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Issues Involved:
1. Whether the legal expenses incurred in defending a pre-emption suit are capital or revenue expenditure. 2. The applicability of Section 10(2)(xii) of the Income-tax Act, as amended in 1939. Issue-wise Detailed Analysis: 1. Whether the legal expenses incurred in defending a pre-emption suit are capital or revenue expenditure: The Tribunal initially did not consider the user of the property and assumed that the expenditure was wholly and exclusively for business purposes. The primary legal question was whether the expenditure in defending the pre-emption suit was in the nature of capital expenditure. The relevant provision is Section 10(2)(xii) of the Income-tax Act, which allows deductions for expenses not being capital expenditure or personal expenses, incurred wholly and exclusively for business purposes. The judgment referenced two key cases: Kangra Valley Slate Company Limited v. Commissioner of Income-tax and Central India Spinning, Weaving and Manufacturing Co., Ltd. v. Commissioner of Income-tax. In the former, the expenditure was deemed capital as it was incurred to retain a capital asset. In the latter, the expenses were considered revenue as they were for maintaining an existing asset. The assessee argued that the expenditure did not create a new asset but was for maintaining the existing asset, relying on Southern (H.M. Inspector of Taxes) v. Borax Consolidated, Ltd., where legal expenses for defending title to land were considered revenue expenses. The Tribunal's decision in Kangra Valley Slate Company was questioned, with the argument that it was wrongly decided based on the principles established in Southern v. Borax Consolidated. 2. The applicability of Section 10(2)(xii) of the Income-tax Act, as amended in 1939: The assessee, a plumber and dealer in cement and sanitary goods, purchased a building used as a godown. A pre-emption suit was filed against him, and he incurred legal expenses defending it. The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal disallowed the deduction, considering it capital expenditure. The Tribunal formulated the question for the Court: "Whether the litigation expenditure incurred in defending a pre-emption suit relating to immovable property acquired by the applicant for use as business premises is an expense allowed under Section 10(2)(xii) of the Income-tax Act." The Division Bench remitted the case to the Tribunal to clarify the grounds for assuming the expenditure was for business purposes. The Tribunal clarified that both parties agreed the expenditure was for business purposes, and the only issue was whether it was capital or revenue expenditure. The Division Bench noted the divergence in judicial opinions and referred the question to a Full Bench. The Full Bench considered the expenditure in question as capital based on the Kangra Valley Slate Company case but acknowledged the differing views in Southern v. Borax Consolidated and Central India Spinning. The judgment emphasized the principle laid down by Lawrence, J., that expenditure for acquiring or improving a fixed capital asset is capital, while expenditure for maintaining an existing asset is revenue. The Full Bench concluded that the legal expenses were revenue expenditure, not capital, as they were incurred to maintain an existing asset without creating or improving a new asset. Conclusion: The Full Bench answered the reference in the negative, holding that the legal expenses incurred in defending the pre-emption suit were revenue expenditure and not capital expenditure under Section 10(2)(xii) of the Income-tax Act. The judgment highlighted the importance of distinguishing between maintaining existing assets and acquiring or improving new assets in determining the nature of expenditure.
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