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TMI Blog1945 (2) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure was in the nature of capital or revenue ex- penditure. After hearing counsel further in this case we are of opinion that the essential point of law to determine is whether the expenditure in defending the suit for pre-emption was or was not in the nature of capital expenditure . As has been pointed out in the previous Division Bench judgment, the provision of law which is applicable to this case is Section 10, sub-section (2)(xii), of the Income-tax Act as amended in 1939, by which a deduction can be allowed in respect of any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. It is, therefore, clear that if the expenditure in defending the preemption case is, as contended on behalf of the Department, in the nature of capital expenditure the deduction cannot in any case be allowed. The second point relating to the user of the property in question is purely a question of fact. The question whether such expenditure is in the nature of capital expenditure is a difficult question of mixed law and fact on which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment of the English Court cited as Southern (H. M. Inspector of Taxes) v. Borax Consolidated, Ltd [1942] 10 I.T.R. Suppl. 1. In this case Lawrence, J., delivering judgment in October, 1940, held that the legal expenses incurred by the company in defending its title to certain land and buildings which had been acquired for the purposes of the business did not create any new asset at all, but were expenses incurred in the ordinary course of maintaining the assets of the company. The learned Judge, therefore, held that these legal expenses were under the English law deductible. The relevant English Statute does not use the expression capital expenditure at all, but the learned Judge in holding that these expenses are properly attributable to revenue obviously implied that it was not capital expenditure; and if the principles laid down by Lawrence, J., in that case are to be followed it would seem that the expenditure in the present reference is equally expenditure attributable to revenue and not of a capital nature. I am inclined to agree that if the judgment of Mr. Justice Lawrence in Southern (H.M. Inspector of Taxes) v. Borax Consolidated, Ltd. [1942] 10 I.T.R. Suppl. 1 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsolidated, Ltd.#, was incurred in the ordinary course of maintaining the assets of the company, and is, therefore, attributable properly to revenue and not capital expenditure. Mr. Sikri for the Department attempted to distinguish between expenses incurred in defending a pre-emption suit and any other suit. I am inclined to doubt whether there is any distinction in principle between the nature of a pre-emption suit and any other suit for the purposes of considering whether the legal expenses connected therewith would be in the nature of capital expenditure, but the argument may be borne in mind and the question will be formulated so as to cover Mr. Sikri's contention. I consider that this would be an appropriate opportunity to refer the question for authoritative decision by a Full Bench and I would formulate the question for consideration by the Full Bench as follows:- Whether legal expenses incurred in defending a pre-emption or other suit relating to immovable property, acquired as a capital asset for business purposes, is expenditure in the nature of capital expenditure within the meaning of Section 10(2)(xii), Income-tax Act, as amended in 1939? Mr. Sikri has su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (4) of Section 66 requiring them to state clearly the grounds on which it has been assumed that the expenditure claimed to be deducted was incurred wholly and exclusively for the purpose of the assessee's business . In compliance with this order the Tribunal have stated the grounds for the assumption which may be set out in their own words. From what we have set out above , they say, it will be seen that the Tribunal made no assumptions whatsoever, nor did it apply its mind to the question of the user of the property, since it was agreed on both sides that the expenditure in dispute was incurred wholly and exclusively for the purpose of the business. The only question that the Tribunal considered was the one at issue between the parties, whether the expenditure was in the nature of capital or revenue expenditure. We must, however, own that the question formulated by us is unhappily wider than the actual issue that was strictly the subject matter of reference. When the matter came up for further hearing before the Division Bench, the Bench though that the essential point of law that arose out of the order of the Tribunal and which required determination was wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed an expenditure of a sum of ₹ 13,397 during the previous year and it claimed to deduct this amount from its income as a business expense under Section 10(2)(ix) of the Income-tax Act, as it was before its amendment by the Act of 1939. Following Lord Dunedin's definition of capital expenditure in Vallambrosa Rubber Co. v. Farmer [1910]5 Tax Cas. 529, which