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TMI Blog1963 (2) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the Public Demands Recovery Act. A sale certificate was granted on the 21st June, 1951. Thereafter, on the 26th July, 1951, and the 30th September, 1951, the assessee purchased the interests of M/s. Agarwalla and Advani. The assessees accounting year for the assessment year 1953-54 commences from the 28th October, 1951. The facts found are that the expense for the acquisition of the lease up to that date was for ₹ 68,673. In the year of account it was claimed that there was an additional expense of ₹ 34,388 on account of the leasehold buildings and rights and the total expense under the head was, in all, for ₹ 1,03,062. What the assessee did was to write off one-fifth of this amount on the ground that the lease was for five years and the amount written off was one-fifth of ₹ 1,03,062, i.e., ₹ 20,612. In the statement of the case it is clearly laid down as a fact that the assessees claim in all the years under appeal was that the amount of ₹ 20,612 should be allowed as an expense written off against acquisition of the lease. The assessees contention was that so far as the amount of ₹ 34,388 spent in the first year of account was c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the cinema in an account under the head leasehold building account but charged proportionate amount for the relevant assessment year. It was found as a fact by the Income-tax Officer that these expenses were of capital nature and related to the period prior to the starting of the business. Therefore, he disallowed the amount charged to revenue account. If the finding is that these expenses were all of capital nature, very little remains of this reference so far as the assessee is concerned. The Appellate Assistant Commissioner emphasised the fact that these expenses were of capital nature and had been incurred before the commencement of the business of the firm as found by the Income-tax Officer. But he records the fact th at the assessee did not seriously contest those findings of the Income-tax Officer that the expenses were all of capital nature. There was a refinement of the assessees case before the Appellate Assistant Commissioner. The refinement is that it was contended that even though the expenses were of capital nature, some part of the expenses which were incurred during the accounting year should be allowed. At that time the claim for repairs and renovation was ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 10(2)(xv) of the Income-tax Act. This part of the reasoning of the Tribunal cannot be upheld. If the law allows an expense, then how can it be disallowed. A bare reference to section 10(2)(xv) of the Income-tax Act makes it quite clear that one of the conditions to be satisfied there i : ...the expenditure should not be an allowance of the nature described in any of the clauses (i) to (xiv) inclusive. That being so it is only when the allowance does not come under any of the previous sub-clauses (i) to (xiv) that a claim can at least aspire to come under clause (xv) of section 10(2) of the Act and not otherwise. It, therefore, cannot be said that because a claim fails under clauses (i) to (xiv) of section 10(2) of the Act, therefore, it must fail under section 10(2)(xv). We respectfully agree with the view expressed in a recent decision of the Division Bench of the Allahabad High Court in J.K. Woollen Manufacturers Private Ltd. v. Commissioner of Income-tax, where it is laid down that under section 10(2)(xv) of the Income-tax Act as it stood before the words not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive were added to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat such allowances are permissible is upon him. The Supreme Court decision in Commissioner of Income-tax v. Calcutta Agency Limited is an authority in support of this proposition, where Kania J., at page 196, observe : Now it is clear that this being a claim for exemption of an amount, contended to be an expenditure falling under section 10(2)(xv), the burden of proving the necessary facts in that connection was on the assessee.... It is also an authority for the proposition that the High Court in such reference must base its answer of the facts as found by the Tribunal as pointed out Kania C.J., on the same page of the reports, where the learned Chief Justice observe : It is, therefore, the duty of the High Court to start by looking at the facts found by the Tribunal and answer the questions of law on that footing. Any departure from this rule of law will convert the High Court into a fact-finding authority, which it is not under the advisory jurisdiction. Judged by this test and taking the two central facts stated in the statement of case and in the different orders of the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal, viz., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax and it will be unnecessary for us here again to catalogue those cases and discuss them. On the contrast between section 10(2)(xv) and section 12(2) of the Income-tax Act, reference may also be made to the decision of the Division Bench in Madanlal Sohanlal v. Commissioner of Income-tax. But again as we say it is not necessary for us on the facts of this reference to pursue these authorities. Therefore on the facts found that the expenses incurred on this account were all of capital nature, and on the fact that the onus was on the assessee to prove the facts to bring him within the allowance under section 10(2)(xv) of the Act and such onus the assessee having failed completely to discharge by producing any fact showing the nature and character of these expenses, it must be found that the sum of ₹ 24,498-12-6 cannot be claimed under section 10(2)(xv) or under section 10(2)(v) of the Act. The other part of the question relates to the sum of ₹ 9,890 alleged to have been incurred for legal expenses. The assessee claims this also under section 10(2)(xv) of the Income-tax Act. The difficulty in the way of the assessees claim in this respect is again one of fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... title. But the fundamental question is, can such a test of effect, possible or probable or direct or indirect or remote, make such legal expenses capital expenses. Then, why not all expenses for watch and ward and those employees who guard and protect the property of the business, capital expenses, for they are all defending and protecting the property and the capital of the business. Curiously enough, none of the decided cases appears to have approached this problem from this point of view. On behalf of the revenue authorities the decision of the Australian High Court in Hallstroms Proprietary Ltd. v. Federal Commissioner of Taxation was