Litigation expenses for compensation claims are capital in nature when the suit seeks recovery for loss of a business source.

Litigation expenses are deductible only if incurred wholly and exclusively for carrying on or protecting the business. Where the suit is aimed at recovering compensation for cancellation of a liquor licence and stoppage of business, the claim is treated as compensation for loss of a source of income and for sterilisation of the profit-making apparatus. In that situation, the expenditure is capital in character and is not allowable as revenue expenditure, even if the damages are measured by reference to lost profits. Claims directed to preserve trading operations are distinguishable from claims for capital compensation.

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Issues: Whether litigation expenses incurred for suing for damages arising out of cancellation of a liquor licence and stoppage of the business were admissible as revenue expenditure.

Analysis: The decisive test was the aim and object of the litigation and the character of the claim pursued. The suit was not directed to preserve or continue the business, but to recover damages for the loss caused by the stoppage of the business and sterilisation of the profit-making apparatus. The claim was substantially for compensation for loss of the source of income and not for a trading receipt. Expenses incurred to obtain a capital receipt are not deductible as business expenditure merely because the claim is quantified by reference to lost profits. The authorities dealing with cancellation of ordinary trading arrangements or litigation to protect the business were distinguishable.

Conclusion: The expenditure was not allowable as revenue expenditure and the answer was against the assessee.

Ratio Decidendi: Litigation expenses are deductible only when incurred wholly and exclusively for the purposes of carrying on or protecting the business; where the litigation is to recover compensation for loss of a source of income or destruction of the profit-making apparatus, the expenditure is capital in character and not allowable as revenue expenditure.

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