JUDGMENT
Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, the following question of law has been referred to this court for the assessment year 1978-79 :
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the litigation expenses of Rs. 1,58,415 in the hands of the smaller Hindu undivided family incurred in connection with the partition suit as revenue expenditure under Section 37 of the Act?”
2. Shortly stated, the facts are that the assessee, Mahadeo Prosad Shyamsunder, Hindu undivided family, was a coparcener of a bigger Hindu undivided family named and styled as Messrs. Ramdas Mahadeo Prosad. The bigger Hindu undivided family named above was owner of various house properties, certain mines and oil mills.
3. In the bigger Hindu undivided family, there were mainly two groups, namely, S.S. Swaika Group and G.V. Swaika Group. A difference arose among the members of the two groups as a result of which a partition suit was filed before the Calcutta High Court. The High Court decided the suit on June 12, 1977, in consequence of which each group was allotted certain properties and business belonging to the bigger Hindu undivided family. The assessee claimed deduction of Rs. 1,58,415 being expenses for litigation in respect of the aforementioned suit. The Income-tax Officer negatived the assessee’s claim.
4. The assessee appealed to the Commissioner of Income-tax (Appeals) who, after considering the entire factual aspects of the matter and by following the decision of the Andhra Pradesh High Court in the case of Boorugu Nagaiah Rajanna v. CIT , held that the entire
litigation expenses claimed by the assessee should be allowed as a deduction in the assessment year under reference.
5. Against the order of the Commissioner of Income-tax (Appeals), the Revenue preferred an appeal before the Appellate Tribunal. The Tribunal held that the partition suit was finally settled during the previous year relevant to the assessment year under reference. The Tribunal, following the decision of the Andhra Pradesh High Court in the case of Boorugu Nagaiah Rajanna , held that the assessee was entitled to deduction of the entire amount of litigation expenses during the assessment year under appeal.
6. At the hearing before us, Mr. Moitra, learned counsel for the Revenue, has contended that the litigation expenses do not relate to the assets of the assessee-Hindu undivided family and, accordingly, they were not allowable as deduction. He has also submitted that, in any event, the claims made are in respect of earlier years which cannot be allowed for the assessment year in question. On the other hand, the contention of Dr. Pal is that litigation expenses are allowable as they were incurred for protection and preservation of the assets of the Hindu undivided family.
7. Our attention has been drawn to several decisions to which we shall presently refer.
8. The contentions of learned counsel, however, have to be examined in the light of the facts of this case. From the orders of the authorities below, it appears that the assessee-Hindu undivided family submitted its return on December 23, 1978, showing a loss of Rs. 1,24,000. S.S. Swaika, karta of the assessee-Hindu undivided family, was a member of an erstwhile Hindu undivided family which carried on business under the name and style of Messrs. Ramdas Mahadeo Prosad. On account of disputes and differences between the brothers, S.S. Swaika filed a partition and administration suit, being P and A Suit No. 191 of 1972 before this court for partition of the Hindu undivided family properties and assets. In terms of the settlement, the properties and assets were actually divided between S.S. Swaika and G.V. Swaika with effect from June 13, 1977. The business of Soapstone and Dolomite Mines at Bhoraghat, Jabalpur, came to S.S. Swaika, the karta of the assessee-Hindu undivided family,
9. The assessee-Hindu undivided family claimed Rs. 1,58,415 as deduction from the total income being the partition and litigation expenses incurred by S.S. Swaika as karta of his branch in respect of the partition suit concerning the bigger Hindu undivided family during the accounting
years 1971-72 to 1977-78. The following is the list of legal expenses claimed by the assessee family :
Accounting year
Assessment year
Amount
(Rs.)
