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Issues Involved:
1. Whether the legal expense incurred by the assessee in defending a suit to unseat him was rightly allowed as a deduction under Section 12(2) of the Indian Income-tax Act, 1939. 2. Whether the expenditure was in the nature of capital expenditure. Detailed Analysis: Issue 1: Deductibility of Legal Expenses under Section 12(2) The primary question was whether the legal expense of Rs. 7,500 incurred by the assessee in defending a suit brought to unseat him was rightly allowed as a deduction in computing his total income for the charge year 1940-41 under Section 12(2) of the Indian Income-tax Act, 1939. The assessee, a director of several companies, was elected to the Local Board for the Western Area of the Reserve Bank of India. A suit was filed against him to declare his election invalid, which he defended, incurring the said expenses. The relevant section, Section 12(2), provides for the computation of income, profits, and gains after making allowance for any expenditure incurred solely for the purpose of making or earning such income, profits, or gains, provided it is not of a capital nature. The Crown argued that the expenditure was capital in nature. However, it was held that the expenditure was not incurred in creating or originating the source of income but in preserving it. The judgment referred to Atherton v. British Insulated and Helsby Cables, Ltd., where it was held that expenditure for bringing into existence an asset or advantage for the enduring benefit of a trade is capital expenditure. In contrast, expenditure for maintaining or preserving an existing asset is revenue expenditure. The Court distinguished this case from the Lahore High Court's decision in Kangra Valley Slate Co., Ltd. v. Commissioner of Income-tax, which held that non-recurring outlay to retain a capital asset was capital expenditure. The Court noted that the Lahore decision was not intended to be an authoritative exposition on capital expenditure. The Court concluded that the legal expenses incurred by the assessee were for the maintenance and preservation of an existing asset (the directorship) and not for creating a new asset. Therefore, the expenses were revenue in nature and deductible. Issue 2: Sole Purpose of Incurring Legal Expenses The second question was whether the costs of litigation were incurred "solely" for the purpose of making and earning the income. The Crown argued that the assessee defended the litigation not only to secure his director's fees but also to maintain the privileges and status associated with the office. The case of Commissioner of Income-tax v. Sir Homi M. Mehta was cited, where it was held that a gift made to a company by its promoter to save the company and his own reputation was not solely for earning income. The Court, however, found that the sole purpose of the assessee in defending the litigation was to preserve his directorship, which yielded income. There were no personal attacks involved, and the Income-tax Act does not regard status and privileges in monetary terms. The expenses were incurred solely for earning the director's fees, and thus, the deduction was allowable. Conclusion: The Court held that the legal expenses incurred by the assessee were revenue in nature and were incurred solely for the purpose of earning income from the directorship. Therefore, the expenses were rightly allowed as a deduction under Section 12(2) of the Indian Income-tax Act, 1939. The Commissioner was ordered to pay the costs of the assessee. The judgment was agreed upon by both judges, and the reference was answered in the affirmative.
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