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TMI Blog1943 (1) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... ellate Assistant Commissioner holding that it was capital expenditure being a non-recurring outlay for retaining a valuable asset of the company. That view was upheld by the Income-tax Appellate Tribunal on the ground that the trade-mark was a capital asset of the assessee company and that consequently the legal expense incurred for protecting it against infringement was capital expenditure. 2. The Tribunal rested their decision on Kangra Valley Slate Co., Ltd. v. Commissioner of Income-tax, Punjab [1935] 3 I.T.R. 324; I.L.R. 16 Lah. 479, in which the Lahore High Court held a non-recurring outlay required to retain a capital asset is capital expenditure and it declined to follow Southern v. Borax Consolidated, Ltd. [1942] 10 I.T.R. Suppl. 1, which is an English case in which a single Judge of the King's Bench Division held that legal expense incurred by a company for maintenance of a capital asset is properly attributable to revenue for the reason that such expense does not create any new asset. It is because of the conflict between the two cases and the absence of any authoritative decision by any other High Court in India that the Appellate Tribunal thought it necessary to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses are such as are attributable to revenue account. On that point as pointed out by Pullock, M.R., in Atherton v. British Insulated and Helsby Cables, Ltd. [1924] 10 Tax Cas. 155 at 179-80, it is not possible to lay down any satisfactory definition. Nevertheless attempts in that direction have been made in England. In Vallambrosa Rubber Co. Ltd. v. Farmer [1910] 5 Tax Cas. 529 at 536, Lord Dunedin laid down a broad test in these words: Now, I don't say that this consideration (namely, that the expenses are all expenses which are necessary every year) is absolutely final or determinative, but in a rough way I think it is not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year. But the efficacy of this test was doubted in Ounsworth v. Vickers Limited [1915] 3 K.B. 267 at 273, where Mr. Justice Rowlatt observed that the real test was between expenditure which is made to meet a continuous demand for expenditure as opposed to an expenditure which is made once and for all. In British In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture must be of a kind which is calculated to result in an asset to the company or in some particular advantage which would enure permanently or for long series of years. This test was accepted as sound in Rhodesia Railways v. Income-Tax Collector, Bechuanaland [1933] A.C. 368, which was a case of an expenditure of 252,174 made in renewing 74 miles of railway track including the supply of new rails, sleepers and fastenings wherever necessary. The renewal brought back the worn track to normal condition and as renewed it was not capable of giving more service than the original line. Lord Macmillan after stating that the expenditure did not result in the creation of any new asset but that it was incurred to maintain the assessee's existing line in a state to earn revenue, observed Nor do their Lordships agree that expenditure in order to form a permissible deduction must have been incurred in the production of the actual year's income which is the subject of the assessment, if by this it is meant that the benefit of the expenditure must not extend beyond the year of assessment, for very many repairs have the result of enabling income to be earned in future years as well a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h a banker or a money-lender employed in his business, while it was in one sense capital, was also his stock-in-trade and that the money expended for the purpose of insuring the stock-in-trade of a business must be considered to be expenditure in the nature of revenue expenditure, incurred solely for earning the profits in the business. It was argued on behalf of the Commissioner of Income-tax that, had the suit succeeded, the assessee would have had to part with a large part of his capital and that his primary object in defending the suit was to prevent this loss of capital. Agarwala, J., repelled the contention by saying that the expenditure incurred for securing the assessee against possible loss of his business stock and stores (that is, his stock-in-trade) was allowable and that the expenditure could not be disallowed when it was incurred for the purpose of repelling an actual attack on the assessee's stock-in-trade and held that the deduction claimed fell within Section 10(2)(ix) of the Income-tax Act. Meredith, J., agreed with the learned Judge on the ground that defence of such suits must be regarded as a necessary though unpleasant part of the business. The case went u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her director remaining in the business or by a dismissal of him against his will, involving proceedings by way of action in which the good name of the Company might suffer. To avoid that and to preserve the status and dividend earning power of the Company seems to me a purpose which is well within the ordinary purposes of the trade, profession or vocation of the Company. The judgement in Southern v. Borax Consolidated Ltd. [1942] 10 I.T.R. Suppl. 1, though delivered by a single judge has the support of a long line of authorities which hold that an expenditure to be capital expenditure must be one which is made with a view to bring into existence an asset or advantage for the enduring benefit of a trade and not an expenditure which is incurred in the ordinary course of maintaining the assets of the company or to preserve the status and dividend-earning power of the company. 8. Our attention is invited to, In re Magniram Bangor Co. [1941] I.L.R. 1 Cal. 572; 9 I.T.R. 573, where the assessee was joined as defendant as an assignee of the original grantee of the mining leases in a suit for arrears of rent and royalty by the superior landlord. In defending the suit successfully ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But since the decision of the question turns upon a principle which the legislature has left it to the judiciary to evolve and apply, it must be treated as involving a point of law. That is how the matter has been regarded in the numerous decisions relevant to the issue. It must be noticed that though the provisions of the Income-tax Act may in their terms appear to be different from those in the English Act the question, whether legal expenses should be treated as capital expenditure or revenue expenditure, is one that arises in both countries and in respect of which the law has made no specific provision. The matter therefore has to be considered on some principle of general application. Whether that principle is evolved by the British or by the Indian Courts is immaterial. If it is found to answer a judicial purpose it cannot be rejected for the simple reason that the letter of the laws in the two countries is different. The highest judicial authority in England, viz., the House of Lords, has on full discussion propounded two tests, one that of Lord Dunedin in Vallambrosa Rubber Co., Ltd. v. Farmer [1910] 5 Tax Cas. 529 and the other that of Lord Cave in British Insulated and He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - I have had the advantage of reading the judgement of my brother Niyogi, J., and concur with his conclusion. I think, though I do not decide, that expenditure incurred in defending a capital asset may in some cases be expenditure of a capital nature, and I consider that a trade-mark is a capital asset, but I also feel that an attack on a trade-mark made by infringement is to be regarded not as an attack on a capital asset but rather as an attack on existing and future trade and on the value of stock-in-trade, existing and in course of manufacture and to be manufactured in the future. Hence I think that this case falls within the ambit of the Privy Council decision cited ( Bihar Income- tax Commissioner, Bihar v. Kameshwar Singh [1942] A.I.R. 1942 P.C. 11; 10 I.T.R. 214. The word solely in Section 10(2)(ix) of the Act under construction is related to the object of expenditure, the earning of profits and gains, and not to the profits and gains of the particular year in which the expenditure is made and deducted. For, obviously, expenditure of one year, not of a capital nature, may often be intended to have a favourable effect on the next year's profits. A good example would be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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