ORDER
K. C. Singhal, JM:
The only issue arising out of this appeal is whether the sum of Rs. 15,23,266 paid by the assessee to Shri Chhaburao Pradhan under a compromise decree can be considered as business expenditure.
2. The assessee is a limited company whose previous year consisted of fifteen months commencing from 1-1-1988, to 31-3-1989, relevant to assessment year 1989-90. It had purchased lands acre measuring 47,295 sq. mtrs. at village Aundh, Pune, from one Shri Maruti Ganpat Gaikwad, in the year 1962, who was owner of such lands bearing Survey No. 138 and 156(2). Earlier to this transaction, said Gaikwad had also sold 1 acre and 20 Guntahas of land from Survey No. 138 in favour of Shri Chhaburao Pradhan on 20-2-1956 and also sold 20 Guntahas of land to Shri Subhash Pradhan on 19-5-1961. Shri Chhaburao Pradhan and Subhash Pradhan were living in Bombay. As soon as they came to know that lands purchased by, them were encroached by the assessee, they filed a suit in Civil Court at Pune. The civil Court vide its order dt. 11-2-1985, held that a assessee had encroached upon the land of the plaintiffs and consequently passed the decree in favour of plaintiffs. This was further confirmed by the Court of Addl. District Judge, Pune, vide his order dt. 24-6-1986. The assessee filed further appeal before Hon’ble Bombay High Court. During the pendency of the appeal before the High Court, the assessee entered into compromise with the plaintiffs as a result of which, a compromise decree was passed by the Hon’ble High Court on 14-1-1988, under which the plaintiffs gave up their claims, right, title and interest in the suit lands against the consideration of Rs. 15,23, 266.
3. The aforesaid amount was claimed by the assessee as revenue expenditure in assessment year 1989-90. However, such claim was rejected by the assessing officer on the ground that it was a capital expenditure since the amount was paid for protection of its right for the lands which is a capital asset. The appeal before the Commissioner (Appeals) remained unsuccessful. The Commissioner (Appeals) rejected the contention of the assessee after relying upon the decision of the Hon’ble Supreme Court in the case of V. Jaganmohan Rao & Ors. v. CITICEPT (1970) 75 1TR 373 (SC). Aggrieved by this order, the present appeal has been preferred by the assessee.
4. The learned counsel for assessee Mr. Dalvi contended before us that expenditure incurred by the assessee was revenue expenditure since the payment was made by the assessee in order to protect its existing assets of the company and no new asset or advantage of enduring nature came into existence. In this connection, he relied on the judgment of the Hon’ble Supreme Court in the case of Dalmia Jain & Co. Ltd. v. C1T (1971) 81 ITR 754 (SC). He took us through the said judgment and then submitted that litigation expenditure incurred to protect the existing business of the assessee was allowed as revenue expenditure in that case. He then referred to various decisions of the High Courts namely CIT v. New Carriages Ltd. (1981) 129 1TR 122 (Del), CIT v. Mohanlal Bros. (1982) 133 ITR 642 (Bom) and CIT v. Delux Film Disbibutors (1978) 114 ITR 434 (Cal). It was then contended by him that Supreme Court in the case of V. Jagmohanrao v. CIT (supra), had taken a contrary view which has not been followed by the Madras High Court in the case of Ghansham Singh v. CIT (1982) 31 CTR (Mad) 56 : (1983) 141 ITR 601 (Mad), as according to the Madras High Court, the aforesaid decision of the Supreme Court was per incuriam or at the best, the observations of the Supreme Court were by way of obiter dicta. In view of this Madras High Court decision, it was pleaded by Mr. Dalvi that the decision of Supreme Court in the case of Dalmia Jain & Co. Ltd. (supra) should be preferred which covers the case of the assessee.
