1955 (5) TMI 15 - HC - Income Tax

Summary

Issues Involved:
1. Whether the litigation expense of Rs. 12,429 is capital expenditure.
2. Nature of the suit and its implications on the expenditure.
3. Whether the expenditure was incurred solely and exclusively for the business of the assessee.

Detailed Analysis:

1. Whether the litigation expense of Rs. 12,429 is capital expenditure:

The primary issue was whether the litigation expenses incurred by the assessee, amounting to Rs. 12,429, could be classified as capital expenditure under section 10(2)(xv) of the Income-tax Act. The assessee claimed this amount as a deduction, arguing that it was spent during the accounting year for conducting a suit (O.S. No. 37 of 1944) to establish his title to five buses and to recover possession of them.

The Income-tax Officer found that the suit was against the ownership of the buses and deemed the expenses as capital expenditure, stating, "As the expenses are spent for the acquisition of the capital asset, they will be treated as capital expenditure." The Assistant Commissioner supported this view, noting that the litigation involved acquiring a valuable right and thus, the expenses were part of the cost of acquiring the asset, making them capital in nature.

However, the Tribunal concluded that the expenditure was of a capital nature, based on the nature of the suit, which was to claim title to the five buses and to recover possession of them.

2. Nature of the suit and its implications on the expenditure:

The nature of the suit was crucial in determining whether the expenditure was capital or revenue in nature. The Tribunal found that the suit was to establish the assessee's title to the five buses and to recover possession from Raman and Raman Ltd. The court applied the test formulated by Lawrence, J., in Southern v. Borax Consolidated Ltd., which states, "where a sum of money is laid out for the acquisition or the improvement of a fixed capital asset it is attributable to capital, but that if no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue."

The court noted that the expenses were not for acquiring capital assets, as the assets had already been acquired. The suit was to establish title to those capital assets, which the assessee claimed he had already acquired. The court referenced Commissioner of Income-tax v. Raman and Raman Ltd., where a similar litigation was deemed revenue expenditure, stating, "The expenditure did not create any new asset nor did it alter the character of the capital asset that had been acquired by the company."

The court also cited Commissioner of Income-tax v. Hirjee, emphasizing that the ultimate result of the litigation is irrelevant in determining the nature of the expenditure. The court concluded that the litigation expenses were not for acquiring capital assets but for maintaining the title to already acquired assets, making them revenue in nature.

3. Whether the expenditure was incurred solely and exclusively for the business of the assessee:

The court considered whether the expenditure was incurred solely and exclusively for the assessee's business. The Tribunal did not contest this point, and the court found that the expenses were indeed laid out for the assessee's transport business. The court noted, "The business of the assessee was as a transport operator. He expanded his business by expenditure of new capital which resulted in the acquisition of the five buses with their route permits."

The court concluded that since the expenditure was not of a capital but of a revenue nature, it was laid out for the assessee's business and solely and exclusively for it. The court answered the question in the negative, ruling in favor of the assessee and allowing the deduction of the litigation expenses as revenue expenditure.

Conclusion:

The court held that the litigation expenses of Rs. 12,429 incurred by the assessee were not capital expenditure but revenue expenditure, deductible under section 10(2)(xv) of the Income-tax Act. The expenses were incurred to maintain the title to already acquired assets and were laid out solely and exclusively for the assessee's transport business. The reference was answered in the negative, in favor of the assessee, with costs awarded to the assessee.