N. Selvarajulu Chetty and Co. (India) vs Commissioner of Income Tax, Madras

Srinivasan, J.—The question that stands referred to us is :

Whether the legal expenses of Rs. 3,900 and Rs. 6,480 were allowable under the provisions of section 10(2)(xv) of the Indian Income Tax Act ?

The facts leading to this question are these. One Selvarjulu Chetty was carrying on a stevedoring business in Mardras. He died in 1938 leaving

Padmini as his only surviving daughter. Therefore, certain relations of this Selvarajulu Chetty carried on the business purporting to claim it, the

business, to be a joint family business. Matters went on thus. In 1948, a deed of partnership came into existence and Padmini, the daughter of

Selvarajulu Chetty, was taken as a partner. Subsequnetly, however, Padmini instituted a suit in the High Court claiming that the business belonged

solely to Selvarajula Chetty as his Self-acquired property and that the other so-called partners were not entitled to any interest in that business and

sought a declaration that she was soley entitled to the business. There were other reliefs sought in that suit, such as to recover a sum of Rs.

1,32,000 received on life insurance polices of Selvarajulu Chetty, and jewels belonging to him, his wife and Padmini. The trial judge upheld the

claim of Padmini in so far as the movables are concerned. The business asset was however held to belong to the Hindu undivided family. We may

mention at this stage that on appeal from that decision, a Bench of this court held in favour of Padmini even with regard to the business assets.

It was the expenses of the defendants in that suit that is the subject matter of the present reference.

The Income Tax Officer allowed these expenses in the assessment year 1958-59. But the Commissioner of Income Tax, after notice to the

parties held that the legal expenses were incurred in a dispute regarding the title to the business itself and was not for the protection of the business.

He also held that the dispute was between the partners and that it covered not only this business asset but other non-business assets as well.

According to him, the expenditure could not be said to have been incurred wholly and exclusively for the purpose of the business. This order of the

commissioner was with regard to the assessment year 1958-59. For the assessment year 1959-60, the Income Tax Officer declined to grant the

allowance. The further appeals to the Appellate Assistant Commissioner and the tribunal also failed.

On the application of the assessee, the question set out above stands referred to this courts.

Shortly stated, the dispute in the suit was to declare the title to the business in the its entirety, whether it vested in A or in B. Would the

expenditure incurred in relation to such a suit be one that could be described as having been incurred wholly and exclusively for for the purpose of

the business ? Shri. S. Narayanaswami, learned counsel for the petitioner, argues that if the business has to establish its title to an asset or litigate in

order to secure its maintenance, it would be properly allowable u/s 10(2)(xv). Equally, he argues, when the title to the entire business is in issue, it

is the same as saying that the title to each and everyone of the assets of the business is in question. Therefore, he claims that the expenditure must

be one which would come within the scope of the relevant clause of section 10(2). It seems to us that there is fundamental fallacy in the argument.

What we conceive to be the real sons of the allowance contemplated by the relevant provision is that the business regarded as an entity has to

takes steps and incur expenditure for the purpose of protecting itself against any inroads made upon its productive capacity, ownership of assets or

the like. Where two disputing claimants claim title to the business as a whole, it does not appear to us that any such dispute would involve

expenditure which can be regarded as having been expended for the purpose of the business. The expenditure is really incurred for and on behalf

of the contending parties, each seeking to establish title to the entirety of the business in himself. It is not a case where the business protects itself

against any claims to its prejudice or which would jeopardise its profits-making ability. This point of distinction seems to us to be substantial and

that is virtually overlooked by the learned counsel in putting forward this argument.

In support of his argument, learned counsel has referred to certain decisions, none of which to our minds lends any real support to the

proposition which he advances. The case, southern (H.M. Inspector of Taxes) v. Borax Consolidated Ltd. is hardly in point. That was a case

where a company had acquired land in America for the purpose of its business. The title of the company to the land was disputed in American

courts and in defending the action the company incurred expenses. This expenditure was held to be wholly and exclusively laid out by the company

for the purpose of its trade. We are really unable to see what parallel there is between the facts of that decision and the present one. That was a

case where the company as an entity sought to maintain its right to certain assests, and the legal expenses incurred did not creation any new assets

at all if a sum of money is expended for the acquisition or the improvement of a fixed capital assets ,it is undoubtedly attributable to capital. But if

