JUDGMENT
S.P. Bharucha, J.
1. Three questions are referred in these reference at the instance of the assessee under section 256(1) of the Income-tax Act.
2. Counsel are agreed that the answer to the first question is governed by the decision of this court in the assessee’s own case in Life Insurance Corporation of India v. CIT [1979] 119 ITR 900, and that the expenditure is deductible.
3. Counsel are agreed that the answers to be given to questions Nos. 3(i) and 3(ii) are governed by the decision of this court in the aforesaid matter and that these questions must be answered in the negative and in favour of the Revenue.
Question No. 1 and questions Nos. 3(i) and 3(ii) are answered accordingly.
Question No. 2 reads thus :
“Whether, on the facts and in the circumstances of the case, the sums of Rs. 78,712 being the amount paid during the intervaluation period ended December 31, 1959, for the assessment years 1960-61 and 1961-62, and Rs. 42,022 paid during the intervaluation period ended December 31, 1961, for the assessment year 1962-63, respectively, as legal charges incurred to meet the erstwhile insurers’ claim for compensation to the extent that such claim was considered by the assessee to be in excess of the amount payable under section 16 of the Life Insurance Corporation Act, 1956, in accordance with the principles contained in the First Schedule to the said Act was not an expenditure deductible under section (sic) of the Indian Income-tax Act, 1922, sections 30 to 43 of the Income-tax Act, 1961 ?”
4. The assessee took over the business of certain insurance companies. There was a dispute as to the quantum of compensation payable to the insurance companies. There was litigation and the assessee incurred legal expenditure. An allowance in respect of this expenditure was claimed by the assessee and was disallowed by the taxing authorities.
5. It was urged that if the assessee were to pay the insurance companies by way of compensation an amount higher than what was warranted in law, such payment would deplete the assets of the assessee. The expenditure was incurred to prevent a depletion of the assets and was revenue expenditure in respect of which deduction could be claimed. The Tribunal observed that every outgoing might, to an extent, result in a depletion of the assets but the assessee’s case was not that when the insurance companies were asking for an amount higher than what was considered by the assessee as due to them, they were laying any claim to any specific asset of the assessee. The Tribunal concluded that the litigations related to the amount of compensation due for the acquisition or taking over of a capital asset. It, therefore, disallowed the deduction claimed by the assessee.
6. The assessee, when it acquired the business of the insurance companies, was acquiring a capital asset. The compensation paid in regard to such acquisition was capital expenditure. The expenditure incurred on litigation relating to such capital expenditure must also be treated as capital expenditure.
7. In the result, the question is answered in the affirmative and in favour of the Revenue.
8. No order as to costs.