JUDGMENT
Divan, C.J.
1. In this case, at the instance of the assessee, the following question has been referred to us for our opinion :
“Whether, on the facts and circumstances of the case, the whole or any portion of the expenses amounting to Rs. 69,190 incurred by the asses-see is allowable as deduction in computing the assessee’s total-income for the assessment year 1966-67 ?”
2. The facts leading to this case are as follows : The assessment year under consideration is 1966-67. The assessee before us is a partnership firm registered under the provisions of the Income-tax Act, 1961. One Sri Boorugu Rajanna died leaving three sons, Boorugu Viswanatham, Boorugu Veeraiah and Boorugu Mahadev. Out of these three sons, Boorugu Viswanatham died issueless. Boorugu Veeraiah died leaving behind him his widow, Smt. Sakuntalamma, but without leaving a male issue. Boorugu Mahadev had five sons and five grandsons. After the death of Boorugu Rajanna, all his properties were taken over by survivorship by Boorugu Mahadev and his sons. Smt. Sakuntalamma, the widow of Boorugu Veeraiah, was given only the right of maintenance. The sons and grandsons of Boorugu Mahadev formed themselves into a partnership and that partnership is the assessee-firm before us. On February 15, 1954, Smt. Sakuntalamma purported to adopt one Harnath as a son to her deceased husband, Boorugu Veeraiah, and a deed of adoption was executed on March 2, 1954, After the adoption, Harnath filed a suit claiming half share of the property of the joint family of Boorugu Rajanna. This suit, being O.S. No. 31 of 1957, was filed in the court of the Chief Judge, City Civil Court, Hyderabad. It appears that, on February 14, 1952, there was a partial partition of the assets of the family of Boorugu Rajanna and, as a result of that partition, the assets which came to the share of Boorugu Mahadev and his sons, were utilised by them as assets of the assessee-partnership firm, which was formed on February 14, 1952, and thus a substantial part of the assets of Boorugu Rajanna were utilised as business assets of the assessee-firm. The partition suit was resisted on several grounds, one of them being that the adoption was not valid since the consent of the sapindas of Boorugu Veeraiah was obtained after the adoption and not before as required by law. The defendants succeeded in the suit in the trial court and by the judgment delivered on December 30, 1964, the City Civil Court, Hyderabad, held that the adoption was invalid and the suit for partition filed by Harnath was dismissed, but there was no order as to costs of the suit. Thereafter, it appears that Harnath filed an appeal against the decision of the City Civil Court and that appeal was also dismissed. In the accounting year relevant to the assessment year 1966-67, the assessee-firm claimed an expenditure of Rs. 94,587 as legal expenses incurred by it in connection with the partition suit filed by Harnath. It appears that the parties to the suit were not merely some of the partners of the assessee-firm, but also the Hindu undivided family of Sri Boorugu Mahadev and also another firm of M/s. Boorugu Viswanatham Bros., Guntur. It was found that the partners of the firm, the Hindu undivided family of Boorugu Mahadev and M/s. Boorugu-Viswanatham
Bros., had each got some of the assets left by Boorugu Rajanna; on the basis of the proportionate assets coming to each of these three groups or entities, the legal expenses amounting to Rs. 94,587 were proportionately divided between the assessee-firm, the Hindu undivided family of Boorugu Mahadev and the firm of M/s. B. Viswanatham Bros., Guntur, On the basis of proportionate apportionment, the assessee-firm’s share came to Rs. 69,190 and this amount of Rs. 69,190 was claimed by the assessee as a deduction on the ground that it was a business expenditure incurred by it wholly and exclusively for the purpose of the business, i.e., in order to protect its assets. The Income-tax Officer disallowed the claim on the ground that the firm was not included as a defendant in the suit, but only some of the partners of the firm pursued the suit. According to the Income-tax Officer, the assets of the firm were not in jeopardy, but only part of the assets. He held that there was no litigation by the firm to protect its business assets against a hostile title, but only some of the partners were trying to protect their ownership over the properties. The Income-tax Officer, therefore, disallowed the claim for deduction. He did not discuss whether the claim should be allowed during the assessment year 1966-67 or any other year nor did he discuss whether the total assets of the concerned partnerships should be taxed and if so on what date.