cited to us. Legal expenses amounting to Pounds 6,020 were held to be of revenue and not of a capital nature and, therefore, deductible from the taxpayers assessable income. Latham C.J. proceeded on the basis that the expenditure by the company was not made for the purposes of acquiring an asset or of adding to the profit-yielding subject which constituted the capital structure of the business and also on the basis that the company by making the expenditure did not gain any enduring advantage . At pages 641-42 Latham C.J. observe : It gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not be deductible. Cooke v. Quick Shoe Repair Service somewhat resembled Ushers Wiltshire Brewery in that the taxpayer, in order to maintain the goodwill of the business, voluntarily discharged certain liabilities which the vendor of the business had failed to discharge. He was held entitled to deduct these payments because they had been made to preserve an asset of the business. On the other hand, there are cases where it has been held that expenditure is not deductible, because it was not incurred by the taxpayer in his capacity of trader. Payment of a fine is not an ordinary commercial loss (Inland Revenue Commissioner v. Warnes Co. Ltd.); and insurance against loss owing to strikes has been held not to be deductible (Rhymney Iron Co. Ltd. v. Fowler; Thomas Merthyr Colliery Co. Ltd. v. Davis). I find these last cases difficult to follow and I cannot find that they throw any light on the present case. The ground of judgment is most clearly state by Slesser L.J. in the latter case where he said (Thomas Merthyr Colliery Co. Ltd. v. Davis : I find the greatest difficulty in taking the view that an expense which is incurred exclusively for the purposes of the trade can be e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d down that where the purpose of the litigation is to maintain an existing title to the assets of the assessees business, expenditure therefore would be of a revenue nature, but if the purpose was to acquire or cure a defect in the assessees title to the assets it would be of a capital nature. It was held immaterial whether the assessee figured as a plaintiff of defendant in the action. It was also held immaterial whether the result of the suit was in favour or against the assessee. The Privy Council in Commissioner of Income-tax v. Maharajadhiraj Sir Kameshwar Singh of Dharbhanga had also to consider the question of legal costs being an allowable deduction. On the facts of that case the Privy Council upheld the contention that the respondent was entitled to the deduction claimed on the ground that the main character of the action was against the respondents father as the money-lender, and his defence to the action was just as essential for the full protection of his rights as creditor in the loan of ₹ 10 lakhs as was his suit for the recovery of that loan the costs of which had been allowed as an expense incurred in his money-lending business. Reliance was placed on behal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he scheme of the Act, contained specially in sections 20 to 25, it is clear that the perfection of title under a sale certificate goes through different stages. At first, sale is held under the certificate. There is a period of time given for making the application for setting aside the sale. Thirdly, and lastly, there is a time for confirming the sale and making the sale absolute . Now in the facts of this reference the legal expenses incurred in this case were all incurred within this time between the sale under the sale certificate and before the confirmation of the sale and before the sale became absolute. Naturally, therefore, and rightly the Tribunal came to the conclusion that these legal expenses were incurred for completing the title of the assessee and as such was capital expenditure. In ordinary sales, as for instance by private agreement, there is no question of any statutory period for setting aside the sale or for the sale to become absolute or to be confirmed. A person purchasing therefore at a sale held under section 20 of the Public Demands Recovery Act really purchases an inchoate right which is completed by the sale becoming confirmed and becoming absolute u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition, improvement or alteration of a capital asset. This last sentence in the observation makes the distinction clear. There on the facts it was held not to be an acquisition, improvement or alteration of the capital assets. Here on the facts of the reference made in the statement of the case as well as in the order of the Tribunal, it is the other way about and it has been held and found that the legal expense in this case was only for the purpose of completing the title of the assessee. The broad test evolved by the authorities and what Lord Cave formulated as the test in British Insulated and Helsby Cables Ltd v. Atherton is that in determining whether litigation expenses are in a particular case capital expenditure is to see whether such expenses were incurred in acquiring a new capital asset or in improving or altering an existing capital asset. Applying that test on the facts of this reference the answer can only be that the legal expenses in this case were capital expenditure. Even in the Lahore case the observation is there that where an assessee purchases a property with a knowledge of defect in title and perfects it by further payment, the expenditure incurred is at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particular facts that legal expenses there incurred did not amount to revenue expenditure and did not permit their deduction. In the last-mentioned case the learned Chief Justice, at page 207, observe : He chose to purchase the property in presenti with all such defects of title as there might be in it for a consideration which was to be utilised in financing the litigation. This observation shows that legal expenses that follow in instances where purchaser knowingly purchases litigations with a view to perfect known defects of title by litigation may not be revenue expenditure. On the authorities discussed above, we do not consider it appropriate to lay down any rigid or narrow test and this court is content in expressing its concurrence with the broad principle indicated above. For reasons stated above we hold that the two sums of money, (1) ₹ 24,498-12-6 and (2) ₹ 9,890, cannot be deducted as an allowance under section 10(2) of the Indian Income-tax Act either under sub-clause (v) thereof or under sub-clause (xv) thereof. We accordingly answer the question in the negative. The assessee will pay the costs of this reference. Certified for two counsel. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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