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TMI Blog1951 (3) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... ench territory. On 9th March, 1944, the company through its managing director entered into an agreement for the purchase of the 5 buses of the Chamundeswari Bus Service with one T.D. Balasubramania Pillai in whose name the buses were registered and the permits for running the buses on the routes specified therein stood. The material portion of the agreement was in these terms:- The five buses owned by T.D. Balasubramania Pillai and detailed below have been purchased by Raman and Raman Ltd. for ₹ 31,001. On this date Raman and Raman Ltd. have paid ₹ 1,001 to T.D. Balasubramania Pillai. The managing director, P.S. Narayanan, has agreed to pay the balance of ₹ 30,000 by giving on 15th March, 1944, a sum of ₹ 10,000, the remaining ₹ 20,000 to be paid by him within a week after the transfer of ownership of the said five buses and the relative route permits in his name. These five buses belong solely to T.D. Balasubramania Pillai and nobody else has absolutely any right whatever to these buses............ The tin shed in Post Office Road where the five buses are now parked and which belongs to T.D. Balasubramania Pillai has now been sold for ₹ 700 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The buses were run by the company from 10th March, 1944, till 19th March, 1944. Thereafter, the buses remained idle in the possession of the company. From 14th August, 1945, the buses were run by Veerappa Pillai as receiver appointed by the Court. The buses, therefore, were in custodia legis till the end of the litigation. The Subordinate Judge found that the five buses belonged both to Balasubramania Pillai and Gnanasundaram Pillai as joint owners and the plaintiff Veerappa Pillai was entitled to a decree for possession of the buses. On appeal the decision of the Subordinate Judge was reversed and this Court held that the plaintiff had not established that T.D. Subramania Pillai was a benamidar or agent for Gnanasundaram Pillai or that he was not the real owner of the buses. This Court, therefore, dismissed the suit of the plaintiff on the ground that he was attempting in concert with Balasubramania Pillai to sabotage the contract entered into between the company and Balasubramania Pillai. Further into the merits of the dispute it is unnecessary for us to enter as the litigation has now been carried to the Supreme Court. In defending the above suit and other proceedings in Courts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e where money had to be spent for the protection of the assessee's title to an existing business asset against hostile litigous attacks but a case where money was spent in the process of acquiring title to a capital asset and it was therefore part of the cost of acquisition of that asset itself. He compared the expenditure in this case to the preliminary expenses in connection with the floatation of a company which are regarded as capital expenditure incurred not earning profits, but in bringing into existence the profit earning machinery. He also referred to some English and Indian decisions which will be noticed presently. In our view, it is important to consider the rights of the company which flow from the contract. The contention of Mr. Rama Rao Saheb was that the property in the buses would pass to the company only on payment of the remaining consideration of ₹ 30,000 on the due dates. He also maintained that having regard to the object of the contract, namely the acquisition of the right to ply the buses along the routes assigned to them, the transfer of registry of these buses in the name of the company and the issue of fresh permits to the company for plying o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er on the date of the contract itself and thereafter the property in the buses was in the company. It is no doubt true that for about 10 days after the contract the buses plied for hire on the routes assigned to them as if Balasubramania Pillai, the seller, was entitled to ply them for hire. That was because the registry of the buses had not been transferred and the permits for running the buses on the specified routes had not been issued to the purchaser. It was merely in order to avoid a transgression of the Motor Vehicles Rules that this procedure was adopted. But that had nothing to do with the passing of the title in the buses to the purchaser. Thereafter when the vendor himself started criminal proceedings and purported to enter into an agreement for sale of these five buses to Veerappa Pillai, the plaintiff in the suit in the Sub-Court, the company had no option but to defend its title to the valuable property which it had acquired under the contract. Not only the buses but also the routes which had been assigned to the buses and which were usually recognised by the Road Transport Authority, not as a matter of law but in practice, as entitling the purchasers to ply along the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness. Litigation is often conducted by businessmen in order to maintain, preserve or defend an existing right or title to property or to prevent the invasion of such right in future. Legal expenses incurred in such litigation do not create a new capital asset or stock-in-trade but are incurred in the ordinary course of preserving or maintaining the assets or stock-in-trade of the business. We, therefore, think that such expenses are part of the revenue expenditure of the business and their deduction is permissible under Section 10(2)(xv) of the Income-tax Act. This is our opinion unassisted by authority. In Usher's Wiltshire Brewery, Ltd. v. Bruce [1915] A.C. 433, it was held by the House of Lords reversing the decision of the Court of Appeal that a brewery company was entitled to deduct legal expenses incurred in connection with the renewal of licences, preferring of complaints against tenants and obtaining advice as regards thefts of beer etc. Such expenses had the effect of preserving the brewery company's interests just as much as the defending of an action attacking the title of the company to the property in which it carried on its business. The leading modern auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company. In the present case the only way in which it can be said that there was anything like an alteration in the capital assets of the respondent company was that Veerappa Pillai, the plaintiff in the suit filed in the Court of the Subordinate Judge of Kumbakonam, was removed from the category of possible litigants who might challenge the title of the company to the buses. In our opinion it could not be said that this expenditure in any way altered the original character of the capital asset which was acquired by the company. If it had done so, certainly it would be a payment in respect of capital. As the capital assets of the company remained absolutely unaltered and all that was done was to retain the capital assets in the hands of the company by resisting attempts to deprive the company of such assets, expenses incurred in connection with the defence of a litigation threatening the title to these assets would properly be attributable to revenue. The decision of Lawrence, J., was summed up in the last paragraph of the judgment in these terms:- It appears to me that the legal expenses which were incurred by the respondent company did not create any new asset at all, bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in connection with a suit brought by the assessee against another company to restrain the latter from using the trade mark to which the assessee claimed exclusive right was deductible as revenue expenditure. It may be said that at least in the opinion of Digby, J., one of the learned Judges who decided that case, the threat was directed not against the capital of the assessee, but against its trade and the object of the litigation was to prevent a drop in the sales and a loss of profits. The attack on trade mark by infringement was treated as an attack not on capital asset but rather as an attack on the existing and future trade and on the value of the stock-in-trade existing and in the course of manufacture and to be manufactured in future. It may be that a trade mark is in the nature of a capital asset and expenses incurred in repelling an attack on an existing capital asset must be attributed to revenue. Legal expenses incurred in connection with the acquisition or protection of stock-intrade are clearly in the nature of revenue expenditure. It is on this ground that litigation expenses incurred by a money-lender in connection with loans advanced or capital invested in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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