5. On the other hand, the learned senior departmental Representative has vehemently opposed the submissions made by the counsel for the assessee by submitting that issue in the present case is squarely covered by the decision of Supreme Court in the case of V. Jaganmohan Rao (supra) wherein it has been held that expenditure incurred for perfecting a title or for getting rid of defect in the title would be capital expenditure. According to him, the assessee had no right or interest in suit lands in view of the clear findings given by the civil Court and the appellate Court. So what he obtained under the compromise decree was the perfect title in such lands which amounts to acquisition of asset. Alternatively, it was pleaded by him that assessee got rid of the defective title in such lands. In either case, it was a capital expenditure in view of the Supreme Court decisions in the case of V. Jaganmohan Rao (supra) as well as in the case of Dalmia Jain & Co. Ltd. (supra). It was further submitted by him that other decisions relied upon by the assessee’s counsel were distinguishable on facts.
6. Rival submissions of the parties, material placed before us, as well as case law referred to before us have been considered carefully. The perusal of the orders passed by the civil Court and appellate Court reveals that assessee had encroached upon the lands owned by Shri Chbaburao Pradhan. It is only during the pendency of the appeal proceedings before the Hon’ble High Court that assessee entered into a compromise with the plaintiffs. At this stage, it would be useful to refer cls. 2, 3 an 5 of the said compromise decree which are set out as under:
“(2). The Respondent No. 1 Chhaburao Nilkanth Pradhan further declares and states that he has given up his alleged right, title and interest in the suit land admeasuring 1286.50 sq. mtr. and of which he had sought possession and was granted a decree in the trial Court which was confirmed by the District Court, Pune.
(3) That by way of settlement, the appellant has paid to the first respondent the said Chhaburao Nilkanth Pradhan, an amount of Rs. 15,23,266.80 (rupees fifteen lakhs twenty-three thousand two hundred sixty-six and paise eighty only) by Cheque No. NCCA 6414756 dt. 6-6-1988 on Canara Bank, Pune Branch (the receipts of which the first respondent hereby admits and acknowledges).
(5) The first respondent Chbaburao Nilkantha Pradhan gives up all his claims, rights, title and interest including the claim for interest, mesne profits, legal costs throughout.
On perusal of the facts stated above, we are of the view that it is a case of acquisition of the title in the suit lands by the assessee inasmuch as both the Courts had given a finding to the effect that assessee had encroached upon the suit lands. In the alternative, it can be considered as a case where the assessee’s title in the suit lands became defective due to the decisions of civil Court and appellate Court. By the compromise decree passed by the High Court, the assessee can be said either to have acquired the title or got rid of the defective title. The advantage obtained by the assessee in respect of such lands was perpetual and of enduring nature and therefore, is attributable to the capital field.
7. As far as the legal position is concerned, we are of the view that issue is squarely covered by the decision of the apex Court in the case of V. Jaganmohan Rao (supra), which was delivered by Bench of three Judges. The following test was laid down by the apex Court:
“It is well established that where money is paid to perfect a title or as considerations for getting rid of a defect in the title or a threat of litigation, the payment would be capital payment and not a revenue payment.”
8. However-it was contended seriously by the learned counsel for the assessee that his case was covered by the later decision of the Supreme Court in the case of Dalmia Jain & Co. Ltd. (supra), which was delivered by a Division Bench. According to him, contrary view has been taken by the apex Court in this decision by holding that expenditure incurred in protecting the business assets would be revenue expenditure. To strengthen his contention, he relied on the decision of Madras High Court in the case of Ghansham Singh v. CIT (supra). After giving our deep thoughts to the contention of the assessee, we are of the view that there is no conflict between these decisions of the Supreme Court. It would be useful to refer the legal principle laid down by the Supreme Court in the decision of Dairnia Jain & Co. Ltd. (supra).
“Where litigation expenses are incurred by the assessee for the purpose of creating, curing or completing the assessee’s title to the capital, then 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 a revenue expenditure.”