3. The assessee took the matter in appeal and the Appellate Assistant Commissioner held that the expenditure was not incidental to the business carried on by the firm and the suit was in fact one about the validity or otherwise of the adoption.
4. Against the decision of the Appellate Assistant Commissioner, the assessee took the matter in further appeal to the Tribunal and the Tribunal held that it was not possible to find out the exact extent of the expenditure incurred during the year or even whether any expenditure had been incurred at all. The Tribunal, therefore, remanded the case to the Income-tax Officer. According to the remand report submitted by the Income-tax Officer, the total expenditure of Rs. 94,587 was spent over a period of nine years from 1957 Deepavali to 1965 Deepavali. The actual expenditure relevant for the assessment year 1966-67 was only Rs. 10,966. The Tribunal held that merely because a suit was filed against the Hindu undivided family, even the capital of the family invested in the firm would not have been affected or reduced and that the firm’s business also could have continued. According to the Tribunal, the connection between the suit filed and the business of the firm was remote and there was no nexus between the expenditure incurred and the business run by the assessee-firm so as to entitle the assessee to a deduction of the expenditure incurred in connection with the suit. The Tribunal further held that even granting that the claim could be allowed, it was only the expenditure
relating to the assets of the firm referable to the partners of the firm impleaded in the suit on a proportionate basis that could be allowed. The Tribunal ultimately held that no part of the amount claimed was an allowable expenditure. The Tribunal observed that, even if the expenditure incurred by the joint family was held to be the expenditure of the assessee, only the amount spent during the relevant previous year could be regarded as an expenditure. The Tribunal held that, if at all any expenditure were to be allowed, the proportionate share of the assessee-firm out of the amount of Rs. 10,966 spent in connection with the litigation regarding adoption during the relevant previous assessment year 1966-67 could be allowed. However, the Tribunal held that this expenditure was not an allowable expenditure at all. Hence, the Tribunal dismissed the appeal. Thereafter, at the instance of the assessee, the question hereinabove set out has been referred to us for our opinion.
5. The question of what is known as “litigation expenses” has been engaging the attention of the courts in England and India for many years. As far back as 1940, in Southern (H. M. Inspector of Taxes) v. Borax Consolidated Ltd. [1942] 10 ITR (Suppl) 1 (KB), the question of litigation expenses arose under these circumstances. A company acquired land in America for the purpose of its business and subsequently an action was brought in the American courts against the company claiming that the company’s title to the land and buildings erected thereon was invalid and in defending the action the company incurred costs amounting to 6,249. Lawrence J. held that the sum of 6,249 was wholly and exclusively laid out by the company for the purposes of its trade and was an allowable deduction in computing the profits of the company for income-tax purposes. It was held that the legal expenses incurred by the company did not create any new asset at all, but were expenses incurred in the ordinary course of maintaining the assets of the company and the fact that it was maintaining the title, and not the value, of the company’s business did not make any difference. At page 5 of the report, Lawrence J. observed :
“On the other question as to whether this is a payment properly attributable to capital or to revenue, in my opinion the principle which is to be deduced from the cases is that where a sum of money is laid out for the acquisition or the improvement of a fixed capital asset it is attributable to capital, but that if no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital assets of the company…..The title of the company, which must be
assumed, in my opinion, to have been a good title, remains the same ; there is nothing added to the title or taken away, and the title bas simply been maintained by this payment.”
