1978 (8) TMI 39 - HC - Income Tax

Expenditure On Litigation Income From Other Sources Litigation Expenses Rental Income Wholly And Exclusively

Summary

Issues:
1. Whether the expenses incurred by the assessee for litigation were allowable deductions under the head "Income from other sources" for increasing rental income.
2. Whether the Tribunal's finding on the nature of the expenses and their relation to earning rental income was reasonable and not perverse.

Detailed Analysis:
Issue 1: The case involved determining whether the expenses incurred by the assessee for litigation were deductible under "Income from other sources" for increasing rental income. The assessee claimed the expenses were solely for enhancing rental income, while the revenue argued the expenses were not wholly and exclusively for earning rental income. The Tribunal found the expenses were incurred to increase rental income and were allowable under section 57 of the Income-tax Act, 1961.

Issue 2: The Tribunal's finding on the nature of the expenses and their relation to earning rental income was challenged as unreasonable and perverse. The revenue contended that the expenses were not directly related to earning rental income but were incidental. However, the assessee argued that the expenses were solely for earning enhanced rental income, citing precedents supporting indirect connections between expenses and income. The Tribunal's conclusion that the expenses were allowable deductions under section 57(iii) of the Act was upheld, considering the substantial increase in rental income resulting from the litigation.

The judgment answered the questions as follows: Question 1 was answered in the negative, favoring the assessee, indicating that the expenses were allowable deductions. Question 2 was answered in the affirmative, also in favor of the assessee. The judgment highlighted that the Tribunal's decision on the deductibility of expenses under section 57(iii) for increasing rental income was not considered perverse, given the direct correlation between the expenses and the substantial rental income enhancement.