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TMI Blog1975 (11) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness in mining of copper ore and kyanite and manufacture of copper and brass. The assessee claimed before the Income-tax Officer certain deductions as and by way of legal charges. For the assessment year 1960-61 it claimed Rs. 2,38,264, for the assessment year 1961-62 a sum of Rs. 14,810 was claimed and for the assessment year 1962-63, it claimed deduction of Rs. 43,494. It appears that by the registered lease dated the 15th November, 1926, the Ruler of the then Kharsawan State granted a mining lease to the assessee-company with effect from 1st of February, 1925, for a period of thirty years. The lease was thus to expire on the 31st of January, 1955. There was an option for renewal for a further period of thirty years given to the lessee "at such rent as shall be agreed upon between the parties". The option for renewal had to be exercised by giving six calendar months' previous notice. Clause 14 of the lease prohibited the lessee from direct or indirect financial arrangement with any third party without the written consent of the lessor. The assessee entered into certain agreements with a firm named Messrs. Pawle and Berelick of London and later with Messrs. Pawle and Berelick ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the 31 st of January, 1955, the State of Bihar applied for amendment of the plaint for adding the prayer for declaration to the effect that the lease had expired on the 31 st of January, 1955, and that with effect from the 1st of February, 1955, the assessee was a trespasser and liable to be evicted and for grant of mesne profits of a sum of Rs. 20,00,000. Both the suits were ultimately transferred to the court of the Subordinate Judge at Patna. In the suit filed by the State Government the defence taken by the assessee was that there were no breaches or violation of the lease terms and that the suit for declaration of forfeiture of the lease was not maintainable. In the suit filed by the assessee, the Bihar Government took the stand, inter alia, that there could be no specific performance of the clause for renewal as the clause was vague and required agreement on future royalty and as the Mines and Minerals (Regulation and Development) Act (53 of 1948), rendered the renewal in favour of the assessee impossible. The Subordinate Judge decreed the assessee's suit for specific performance and dismissed the suit filed by the State Government. Being aggrieved, the State filed appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee was creating an asset of enduring benefit for the coming 30 years and the expenses incurred on that account were clearly in the nature of capital expenditure. Accordingly, the Income-tax Officer apportioned 50 per cent. of the expenses incurred as being expenses of capital nature. In appeals filed by the assessee, the Appellate Assistant Commissioner took the view that the suit which was filed by the assessee was for specific performance of a clause of the original contract and as such it was not a new benefit of an enduring nature which was to be brought into existence. The expenditure, on the contrary, was incurred for defending the title of the assessee in the leasehold right. Accordingly, the Appellate Assistant Commissioner held that the disallowance of a part of the expenses was not justified. The department thereafter filed appeals before the Income-tax Appellate Tribunal, "E" Bench, Calcutta, and the Tribunal taking all the relevant facts into consideration held that without the aid of the suit the assessee could not have had an extension of the lease and further observed that the issue of the certificate of approval which enabled the assessee to qualify for the ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t expenditure incurred to resist in a civil proceeding the enforcement of a measure, legislative or executive, which imposes restrictions on the carrying on of a business or to obtain a declaration that the measure is invalid, would, if other conditions are satisfied, be admissible under section 10(2)(xv) of the Indian Income-tax Act, 1922, as permissible deductions in the computation of taxable income. In that case, the Supreme Court reiterated the principle laid down in the case of Commissioner of Income-tax v. H. Hirjee [1953] 23 ITR 427 (SC), that the deductibility of expenditure under section 10(2)(xv) must depend upon the nature and purpose of the legal proceedings in relation to the business whose profits are under computation and cannot be affected by the final outcome of that proceeding. The Supreme Court further observed as follows: "However wrong-headed, ill-advised, unduly optimistic, or over-confident in his conviction the assessee may appear in the light of the ultimate decision, expenditure in starting and prosecuting the proceeding may not be denied admission as permissible deduction in computing the taxable income, merely because the proceeding has failed, if oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioned case has no bearing on the point under consideration. The last case of Dalmia lain and Co. Ltd. v. Commissioner of Income-tax [1971] 81 ITR 754 (SC) is very important as the Supreme Court has made a distinction between litigation expenses incurred for the purpose of creating, curing or completing the assessee's title to the capital and the expenses incurred for the purpose of protecting the business and held that in that former case the expenses incurred must be considered as capital expenditure. The following observation of the Supreme Court in that case is a settler on the question: "The principle which has to be deduced from decided cases is that, where the expenditure laid out for the acquisition or improvement of a fixed capital asset is attributable to capital, it is a capital expenditure, but if it is incurred to protect the trade or business of the assessee then it is a revenue expenditure. In deciding whether a particular expenditure is capital or revenue in nature, what the courts have to see is whether the expenditure in question was incurred to create any new asset or was incurred for maintaining the business of the company. If it is the former it is the capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reed the suit of the assessee and dismissed the suit of the Government but in appeals filed by State in the High Court, the State won and the assessee lost. Thereafter, there was a compromise when the matter was pending before the Supreme Court. From the facts which I have stated above, it is clear that there were two types of litigations between the partners. In the suit, which was filed by the State of Bihar, there might have been a question of preservation of business and protection of the assets of the petitioner-company but in the litigation which cropped up as a result of the filing of the suit by the petitioner-company there was no question of preservation of business or protection of the existing assets of the company. Under the terms of the lease in favour of the petitioner-company, the lease could be renewed for a further term of 30 years only if there was an agreement between the parties with regard to rent. The State of Bihar was not prepared to renew the lease of the petitioner-company, and, therefore, the assessee had to file a suit for creation and for completion of its title to the capital. That title suit had not been filed for the preservation of the business or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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