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TMI Blog1945 (11) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... ve years. Some time after his election one Mr. P.D. Shamdasani brought a suit against him for a declaration that the election was invalid and that he himself should be declared duly elected. The suit was dismissed both in the first Court and in the appeal Court. In defending the suit the assessee incurred a legal expense of ₹ 7,500 in the year of account. These facts are undisputed. The relevant section of the Indian Income-tax Act under which head director's fees come is Section 12 of the Act. Sub-section (2) provides:- Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains......... And then there is a proviso with regard to certain excluded matters. Mr. Setalvad on behalf of the Crown has taken two points. The first is that the expenditure is a capital expenditure. In my opinion this is not so. It was not an expenditure incurred in creating or in originating the source of income or in bringing it into being, but in preserving it when it was already there. The expenditure was incurred in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Justice Addison and Mr. Justice Sale and in a later case (Mahabir Parshad and Sons v. Commissioner of Income-tax [1945] 13 I.T.R. 340 ), when sitting as a member of a Full Bench, Mr. Justice Sale said of his previous decision that it was not intended to be an authoritative exposition of the question of what is or what is not capital expenditure. To the effect that such an expenditure is an income expenditure and not a capital one is also the case of Income-tax Appellate Tribunal, New Delhi v. Central India Spinning, Weaving and Manufacturing Co., Ltd., The Empress Mills, Nagpur [1943] 11 I.T.R. 266 ; I.L.R. 1943 Nag. 307. On this first question, therefore, in my opinion on the authorities, which draw a clear distinction between the bringing into being of an asset and its maintenance and preservation, this case falls within the maintenance and preservation of an existing asset and, therefore, the appeal fails on this point. The second question which arises is whether the costs of this litigation were incurred solely for the purpose of making and earning the income. Various English cases have been examined in this Court, but the wording of the Schedule to the English In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see is put thus by Sir Jamshedji Kanga. He says that payment is not only for attending the directors' meetings but for services and duties performed and that what Mr. Setalvad points out as being privileges are in fact duties laid down by the Act which it is incumbent for the directors to carry out. The Income-tax Act has no regard to status and privileges and does not quantify them in moneys; therefore, says Sir Jamshedji Kanga what it taxes is the director's fees and the costs of the litigation are in defending those fees. It is also pointed out that it is a pure matter of speculation what was the assessee's motive in defending the action and further that there is no evidence at all on the record as to what that motive was other than to defend his directorship. In this respect it should be observed that in the proceedings the personal reputation and honour of the assessee were not attacked. Sir Jamshedji Kanga also relies upon the case of Commissioner of Income-tax, Bihar Orissa v. Sir Kameshwar Singh [1942] 10 I.T.R. 214, at p. 218. In that case the assessee was a money-lender and he had lent a large sum of money to a company and he sued the company and obtaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. Accordingly in my opinion the Crown fails on this question also. The Commissioner to pay the costs of the assessee. CHAGLA, J.--I agree. Two questions arise on this reference. The first is whether the expense incurred by Sir Purshottamdas Thakurdas in defending the suit filed against him by Mr. Shamdasani was incurred solely for the purpose of making or earning an income which he derived from being a member of the Local Board of the Reserve Bank of India; and the second question is whether such an expenditure was in the nature of capital expenditure. Now, in this case it cannot be disputed that Sir Purshottamdas Thakurdas incurred the expenditure for the purpose of earning the income as a member of the Local Board of the Reserve Bank. The question that we have got to determine is whether it was incurred solely for that purpose. Now, whether it was solely incurred or not is essentially a question of fact, and we have to consider what are the findings of fact of the Tribunal as set out in the statement of the case. The first fact which has been found by the Tribunal is that Sir Purshottamdas defended this litigation in order that he should not be unseated as a member o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and obligations. Therefore there is nothing peculiar