Dalmia Jain & Co. Ltd. v. Commissioner of Income-tax, Bihar & Orissa, Patna
B Hegde J.-This appeal a.rises 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 :
C "Whether on the facts and circumstances of the case
the Tribunal was justified in holding that litigation ex
penses 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 Sta.le of Bihar. On April I, 1928, the State Govern
ment 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 a.ny 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
wa6 topped from working the quarry by the Government. The
Government forfeited the lease of the Kutchwar Lime Company
on March 23, 1933 and re-entered into possession. The Govern
ment granted a fresh lease of those Hills to Kalyanpur Lime Com
pany 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. va.cated the quarry in April 1936 after the
Kutchwar Lime Company started contempt proceedings. Kutch
war Lime Company got possession of the Murli Hills and remain·
ed in possession until the lease expired on March 31, 1948. The
DAI.MIA JAIN & co. I'. c.1.T. (Htgde,J.)
Government then re-entered into possession. Thereafter Kalyan
pur Lime Comp3!lly 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. Therea.fter the Government appointed the assessee as the
agent of the Goverment for working in the quarry with an under
standing 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 Kalya·npur Lime Company filed a suit for spe
cific performance. In the alternative it claimed damages. In
that suit the Kalyanpur Lime Company impleaded the State of
Bihar as well as the assessee as defendants. It is necessary to
remember that in that suit a claim for damaoges 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 insteoo of granting a decree for specific
performance granted a decree for damages. Under that decree.
the asscssee 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 Ka·lyanpur 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 a.gent 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 standi 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 capita-I 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 acqui·
sition or improvement of a fixed capital asset is attributable to
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SUPREME COURT REPORTS (1971] SUPP.s.c.R.
capital it is capital expenditure but if it is incurred to protect the
trade or business of the assesee then it is a• 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 inc,urred
for maiintaining the business of the company. If it is the former
it is the capital expenditure; if it is the latter, it is the revenue
~nditure.
The Income-tax Officer as well as the Appellate Assistant
Commissioner came to the conclusion that the expenditure i11
question was incurred for the purpose of acquiring a new asset.
Their orders are not cleair as to what is the new asset intended to
be acquired by the assessee. Possibly they were of the opinion,
as was urged by the learned Solicitor-General on behalf of the
Revenue that the expenditure was incurred for securing the asses
see's prospect of getting a lease of the Murli Hills if and when the
Government suceeded in th.~ litigation. But the a·ppellate tribunal
took a different view of the matter. It came to the conclusion
that the expenditure in question was incurred to protect the busi
ness 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 materiol
before the tribunal are : (!) 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) There
after the assessee was working the quarry in question as the agent
of the Government; (4) in the suit filed by the Kalyanpur i,ime
Company, the assessee had been made a party; and (5) in that
suit a claim for da.mages was mad.e both against the Government
a' well as agai'1st 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 Jitigaition by the Kalyanpur Lime Co. Further
the Kalyanpur Lime Comp3ny 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 litigaition.
From these facts, the only reasonable inference that ca•n 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 cann.Ot be
DALMIA JAIN & co. v. C.l.T. (Hegde, J.)
considered as a unreasonable view. As observed by this Court in
Shree Meenakshi Mills Ltd. v. Commissioner of lncom~·tnr,
M 'ldras(') that deductibility of expendi:ure 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 &ffected by the final outcome of that proceeding.
However wrong-headed, ill-advised, unduly optimistic or over
confident 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 pur
pose 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 carry
ing it from court to court and incurring expenditure for that pur
pose 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 &gent of the Government. There
fore the civil proceedings were launched against it because of
on~ of its business activities. Under those circumstances we are
of opinion that the High Court was not right in holding that the
expel!diture 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 affirma
tive 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.
(I) 63 l.T.R. 207.
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