Dalmia Jain & Co. Ltd. Vs.
Commissioner of Income-Tax, Bihar & Orissa, Patna [1971] INSC 172 (29 July
1971)
HEGDE, K.S.
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] Shree Meenakshi Mills Ltd. v.
Commissioner of Income-Tax, Madras, 63 I.T.R. 207, referred to.
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 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 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 the 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 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.
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