1966 PLP 347 (PTD)

The difficulties of the assessee in this reference are insuper?able because the facts found are all against the assessee's contention and the claim. He has given no particulars and no details of the so‑called expenses for repairs. What these repairs actually were are not to be found. Indeed as indicated already it has been found as a fact and even conceded by the assessee before the Appellate Assistant Commissioner that all these expenses were of capital nature and that they were all incurred before the commencement of the business. Even 'the current lease has not been supplied by the assessee and what appears as a lease is the expired lease. If the assessee wants to deduct from his business profits certain items as allowance under subsection (2) of section 10 of the Income‑tax Act the onus of proving that such allowances are permissible is upon him. The Supreme Court decision in Commissioner of Income‑tax v. Calcutta Agency Limited (1) is an authority in support of this proposition, where Kania, J., at page 196, observed "Now it is clear that this being a claim for exemption of an amount, contended to be an expenditure falling under section 10(2) (xv), the burden of proving the necessary facts in that connection was on the assessee . . . ." It is also an authority for the proposition that the High Court in such reference must base its answer on the facts as found by the Tribunal as pointed out by Kania, C. J., on the same page of the reports, where the learned Chief Justice observed "It is, therefore, the duty of the High Court to start by looking at the facts found by the Tribunal and answer the questions of law on that footing. Any departure from this rule of law will convert the High Court into a fact‑finding authority, which it is not under the advisory jurisdiction." Judged by this test and taking the two central facts stated in the statement of case and in the different orders of the Income tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal, viz., ((1951) 19 I T R 191) all these expenses are of a capital nature and (2) that they are all incurred before the commencement of the business, the assessee must fail in this case and the answer to the question referred to us must be to the negative. We must record here that Mr. Mukherjee, learned Advocate for the assessee before us, abandoned all claims of the assessee under section 10 (2)(v) of the Act and claimed the sums mentioned in the question under section 10(2)(xv) of the Income‑tax Act. Even in making this claim under section 10(2)(xv) of the Act his difficulty remains in the finding of fact that the sum of Rs. 24,498‑12‑6 which he claimed for repairs did in fact relate to capital expenditure. One of the conditions to be satisfied under section 10 (2)(xv) is that the expenditure must not be "in the nature of capital expenditure." It will be appropriate at this stage now to refer to some of the arguments and citations made at the Bar. In support of his claim for the allowance of Rs. 24,498‑12‑6 on account of repairs, the assessee relied on the decision of the Punjab High Court in Commissioner of Income‑tax v. S. B. Ranjit Singh ((1955) 28 I T R 14), for the proposition that a sum can be allowed as the cost of repairs and can be held not to be a capital expenditure even though the expenditure in r: particular year is incurred on the ground that it is undertaken to remedy the effect of several years' wear and tear or negligence and also in spite of the fact that such expenditure may not be necessary for several years to come after repairs had been effected. This case is of little help to the assessee on the facts of this reference because it is found that the expenses here on this account were all of a capital nature and were not to remedy the effect of several years' wear and tear or negligence. Lord ‑President Clyde of the Court of Sessions, Scotland, in Law Shipping Co. Ltd. v. Commissioner of Inland Revenue ((1923) 12 T C 621, 625) indicated that even accumulated arrears of repairs can in certain circumstances be regarded as repairs necessary to earn the profits. The Bombay High Court in New Shorrock Spinning and Manufacturing Co. Ltd. v. Commissioner of Income‑tax ((1956) 30 I T R 338) specially emphasised the word "current" in the expression "current repairs" in section 10(2)(v) of the Income‑tax Act. Most of the decisions have been reviewed by the Division Bench of this Court in Humayun Properties Ltd. v. Commissioner of Income‑tax ((1962) 44 I T R 73) and it will be unnecessary for us here again to catalogue those cases and discuss them. On the contrast between section 10(2)(xv) and section 12(2) of the Income‑tax Act, reference may also be made to the decision of the Division Bench in Madanlal Sohanlal v. Commissioner of Income‑tax ((1963) 47 I T R 1). But again as we say it is not necessary for us on the facts of this reference to pursue these authorities. Therefore on the facts found that the expenses incurred on this account were all of capital nature, and on the fact that the onus was on the assessee to prove the facts to bring him within the allowance under section 10 (2) (xv) of the Act and such onus the assessee having failed completely to discharge by producing any fact showing the nature and character of these expenses, it must be found that the sum of Rs. 24,498‑12‑6 cannot be claimed under section 10 (2) (xv) or under section 10 (2) (v) of the Act. The other part of the question relates to the sum of Rs. 9,890 alleged to have been incurred for legal expenses. The assessee claims this also under section 10 (2) (xv) of the Income‑tax Act. The difficulty in the way of the assessee's claim in this respect is again one of facts and that is that it has been found that such legal expenses were incurred "for the purpose of