TMI Blog1996 (7) TMI 122X X X X Extracts X X X X X X X X Extracts X X X X ..... owable expenditure while computing the income of a firm ? " The facts as appearing from the statement of case are brief though sketchy. The assessee is a partnership firm. The Income-tax Officer in computing the income of the assessee-firm for the two aforesaid assessment years disallowed sums of Rs. 18,752 and Rs. 16,225 claimed by the assessee as legal charges in defending the suit filed on behalf of an ex-partner for dissolution of the assessee-firm. The Income-tax Officer disallowed these amounts on the ground that the expenditure incurred was of capital nature as the amounts spent were for contesting the suit filed by an ex-partner in the High Court praying for the dissolution of the partnership business. In appeal filed by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons relied upon by the Departmental representative are not applicable to the facts of the case before us. In the first case, the Allahabad High Court in the case of Raghunath Prasad v. CIT [1955] 28 ITR 45, held that money spent by one partner to enforce his rights against another partner for rendition of accounts cannot be said to be money laid out or expended wholly or exclusively for the purpose of the business. In the second case, viz., Adarsha Dugdhalaya v. CIT [1971] 80 ITR 49 (Bom), the facts in brief are that certain legal expenses were incurred by the assessee in fighting the litigation instituted by two erstwhile partners making certain claims which, if they were allowed as claimed, would have wiped out its assets and would have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 and Rs. 16,235 are to be allowed in computing the income of the assessee-firm in terms of section 37 of the Act. We direct accordingly. " Mr. Vidyarthi, learned counsel for the Revenue referred to us the decision of the Bombay High Court in Godfrey Phillips India Ltd. v. CIT [1994] 206 ITR 23. The core of his contention was that the expenses incurred by the assessee-firm were in the nature of capital expenses and not revenue. In the case before the Bombay High Court, the assessee had incurred legal expenses for amalgamation with another company distributing its products. It was accordingly held that the legal expenses so incurred were capital in nature. Under section 37 of the Act, any expenditure not being in the nature of capital e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 66] 60 ITR 308 in support of his submission that the expenditure incurred in the case would be in the nature of revenue expenditure. However, these two cases pertain to the filing of a petition by the shareholder for dissolution of a company under the Companies Act. The facts in these two cases may not be quite relevant to us inasmuch as the company is a separate entity. On the other hand, a partnership is a compendium name of all the partners. These two cases of the Bombay and Punjab High Courts have referred to the decision of the House of Lords in Morgan (Inspector of Taxes) v. Tate and Lyle Ltd. [1954] 26 ITR 195 where a company which was engaged in sugar refining incurred expenses in a propaganda campaign to oppose the threatened natio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital 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 one has 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. " As has been rightly stated, the line to differentiate between capital and revenue expenditure is quite thin. In the present case, however, as we have noticed above, the High Court ultimately directed the partner who had brought the suit for dissolution of the firm to retire from the part ..... X X X X Extracts X X X X X X X X Extracts X X X X
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