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Issues Involved:
1. Whether the litigation expenses of Rs. 2,15,176 incurred by the assessee are deductible under Section 10(2)(ix) of the Indian Income Tax Act, 1922. Issue-wise Detailed Analysis: 1. Deductibility of Litigation Expenses under Section 10(2)(ix) of the Indian Income Tax Act, 1922 Facts and Background: The assessee, a registered firm engaged in various businesses including dealing in stocks, shares, silver, gold, and money-lending, claimed a deduction of Rs. 2,15,176 spent on defending a lawsuit brought by the Raja of Panchkote in the Court of the Subordinate Judge at Purulia, Bihar. This litigation stemmed from a 1921 transaction with Siddons & Co., involving a mortgage and assignment of salami and royalties from coal-bearing lands. Arguments by the Assessee: The assessee argued that the litigation expenses were incurred under a contract made in the course of their business and were necessary to avoid future business losses. They contended that these expenses should be deductible as they were incurred solely for the purpose of earning profits or gains. Legal Provision: Section 10(2)(ix) of the Indian Income Tax Act, 1922, allows for the deduction of "any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains." Court's Analysis: The court examined whether the litigation expenses were incurred solely for the purpose of earning profits or gains. It was noted that the expenses were related to defending a suit to prevent future liabilities rather than earning profits in the year of assessment (1936-37). The court referred to several cases, including: - G. Scammell and Nephew Ltd. v. Rowles (1940): The court distinguished this case, noting that the English provision allowing deductions for money "wholly and exclusively laid out or expended for the purposes of the trade" is broader than the Indian provision. - Strong & Company of Romsey Ltd. v. Woodfield (1906): This case, decided in favor of the Income Tax authorities, was also considered. - Ward and Company Limited v. Commissioner of Taxes (1923): The court cited this Privy Council decision, which held that expenses incurred to prevent the extinction of a business are not deductible as they are not incurred for the production of income. The court concluded that the Rs. 2,15,176 spent on litigation was not incurred solely for the purpose of earning profits or gains but to prevent future losses, which the Income Tax Act does not provide for. Conclusion: The court held that the litigation expenses were not deductible under Section 10(2)(ix) of the Indian Income Tax Act, 1922. The question propounded by the Commissioner of Income Tax was answered in the negative, and no order was made as to costs. Additional Judgment by H.R. Panckridge, J.: H.R. Panckridge, J. agreed with the Chief Justice, adding that the expenditure was of a capital nature. The assessees incurred the expenses to dispose of the Raja's claim for rent and royalty once for all, preventing similar future proceedings. Therefore, the expenditure was not deductible. Summary: The High Court of Calcutta ruled that the litigation expenses of Rs. 2,15,176 incurred by the assessee were not deductible under Section 10(2)(ix) of the Indian Income Tax Act, 1922, as they were not incurred solely for the purpose of earning profits or gains but to prevent future losses, which is not covered by the Act. The judgment emphasized that such expenses are of a capital nature and not allowable as deductions.
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