6. This decision in Southern (H. M. Inspector of Taxes) v. Borax Consolidated Ltd. [1942] 10 ITR (Suppl) 1 (KB) was approved by the House of Lords in Morgan v. Tate and Lyle Ltd. [1954] 26 ITR 195 (HL). In Commissioner of Income-tax v. Malayalam Plantations Ltd. , the decision in Southern v. Borax Consolidated Ltd. [1942] 10. ITR (Suppl) 1 (KB) was approved and Subba Rao J. (as he then was), speaking for the court, observed at page 146 of the report:
“Where a company incurred an expenditure in defending its title to property, it was held in Southern v. Borax Consolidated Ltd. [1942] 10 ITR (Suppl) 1, 8 (KB) that the said amount was spent wholly and exclusively for the purpose of the company’s trade and was, therefore, an allowable deduction for the purpose of computing the profits of the company for income-tax purposes. This decision gives a more liberal meaning to the expression ‘for the purpose of the trade’ than that given by Lord Davey. ‘Purpose’ of the trade includes the purpose to protect the assets of the company carrying on the trade. The House of Lords resurveyed the legal position in Morgan v. Tate and Lyle Ltd. [1954] 26 ITR 195, 205, 206 (HL) in the context of the question whether the expenditure incurred by a company engaged in sugar refining in a propaganda campaign to oppose the threatened nationalisation of the industry, was an admissible deduction. Lord Morton, after referring to the relevant case law and to Lord Davey’s formula, made the following observations:
'.....this seems to me to bean assumption wholly unwarranted by the evidence. There is no evidence that a transfer of the assets to a national body or authority would not destroy or adversely affect the company's business.....It is clear on the authorities that Lord Davey's formula includes expenditure for the purpose of preventing a person from being disabled from carrying on and earning profits in the trade'--See [1954] 26 ITR 195, 219. Lord Reid laid down the relevant test thus: 'A general test is whether the money was spent by the person assessed in his capacity of trader or in some other capacity--whether on the one hand the expenditure was really incidental to the trade itself or on the other hand it was mainjy incidental to some other vocation or was made by the trader in some other capacity than that of trader.' This decision also restated the two tests, namely, (i) that the expenditure should be for carrying on the business to earn profits in the trade, and (ii) that the expenditure shall be incurred by the assessee in his capacity of a person carrying on the business." 7. Subba Rao J., after considering the different decisions on the point, summed up the legal position as follows (page 150):
“The expression ‘for the purpose of the business’ is wider in scope than the expression ‘for the purpose of earning profits’. Its range is wide : it may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory ; in that event he pays the amount on behalf of another and for a purpose unconnected with the business.”
8. Thus, according to the decision of the Supreme Court, the expression “for the purpose of the business” would include measures for the protection of the assessee’s assets and property against assertion of hostile title. It may be pointed out that, in a subsequent case in Commissioner of Income-tax v. Birla Cotton Spinning & Weaving Mills Ltd. the question of legal expenditure again came up for consideration before the Supreme Court. In that case, during the accounting periods relevant to the assessment years 1952-53 to 1954-55, the assessee-company spent the sums of Rs. 3,810, Rs. 1,42,377 and Rs. 2,42,688 respectively towards expenses in engaging eminent lawyers and conducting appropriate proceedings before the Investigation Commission for its case relating to assessment years 1941-42 to 1947-48 and also in courts where the vires of the statute under which the Commission was constituted were challenged. The question before the Supreme Court was whether the law charges so incurred in connection with the proceedings before the Investigation Commission could be deducted in computing the profits of the business of the assessee and the Supreme Court held that the law charges were expenses incurred for the preservation and protection of the assessee’s business from any process or proceedings which might have resulted in the reduction of its income and profits.
9. Even otherwise, the expenditure was incidental to the business and was necessitated or justified by commercial expediency. The expenditure which was incurred by the assessee in opposing a coerciye Government action with the object of saving taxation and safeguarding business was
justified by commercial expediency and was, therefore, allowable under Section 10(2)(xv) of the Indian Income-tax Act, 1922. Relying upon the observations of Viscount Simon in Smith’s Potato Estates Ltd. v. Bolland [1949] 17 ITR (Suppl) 1 (HL) it was held that if a trader considers that the revenue seeks to take too large a share and to leave him with too little, the expenditure which the trader incurs in endeavouring to correct the mistake is a disbursement laid out for the purpose of his trade. The Supreme Court followed its earlier decision in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax and held–See :
“The essential test which has to be applied is whether the expenses were incurred for the preservation and protection of the assessee’s business from any such process or proceedings which might have resulted in the reduction of its income and profits and whether the same was actually and honestly incurred. It is well settled that the deductibility of expenditure incurred in prosecuting civil proceedings to resist the enforcement of a measure, legislative or executive, which means restriction on the carrying on of a business or to obtain a declaration that the measure is invalid, would, if other conditions are satisfied, be admissible as a deduction under Section 10(2)(xv). Deductibility of such expenditure does not depend on the final outcome of those proceedings. However wrong-headed, ill-advised, unduly optimistic or over-confident in his convictions the assessee might appear in the light of the ultimate decision, expenditure in prosecuting a civil proceeding cannot be denied as a permissible deduction if it is reasonably and honestly incurred to promote the interest of the business.”
