TMI Blog1982 (6) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... ebted to the assessee under a mortgage. Subsequent to the dissolution of the partnership in 1957, disputes arose between the two individuals. The assessee retained possession of the entire eighteen acres of punja lands and was exploiting the lands as salt pans exclusively for his own benefit. He manufactured salt and derived income from all those lands. In 1958, John Samuel filed a suit against the assessee for a partition of the lands and separate possession of his half share. He also prayed for past mesne profits as respects his half share for the period during which the assessee was in Possession. The suit was decreed by the trial court. The assessee appealed to the High Court but failed. The assessee had incurred legal expenses by way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the assessee had put up a false case in resisting the suit of John Samuel for partition and, therefore, the assessee was not entitled to claim deduction of the legal expenses in the computation of his taxable profit from his business. The learned standing counsel, however, did not pursue this line of argument before us, and quite rightly so because the question of allowability of a deduction for legal expenses in the computation of an assessee's business income does not really depend upon the fortunes of the assessee in the litigation, nor even on the ethical character of the assessee's contention in the legal proceedings concerned. The real question for our consideration is two-fold. The first one is whether the litigation expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear that the one and only purpose which motivated the assessee while defending the suit was to preserve for himself the source of income from the salt pans. Admittedly, he was in possession of the entire area of salt pans including the half share belonging to John Samuel. Admittedly, he worked to his own advantage the entire salt pans by manufacturing salt therefrom, which he subsequently disposed of at a profit. This profit was duly brought to account and returned for the purpose of income-tax as income from business. It is only in the computation of this business income that the assessee' claimed the deduction towards the legal expenses. In the events that happened, it is difficult to see how the expenses incurred by the assessee for resi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Department, Mr. Rangaswamy also cited CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140, rendered by the Supreme Court. In this case, several decisions, both English and Indian, were referred to in extenso by the Supreme Court. One of the English decisions cited was Southern v. Borax Consolidated Ltd. [1940] 23 TC 597; [1942] 10 ITR (Supp) I (KB). That was a case where a company carrying on business in England incurred expenditure in defending its title to property situated in the United States. It was held that the amount was spent wholly and exclusively for the purpose of the company's trade and, therefore, the expenditure was an allowable deduction for computing the profits of the company for income-tax purposes. While citing thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of a capital asset on the one hand, and expenditure incurred for merely protecting and maintaining the title to an existing capital asset on the other. The Bench held that the former expenditure was capital in nature, whereas the latter expenditure was revenue in character. Following this decision, we are satisfied that the legal expenditure amounting to Rs. 13,164 cannot be disallowed on the ground that it was capital in nature. Our answer to the question which we have set out earlier must, therefore, be in favour of the assessee. One other question which has been referred to us in this case relates to another item of deduction claimed by the assessee, which was disallowed by the ITO in the first instance, but subsequently allowed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of receipt of income and for the purpose of determining the year for allowance of expenditure. Bat, in this case, the very peculiar conception of mesne profits can be consistent only with the position that the person in possession is in unlawful occupation of property which actually produces or is capable of producing profits. So long as the assessee in this case was claiming that be was in lawful occupation not only of his own half share of the salt pans, but also of the half share belonging to John Samuel, he could not consistent with that stand, be expected to claim an allowance in his income-tax assessments of a deduction in respect of the so-called mesne profits as having accrued year by year. It is only when the court gave its verdi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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