completing the title of the assessee". In the application before the Tribunal for stating a case for the decision of this Court the assessee in fact showed two different sums of money for legal expenses, one for Rs. 10,078‑15‑3 said to have been incurred as legal expenses in connection with the auction purchase "before" the commence?ment of the business and the other sum of Rs. 9,890 which is the subject‑matter of the question as legal expenses in connection with the proceeding for setting aside the certificate sale "after" the commencement of the business. The Tribunal found that the legal expense was for the purpose of completing the title of the assessee and, therefore, this part of the expense was for the acquisition of a capital asset. The claim for legal expense as an allowance under section 10 (2) (xv) of the Income‑tax Act has been considered from time to time in some of the reported cases. But somehow or other, the basic character of such a claim seems to have received no close judicial scrutiny. Section 10 of the Income‑tax Act deals with profits and gains of business, profession or vocation and the allowance that can be made in computing such profits and gains. A cursory glance at the different sub‑clauses from (i) to (xiv) shows the type and nature of allowance contemplated by that section. Not one of the clauses between (i) to (xiv) indicates any allowance in respect of legal charges or expenses. If, therefore, legal expenses are to come under section 10 (2) (xv) it must come through the door of the language used in this clause, viz. "Any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation." If this point was res integra this Court would have preferred to consider if legal expenses, as such, could in any circumstances be "in the nature of capital expenditure" within the meaning of these sub‑clauses. Legal expenses however have come under "capital expenditure" in the decided cases on the ground that such expenses defended the capital of the business. Legal expenses as such are not capital expenses but they may incidentally, directly or indirectly or remotely protect or defend capital or title. But the fundamental question is, can such a test of effect, possible or probable or direct or indirect or remote, make such legal expenses capital expenses. Then, why not all expenses for watch and ward and those employees who guard and protect the property of the business, capital expenses, for they are all defending and protecting the property and the capital of the business. Curiously enough, none of the decided cases appears to have approached this problem from this point of view. On behalf of the revenue authorities the decision of the Australian High Court in Hallstroms Proprietary Ltd. v. Federal Commissioner of Taxation ((1946) 72 C L R 634) was cited to us. Legal expenses amounting to ?6,020 were held to be of revenue and not of a capital nature and, therefore, deductible from the taxpayer's assessable income. Latham, C. J. proceeded on the basis that the expenditure by the company was not made for the purposes of acquiring an asset or of adding to the profit‑yielding subject which constituted the capital structure of the business and also on the basis that the company by making the expenditure did not gain any "enduring advantage". At pages 641‑42 Latham, C. J. observed: "It gained nothing‑it merely succeeded in maintaining an existing position. The prevention or avoidance of a loss is not a gain of anything. The prevention of subtraction is not the same thing as addition. Occasional legal proceedings are incidental to many businesses. They may result in the acquisition of a new right as, for example, where a person successfully applies for and obtains a patent. But expenditure in the defence of a right enjoyed in common with all His Majesty's subjects is not expenditure incurred in obtaining anything. It is an outgoing of the business incurred in keeping the business going on the same basis as in the past, without any change in the constituent elements of the profit‑yielding structure." Latham, C. J. distinguished the leading case, Southern v. Borax Consolidated Ltd. ((1941) 1 K B 111), on the ground that there the company incurred costs in defending its title to its land and buildings and was, therefore, entitled to deduct such costs, as expenditure wholly and exclusively laid out for the purposes of the business of the company. This principle or basis or test was approved by the Court of Appeal in Associated Portland Cement Manufacturers Ltd. v. Inland Revenue Commissioners ((1945) 27 T C 103) by Lord Gteene M. R. "But it is too late in the day for this Court to think originally on this subject and the cue handed over to us from the past has to be passed on." The question came up recently before the House of Lords in Morgan v. Tate & Lyle Ltd. ((1955) A C 21) This of course was not a case for legal expenses but for expenses incurred by the company in connection with a propaganda campaign to oppose the threatened nationalisation of the industry. At pages 51‑52 of that report Lord Reid discussed the cases and the problems raised in this connection. The learned Lord observed "There are a number of other cases in which expenses incurred in defending or preserving the existence of capital assets has been held to be deductible. In Southern v. Borax Consolidated Ltd. (1941) 1 K B 111 legal expenses in defending a title to land abroad were allowed. Associated Portland Cement Manufacturers Ltd. v. Kerr (1945) 27 T C 103 was a case rather like Mitchell v. B. W. Noble Ltd. (1927) 1 K B 719 Lord Greene M. R. there said: The money that you spend in defending your title to a capital asset, which is assailed unjustly, is obviously a revenue expenditure, and having said that it was rot a capital expense, apparently