1970 (1) TMI 4 - HC - Income Tax

Sums paid by the assessee to solicitor and advocates in respect of the preparation of agreements and the suits - Whether the claim of the applicant to deduct the sum paid has been rightly rejected in the assessments of the applicant - Held no

Issues Involved:
1. Deductibility of Rs. 3,00,000 or any instalment thereof as paid.
2. Deductibility of litigation expenses amounting to Rs. 69,645.

Detailed Analysis:

1. Deductibility of Rs. 3,00,000 or any Instalment Thereof as Paid:
The applicant-company, engaged in the business of importing and distributing petrol and allied products, had entered into three finance agreements with a partnership firm for securing loans and pledging imported goods as security. These agreements were later contested by the company as being extortionate and unconscionable, leading to a suit and subsequent settlement. Under the settlement, the company agreed to pay Rs. 3,00,000 in five annual instalments of Rs. 60,000 each as compensation and damages for the termination of these agreements.

The company claimed that this payment was a revenue expenditure, arguing that it was made to terminate a disadvantageous relationship obstructing the smooth operation of its business. The revenue authorities, however, rejected this claim, asserting that the agreements constituted the framework of the company's business and their termination provided a permanent and enduring benefit, thus making the expenditure capital in nature.

The court examined various precedents, including B. W. Noble Ltd. v. Mitchell and Anglo-Persian Oil Co. Ltd. v. Dale, which differentiated between expenditures made to remove recurring disadvantages and those made to acquire enduring benefits. The court noted that the agreements were primarily finance agreements and did not alter the company's business structure. The termination of these agreements removed trading disadvantages and liabilities, rather than procuring any enduring benefits.

Ultimately, the court concluded that the payment of Rs. 3,00,000 was a revenue expenditure as it was made to remove obstructions and disadvantages in the smooth carrying on of the business. However, the deduction could only be allowed for the actual instalments paid in each assessment year, i.e., Rs. 60,000 per year.

2. Deductibility of Litigation Expenses Amounting to Rs. 69,645:
The litigation expenses claimed by the company included three items:
1. Rs. 24,719.08 paid to Messrs. Kanga & Co. for the preparation of the finance agreements.
2. Rs. 3,895.00 paid to Mr. R. S. Daruwala, Advocate.
3. Rs. 41,031.3 paid to Messrs. Little & Co. for settling the suit and counter-claim.

The court noted that the first item related to the making of the agreements and was conceded by the respondent as revenue expenditure. For the remaining two items, the respondent argued that these were capital expenditures related to the settlement of the suit and counter-claim. However, since the court determined that the payment of Rs. 3,00,000 was a revenue expenditure, it followed that the litigation expenses incurred in connection with settling the suit were also revenue expenditures. Therefore, all three items were allowable deductions.

Conclusion:
The court answered the question in the negative, allowing the deduction of Rs. 60,000 for each relevant assessment year and the litigation expenses amounting to Rs. 69,645. The respondent was ordered to pay the costs.

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