9. The study of the tests laid down in the aforesaid two decisions of the Hon’ble Supreme Court shows that there is a uniformity in both the decisions in the sense that expenditure incurred in curing, completing, perfecting or on getting rid of defect in the title to the capital would be capital in nature. In the case of V. Jaganmohan Rao (supra) the Hon’ble Supreme Court had not referred to the words ‘capital’ after the word ‘title’ while in the later case, the position has been clarified by using the words ‘title to the capital’. The Hon’ble Supreme Court has gone a step further in the later case by observing that if the expenses are incurred to protect the business of the assessee, then such expenses should be considered as revenue expenditure. If both the judgments of the Hon’ble Supreme Court are considered harmoniously, then, in our opinion, the legal proposition would emerge as under:
1. If the expenditure is incurred for the purpose of perfecting or completing a title. or for curing or getting rid of defect in the title to the capital asset, then it would be capital expenditure.
2. If the expenditure is incurred for the purpose of protecting the business of the assessee, then it would be revenue expenditure.
10. Much reliance has been placed by the learned counsel for the assessee upon the decision of the Madras High Court in the case of Ghansharn Singh (supra) which has held in clear terms that judgment of Supreme Court in the case of V. Jaganmohan Rao (supra) is per income and at the best observations of the Supreme Court can be considered as obiter dicta while the decision of the Supreme Court in the case of -Dalmia Jain & Co. Ltd. (supra) lays down ratio decidendi. So according to their Lordships of the Madras High Court, ratio has to be preferred, then the obiter dicta despite the fact that obiter dicta was by the larger Bench. It is because of this view, that learned counsel for the assessee asked before us that Commissioner (Appeals) was not justified in holding against the assessee on the basis of the judgment of Supreme Court in the case of V. Jaganmohan Rao (supra).
11. We have already expressed our view that there is no conflict between the two cases. It is the settled law that judgment of a Court has to be understood in the context of the facts of each case. In the former case, their Lordships of the Supreme Court were concerned with the case where the assessee has purchased a spinning mill during the pendency of a suit between the vendor and his sons. The sons were claiming their right in the mill on the ground that it was HUF property. After the purchase of the mill by the assessee, the High Court decreed its suit in favour of the sons. Because of the judgment of the High Court, the title of the assessee in the spinning mill became defective and, therefore, in order to get rid of such defect in the title, the assessee had paid Rs. 1, 15, 000 to the sons of the vendors. The judgment of the Supreme Court in the case of V Jaganmohan Rao (supra) was delivered on the basis of these facts. Therefore, the test laid down by the Supreme Court has to be applied where there is a defect in the title of the assets only and it cannot be extended further to other situations.
12. In the later decision in the case of Dalmia Jain & Co. Ltd. (supra), the Supreme Court was concerned with a case where assessee has not acquired any asset. It was carrying on the business of working the quary as an agent of the Government. Third party had filed a suit against the Government for specific performance and in the alternative damages against the Government inpleading the assessee as defendant. Since the assessee was dragged in the litigation, it had to defend itself against damages. In view of these facts, it was held by the Supreme Court that expenses were incurred to protect the business and were allowable as revenue expenditure. Therefore, this decision would be applicable only where expenses are incurred to protect the trade or business and cannot be applied to a case where the expenditure is laid out to protect the title of the capital asset. In these cases, it has been laid down by the Court in clear terms that expenditure incurred for creating, curing or completing the title to the capital would be capital expenditure.
13. Even assuming that there is a conflict between these two decisions, the decision rendered by larger Bench would be applicable. Further, in our opinion, the test laid down by the larger Bench of the Supreme Court cannot be considered as obiter dicta as held by the Madras High Court in the case of Ghansham Singh (supra) for the reasons expressed by us above. There is no dispute to the proposition that where the observations by the larger Bench are by way of obiter dicta and ratio has been laid down by the Division Bench, then the decision of the Division Bench would prevail. Since, in our opinion, the ratio has been laid down by the larger Bench and no conflict appears between the two decisions of the Supreme Court- we find ourselves not pursuaded by the decision of the Madras High Court.
14. In view of the above discussion, it is not necessary for us to discuss the other case law cited before us. Facts of this case already show that assessee had no legal title to the suit lands. The advantage obtained by the assessee by acquiring the legal title to such lands was in the capital field. Even assuming that assessee had a title in the land, it was a defective title which was cured under the compromise decree. Therefore, the expenditure incurred by the assessee was clearly capital expenditure. The order of Commissioner (Appeals) is, therefore, upheld.