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Issues involved:
The judgment involves the allowability of legal expenses as business expenditure u/s the Income Tax Act, 1961 and the deduction of mesne profits decreed in a partition suit. Legal expenses as business expenditure: The assessee, involved in a partnership for salt pan business, incurred legal expenses in defending a partition suit to protect his possession and income source. The court held that such expenses incurred to protect the source of income are allowable as business expenditure, even if the litigation was not directly related to the partnership business. The court distinguished this case from others where litigation expenses were disallowed as they did not relate to ongoing business activities. Nature of legal expenditure: The court rejected the argument that the legal expenses were capital in nature, citing a previous judgment that distinguished between expenditure for acquiring or improving capital assets and expenditure for protecting existing assets. It held that the legal expenses in this case were revenue in character as they were incurred to maintain the title to an existing capital asset, the salt pans. Deduction of mesne profits: The court allowed the deduction of mesne profits decreed in the partition suit, ruling that the liability for such profits accrued only after the court judgment. It emphasized that the liability for mesne profits arose when the court determined the unlawful possession, and thus, the deduction was allowable in the relevant assessment year. Conclusion: The court ruled in favor of the assessee on both issues, allowing the legal expenses as business expenditure and permitting the deduction of mesne profits. The Department was directed to pay the assessee's costs, including counsel's fee.
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