10. In Dalmia Jain & Co. v. Commissioner of Income-tax , the question of litigation expenses was again considered by the Supreme Court. The assessee in that case took on lease from the Government the Murli Hills for the purpose of quarrying limestone for a period of one year. Thereafter, the assessee worked the quarry as agent of the Government with an understanding that the Murli Hills would be ultimately leased out to the assessee. While the assessee was in possession of the Murli Hills as agent of the Government, the Kalyanpur Lime Co., on the basis of an earlier agreement with the Government, filed a suit for specific performance and in the alternative damages against the Government impleading the assessee also as a defendant. The suit was resisted by the Government as well as by the assessee. The assessee incurred the sum of Rs. 1,29,994 in resisting the suit, in which ultimately the Supreme Court granted a decree for damages, and the question was whether the litigation expenses constituted expenditure laid out wholly and exclusively for the purpose of the business. On these facts, the Supreme Court held that the assessee resisted the suit in order to protect its business and not to safe-
guard its prospects of getting a new lease. It did not initiate the proceedings ; it merely defended the claim made against it. The suit was launched against it because of one of its business activities and, therefore, the litigation expenses were revenue expenditure laid out wholly and exclusively for the purpose of the business. The Supreme Court further held that, where litigation expenses are incurred by the assessee for the purpose of creating, curing or completing the assessee’s title to the capital, tnen the expenses incurred must be considered as capital expenditure. But if the litigation expenses, are incurred to protect the business of the assessee, they must be considered as revenue expenditure.
11. The Bombay High Court in Ebrahim Aboobaker v. Commissioner of Income-tax [1971] 81 ITR 664 also held that the expenditure incurred for the preservation of the entire business as an entity and for defending against a claim of hostile title or against nationalisation must be held to be an expenditure incurred “for the purpose of business” which is deductible under Section 10(2)(xv) of the Indian Income-tax Act, 1922. Deductible expenditure would not include merely expenditure incurred for protecting individual asset or assets, but would include expenditure incurred in defending a challenge to the title of the trader to the entire business as an entity. In the light of these principles, it was held that the expenditure incurred by an assessee to the extent that it has been incurred for defending the proceedings seeking to declare the business of the assessee as “evacuee property”, under the provisions of the Administration of Evacuee Property Act, 1950, is expenditure which is deductible under Section 10(2)(xv) of the Indian Income-tax Actf 1922, and in this connection, the Bombay High Court relied upon the decision of the House of Lords in Morgan v. Tate and Lyle Ltd. [1954] 26 ITR 195 (HL).
12. In Transport Company Ltd. v. Commissioner of Income-tax [1957] 31 ITR 259, the Madras High Court has held that the principle to be applied in determining whether expenditure incurred in civil litigation can be allowed as business expenditure is that if the purpose of the litigation was to maintain an existing title to the assets of the business it would be of a revenue nature, and if the purpose was to acquire or cure a defect in the assessee’s title to the assets it would be of a capital nature. Whether the assessee figured as a plaintiff or as a defendant in the litigation is immaterial. The ultimate result of the suit is also in normal circumstances immaterial. The deciding factor is the real nature of the claim of the assessee in the suit. At page 266 of the report, Rajagopalan J., speaking for the Division Bench of the Madras High Court, after referring to the earlier decisions of the Madras High Court in Commissioner of Income-tax v. Raman and Rawan Ltd. [1951] 19 ITR 558 and G. Veerappa Pillai v. Commissioner of Income-tax [1955] 28 ITR 636, observed (at pages 266, 267):
“If the assessee preferred in good faith a claim of title to one or more items of the capital assets of his business and incurred litigation expenses lor maintaining that claim of title, the expenditure would be of a revenue nature…..If the claim of title succeeds, the decree does not add anything to the title. If the claim of title fails, that would not make the expenditure one of capital nature, because the expenditure would have been still one to maintain a title and not expenditure to supplement a defective title by something to be secured as a result of the litigation. It should be Obvious that every challenged title is not necessarily a defective title. If the assessee seeks something in the suit which has to cure a defective title, whether he ultimately succeeds or fails in that suit, the expenditure in such a suit would be of a capital nature. It would be expenditure incurred to acquire a capital asset, among other things, by curing a defect in title.”