Paid to whom
1971-72
1973-74
10,800
Jalan and Company Solicitor
1972-73
1974-75
71,200
” “
1974-75 1976-77 10,000 " " 1975-76 1977-78 12,250 " " 1976-77 1978-79 4,165 Umpire Fee-appointed by the High Court 1977-78 1978-79 50,000 Jalan and Company Solicitor
10. It appears that certain mines, oil mills and other business and properties of the Hindu undivided family known as Ramdas Mahadeo Prosad were being controlled by the separate group of members of the Hindu undivided family, namely, Sri S.S. Swaika and his group and Sri G.V. Swaika and his group. The mining business at Jabalpur and grinding business at Liluah were controlled by Sri S.S. Swaika group. Separate returns of income were filed by those two groups. The Income-tax Officer, while assessing the Hindu undivided family, Ramdas Mahadeo Prosad, clubbed these two returns and made one assessment. According to the terms of settlement filed in the said partition suit, the mining business at Jabalpur was allotted to S.S. Swaika group.
11. It was contended by Dr. Pal, learned counsel for the assessee, that the mines were in the name of Ramdas Mahadeo Prosad before the suit and even after the suit the mines continued to be in the same name and that the mining business and the assets were all along under the control and management of S.S. Swaika, the karta of the assessee-Hindu undivided family. In order to protect and preserve the interest which the S.S. Swaika group had in the mining business, the said partition suit was filed and legal expenses were incurred. It was, therefore, submitted that the legal expenditure was incurred only to preserve and protect the existing business interest of the assessee and for the maintenance of the capital structure and the assets of the assessee in the Hindu undivided family called Ramdas Mahadeo Prosad.
12. In support of the contention, reliance has been placed on the case of Boorugu Nagaiah Rajanna . In that case “A” died leaving behind three sons “B”, “C” and “D”. “B” died issueless. “C” died
leaving behind him his widow “S”, but he did not have any male issue. “D” had five sons and five grandsons. After the death of “A”, all his properties were taken over by survivorship by “D” and his sons. The widow of “C” was given the right to maintenance. The sons and grandsons of “D” formed themselves into a partnership and the partnership firm is the assessee in the instant case. Subsequently, “C’s” widow purported to adopt one “H” as a son to her deceased husband “C” and “H” filed a suit claiming half share of the property of the joint family of “A”. The suit was ultimately dismissed by the civil court on December 30, 1964. The said judgment was confirmed in appeal by the High Court. The total legal expenses amounting to Rs. 94,587 were incurred in the civil suit and the said amount was proportionately divided between the assessee-firm, Hindu undivided family of “D” and another firm. On the proportionate apportionment, the assessee-firm’s share came to Rs. 69,190, which was claimed as a deduction by the assessee on the ground that it was 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, the Appellate Assistant Commissioner and the Appellate Tribunal rejected the claim of the assessee on the ground that all the assets of the firm as such were not in jeopardy but the dispute was only concerning a part of the assets between the coparceners and that there was no nexus between the expenditure incurred and the business run by the assessee-firm. There, the Andhra Pradesh High Court held that where litigation expenses are incurred by the assessee for the purpose of creating, curing or completing his title to the capital, the expenditure 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. Though the assessee-firm was not directly connected with the litigation that ensued between the partners of the firm on the one hand and the alleged adopted son of the coparcener, still, if the litigation ended in favour of the adopted son of the coparcener and against the partners of the assessee-firm, the assessee-partnership-firm would have to part with at least half of the assets which were invested in its business and that would have had seriously affected the business prospects of the assessee-firm. Therefore, it was not for acquiring a new title, or curing, or getting rid of, a defect in the title that the amount was spent by the assessee-firm, but the amount was spent to maintain the title which was otherwise a good title. As the expenditure incurred was for the purpose of defending the challenge to its title to the assets, the expenditure incurred by the assessee-firm must be allowed as revenue expenditure.
13. The court further held that it cannot be known until final disposal of the civil suit as to what was the actual amount of expenditure incurred in fighting the litigation and also whether any such expenditure incurred would be recovered from the other party or not. Therefore, the amount can only be determined at the end of the litigation and hence the assessee is entitled to claim the entire amount of expenditure as deduction in the accounting year in which the civil suit has come to an end.
