TMI Blog1976 (12) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... without leaving a male issue. Boorugu Mahadev had five sons and five grandsons. After the death of Boorugu Rajanna, all his properties were taken over by survivorship by Boorugu Mahadev and his sons. Smt. Sakuntalamma, the widow of Boorugu Veeraiah, was given only the right of maintenance. The sons and grandsons of Boorugu Mahadev formed themselves into a partnership and that partnership is the assessee-firm before us. On February 15, 1954, Smt. Sakuntalamma purported to adopt one Harnath as a son to her deceased husband, Boorugu Veeraiah, and a deed of adoption was executed on March 2, 1954. After the adoption, Harnath filed a suit claiming half share of the property of the joint family of Boorugu Rajanna. This suit, being O.S. No. 31 of 1957, was filed in the court of the Chief judge, City Civil Court, Hyderabad. It appears that, on February 14, 1952, there was a partial partition of the assets of the family of Boorugu Rajanna and, as a result of that partition, the assets which came to the share of Boorugu Mahadev and his sons, were utilised by them as assets of the assessee-partnership firm, which was formed on February 14, 1952, and thus a substantial part of the assets of Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e properties. The Income-tax Officer, therefore, disallowed the claim for deduction. He did not discuss whether the claim should be allowed during the assessment year 1966-67 or any other year nor did he discus whether the total assets of the concerned partnerships should be taxed and if so on what date. The assessee took the matter in appeal and the Appellate Assistant Commissioner held that the expenditure was not incidental to the business carried on by the firm and the suit was in fact one about the validity or otherwise of the adoption. Against the decision of the Appellate Assistant Commissioner, the assessee took the matter in further appeal to the Tribunal and the Tribunal held that it was not possible to find out the exact extent of the expenditure incurred during the year or even whether any expenditure had been incurred at all. The Tribunal, therefore, remanded the case to the Income-tax Officer. According to the remand report submitted by the Income-tax Officer, the total expenditure of Rs. 94,587 was spent over a period of nine years from 1957 Deepavali to 1965 Deepavali. The actual expenditure relevant for the assessment year 1966-67 was only Rs. 10,966. The Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and was an allowable deduction in computing the profits of the company for income-tax purposes. It was held that the legal expenses incurred by the company did not create any new asset at all, but were expenses incurred in the ordinary course of maintaining the assets of the company and the fact that it was maintaining the title, and not the value, of the company's business did not make any difference. At page 5 of the report, Lawrence J. observed : " On the other question as to whether this is a payment properly attributable to capital or to revenue, in my opinion the principle which is to be deduced from the cases is that where a sum of money is laid out for the acquisition or the improvement of a fixed capital asset it is attributable to capital, but that if no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital assets of the company ...... The title of the company, which must be assumed in my opinion, to have been a good title, remains the same ; there is nothing added to the title or taken away, and the title has simply be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. This decision also restated the two tests, namely, (i) that the expenditure should be for carrying on the business to earn profits in the trade, and (ii) that the expenditure shall be incurred by the assessee in his capacity of a person carrying on the business. " Subba Rao J., after considering the different decisions on the point, summed up the legal position as follows : " The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide it may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernization of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as, a precondition to commence or for carrying on of a business ; it may comprehend many other acts incidental to the carrying on of a business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue seeks to take too large a share and to leave him with too little, the expenditure which the trader incurs in endeavouring to correct the mistake is a disbursement laid out for the purpose of his trade. The Supreme Court followed its earlier decision in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax [19671 63 ITR 207 (SC) and held--See [1971] 82 1TR 166, 171 (SC) : " The essential test which has to be applied is whether the expenses were incurred for the preservation and protection of the assessee's business for any such process or proceedings which might have resulted in the reduction of its income and profits and whether the same was actually and honestly incurred. It is well settled that the deductibility of expenditure incurred in prosecuting civil proceedings to resist the enforcement of a measure, legislative or executive, which means restriction on the carrying on of a business or to obtain a declaration that the measure is invalid, would, it other conditions are satisfied, be admissible as a deduction under section 10(2)(xv). Deductibility of such expenditure does not depend on the final outcome of those proceedings. However wrong-headed, ill-advised, unduly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business as an entity and for defending against a claim of hostile title or against nationalisation must be held to be an expenditure incurred " for the purpose of business " which is deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922. Deductible expenditure would not include merely expenditure incurred for protecting individual asset or assets, but would include expenditure incurred in defending a challenge to the title of the trader to the entire business as an entity. In the light of these principles, it was held that the expenditure incurred by an assessee to the extent that it has been incurred for defending the proceedings seeking to declare the business of the assessee as " evacuee property", under the provisions of the Administration of Evacuee Property Act, 1950, is expenditure which is deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922, and in this connection, the Bombay High Court relied upon the decision of the House of Lords in Morgan v. Tate and Lyle Ltd. [1954] 26 ITR 195 (HL). In Transport Company Ltd. v. Commissioner of Income-tax [1957] 31 ITR 259, the Madras High Court has held that the principle to be applied in determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also consider as to what was the interest