13. The same conclusion was reiterated by the Madras High Court in Transport Co. (P.) Ltd. v. Commissioner of Income-tax [1962] 46 ITR 1009 and the observations which we have culled out from the decision in Transport Company Ltd. v. Commissioner of Income-tax [1957] 31 ITR 259 (Mad) were followed.
14. In the light of this discussion, let us consider the exact nature of the litigation in the course of which the aggregate amount of Rs. 94,587 was incurred as litigation expenses and let us also consider as to what was the interest which the assessee-firm had in that litigation. As pointed out above, a substantial portion of the assets left by Boorugu Rajanna, after the partial partition on 14th February, 1952, was invested by the members of the branch of Boorugu Mahadev in the assessee-firm. Harnath was claiming that he was the validly adopted son of Boorugu Veeraiah and on that basis, he was claiming half share on partition of the assets left by Boorugu Rajanna. If that claim to half share of the assets left by Boorugu Rajanna succeeded, it would mean that the assessee-firm would have to part with at least half of the assets which were invested in its business. There was no defect in the title to the property which was brought in b,y the sons of Boorugu Mahadev as the assets of the firm. But to the extent to which the claim of Harnath succeeded, the assets brought in for the purpose of the assessee-firm by the sons of Boorugu Mahadev would have to be handed over to Harnath and in the event of Harnath’s claim succeeding, the assessee-firm would find its assets reduced by one-half. We find from the assessment order passed by the Income-tax Officer on December 19, 1966, which is annexure “A” to the statement of the case, thai out of the total assets of Rs. 50,29,989 which were the assets in dispute in the litigation in the City Civil Court in the suit filed by Harnath, Rs. 36,79,644 were invested in the business of the assessee-firm and an amount of Rs. 3,31,788 was in the possession of the Hindu undivided family
of Boorugu Mahadev and an amount of Rs. 10,18,517 was in the possession of Messrs. Boorugu Viswanatham Brothers, Guntur. Thus, out of the total assets of Rs. 50,29,989, a half share, i.e., nearly Rs. 25,15,000, would have to be handed over to Harnath if Harnath succeeds in his claim. In that case, the assessee-firm would have its assets reduced by nearly Rs. 18,40,000. Thus, the assessee-firm would be crippled to a considerable extent in carrying on its business if nearly one-half of its business assets were required to be parted with. Under these circumstances, it is obvious that the assessee-firm had a vital stake in seeing to it that its business assets were not reduced and the hostile assertion of title by Harnath to these assets aggregating to Rs. 18,40,000 approximately was met. It is true that the assessee-firm was not directly interested in that litigation as such; but the result of that litigation, if it ended in favour of Harnath, would adversely affect its business by reduction of one-half of its assets.
