1971 (7) TMI 2 - SC - Income Tax

Amounts spent by the assessee in defending a suit against damage - litigation expenses were revenue expenditure spent wholly and exclusively for the purpose of the business - Assessee s appeal allowed

Summary

Issues:
Whether the litigation expenses incurred by the assessee for the assessment year 1951-52 constitute expenditure laid out wholly and exclusively for the purpose of the assessee's business.

Analysis:
The Supreme Court judgment dealt with an appeal arising from a reference under section 66(1) of the Indian Income-tax Act, 1922. The primary issue in focus was whether the litigation expenses of Rs. 1,29,994 incurred by the assessee for the assessment year 1951-52 were considered as expenditure laid out wholly and exclusively for the purpose of the assessee's business. The case involved a complex history of litigation surrounding the ownership and lease of Murli Hills, initially leased to Kutchwar Lime Co. by the State of Bihar. The subsequent assignment of the leasehold right and the legal battles that ensued were crucial to determining the nature of the expenses incurred by the assessee.

The Tribunal had found that the assessee's expenditure was aimed at protecting its business interests rather than acquiring a new asset. The High Court, however, sided with the Income-tax Officer and the Appellate Assistant Commissioner, asserting that the expenses were for acquiring a new asset. The Supreme Court analyzed the facts and concluded that the assessee had been dragged into the litigation by Kalyanpur Lime Co., which had made a claim for damages against the assessee as well. The Court observed that the assessee's involvement in the legal proceedings was to safeguard its business interests, as it was already working the Murli Hills at the time of the litigation.

The Court relied on precedents to establish that the deductibility of expenditure in prosecuting a civil proceeding depends on the nature and purpose of the legal proceeding in relation to the assessee's business. The final outcome of the proceeding should not affect the deductibility if the expenditure was incurred wholly and exclusively to promote the interest of the business. In this case, the assessee's defense in the litigation was deemed necessary for protecting its business activities, and therefore, the expenditure was considered a revenue expenditure rather than capital expenditure.

Ultimately, the Supreme Court allowed the appeal, revoking the High Court's decision and ruling in favor of the assessee. The Court held that the litigation expenses were indeed incurred wholly and exclusively for the purpose of the assessee's business. The assessee was granted costs in both the Supreme Court and the High Court.