14. Accordingly, it is contended that the assessee is entitled to get the deduction not only of the expenditure incurred for the protection and preservation of the assets but also that the entire expenditure should be allowed in the year under reference as the amount of expenditure was determined at the end of the litigation.
15. Our attention has also been drawn to a decision of the Madras High Court in CIT v. O.P.N. Arunachala Nadar [1983] 141 ITR 620. In that case, the assessee and one J acquired in common 18 acres of land which were developed into salt pans and worked under a partnership arrangement. Apart from his obligation under the partnership, J was indebted to the assessee under a mortgage. Subsequent to the dissolution of the partnership, disputes arose between the assessee and J. The assessee retained possession of the entire lands and was exploiting the salt pans exclusively for his own benefit. J filed a suit against the assessee for partition of the lands and for separate possession of his half share and also prayed for mesne profits in respect of his half share for the period during which the assessee was in possession. The suit was decreed by the trial court and the appeal against the said decree was also dismissed by the High Court. The assessee had incurred legal expenses amounting to Rs. 13,164 in connection with the said suit. The assessee’s claim for deduction of this sum of Rs. 13,164 as a business expenditure in computing his income from the salt pan business for the assessment year 1962-63 was negatived by the Income-tax Officer but upheld by the Appellate Assistant Commissioner and the Tribunal.
16. The court held that the assessee’s resistance to the partition suit by J was motivated wholly with the intention of preserving for himself possession not only of his half share of the properties in question but also of the other half share claimed by J, so as to preserve for himself the source of income from the salt pans. The expenses incurred by the assessee for resisting the suit were only to protect his title to an existing capital asset. It was not a capital expenditure. It had to be allowed as a deduction in the computation of the assessee’s taxable income.
17. On the other hand, Mr. Moitra has drawn our attention to the decision of this court in Albert David Ltd. v. CIT [1981] 131 ITR 192. In that case, the assessee-company was promoted by J, who, with his wife, was the largest owner of shares of the company. J was the managing director for life under the articles of the company. Subsequently, M became a director of the company and disputes arose between J and M. A number of important resolutions were passed at a meeting of the board of directors of the company held in September, 1954, including one by which J was deprived of the power of operating the company’s bank accounts. A lien in favour of the company on all shares registered in the name of J for a sum of over Rs. 4 lakhs alleged to be debts due by J to the company was declared. J filed suits against M and in 1956, possession of the company was made over to M. Thereafter, shares registered in the name of J were purported to be sold to R. J instituted a suit and the assessee-company and R were impleaded as defendants in the suit. J succeeded in the suit and it was held that J owed the company only Rs. 57,797 and hence the demand for payment of the alleged debts and the sale pursuant thereto were wrongful. On the question whether the expenses incurred by the company in connection with the suit were deductible, the court held that it could not be said that, in the litigation, the assessee-company was only seeking to preserve its book debts as a business asset. In resisting the suit, the company went far beyond establishing its legitimate dues. In fact, it fought a battle for R who did not appear in the proceedings. Business exigencies did not require the assessee to fight the suit on all issues and perfect the title of R to the disputed shares. The expenses incurred in connection with the suit were not, therefore, allowable as business expenditure.