15. It was contended by Sri Rama Rao, the learned counsel for the revenue, that the suit filed by Harnath was for partition of the Hindu undivided family and if Harnath had succeeded in the suit, one-half of the Hindu undivided family properties would go to Harnath. This argument overlooks the basic feature, which is found as a fact by the Tribunal, that a substantial portion of the assets of the Hindu undivided family which came into existence on the death of Boorugu Rajanna was invested in the business of the assessee-firm. To hold, as the Tribunal has held, that merely because Harnath won his case against the Hindu undivided family, it would not automatically follow that the capital of the family invested in the firm gets reduced or affected and that the firm’s business could continue as if nothing has happened, is to disregard the realities of the situation and to disregard completely what is likely to happen in the field of commerce and business. The Tribunal came to the conclusion that the connection between the suit filed and the business of the firm was remote. The Tribunal observed : “It is not inconceivable that the Hindu undivided family is capable of having other amounts to satisfy the demand of Shri Harnath even in a case where he succeeds completely.” This type of speculative reasoning cannot help the revenue because the moment the partnership firm was compelled to part with one-half of the assets of the business, the assessee-firm, to that extent, was bound to suffer because out of the capital available to the assessee-firm of Rs. 36 lakhs and odd, only Rs. 18 lakhs and odd would be left. To hold, as the Tribunal has held, that, if Harnath had succeeded in the suit, he would be made a member of the family and would be entitled to his share of the family properties and then would join the firm as a partner is to overlook the basic feature of the law of partnership, viz., that a partnership agreement is a contract
between the partners as a result of an agreement between the parties and unless all the partners of the firm agreed, Harnath would not have been admitted as a partner of the assessee-firm and it presupposes that Harnath himself was willing to join as a partner of the firm. There was no evidence to that effect and with respect to the Tribunal, this was purely speculative reasoning. In our opinion, the Tribunal’s reasoning in this connection is quite contrary to the legitimate inference which can be drawn from the facts which we have pointed out, viz., that a substantial portion of the assets of the family, nearly 72% of the assets of the Hindu undivided family were brought in by the sons of Boorugu Mahadev and constituted the assets of the assessee-firm and it is in that context that one has to consider the action of the assessee-firm in spending money as litigation expenses in fighting the suit filed by Harnath.
16. Mr. Rama Rao, appearing for the revenue, has drawn our attention to paragraph 9 of the order of the Tribunal where the Tribunal observed :
“In the present case, as pointed out by the learned counsel for the department, the amount has not been paid by the assessee-firm at all; it has not affected its coffers. The liability has been incurred by the Hindu undivided family and since some of the members of the family had investments in the firm, proportionate shares of the expenses were allotted to them. The firm thus, if at all, is forced to bear the expenses on behalf of another and for a purpose unconnected with the business.”
17. We find from the order of the Tribunal that initially the amount was spent by the Hindu undivided family of Boorugu Mahadev and after the City Civil Court disposed of the suit, it was ascertained that, till that stage, the aggregate amount of expenditure came to Rs. 94,587 and the proportionate share of the assets of Boorugu Rajanna found to have been invested in the business of the firm came to Rs. 36,79,644 and hence the proportionate expenditure coming to the share of the assessee-firm was Rs. 69,190. It is by transfer and cross entries that the assessee-firm agreed to be liable to the Hindu undivided family of Boorugu Mahadev in the sum of Rs. 69,190 and this amount represents the legal expenses in defending the suit filed by Harnath. Though the assessee-firm was not directly a party to that litigation, it was rightly interested in the result of the litigation as we have pointed out above, because if Harnath had succeeded in that litigation, one-half of the assets of the assessee-firm would have to be parted with and that would have seriously affected its business prospects.
18. The learned counsel for the revenue relied upon the following observations of the Supreme Court in Commissioner of Income-tax v. Chandulal Keshavlal & Co. :
“In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and
the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party. Another test is whether the transaction is properly entered into as a part of the assessee’s legitimate commercial undertaking in order to facilitate the carrying on of its business ; and it is immaterial -that a third party also benefits thereby. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee.”
19. The nature of the expenditure “for the purpose of the business” of the assessee has to be judged in the light of the principles which must be culled out from the several decisions particularly in the light of the observations of the Supreme Court in Malayalam Plantations Ltd.’s case and in Birla Cotton Spinning & Weaving Mills Ltd.’s case and in view of the fact that the observations in Southern (H. M. Inspector of Taxes) v. Borax Consolidated Ltd. [1942] 10 ITR (Suppl) 1 (KB) and Morgan v. Tate and Lyle Ltd. [1954] 26 ITR 195 (HL) were approved by the Supreme Court in Malayalam Plantations Ltd.’s case .
