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PETITIONER: DALMIA JAIN & CO.  LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX,BIHAR & ORISSA, PATNA

DATE OF JUDGMENT29/07/1971

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. GROVER, A.N.

CITATION:  1971 AIR 2129            1971 SCR  963

ACT: Income   Tax-Litigation  expenses-Capital   expenditure   or Revenue expenditure-Tests for determining.

HEADNOTE: The appellant-assessee, one of whose business activities was quarrying  lime-stone, was working a quarry as agent of  the government  with an understanding that the quarry  would  be leased  out to the assessee if the ,government succeeded  in the  litigation in respect of it.  When the assessee was  in possession,   a  company  instituted  a  suit  against   the government for specific performance of an agreement to lease the quarry.  The assessee was made a party to the suit and a claim for damages was made against the government as well as the  assessee.  This Court granted a decree for damages  and the  assessee was also made liable to pay damages.   On  the ,question  whether the litigation expenses incurred  by  the assessee   constituted  expenditure  laid  out  wholly   and exclusively  for the purpose of the assessee’s  business  or whether  it was incurred for the purpose of acquiring a  new asset, HELD:(i)  Where  the  expenditure  laid  out  for   the acquisition  or  improvement  of a fixed  capital  asset  is attributable to capital, it is capital Expenditure but if it is  incurred  to  protect  the  trade  or  business  of  the assessee, it is a revenue expenditure.  In deciding  whether a  particular ex penditure 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 capital expenditure;  if  it  is  the latter, it is revenue expenditure. [965A-966B] (ii)In  the present case the expenditure was  incurred  for the  purpose  of  protecting the  assessee’s  business  and, therefore,  was  revenue  expenditure.   The  assessee   was dragged into the litigation and a claim for damages was made against  the  assessee  also.  The  litigation  came  to  be instituted  against the assessee because the  assessee  was working  the quarry and it was working the same at the  time of the litigation.  Therefore, the only reasonable inference that could be drawn was that the assessee resisted the  suit in  order  to protect its business and not with  a  view  to safeguarding its prospects of getting a new lease. [966G]

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Shree  Meenakshi Mills Ltd. v. Commissioner  of  Income-Tax, Madras, 63 I.T.R. 207, referred to.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  1812  of 1967. Appeal from the judgment and order dated January13, 1966 of the  Patna  High Court in Misc.  Judicial Case  No.  665  of 1962. 964 M. C. Chagla and R. Gopalakrishnan, for the appellant. Jagadish  Swarup, Solicitor-General, B. B. Ahuja and  B.  D. Sharma, for the respondent. The Judgment of the Court was delivered by Hegde  J  This appeal arises from the decision of  the  High Court  of Patna in a reference under s. 66(1) of the  Indian Income  tax Act, 1922 (to be hereinafter referred to as  the Act).   In  that  reference several questions  of  law  were referred to the High Court for its opinion.  In this  appeal we  are concerned with only one of those questions and  that question is :               "Whether on the facts and circumstances of the               case  the  Tribunal was justified  in  holding               that  litigation  expenses of  Rs.  1,29,994/-               incurred  by the assessee for  the  assessment               year  1951-52 constitute expenditure laid  out               wholly and exclusively for the purpose of  the               assessee’s business"? The  relevant  facts  as found by the tribunal  may  now  be briefly stated.  The litigation expenses in question  relate to  the  protracted litigation in respect  of  Murli  Hills. Those  Hills were owned by the State of Bihar.  On April  1, 1928,  the State Government gave a lease of those  Hills  to Kutchwar  Lime  Company  for 20 years  for  the  purpose  of quarrying limestone therein.  In the lease deed entered into between  the  parties,  there was a  clause  preventing  the lessee from assigning its rights to any third party  without the  consent of the lessor. in January 1933,  Kutchwar  Lime Co.  went  into voluntary liquidation  and  the  liquidators assigned  the  lease-hold  right to  Subodh  Gopal  Bose  in September   1933  without  the  permission  of   the   State Government.  The assignee took possession of the property on March 9, 1933 but was topped from working the quarry by  the Government.   The  Government  forfeited the  lease  of  the Kutchwar Lime Company on March 23, 1933 and recentered  into possession.   The Government granted a fresh lease of  those Hills  to  Kalyanpur Lime Company for a period of  20  years with  effect  from April, 1934.  On September 24,  1934  the Kutchwar  Lime  Co. sued the Government for  a,  declaration that  the lease granted to it in 1928 had not  been  validly forfeited  and for an injunction restraining the  respondent from granting Murli Hills on lease to anyone else.  The suit was  decreed by the High Court on February 7, 1936  and  the decree  was  affirmed by the Privy Council on  November  19, 1937.   The Kalyanpur Lime Co. vacated the quarry  in  April 1936  after  the  Kutchwar  Lime  Company  started  contempt proceedings.   Kutchwar Lime Company got possession  of  the Murli  Hills  and  remained in possession  until  the  lease expired on March 31, 1948.  The 965 Government  then  re-entered  into  possession.   Thereafter Kalyanpur  Lime Company repeatedly asked the  Government  to execute  the  lease  as  agreed  to  by  it  in  1934.   The