18. We have considered the rival contentions. From the narration of facts, it would be evident that the karta of the assessee-Hindu undivided family was entitled to the assets on a partition of a bigger Hindu undivided family in terms of the settlement arrived at in the partition and administration suit in June, 1977. The assessee-Hindu undivided family was never assessed to income-tax prior to the assessment year 1978-79. It is only after the settlement in the partition suit that the karta of the assessee-Hindu undivided family was allotted its share in respect of the assets which belonged to the bigger Hindu undivided family. The litigation expenses were incurred in the partition suit between two groups of coparceners. It is now well-settled that expenditure on civil litigation commenced or carried on by an assessee for protecting the business is admissible as business expenditure provided the other conditions are fulfilled, even though the expenditure does not directly relate to the earning of the income. There was no asset
as such of the Hindu undivided family, the assessee before us, which could be preserved or protected by filing a partition suit. The deductibility of expenditure incurred in prosecuting the partition suit depends upon the nature and purpose of the suit or proceeding in relation to the assessee’s business. The assessee in the instant case, as indicated earlier, did not have any business of its own, nor did the assets which were the subject-matter of the partition suit belong to the assessee-Hindu undivided family as such. It is true that the karta of the assessee-Hindu undivided family being a coparcener in the bigger Hindu undivided family had a certain interest in the coparcenary property. But that will not be a ground for claiming deduction in the assessment of the assessee-Hindu undivided family when it had no business assets to be protected or preserved. On the other hand, the two groups in their respective returns filed before the Commissioner of Partition Suit must have claimed the litigation expenses, inasmuch as until the allotment of the assets on partition to the respective groups, it was the bigger Hindu undivided family in the name and style of Messrs. Ramdas Mahadeo Prosad which was being assessed as a separate and distinct assessee in respect of all the assets of the said Hindu undivided family.
19. The object or purpose of the partition suit is to defend or maintain an existing title to the capital assets of the assessee’s business. In deciding whether an expenditure is allowable as an expenditure under Section 37(1), the essential requirement is to find out whether the expenditure was, either in reality or for business expediency, necessary either for the earning of the profit or for protecting and safeguarding the business assets of the assessee including the goodwill or in connection with some transaction or activity which is directly and substantially connected with the running of the business of the assessee or is intimately connected with the assessee’s business activity. Such expense must necessarily pertain to the business itself and not be an expenditure merely connected with the activity, however remote or ancillary.
20. The coparcenary property is that in which every coparcener has a joint interest and joint possession. The effect of a partition is to dissolve the copercenary with the result that the separating members hold their respective shares as their separate property. Partition in the sense of a division of property is according to the Mitakshara school division of joint family property into specific shares.
21. Until partition, the ownership of the whole and every part of the joint family property is in the whole body of the coparcenary, and that in consequence each co-owner or coparcener is until partition the owner of
the whole and every part of the joint family property, but no owner has his right fastened upon any particular portion of the property, his interest being unspecified, that is, undivided and fluctuating. According to the Mitakshara school, partition of the joint family property, therefore, consists in division of the property into specific shares, whether it is accompanied by an actual division (such as by metes and bounds) or not.
22. Partition does not mean transfer of property by one coparcener to another. As observed by the Supreme Court in V.N. Sarin v. Ajit Kumar Poplai, , having regard to the basic character of a joint Hindu family, each coparcener has an antecedent title to the property, though its extent is not determined until partition takes place. That being so, partition really means, that whereas initially all the coperceners had subsisting title to the totality of the property of the family jointly, that joint title is transferred by partition into separate titles by the individual coparceners in respect of several items of properties allotted to them respectively. As this is the nature of the partition, it is incorrect to say that the partition of an Hindu undivided family property necessarily means transfer of property to the individual coparceners.
23. As indicated earlier, in this case partition was effected by agreement in the suit on June 12, 1977, during the previous year relevant to the assessment year 1978-79. In the assessment year 1978-79, the assessment was being made on the income or loss coming out of the assets allotted on June 12, 1977, to the karta of the assessee-Hindu undivided family which are treated as assets of the assessee-Hindu undivided family. Any expenditure incurred on litigation by the karta in connection with the partition suit concerning the aforesaid assets, prior to June 12, 1977, cannot, therefore, be allowed as expenditure relating to preservation or protection of the business assets of the assessee-Hindu undivided family.
24. For the reasons aforesaid, we answer this question in the negative and in favour of the Revenue by saying that any expenditure incurred by the assessee-Hindu undivided family in respect of the assets allotted to the karta of the Hindu undivided family after June 12, 1977, and treated as business assets of the assessee-Hindu undivided family will only be allowable as deduction.
25. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.
26. I agree.