Commercial expediency in business litigation supports deduction of legal expenses incurred to protect occupation of trading premises.

Legal expenses incurred to resist landlords' proceedings for fixation of fair rent and eviction of business premises were treated as deductible revenue expenditure under section 37 because the litigation directly affected continued occupation of the premises from which the business was carried on. The expenditure was incurred to preserve and protect the business from disruption and possible loss of income, satisfying the test of commercial expediency and being incidental to the carrying on of business. Legal charges honestly incurred for preservation of the business were therefore allowable as business expenditure, and the disallowance was not sustainable.

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Issues: Whether legal expenses incurred in resisting the landlords' proceedings for fixation of fair rent and eviction of the premises used for the assessee's business were deductible as business expenditure under section 37 of the Income-tax Act, 1961.

Analysis: The business had been carried on for many years in the premises at a nominal rent and the rent itself had been allowed as a deduction. The litigation directly affected the continued occupation of the premises from which the assessee carried on its business and on which its income depended. The expenditure was incurred to preserve and protect the business from disruption and possible adverse impact on income, and was therefore incidental to the carrying on of the business. Such expenditure satisfied the test of commercial expediency and fell within the principle that legal charges incurred honestly for preservation of the business are allowable.

Conclusion: The legal expenses were allowable as revenue expenditure under section 37 and the disallowance was not sustainable.

Ratio Decidendi: Legal expenses incurred honestly and on grounds of commercial expediency to preserve and protect an assessee's business from proceedings that may jeopardise its income are deductible as business expenditure if they are incidental to the carrying on of the business.

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