the assessee's business and did not amount to expenditure for creating or improving a fixed capital asset. The final failure of the litigation did not alter the character of the expenditure if it was honestly and reasonably incurred for business purposes.

Conclusion: The expenditure was revenue in nature and was allowable as having been incurred wholly and exclusively for the purpose of the assessee's business.

Ratio Decidendi: Expenditure incurred in defending litigation is deductible as revenue expenditure where, judged by its nature and purpose, it is honestly and reasonably incurred to protect or promote the assessee's business and is not laid out for acquiring or improving a capital asset.

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