he saw no reason why it should not be deductible Cooke v. Quick Shoe Repair Service (U49) 30 T C 460 somewhat resembled Usher's Wiltshire Brewery (1915) A C 433 in that the taxpayer, in order to maintain the goodwill of the business, voluntarily discharged certain liabilities which the vendor of the business had failed to discharge. He was held entitled to deduct these payments because they had been made to preserve an asset of the business. On the other hand, there are cases where it has been held that expenditure is not deductible, because it was not incurred by the taxpayer in his capacity of trader. Payment of a fine is not an ordinary commercial loss (Inland Revenue Commissioner v. Warnes & Co. Ltd. (1919) 2 K B 444 and insurance against loss owing to strikes has been held not to be deductible (Rhymney Iron Co. Ltd. v. Fowler (1896) 2 Q B 79 ; Thomas Merthyr Colliery Co. Ltd. v. Davis (1933) 1 K B 349, 374. 1 find these last cases difficult to follow and I cannot find that they throw any light on the present case. The ground of judgment is most clearly stated by Slesser L. J. in the latter case where he said (Thomas Merthyr Colliery Co. Ltd. v. Davis) ?I find the greatest difficulty in taking the view that an expense which is incurred exclusively for the purposes of the trade can be extended to cover an expense wholly and exclusively laid out for the purpose of protecting the trader against the absence of trade.? That may or may not be right in its context, but I do not think it sets out any general rule capable of wider application." Turning now our attention to the decisions of the Supreme Court in India, the leading case on the subject is Commissioner of Income‑tax v. Finlay Mills Ltd. ((1951) 20 I T R 475). There the expenditure was incurred by a company carrying on business of manufacturing and selling textile goods in registering for the first time its trade marks which were not in use prior to 25th February 1937. It was held that such expenditure was revenue expenditure and an allowable deduction under section 10 (2) (xv) of the Income?-tax Act, 1922. At pages 478 and 479 of the report Kania, C. J. observed: "In our opinion, this is neither such an asset nor an advantage so as to make payment for its registration a capital expenditure. In this connection it may be useful to notice that expenditure incurred by a company in defending title to property is not considered expense of a capital nature." The Supreme Court again had to consider section 10 (2) (xv) of the Income‑tax Act in the case of Commissioner of Income‑tax v. H. Hirjee ((1953) 23 I T R 427) and also in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income‑tax ((1961) 41 I T R 350, 360). In the former case the assessee was prosecuted under the Hoarding and Profiteering Ordinance and was finally acquitted and claimed the amount spent in defending himself under section 10 (2) (xv). It was held there that the distinction between legal expenses of a successful and unsuccessful defence was not sound and that the deductibility of such expenses under section 10 (2) (xv) must depend on the nature and purpose of the legal proceedings in relation to the business whose profits were under computation and were unaffected by the final outcome of the proceedings. In the latter case, at page 664, Kapur, J. observed "In our opinion, no expense which is paid by way of penalty for a breach of the law can be said to be an amount wholly and exclusively laid for the purpose of the business." The latter case was concerned with the amount paid by way of penalty for breach of the law under the Sea Customs Act. In a recent decision of the Division Bench of the Madras High Court in Transport Co. (Private) Ltd. v. Commissioner of Income‑tax ((1962) 46 I T R 1009) it is laid down that where the purpose of the litigation is to maintain an existing title to the assets of the assessee's business, expenditure therefore would be of a revenue nature, but if the purpose was to acquire or cure a defect in the assessee's title to the assets it would be of a capital nature. It was held immaterial whether the assessee figured as a plaintiff or defendant in the action. It was also held immaterial whether the result of the suit was in favour or against the assessee. The Privy Council in Commissioner of Income‑tax v. Maharaja?dhiraj Sir Kameshwar Singh of Dharbhanga ((1942) 10 I T R 214 (P C)) had also to consider the question of legal costs being an allowable deduction. On the facts of that case the Privy Council upheld the contention that the respondent was entitled to the deduction claimed on the ground that the main character of the action was against the respondent's father as the money‑lender, and his defence to the action was just as essential for the full protection of his rights as creditor in the loan of Rs. 10 lakhs as was his suit for the recovery of that loan the costs of which had been allowed as an expense incurred in his money‑lending business. Reliance was placed on behalf of the assessee on the decision of the Allahabad High Court in Jagat Bus Services, Saharanpur v. Commissioner of Income‑tax ((1950) 18 I T R 13). During the relevant year the road in that case was not in a motorable condition for several months and the assessee had to pay only a sum of Rs. 5,000 to the State and the assessee claimed payment as an allowable deduction under section 10(2) (xii) of the Income‑tax Act, 1922, as it then was. It was held that the sum of Rs. 5,000 paid under the agreement was a revenue expenditure and therefore, was allowable as a deduction. The position on the authorities, therefore, is that if the legal expenses are incurred in creating, curing or completing title to the capital then it is capital expenditure. The question in each case, however, turns on the point