1968 (9) TMI 27 - HC - Income Tax

Assessee claimed legal expenses incurred in defending a suit instituted against him disputing adoption and on his claim over the shares on death of his foster father - held that such expenditure is not allowable as a deduction against dividend income

Summary

Issues Involved:
1. Whether litigation expenses in defending a suit disputing the assessee's status constitute an expenditure deductible under section 12(2) of the Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Deductibility of Litigation Expenses under Section 12(2):

The primary question was whether litigation expenses incurred by the assessee in defending a suit, which disputed his status as an adopted son, could be deducted under section 12(2) of the Income-tax Act, 1922. The assessee claimed deduction of litigation expenses from his dividend income. The revenue initially disallowed this deduction, but the Tribunal later allowed it, leading to the reference.

The court examined the scope and application of section 12(2). It was noted that income tax is charged on net income, allowing for deductions of expenditures related to the activity producing the income. The court emphasized that the expenditure must have a direct connection with the activity generating the income. Section 12(2) requires that the expenditure be "incurred solely for the purpose of making or earning such income."

The court compared section 12(2) with section 10(2)(xv), noting that while both provisions overlap, section 12(2) is narrower in scope. Section 10(2)(xv) covers expenditures for the purpose of business, which includes earning income, profits, or gains, whereas section 12(2) specifically pertains to expenditures for earning income.

The court referenced several cases to elucidate the principles governing these deductions. In *Commissioner of Income-tax v. Malayalam Plantations Ltd.*, it was established that the scope of "for the purpose of the business" is broader than "for the purpose of earning profits." The court also considered *Eastern Investments Ltd. v. Commissioner of Income-tax*, which dealt with the deductibility of interest paid on debentures under section 12(2). The judgment highlighted that expenditures incurred voluntarily on commercial expediency to facilitate the carrying on of business could be deductible.

However, the court clarified that the principles from these cases must be applied in the context of the specific language of section 12(2). The court agreed with the view of the Gujarat High Court in *Commissioner of Income-tax v. Lalbhai*, which emphasized that the expenditure must facilitate the earning of income, not just the carrying on of business.

Applying these principles, the court found no direct or indirect connection between the litigation expenses and the earning of dividend income. The litigation concerned the assessee's status as an adopted son, which was a personal matter and did not directly relate to the investments producing the dividends. The court distinguished this case from others, such as *Commissioner of Income-tax v. Sir Kameshwar Singh* and *Commissioner of Income-tax v. Purshottamdas Thakurdas*, where the expenditures were directly related to the source of income.

Conclusion:

The court concluded that the litigation expenses incurred by the assessee did not satisfy the requisites of section 12(2) as they were not directly connected to the earning of dividend income. Therefore, the expenses were not deductible under section 12(2). The question was answered in favor of the revenue, and the assessee's claim for deduction was disallowed. The court also noted the inconsistency in the Tribunal's decisions and suggested that the Tribunal should maintain consistency in its views on statutory provisions.