Revenue expenditure on protecting an existing investment was deductible where incurred to preserve dividend-earning capacity.

Legal and travelling expenses incurred to protect a shareholder's existing investment in company litigation were treated as revenue expenditure, because they did not create or improve any capital asset and were directed only to preserving the investment and its income-earning capacity. The Court held that expenditure made on commercial expediency to safeguard dividend yield remained allowable under section 12(2) of the Income-tax Act, 1922. The fact that other persons also benefited, or that a prudent investor might not have borne the whole cost, did not change the character of the expenditure or take it outside the provision.

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Issues: Whether the legal and travelling expenses incurred by the assessee in connection with company litigation were allowable as a deduction under section 12(2) of the Income-tax Act, 1922.

Analysis: The expenditure was incurred to protect the assessee's share investment in a company whose management was alleged to be seriously mismanaging the business and jeopardising the value of the shares. The Court held that the expenses did not create any new asset or improve the investment, but were incurred for preservation and protection of an existing capital asset. Such expenditure was therefore revenue in character. The Court further held that the expenses were voluntarily incurred on grounds of commercial expediency and for the purpose of safeguarding the dividend-earning capacity of the shares. The fact that the assessee was not the only beneficiary, or that the whole expense might not have been borne by a prudent investor, did not take the case outside section 12(2).

Conclusion: The entire legal and travelling expenses were allowable under section 12(2) and no part of them was liable to be disallowed.

Ratio Decidendi: Expenditure incurred for preservation or protection of an existing investment, without creating or improving a capital asset, is revenue expenditure and is allowable if it is incurred solely for earning income from that investment.

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