1999 (9) TMI 40 - HC - Income Tax

Summary

Issues:
1. Whether the litigation expenses of Rs. 60,000 was capital expenditure and not allowable in computing the income of the assessee?
2. Whether the litigation expenditure is capital expenditure even when incurred in connection with acquiring a business asset, demanding specific performance of a contract?

Analysis:
1. The case involved an assessee firm in Bangalore that entered into a contract with a trust to purchase a property, but the trust did not convey the property. The firm then spent Rs. 60,000 on litigation expenses during the previous year, which it claimed in the revenue field. The Commissioner of Income-tax (Appeals) initially deleted this amount disallowed by the Assessing Officer. The Revenue appealed before the Tribunal, arguing that the expenditure was in the capital field, while the assessee contended it was in connection with the business and thus allowable in the revenue field.

2. The Tribunal considered various legal precedents cited by both parties. The assessee relied on the Supreme Court's decision in Dalmia Jain and Co. Ltd. v. CIT [1971] 81 ITR 754 and the Madras High Court's decision in Ghansham Singh v. CIT [1983] 141 ITR 601 to support their position. On the other hand, the Revenue cited cases like Plastic Products Ltd. v. CIT [1966] 62 ITR 209 and Indian Copper Corporation Ltd. v. CIT [1977] 110 ITR 434. The Tribunal ultimately held that the Rs. 60,000 spent on litigation was not deductible as an expenditure, reversing the Commissioner's decision.

3. The assessee argued that the expenditure was related to acquiring the property for business purposes, and therefore should be allowed as revenue expenditure. They contended that if the litigation expenses were to protect the business, they should be considered revenue expenditure. The Revenue, however, maintained that the expenditure was unmistakably in the capital field, as it would have contributed to the cost of acquiring the asset if successful. The Tribunal agreed with the Revenue's position, leading to the reference application by the assessee.

4. The Tribunal differentiated the facts of the case from the legal precedents cited by the assessee, emphasizing that the expenditure was akin to acquiring a capital asset through litigation. The Tribunal found that the expenditure was indeed in the capital field, and if the asset was acquired, it would be a capital asset; conversely, if the litigation was lost, it would result in a capital loss. Therefore, the Tribunal upheld the Revenue's position, ruling in their favor against the assessee.

In conclusion, the High Court upheld the Tribunal's decision, finding that the litigation expenses of Rs. 60,000 were capital expenditure and not allowable in computing the assessee's income. The judgment favored the Revenue's contention that the expenditure was in the capital field, related to acquiring a business asset through litigation, and thus not eligible for deduction as revenue expenditure.