was approved by Lord Justice Clerk in Small v. Easson [1920] 12 Tax Cas. 351, the Bench held that the expenditure incurred was a non-recurring outlay which had been incurred to retain a capital asset and that it was, therefore, in the nature of a capital expenditure. In the Vallambrosa Rubber Company's case the assessee had an estate, of which in the previous year only oneseventh produced rubber, the other six-sevenths being in process of cultivation for the production of rubber because rubber trees do not yield rubber until they are about six years old. The question was whether expenditure for superintendence, weeding etc., incurred by the company in respect of the whole estate, and not only one-seventh of the estate, could be deducted in arriving at the assessable profits of the company. The answer was in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that is going to recur every year'; and no doubt this is often a material consideration. But the criterion suggested is not, and was obviously not intended by Lord Dunedin to be, a decisive one in every case; for it is easy to imagine many cases in which a payment, though made 'once and for all' would be properly chargeable against the receipts for the year. Instances of such payments may be found in the gratuity of ? 1,500 paid to a reporter on his retirement which was the subject of the decision in Smith v. Incorporated Council of Law Reporting [1914] 6 Tax Cas. 477, and in the expenditure of ? 4,994 in the purchase of an annuity for the benefit of an actuary who had retired which, in Hancock v. General Reversionary and Investment Company [1919] 7 Tax Cas. 358, was allowed, and I think rightly allowed, to be deducted from profits. But when an expenditure is made, not once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital expenditure, and by both the learned Judges that the expenditure was allowable, having been incurred in repelling an attack on the existing and future trade and on the value of the stock-in-trade of the company. The Nagpur case is apparently distinguishable from the present case because the expenditure in that case related to the preservation of stock-in-trade and not a capital asset and therefore the case came within the rule of decision confirmed by the Privy Council in Commissioner of Income-tax, Bihar and Orissa v. Kameshwar Singh [1942] A.I.R. 1942 P.C. 11; 10 I.T.R. 214. That case however, is of importance because in considering the question whether the expenditure in question was a capital expenditure or a revenue expenditure one of the learned Judges preferred to follow the test laid down by Lord Cave in British Insulated and Helsby Cables Ltd. v. Atherton [1931] A.C. 205, at p. 213 in preference to that suggested by Lord Dunedin in Vallambrosa Rubber Company v. Farmer [1910] 5 Tax Cas. 529. The decision in the Kangra Valley Slate Company's case [1915] I.L.R. 16 Lah. 479; 3 I.T.R. 324 was relied on by the Crown in the Nagpur case [1943] 11 I.T.R. 266 and the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Crown strongly relies on Mallett v. The Staveley Coal and Iron Company, Limited [1928] 13 Tax Cas. 772 and Van Den Berghs, Limited v. Clark [1935] 19 Tax Cas. 390; 3 I.T.R. Eng. Cas. 17, in support of this view. In the former, the assessee, a colliery company, held the right to work certain beds of coal under mining leases dated 1882 and 1919 for terms of 63 and 21 years respectively. Under these leases the company contracted to pay a minimum rent and royalties, to work the coal according to approved practice, and in one case to restore the surface of the land. No provision was made in the lease of 1919 for the surrender of the whole or any part of the seams of coal demised, or in the lease of 1882 for the surrender of any part of the seams demised as distinct from the whole. In 1923 the company agreed with the lessor for the surrender of a part of the seams demised by the lease of 1882 and of the whole of those demised by the lease of 1919, the company being absolved in the latter case from the obligation to restore the surface of the land. The consideration paid to the lessor was ? 4,500 in one case and ? 3,000 in the other. The General Commissioners held, on appeal, that the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proved so lengthy and costly that, in 1927, the companies, in contemplation of a merger of interests, entered into negotiations with a view to a settlement of the dispute. The Dutch company desired to cancel the agreements, but the assessee company, which considered that such a course would be to its disadvantage, refused to consent to cancellation unless the Dutch company paid to it, at least, ? 4,49,042. A settlement was finally reached in 1927, whereby, inter alia, (a) all claims and counter-claims under the agreements for the period 1914 to 1927 were withdrawn; and (b) in consideration of the payment by the Dutch company of ? 4,50,000 to the assessee company as damages , the agreements were determined as at 31st December, 1927, and each party released the other party from all claims thereunder. That sum was paid in 1927 and credited in the assessee company's accounts for that year. The company was assessed to income- tax under Schedule D, for the year 1928-29, on an amount which included the sum of ? 