20. Mr. Rama Rao had also relied upon certain observations of the Supreme Court in Travancore Titanium Products Ltd. v. Commissioner of Income-tax . At page 282, the legal position was summarised thus:
“The nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and be laid out by the taxpayer in his character as a trader. To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business.”
21. These observations far from going against the assessee rather help him because it is obvious that the assessee incurred this expenditure in his character as a trader and in order to maintain his assets, this expenditure was incurred by the assessee and hence it must be held to be a revenue expenditure.
22. One further decision that was relied upon by Mr. Rama Rao was the decision of the Supreme Court in V. Jaganmohan Rao v. Commissioner of Income-tax . At page 380 of the report, Ramaswami J., speaking for the Supreme Court, observed :
“It is well established that where money is paid to perfect a title or as consideration for getting rid of a defect in the title or a threat of litigation the payment would be capital payment and not revenue payment. What is essential to be seen is whether the amount of Rs. 1,15,000 was paid for bringing into existence a right or asset of an enduring nature. In other words if the asset which is acquired is in its character a capital asset, then any sum paid to acquire it must surely be capital outlay. Money paid in consideration of the acquisition of a source of profit of income is capital expenditure both on principle and authority.”
23. In the instant case, it was not for acquiring a new title or curing a defect in the title or getting rid of a defect in the title that the amount was spent. The amount was spent to maintain the title which was otherwise a perfectly good title. It was to maintain that title to one-half of the assets invested in the business of the assessee-firm that the expenditure was incurred and these observations in V. Jaganmohan Rao v. Commissioner of Income-tax in no way go contrary to what we have pointed out above.
24. Mr. Rama Rao for the revenue has very strongly relied upon two decisions, one of the Bombay High Court and the other of the Madras High Court and has contended that, in the light of the facts of each of those two cases, the decisions rendered by the Madras High Court and the Bombay High Court go to support the revenue’s case. In Adarsha Dugdhalaya v. Commissioner of Income-tax [1971] 80 ITR 49 (Bom), the main question was about the litigation expenses in the course of inter se disputes between the partners of a firm. V. S. Desai J., speaking for the Division Bench of the Bombay High Court, has pointed out at page 61 of the report:
“In the present case, however, the expenditure incurred is not for the purpose of protecting the assets but for the purpose of ascertaining what they are on settlement of the disputes between the partners in relation to them. In our opinion, therefore, having regard to the essential nature of the litigation and the purpose for which it was contested, we do not think that the expenses of litigation claimed by the assessee could be allowed to it as expenditure incurred wholly and exclusively for the purpose of carrying on its business.”
25. No doubt, the expenses were incurred by the assessee-firm before the Bombay High Court for fighting litigation, but that litigation was between the partners inter se and not by the partnership as such in seeking to protect its title to any of the assets of the firm. Thus, that decision cannot help the revenue in the light of the facts of the case before us.
26. The other decision is the decision of the Madras High Court in N. Selvarajulu Chetty & Co. (India) v. Commissioner of Income-tax [1965] 56 ITR 29. It may be pointed out that, in that case, the Madras High Court
relied upon certain observations of Lord Keith in Morgan v. Tate and Lyle Ltd. [1954] 26 ITR 195 (HL). Lord Keith delivered one of the minority judgments in that case and the majority view in Morgan v. Tate and Lyle Ltd. [1954] 26 ITR 195 (HL) was subsequently approved and followed by the Supreme Court in Malayalam Plantations Ltd.’s case . Under these circumstances, it is not necessary to consider the decision of the Madras High Court in N. Selvarajulu Chetty & Co. (India) v. Commissioner of Income-tax [1965] 56 ITR 29, on which strong reliance has been placed by Mr. Rama Rao.
27. Under these circumstances, our conclusion is that, looking to the nature of the expenses incurred by the assessee-firm and the stake of the assessee-firm in the litigation launched by Harnath on the basis of his alleged adoption, it is clear that what the assessee-firm was doing in that case was defending a challenge of its title to its assets. It was maintaining its title and not curing any defect of its title to the assets and hence in the light of the decisions which we have referred to above, it must be held that, in the instant case, the expenditure incurred by the assessee-firm was not in the nature of capital expenditure.
