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Issues Involved:
1. Whether there was a capital element in the 50% of the litigation expenses referable to the kyanite suit filed by the assessee-company for specific performance in terms of the contract, making it non-admissible as a deduction in computing the total income for the assessment years 1960-61, 1961-62, and 1962-63. Summary: Issue 1: Capital Element in Litigation Expenses The High Court of Patna addressed the question of whether 50% of the litigation expenses incurred by the assessee-company in the kyanite suit for specific performance should be considered capital expenditure and thus not deductible in computing the total income for the assessment years 1960-61, 1961-62, and 1962-63. The assessee, a public limited company engaged in mining and manufacturing, claimed deductions for legal charges incurred during litigation with the State of Bihar over the renewal of a mining lease. The court examined the history of the lease, which was initially granted in 1926 and was set to expire in 1955, with an option for renewal. Disputes arose when the State of Bihar alleged breaches of the lease terms and sought forfeiture and re-entry, leading to litigation. The assessee filed a suit for specific performance to enforce the renewal clause. The Income-tax Officer had apportioned 50% of the litigation expenses as capital expenditure, a decision upheld by the Tribunal. The Tribunal reasoned that the expenses were partly for defending against eviction and partly for securing a new lease, which would provide an enduring benefit. The court referenced several Supreme Court decisions, including *Commissioner of Income-tax v. Malayalam Plantations Ltd.*, *Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax*, and *Dalmia Jain and Co. Ltd. v. Commissioner of Income-tax*, to distinguish between expenses incurred for protecting business assets and those for creating or improving capital assets. The court concluded that the litigation initiated by the assessee was aimed at creating and completing its title to the capital (the renewed lease), not merely preserving its business or protecting existing assets. Therefore, the Tribunal was justified in treating 50% of the litigation expenses as capital expenditure. Conclusion: The court answered the question of law in the affirmative, holding that there was a capital element in the 50% of the litigation expenses, making them non-admissible as deductions. The references were answered in favor of the revenue and against the assessee-company, with each party bearing its own costs.
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