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Government refused to do so and informed the Kalyanpur  Lime Company  on June 2, 1949 that the Government has decided  to lease  Murli Hills to the assessee.  The  Government  leased the Murli Hills to the assessee for one year from  September 22,  1949 to September 22 1950.  Thereafter  the  Government appointed  the assessee as the agent of the  Government  for working  in the quarry with an understanding that the  Murli Hills  will be leased out to the assessee if the  Government succeed in the litigation.  When the assessee company was in possession of the Murli Hills as an agent of the Government, the  Kalyanpur  Lime  Company  filed  a  suit  for  specific performance.   In  the alternative it claimed  damages.   In that  suit the Kalyanpur Lime Company imleaded the State  of Bihar  as  well  as  the  assessee  as  defendants.   It  is necessary to remember that in that suit a claim for  damages was also made in the alternative.  That suit was resisted by the State Government as well as by the assessee.  That  suit was  dismissed  by  the  High  Court.   The  appeal  of  the Kalyanpur  Lime  Company was allowed by this Court  and  the suit  decreed against both the defendants.  But as  by  that time  the term of the, lease agreed upon between  the  State Government and the Kalyanpur Lime Company had come to an end this  Court  instead  of  granting  a  decree  for  specific performance  granted  a  decree  for  damages.   Under  that decree,  ’he  assessee company was also made liable  to  pay damages-see the decision by this Court in Civil Appeals Nos. 1170 and 1171 of 1965. From the facts stated above, it is clear that Kalyanpur Lime Company  claimed damages not only from the State  Government ’but  also from the assessee company which in the course  of its  business was acting as the agent of the Government,  no doubt  with  the prospect of getting a lease  of  the  Murli Hills if the Government succeeded in the litigation.  In the judgment of this Court it was observed that the assessee had no locus stand to resist the suit of Kalyanpur Lime Company. The question for decision is whether the litigation expenses incurred  by the assessee were for the purpose of  creating, curing  ,or  completing the assessee’s title to  capital  or whether  it was for the purpose of protecting its  business. If  it  is  the former then the expenses  incurred  must  be considered as capital expenditure.  But on the other hand if it  is held that the expenses were incurred to  protect  the business  of  the assessee then it must be considered  as  a business  loss.  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 966 capital  it is capital expenditure but if it is incurred  to protect  the trade or business of the assesee then it is  as 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 expenditure; if it is the  latter, it is the revenue expenditure. The  Income-tax Officer as well as the  Appellate  Assistant Commissioner came to the conclusion that the expenditure  in question  was  incurred for the purpose of acquiring  a  new asset.   Their  orders are not clear as to what is  the  new asset  intended  to be acquired by the  assessee.   Possibly they  were  of the opinion, arm, was urged  by  the  learned Solicitor-General   on  behalf  of  the  Revenue  that   the expenditure   was  incurred  for  securing  the   assessee’s

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prospect  of getting a lease of the Murli Hills if and  when the  Government  succeeded  in  the  litigation.   But   the appellate tribunal took a different view of the matter.   It came to, the conclusion that the expenditure in question was incurred  to protect the business of the assessee.   On  the other hand, the High Court agreed with the view taken by the Income-tax Officer and the Appellate Assistant Commissioner. The  salient facts that could be gathered from the  material before the tribunal are : (1) one of the business activities of  the  assessee was to quarry lime stone;  (2)  the  Murli Hills had been leased out by the Government to the  assessee for  a  period  of  one year  from  September  22,  1949  to September 22, 1950; (3) Thereafter the assessee was  working the  quarry  in question as the agent filed by  the  Kalyanp limer  of  the  Government; (4) in the  suit  filed  by  the Kalyanpur  Limeur  Company,  the assessee had  been  made  a party;  and  (5) in that suit a claim for damages  was  made both against the Government as well as against the assessee. What  has  been overlooked by the High Court  is  that  them assessee did not get into the litigation of its own  accord. It was dragged into the litigation by the Kalyanpur Lime Co. Further  the  Kalyanpur Lime Company had made  a  claim  for damages against the assessee also.  This litigation came  to be instituted against the assessee because the assessee  was working  the  Murli Hills.  It was working the same  at  the time  of  the  litigation.   From  these  facts,  the   only reasonable inference that can be drawn is that the  assessee resisted the suit in order to protect its business as opined by  the  tribunal  and  not with a  view  to  safeguard  its prospects  of  getting a new lease.  At any  rate  the  view taken  by  the  tribunal on the facts  before  it  that  the assessee incurred the expenditure in question to protect its business interest cannot be                             96 7 considered  as  a unreasonable view.  As  observed  by  this Court  in  Shree  Meenakshi Mills Ltd.  v.  Commissioner  of Income-tax,  Madras(1)  that  deductibility  of  expenditure incurred in prosecuting a civil proceeding depends upon  the nature  and purpose of the legal proceeding in  relation  to the  assessee’s business and the same cannot be affected  by the final outcome of that proceeding.  However wrong-headed, ill-advised,  unduly  optimistic  or  overconfident  in  his conviction  the  assessee might appear in the light  of  the ultimate decision, expenditure in starting and prosecuting a civil proceeding cannot be denied as a permissible deduction in   computing  the  taxable  income  merely   because   the proceeding had failed, if otherwise the expenditure was laid out for the purpose of the business wholly and  exclusively, that  is,  reasonably and honestly incurred to  promote  the interest  of the business.  Persistence of the  assessee  in launching the proceeding and carrying it from court to court and  incurring expenditure for that purpose is not a  ground for disallowing the claim. In  this case the assessee stands on a better  footing.   It did  not  initiate the proceeding.  It merely  defended  the claim  made  against  it.  The claim  was  made  against  it because it was working the Murli Hills though as an agent of the  Government.   Therefore  the  civil  proceedings   were launched   against  it  because  of  one  of  its   business activities.   Under  those circumstances we are  of  opinion that  the  High  Court was not right in  holding  that  the expenditure in question was not a revenue expenditure. For  the reasons mentioned above we revoke the answer  given by  the  High Court to the question referred to it  for  its opinion  and  in its place we answer that  question  in  the

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affirmativeness and in favour of the assessee.  The assessee is  entitled to its costs both in this Court as well  as  in the High Court. K.B.N.                                                Appeal allowed. (1) 63 I.T.R. 207. 968