about the position of a director of the Reserve Bank. Mr. Setalvad has relied on a decision of our Court in Commissioner of Income-tax v. Sir Homi M. Mehta [1943] 11 I.T.R. 142. In that case Sir Homi Mehta made a gift of rupees three lakhs to a company of which he was the promoter, managing director and principal shareholder when that company was in financial difficulties and Sir Homi Mehta claimed that sum as a deduction from his assessable income on the ground that if he had not made the gift the company would have failed and he would have lost his capital invested in the company, his salary, and his business reputation and credit. Sir John Beaumont, Chief Justice, held that this sum of rupees three lakhs was not paid solely for the purpose of earning such income, profits or gains as required by Section 12, sub-section (2), of the Indian Income-tax Act. Now it is to be noted that both in the statement of the case and at the Bar when that case was argued it was conceded on behalf of the assessee that his sole purpose in making that gift was not to earn income as a director or to earn dividends on his shares but one of hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the nature of a capital expenditure, because if it is that, even though it was incurred solely for the purpose of earning the income, the assessee would not be entitled to claim the exemption. Mr. Setalvad has strongly relied, as he was entitled to, on the case of the Lahore High Court in Kangra Valley Slate Co., Ltd. v. Commissioner of Income-tax [1935] 3 I.T.R. 324 ; I.L.R. 16 Lah. 479 , and I admit that it is very difficult to distinguish that case from the facts of the case before us. If the principle enunciated in that case be a sound one, then, undoubtedly that principle applies to the facts of this case as well. In that case the assessees were carrying on a business of manufacturing slates and they had obtained a lease for the exclusive right of quarrying slate in that particular village. The proprietors of the village filed a suit to eject them, and the assessees resisted the suit and incurred an expense in doing so; and the question was whether they were entitled to claim the exemption with regard to that expense; and the Court held that the expenditure, being a non-recurring outlay required to retain a capital asset, was in the nature of a capital expenditure. In com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n v. British Insulated and Helsby Cables, Ltd. [1925] 10 Tax Cas. 155 , and the other, in the judgment of Mr. Justice Lawrence in Southern v. Borax Consolidated Ltd. [1942] 10 I.T.R. Suppl. 1. The observations of Viscount Cave in Atherton's case [1925] 10 Tax Cas. 155 have already been referred to in the judgment of the learned Chief Justice; and what is to be remembered is that Viscount Cave points out that the test to be applied in order to determine whether an expenditure is a capital expenditure is not merely that it should be non-recurring but it should be an expenditure to bring into existence an asset or an advantage for the enduring benefit of a trade. To maintain an existing asset or to preserve an existing asset is not enough. The expenditure must be to bring into existence an asset which did not already exist or a new advantage which must endure for the benefit of that particular business or trade. Now, in this case when Sir Purshottamdas Thakurdas defended Mr. Shamdasani's suit, the asset, viz., the directorship or the seat on the Local Board of the Reserve Bank, already existed. All that he was doing was to preserve and maintain an already existin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the application of the tax. Sir Jamshedji Kanga has also drawn our attention to a Nagpur case, Income-tax Appellate Tribunal, New Delhi v. Central India Spinning, Weaving and Manufacturing Company Ltd., The Empress Mills, Nagpur [1943] 11 I.T.R. 266 ; I.L.R. 1943 Nag. 307 . In that case the assessee company incurred a certain expenditure as legal expenses in connection with a suit which it had brought against another company to restrain the latter from using a trade mark to which the assessee had acquired exclusive right by long usage; and the Court consisting of Mr. Justice Niyogi and Mr. Justice Digby held that the expenditure was revenue expenditure and was allowable in computing the taxable income of the assessee company from the business. It will be noticed that what the company was trying to do was to preserve and maintain its most important capital asset, namely, the trade mark to which it had acquired exclusive right. Notwithstanding that, the Court came to the conclusion that the assessee was entitled to the exemption. Now, Mr. Setalvad has strongly relied for this point also on the judgment of our Court to which I have already referred, namely, Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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