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Issues Involved:
1. Whether the legal expense of Rs. 2,577 is a revenue expenditure and a proper deduction in computing the taxable income of the assessee company from business. Issue-wise Detailed Analysis: 1. Nature of Legal Expenses as Revenue or Capital Expenditure: The primary issue was whether the legal expense of Rs. 2,577 incurred by the assessee company to restrain Binod Mills Ltd. from using a trade-mark was a revenue expenditure deductible under Section 10(2)(ix) of the Indian Income-tax Act, 1922. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal had rejected the deduction claim, classifying it as capital expenditure, as it was a non-recurring outlay intended to retain a valuable asset of the company. The Tribunal based its decision on the precedent set by the Lahore High Court in *Kangra Valley Slate Co., Ltd. v. Commissioner of Income-tax, Punjab*, which held that non-recurring outlay required to retain a capital asset is capital expenditure. The Tribunal declined to follow the English case *Southern v. Borax Consolidated, Ltd.*, where legal expenses for maintaining a capital asset were deemed attributable to revenue. 2. Legal Framework and Comparative Analysis: The court noted that the Indian Income-tax Act, unlike the English Income Tax Act, does not expressly provide for the deduction of legal expenses. The relevant provision, Section 10(2)(ix) of the Indian Income-tax Act before its 1939 amendment, allowed deductions for any expenditure not being in the nature of capital expenditure incurred solely for earning profits or gains. The court compared this with the English Income Tax Act of 1918, which, while not expressly prohibiting legal expenses, allowed deductions for money wholly and exclusively laid out for the purposes of the trade. The court examined various English precedents, including *Atherton v. British Insulated and Helsby Cables, Ltd.*, *Vallambrosa Rubber Co. Ltd. v. Farmer*, and *British Insulated and Helsby Cables v. Atherton*, which provided tests to distinguish between capital and revenue expenditure. 3. Judicial Tests and Principles: The court discussed the tests laid down in English cases. Lord Dunedin's test in *Vallambrosa Rubber Co. Ltd. v. Farmer* suggested that capital expenditure is spent once and for all, whereas income expenditure recurs every year. However, this test was not deemed conclusive. Viscount Cave's test in *British Insulated and Helsby Cables v. Atherton* was more widely accepted, suggesting that expenditure bringing into existence an asset or advantage for the enduring benefit of a trade should be treated as capital expenditure. 4. Application of Precedents: The court analyzed Indian cases, including *Income-tax Commissioner v. Kameshwar Singh*, where legal expenses incurred in defending a money-lending business were considered revenue expenditure. The court also considered *Southern v. Borax Consolidated Ltd.*, where legal expenses to defend a title to land were treated as revenue expenditure because they did not create a new asset but maintained existing assets. 5. Conclusion: The court concluded that the legal expense of Rs. 2,577 was a revenue expenditure. The expense was incurred to displace a counterfeit trade-mark affecting the sale of the assessee's goods, which was an attack on the trade rather than the capital of the company. The legal proceedings aimed to restore the trade to its original standard, preventing actual loss in sales, and did not add to the capital or bring any additional advantage. Thus, the expense was necessary to maintain the assessee's trade and profits, making it a proper deduction in computing taxable income. Separate Judgment: DIGBY, J., concurred with Niyogi, J., emphasizing that an attack on a trade-mark through infringement should be viewed as an attack on existing and future trade rather than on a capital asset. He agreed that the expenditure was not in the nature of capital expenditure and fell within the ambit of the Privy Council decision in *Bihar Income-tax Commissioner, Bihar v. Kameshwar Singh*. Reference Answered Accordingly: The legal expense of Rs. 2,577 is a revenue expenditure and a proper deduction in computing the taxable income of the assessee company from business. The applicant will pay the costs of the non-applicant Counsel's fee Rs. 50.
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