there is no change in the fixed capital assets, then the expenditure is properly attributable to revenue. The argument of the learned counsel in the

present case that what the assessee was doing was to maintain its title to each and every one of the assets, therefore, the expenditure is deductible

u/s 10(2)(xv) cannot possibly be accepted. In Commissioner of Income Tax v. Raman and Raman the assessee-company entered into an

agreement to purchase certain buses along with the permits connected with them. A third party filed a suit claiming title to the buses and seeking to

recover possession of them. The parties went from court to court with varying success. Finally, the company failed in the civil courts to establish its

title. On the question whether the expenditure incurred in relation to these proceedings was deductible u/s 10(2)(xv), this court held that the

expenditure was incurred for the purpose of retaining a capital asset of the company, and there was no improvement to its capital asset by reason

of the litigation. Here again, it will be noticed that it was the company fighting for its own rights. In Veerappa Pillai v. Commissioner of Income Tax

a similar question arose with regard to the litigation expenditure incurred by the assessee in seeking to establish his title to certain buses and to

recover possession from the person who had agreed to sell them to the assessee. Here again, the right to deduction was upheld and it was pointed

out that, for the purpose of section 10(2)(xv), it did not matter whether the assessee figured as a plaintiff or defendant and equally whether be

succeeded or failed in the litigation. In Transport Company Ltd. v. Commissioner of Income Tax his court pointed out the distinction between

expenses of a litigation to maintain an existing title and one where the purpose was to acquire or cure a defect in the assessees title. In the former

the expenditure would be of a revenue nature and in the latter it would be of a capital nature. None of these decisions cited by the learned counsel

for the assessee deals with a case like the present where the dispute in not between the company, on the one hand, and another person claiming

title adversely to it, on the other, but between the members of a company or members of the partnership, each one claiming exclusive title to the

entirety of the business and of the assets it comprises of. That is a position which will not come within the ratio of any of these decisions, and a

dispute of that nature, which is in the individual interest of one of the partners of the firm, cannot be equated to one in which the interests of the

business are affected.

Mr. Ranganathan, learned counsel for the department, has referred to Morgan (Inspector of Taxes) v. Tate and Lyle Ltd. the actual question for

decision in that case was whether an expenditure incurred by the company in conducting a propaganda to oppose the threatened nationalisation of

the industry was an admissible deduction. It was held that the object of the expenditure was to preserve the assets of the company from seizure

and to enable it carry on and earn profits and that being so, the expenditure was an admissible deduction. There are certain observations in this

judgment which bring out the distinction between a case where the interests of the company or the business are affected and one where the

ownership of the business is in question and the nature of the expenditure incurred in litigation relevant to these two aspects. Lord Keith observed

at page 224 :

It is necessary, in my opinion, to distinguish between a threat to the assets of a business and a threat to the right of the owner of the business and

assets to carry on the business. The assets of a business may be threatened in a variety of ways. They may be said to be under a constant threat of

loss by fire, or burglary, or peril of the sea, or other risk varying with the nature of the business or assets : or they may come under a more direct

threat by challenge of the right to use or employ them in the business. Such threats leave the question of ownership of the business unaffected. The

owner of the assets may be able to continue in business and preserve the goodwill even if the threat is realised. On the other hand, it may be that

the loss of the asset or assets will so cripple him as to put him out of business... Where the threat is to the ownership of the business the position is

different...... There is a plain difference between these two cases. Where loss of or damage to an asset results there is loss or damage to the trade,

as such : Where loss of ownership results there is no necessary loss or damage to the trade at all. The trade may go on as before in the hands of

the successful challenger with the old assets or may for a variety of possible reasons come to an end. Income tax legislation has at different times

made different provisions for cases of discontinuance of a trade or succession to a trade. These are no doubt provisions relating to the manner or

measure of assessment, but as they are a clear recognition of the common commercial experience of a business, continuing through several hands,

they indicate that the trade when used in the statutes has to be construed as an entity in itself.

These observations make it clear that whether the ownership of the business is the hands of A or B, it makes no difference to the business and it

is not a case whether the business itself or any of its assets is jeopardised, so that an expenditure incurred in maintaining that asset can be said to be

a revenue expenditure. It accordingly seems abundantly clear to us that in the present case, the expenditure was not one which was incurred wholly

or exclusively for the purpose of the business.

The question is answered in the negative and against the assessee which will pay the costs of the department. Counsels fee Rs. 250.