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1. Allowability of litigation expenses as expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. The judgment in question pertains to the allowability of litigation expenses totaling Rs. 3,98,631 as an expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. The case involved the assessee, who held shares in a company and faced a lawsuit challenging the shareholding exceeding 10% of the subscribed share capital, alleging a contravention of the Insurance Act, 1938. The plaintiff sought a perpetual injunction restraining the assessee from exercising rights in excess of the prescribed limit. Initially disallowed by the Income-tax Officer on the grounds of capital expenditure, the claim was eventually allowed by the Appellate Tribunal. The central question before the court was whether the litigation expenses were revenue or capital in nature. The Commissioner contended that the expenditure was of a capital nature, emphasizing that the suit aimed at controlling the management of the company. Referring to precedents, the Commissioner argued that if legal expenses were incurred to create, cure, or complete title to capital, they constituted capital expenditure. The Commissioner cited cases to support the position that expenses not wholly or exclusively for the business purpose were not revenue expenditures. However, the court rejected this argument, noting that the expenses were incurred to maintain and protect investments and voting rights, not to acquire new assets. The court distinguished the present case from the precedents cited, as the suit aimed to jeopardize the assessee's business activities, justifying the expenses as revenue expenditure. In its analysis, the court highlighted that the legal expenses were not aimed at creating, curing, or completing title to capital, differentiating the case from the cited precedents. Moreover, the court emphasized that the suit threatened the assessee's business activities, justifying the expenses as revenue expenditure. Consequently, the court ruled in favor of the assessee, holding that the litigation expenses were allowable under section 10(2)(xv) of the Income-tax Act. The judgment affirmed that the expenses were incurred to protect the assessee's business interests, thereby qualifying as revenue expenditure and not capital in nature.
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