1990 (11) TMI 13 - HC - Income Tax

Summary

Issues Involved:
1. Justification of litigation expenses as revenue expenditure under section 37 of the Income-tax Act, 1961.
2. Allowability of litigation expenses incurred in previous years for the assessment year 1978-79.

Issue-wise Detailed Analysis:

1. Justification of Litigation Expenses as Revenue Expenditure:
The primary issue revolves around whether the litigation expenses of Rs. 1,58,415 incurred by the smaller Hindu undivided family (HUF) in connection with a partition suit can be considered revenue expenditure under section 37 of the Income-tax Act, 1961. The assessee, Mahadeo Prosad Shyamsunder HUF, was part of a larger HUF named Messrs. Ramdas Mahadeo Prosad, which owned various properties and businesses. Due to disputes between two groups within the larger HUF, a partition suit was filed, and the High Court allocated specific properties and businesses to each group. The assessee claimed these litigation expenses as deductions, but the Income-tax Officer rejected the claim.

2. Allowability of Litigation Expenses Incurred in Previous Years:
The litigation expenses were incurred over several accounting years (1971-72 to 1977-78), but the assessee claimed the entire amount in the assessment year 1978-79. The Revenue contended that these expenses do not relate to the assets of the assessee-HUF and cannot be allowed as deductions for the assessment year in question. The assessee argued that these expenses were incurred to protect and preserve the assets of the HUF and should be allowed as revenue expenditure.

Analysis of Judgment:

Justification of Litigation Expenses as Revenue Expenditure:
The court examined the facts, noting that the assessee-HUF was not assessed to income-tax before the assessment year 1978-79. The litigation expenses were incurred in a partition suit between two groups of coparceners. The court referenced the case of Boorugu Nagaiah Rajanna v. CIT [1978] 114 ITR 350 (AP), where it was held that litigation expenses incurred to protect business assets are considered revenue expenditure. However, the court found that the assessee-HUF did not have any business of its own, nor did the assets involved in the partition suit belong to the assessee-HUF. The litigation expenses were incurred to protect the interest of the karta in the larger HUF's assets, not the assessee-HUF's business assets. Therefore, the court concluded that the litigation expenses could not be allowed as revenue expenditure for the assessee-HUF.

Allowability of Litigation Expenses Incurred in Previous Years:
The court noted that the litigation expenses were incurred over several years, but the assessee claimed the entire amount in the assessment year 1978-79. The court referenced the case of CIT v. O. P. N. Arunachala Nadar [1983] 141 ITR 620 (Mad), where it was held that expenses incurred to protect an existing capital asset are not capital expenditure and should be allowed as deductions. However, the court found that the assessee-HUF did not have any business assets to protect or preserve before the partition. The expenses were incurred by the karta of the larger HUF, and the assessee-HUF was not entitled to claim these expenses as deductions. The court concluded that only expenses incurred after the partition, related to the business assets of the assessee-HUF, could be allowed as deductions.

Conclusion:
The court answered the question in the negative and in favor of the Revenue, stating that any expenditure incurred by the assessee-HUF in respect of the assets allotted to the karta after June 12, 1977, and treated as business assets of the assessee-HUF, would only be allowable as deductions. There was no order as to costs.