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Issues Involved:
1. Deductibility of legal expenses as business expenditure. 2. Nature of legal expenses (capital vs. revenue expenditure). 3. Timing of the deduction for legal expenses. Issue-wise Detailed Analysis: 1. Deductibility of Legal Expenses as Business Expenditure: The primary question was whether the legal expenses amounting to Rs. 69,190 incurred by the assessee were allowable as a deduction in computing the assessee's total income for the assessment year 1966-67. The assessee, a partnership firm, incurred these expenses in defending a suit filed by Harnath, who claimed a half share in the property of the joint family of Boorugu Rajanna based on his alleged adoption. The Income-tax Officer disallowed the claim, stating that the firm was not a defendant in the suit and that the litigation was pursued by some partners individually. The Appellate Assistant Commissioner upheld this view, stating that the expenditure was not incidental to the business carried on by the firm. The Tribunal also dismissed the appeal, stating that the connection between the suit and the business of the firm was remote. 2. Nature of Legal Expenses (Capital vs. Revenue Expenditure): The court examined whether the legal expenses were capital or revenue in nature. Citing precedents such as Southern (H. M. Inspector of Taxes) v. Borax Consolidated Ltd. and Commissioner of Income-tax v. Malayalam Plantations Ltd., the court emphasized that expenses incurred to protect the title of the company's assets are considered revenue expenditure. The court noted that the legal expenses in question were incurred to protect the firm's assets from a hostile claim, not to acquire a new title or cure a defect in the title. Thus, the expenses were deemed to be for maintaining the title and were considered revenue expenditure. 3. Timing of the Deduction for Legal Expenses: The court addressed whether the entire amount of Rs. 69,190 could be claimed as a deduction in the assessment year 1966-67. It was noted that the expenses were initially incurred by the Hindu undivided family of Boorugu Mahadev and later apportioned to the assessee-firm. The court referred to the principle that the expenditure must be claimed in the year it was incurred and found that the liability for the expenses arose after the City Civil Court's decision on December 30, 1964. Thus, the entire amount was allowable as a deduction in the assessment year 1966-67. Conclusion: The court concluded that the whole of the expenses amounting to Rs. 69,190 incurred by the assessee was allowable as a deduction in computing the assessee's total income for the assessment year 1966-67. The question was answered in the affirmative, in favor of the assessee and against the revenue. The Commissioner of Income-tax, Hyderabad, was directed to pay the costs of the reference to the assessee.
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