2017 (8) TMI 239 - HC - Income Tax

Legal expenditure - nature of expenditure - revenue or capital - allowability of business expenditure - Held that - Payment of money made by the assessee therein was in order to perfect his title to the capital asset. It was a lump sum payment for acquisition of a capital asset and therefore, Hon ble Supreme Court in case of Mangalore Ganesh Beedi Works v. CIT 2015 (10) TMI 1283 - SUPREME COURT held that the amount should be treated as capital payment and the assessee was not entitled to exclude from the income sought to be assessed in his hands any portion of that amount. But having regard to the facts in the present case noted above and by applying the decisions in the aforementioned judgments, we find that the Tribunal was justified in holding in favour of the assessee and thereby, dismissing Department s appeal. The substantial question of law sought to be raised by the Department is answered by holding that the legal expenditure incurred by the assessee to defend the writ petitions filed to quash the Government notification and lease deed is not a capital expenditure and deduction is allowable within the meaning of Section 37 of the Act, as it is revenue expenditure. - Decided in favour of assessee.

Issues Involved:
1. Whether the legal expenditure incurred by the assessee to defend the writ petition filed to quash the government notification and lease deed is capital expenditure or revenue expenditure.

Issue-wise Detailed Analysis:

1. Nature of Legal Expenditure:
The primary issue revolves around whether the legal expenditure incurred by the assessee to defend writ petitions filed by third parties seeking to quash government notifications and lease deeds should be classified as capital expenditure or revenue expenditure. The assessee argued that the expenditure was to protect the lease granted by the government and not to perfect a mining lease, thus should be considered revenue expenditure under Section 37 of the Income Tax Act. The Assessing Officer, however, deemed it capital expenditure, asserting that it was related to earning profits in business.

2. Tribunal's Reconsideration:
The Commissioner of Income Tax (Appeals) initially allowed the assessee's claim, but the Income-tax Appellate Tribunal remanded the case for reconsideration, highlighting that the Appellate Commissioner did not properly address whether the expenditure incurred long back could be allowed on a piecemeal basis in subsequent years.

3. Department's Appeal:
The Department contended that the legal expenditure disclosed by the assessee for the Assessment Years 2008-09 and 2009-10 was substantial and incurred to defend the grant of mining lease, which should be treated as capital expenditure. The Department relied on the Supreme Court judgment in V. Jaganmohan Rao v. CIT, which stated that payments made to perfect a title or get rid of a defect in the title are capital payments.

4. Assessee's Defense:
The assessee's counsel argued that the expenditure was for protecting business interests and thus should be considered revenue expenditure. Reliance was placed on Supreme Court judgments in Dalmia Jain & Co. Ltd. v. CIT and Sree Meenakshi Mills Ltd. v. CIT, which established that expenditure incurred to protect business interests is revenue expenditure. The counsel also cited Mangalore Ganesh Beedi Works v. CIT, asserting that the nature of the expenditure is a factual determination and does not constitute a substantial question of law.

5. Judicial Precedents:
The judgment referenced several precedents:
- Dalmia Jain & Co. Ltd. v. CIT: Expenses incurred to protect business are revenue expenditure.
- Sree Meenakshi Mills Ltd. v. CIT: Deductibility of litigation expenses depends on whether they were for protecting business or creating a capital asset.
- V. Jaganmohan Rao v. CIT: Payments to perfect a title or remove a defect are capital payments.
- Mangalore Ganesh Beedi Works v. CIT: Tribunal's finding on the nature of litigation expenses is a factual determination.

6. Court's Conclusion:
The court concluded that the legal expenditure incurred by the assessee was to protect its business interests in relation to the mining lease and not to acquire or perfect the lease. The expenditure did not bring into existence any new asset or capital asset. Thus, it was deemed revenue expenditure. The substantial question of law raised by the Department was answered in favor of the assessee, affirming that the legal expenditure is deductible under Section 37 of the Income Tax Act.

Final Judgment:
The appeals were dismissed, and the legal expenditure incurred by the assessee was classified as revenue expenditure, allowing for its deduction under Section 37 of the Income Tax Act. No costs were awarded.

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