4,50,000. On appeal, the General Commissioners decided that the ? 4,50,000 was paid in respect of the pooling agreements and must be brought in for the purpose of arriving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel contends is that the words in respect of as used by Lord Hanworth in the several passages to which our attention was drawn mean in relation to, in reference to or as relevant to. The inference sought to be drawn is that if it is once found that an expenditure relates to or is in connection with fixed capital, the expenditure must, irrespective of other circumstances, be held to be a capital expenditure. I am unable to accept this contention. The expressions used by Lord Hanworth must be interpreted with regard to the facts of the case that was before him and should not be construed as strictly as the words of a statute. In the case of Usher's Wiltshire Brewery, Limited v. Bruce [1915] A.C. 433 some of the expenditure allowed as a business expense related to the fixed capital of the assessee and was nevertheless allowed. The other two cases cited by the learned counsel for the Crown are clearly distinguishable. In Small v. Easson [1920] 12 Tax Cas. 351 the assessee was the sole proprietor of a business carried on in premises of which he was the owner. The premises were subject to certain bonds, one of which was called up upon the death of the bondholder, but wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the previous year but also because it was incurred to dispose once for all the claim of the zamindar for rents and royalties against the assessee as assignees of the original grantees of the lease. After a consideration of the authorities cited and giving my most careful attention to the matter I am of the view that the question whether legal expenses are in a particular case capital or revenue expenditure should be decided according to the test suggested by Lord Cave and subsequently approved in a large number of cases, in particular by Lawrence, J., whether the expenses were incurred in acquiring a new capital asset or in improving or altering an existing capital asset. The Privy Council decision in Rhodesia Railways, Limited v. Collector of Income-tax, Bechuanaland Protectorate [1933] A.C. 368; 1 I.T.R. 227 tends to suggest the same test. In the present case, the asset to defend which the expenditure was incurred was an existing asset and was not acquired in consequence of the expenditure. Nor was there any improvement or alteration made in that asset because the attack on the capital asset was successfully repelled. In view of the decree of the civil Court dismissing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons, my view is that the expenditure incurred was a revenue expenditure and not a capital expenditure. I would, therefore, answer the question referred to the Full Bench in the negative. MARTEN, J.-- I agree. SALE, J.-- I agree that the test to be applied is that suggested by Lord Cave, viz., whether the expenses were incurred in acquiring a new capital asset or in improving or altering an existing capital asset and that judged by this test the expenditure incurred in the present reference was a revenue expenditure and not a capital expenditure. As the member of the Bench who delivered the judgment in the Kangra Valley Slate Company's case [1936] 16 Lah. 479; 3 I.T.R. 324, I wish, however, to add some observations to my learned brother's judgment, arising out of the Kangra Valley Slate Company's case. It is true that the only test applied in that case was the one suggested by Lord Dunedin in Vallambrosa Rubber Co. Ltd. v. Farmer [1910] 5 Tax Cas. 529. The main reason was the paucity of authorities cited before us at the bar; and in delivering judgment I was careful to point out that no other authority applicable to the facts of that case had been cited be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) the signatories unidentifiable. It held the document was vague, uncertain, unenforceable and not entitled to any weight as a title deed. There was some reference to previous litigation which, however, was left obscure in the judgment though the Court held that there had been no previous admission on behalf of the plaintiffs in favour of the defendant company, while it rejected the defence of adverse possession by limitation on the ground that the lease did not convey any estate in the land. The company appealed to the High Court and the appeal was eventually adjusted by compromise dated the 12th February 1935. The adjustment was that the plaintiffs withdrew from the suit in so far as the validity of the lease was attacked and accepted its terms as binding subject to certain conditions, one of which was that the defendant company had to pay no less than ₹ 8,000 towards the costs of the litigation in addition to what has already been paid. It seems clear from this recital that the effect of this litigation was, if not to acquire a new capital asset, at least to improve an existing capital asset by perfecting what seems to have been a very doubtful title, and, as alr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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