28. The next question is whether this amount of Rs. 69,190 was allowable as revenue expenditure in the year of account relevant to the assessment year 1966-67. It is obvious that, till the decision of the City Civil Court, which was rendered on December 30, 1964, it could not have been known as to what was the amount of expenditure incurred in fighting this litigation and whether a part of the costs would or would not be recovered from the other side, viz., from Harnath. It is not possible to accept the contention urged on behalf of the revenue based on the observations of the Supreme Court in Kedarnath Jute Manufacturing Co, Ltd. v. Commissioner of Income-tax and the observations of the Kerala High Court in L. J. Patel & Company v. Commissioner of Income-tax [1974] 97 ITR 152, that the amount should have been debited in the books of account as and when the actual expenditure was incurred. It must not be forgotten that the initial expenses were incurred from time to time by the Hindu undivided family of Boorugu Mahadev. It was after the entire amount up to the stage of the trial court was ascertained after the decision of the City Civil Court on December 30, 1964, that, by way of transfer entries, the amount of Rs. 69,190 came to be debited by the assessee-firm as litigation expenses in connection with this particular litigation. Therefore, it is not correct to say that any portion of the amount of Rs. 69,190 is allowable as deduction to the assessee in any year other than the assess-ment year 1966-67. The liability of the assessee-firm to pay this amount of Rs. 69,190 by way of its share of litigation expenses arose by virtue of the entries made after December 30, 1964. Under these circumstances, the entire amount of Rs. 69,190 was certainly allowable as revenue expenditure in the year of account relevant to the assessment year 1966-67. It may be pointed out that a similar question arose before the Gujarat High Court in Topandas Kundanmal v. Commissioner of Income-tax . In that case, in the year 1956, the assessee purchased two pieces of land for Rs. 1,000. A part of the land was acquired by the Government under the Land Acquisition Act and the Special Land Acquisition Officer made an award in 1962, offering an amount of Rs. 24,293 by way of compensation. The assessee being dissatisfied with the offer, sought a reference under Section 18 of the Land Acquisition Act and the court of the civil judge determined the amount of compensation at Rs. 5,04,824 and the civil judge also directed the Government to pay the interest at the rate of 4 per cent. for the period from August 15, 1960, to August 31, 1963. The State Government appealed to the High Court which set aside the judgment and award of the civil judge with the result that the State Government became entitled to the return of the amount withdrawn by the assessee. The assessee was granted certificate to appeal to the Supreme Court. In the assessment proceedings for the assessment year 1964-65, the assessee contended that no income or capital gains could be said to have accrued to him during the year of account ending on March 31, 1964, relevant to the assessment year 1964-65, and that in any case since the lands in question were agricultural lands there was no question of any capital gains. On these facts, the Division Bench of the High Court of Gujarat of which one of us was a member, held that if an aggrieved party whose lands were acquired does not accept the offer made by the Land Acquisition Officer in his award, he had a right to seek reference under Section 18 for getting the question of the compensation determined by the court and it was on the amount thus determined judicially that the owner would be entitled to enforce that right for a particular sum. It was on the final determination of the amount of compensation that the right to that income in the nature of compensation would arise or accrue and till then there was no liability in praesenti in respect of the additional amount of compensation claimed by the owner of the lands sought to be acquired.
29. Applying the same principle, it must be held that, in the light of this
decision of the Gujarat High Court, with which we agree until the final
determination of the amount of costs till the end of the trial court stage
was reached, it could not be predicated what the amount of expenditure
would be and, therefore, the assessee was justified in claiming the entire
amount of Rs. 69,190 as a deductible expenditure in the year of account
relevant to the assessment year 1966-67.
30. In the light of the above discussion, we hold that the whole of the expenses amounting to Rs. 69,190 incurred by the assessee was allowable
as deduction in computing the assessee’s total income for the assessment
year 1966-67. We, therefore, answer the question referred to us in the
affirmative and as to the whole of the amount. We thus answer the
question in favour of the assessee and against the revenue. The Commis
sioner of Income-tax, Hyderabad, will pay the costs of this reference to the
assessee.