which the assessee-firm had in that litigation. As pointed out above, a substantial portion of the assets left by Boorugu Rajanna, after the partial partition on 14th February, 1952, was invested by the members of the branch of Boorugu Mahadev in the assessee-firm. Harnath was claiming that he was the validly adopted son of Boorugu Veeraiah and on that basis, he was claiming half share on partition of the assets left by Boorugu Rajanna. If that claim to half share of the assets left by Boorugu Rajanna succeeded, it would mean that the assessee-firm would have to part with at least half of the assets which were invested in its business. There was no defect in the title to the property which was brought in by the sons of Boorugu Mahadev as the assets of the firm. But to the extent to which the claim of Harnath succeeded, the assets brought in for the purpose of the assessee-firm by the sons of Boorugu Mahadev would have to be handed over to Harnath and in the event of Harnath's claim succeeding, the assessee-firm would find its assets reduced by one-half. We find from the assessment order passed by the Income-tax Officer on December 19, 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion between the suit filed and the business of the firm was remote. The Tribunal observed : " It is not inconceivable that the Hindu undivided family is capable of having other amounts to satisfy the demand of Shri Harnath even in a case where he succeeds completely." This type of speculative reasoning cannot help the revenue because the moment the partnership firm was compelled to part with one-half of the assets of the business, the assessee-firm, to that extent, was bound to suffer because out of the capital available to the assessee-firm of Rs. 36 lakhs and odd, only Rs. 18 lakhs and odd would be left. To hold, as the Tribunal has held, that, if Harnath had succeeded in the suit, he would be made a member of the family and would be entitled to his share of the family properties and then would join the firm as a partner is to overlook the basic feature of the law of partnership, viz., that a partnership agreement is a contract between the partners as a result of an agreement between the parties and unless all the partners of the firm agreed, Harnath would not have been admitted as a partner of the assessee-firm and it presupposes that Harnath himself was willing to join as a pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rospects. The learned counsel for the revenue relied upon the following observations of the Supreme Court in Commissioner of Income-tax v. Chandulal Keshavlal Co. [1960] 38 ITR 601 at 610 : " In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party. Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business ; and it is immaterial that a third party also benefits thereby. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee." The nature of the expenditure " for the purpose of the business " of the assessee has to be judged in the light of the principles which must be culled out from the several decisions particularly in the light of the observation of the Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isition of a source of profit of income is capital expenditure both on principle and authority." In the instant case, it was not for acquiring a new title or curing a defect in the title or getting rid of a defect in the title that the amount was spent. The amount was spent to maintain the title which was otherwise a perfectly good title. It was to maintain that title to one-half of the assets invested in the business of the assessee-firm that the expenditure was incurred and these observations in V. Jaganmohan Rao v. Commissioner of Income-tax [1970] 75 ITR 373 (SC) in no way go contrary to what we have pointed out above. Mr. Rama Rao for the revenue has very strongly relied upon two decisions, one of the Bombay High Court and the other of the Madras High Court and has contended that, in the light of the facts of each of those two cases, the decisions rendered by the Madras High Court and the Bombay High Court go to support the revenue's case. In Adarsha Dugdhalaya v. Commissioner of Income-tax [1971] 80 ITR 49 (Bom), the main question was about the litigation expenses in the course of inter se disputes between the partners of a firm. V. S. Desai J., speaking for the Division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of capital expenditure. The next question is whether this amount of Rs. 69,190 was allowable as revenue expenditure in the year of account relevant to the assessment year 1966-67. It is obvious that, till the decision of the City Civil Court, which was rendered on December 30, 1964, it could not have been known as to what was the amount of expenditure incurred in fighting this litigation and whether a part of the costs would or would not be recovered from the other side, viz., from Harnath. It is not possible to accept the contention urged on behalf of the revenue based on the observations of the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of Income-tax [1971] 82 ITR 363 and the observations of the Kerala High Court in L. J. Patel Company v. Commissioner of Income-tax [1974] 97 ITR 152, that the amount should have been debited in the books of account as and when the actual expenditure was incurred. It must not be forgotten that the initial expenses were incurred from time to time by the Hindu undivided family of Boorugu Mahadev. It was after the entire amount up to the stage of the trial court was ascertained after the decision of the Ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ward, he had a right to seek reference under section 18 for getting the question of the compensation determined by the court and it was on the amount thus determined judicially that the owner would be entitled to enforce that right for a particular sum. It was on the final determination of the amount of compensation that the right to that income in the nature of compensation would arise or accrue and till then there was no liability in Praesenti in respect of the additional amount of compensation claimed by the owner of the lands sought to be acquired. Applying the same principle, it must be held that, in the light of this decision of the Gujarat High Court, with which we agree until the final determination of the amount of costs till the end of the trial court stage was reached, it could not be predicated what the amount of expenditure would be and, therefore, the assessee was justified in claiming the entire amount of Rs. 69,190 as a deductible expenditure in the year of account relevant to the assessment year 1966-67. In the light of the above discussion, we hold that the whole of the expenses amounting to Rs. 69,190 incurred by the assessee was allowable as deduction in com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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