whether the legal expenses in question were incurred for purposes of creating, curing or completing title. The facts therefore in this reference may be reviewed in the light of this principle. Before reviewing the facts we would also emphasise again the fact found that the 1egal expenses claimed in this case were "for the purpose of completing the title of the assessee", On the principle laid down by the cases and authorities, it, therefore, becomes clear that legal expenses for that purpose must be regarded as capital expenditure. ? On the merits also this view can be supported. The sale in this case was under the Public Demands Recovery Act. Section 20 of that Act says that where property is sold in execution of a certificate there shall vest in the purchaser merely the right, title and interest of the certificate‑debtor at the time of the sale, even though the property itself be specified. It also provides that where immovable property is sold in execution of a certificate, and such sale has become absolute, the purchaser's right, title and interest shall be deemed to have vested in him from the time when the property is sold and from the time when the sale becomes absolute. The statute provides in section 22 for the procedure to set aside such sale of immovable property. Then in section 25 of the Act it is expressly provided that where no application is made under section 22, section 23 or section 24, or where such an application is made and disallowed, the Certificate Officer shall make an order confirming the sale, and, thereupon, the sale shall become absolute. From the scheme of the Act, contained specially in sections 20 to 25, it is clear that the perfection of title under a sale certificate goes through different stages. At first, sale is held under the certificate. There is a period of time given for making the application for setting aside the sale. Thirdly, and lastly, there is a time for "confirming" the sale a making the sale "absolute". Now in the facts of this reference the legal expenses incurred in this case were all incurred within this time between the sale under the sale certificate and before the confirmation of the sale and before the sale became absolute. Naturally, therefore, and rightly the Tribunal came to the conclusion that these legal expenses were incurred for "completing" the title of the assessee and as such was capital expenditure. In ordinary sales, as for instance by private agree?ment, there is no question of any statutory period for setting aside the sale or for the sale to become absolute or to be confirmed. A person purchasing therefore at a sale held under section 20 of the Public Demands Recovery Act really purchases an inchoate right which is completed by the sale becoming confirmed and becoming absolute under section 25 of the Act. In this case an application was made to set aside the sale under section 22 of the Act before the sale was confirmed or before the sale became absolute and within the time permitted by the statute. The assessee's contention, therefore, that this was revenue expenditure cannot on merits be sustained. To meet this objection an argument was advanced on behalf of the assessee on the strength of a decision of the Lahore High Court in Mahabir Parshad & Sons v. Commissioner of Income?-tax ((1945) 13 I T R 340). There the assessee claimed to deduct from his assessable income a certain sum which he had spent in defending a suit for pre‑emption of a property which he had purchased for business purposes and which he was using as a godown for the storage of his goods. The Lahore High Court came to the conclusion on the facts that the expenditure incurred in defending the suit was revenue expenditure and not capital expenditure within the meaning of section 10 (2) (xii) of the Income‑tax Act as it then was and it was, therefore, an allowable deduction. The distinction between that case and the present reference is that it was not there a case of statutory sale under statutory provisions where the sale could not become absolute except by a special order as in section 25 of the Public Demands Recovery Act. No doubt an argument was made, as noticed in page 353 of that report, that the expenditure in that case was incurred to improve the capital assets because the assessee purchased the property in a town where the pre‑emption Act was in force and where he must have known that some pre‑emptor would sue for possession of the property. But the Court, at page 353, said: "I must confess, I am unable to appreciate this argument. The title of a purchaser may be attacked on several grounds and the right to pre‑empt is only one of them . . . . . The expenditure has so far been incurred only once but there is no guarantee that it may not recur, though it is not likely to recur in connection with a suit for pre‑emption. It is as necessary for a businessman to protect his business premises as his stock?-in‑trade, and I do not see any distinction in principle between litigation expenses incurred to defend the business premises and those incurred to defend the stock‑in‑trade. Both are incurred wholly and exclusively for the purposes of the business and do not result in the acquisition, improvement or alteration of a capital asset." This last sentence in the observation makes the distinction clear. There on the facts it was held not to be an acquisition, improvement or alteration of the capital assets. Here on the facts of the reference made in the statement of the case as well as in the order of the Tribunal, it is the other way about and it has been held and found that the legal expense in this case was only for the purpose of completing the title of the assessee. The broad test evolved by the authorities and what Lord Cave formulated as the test in British Insulated and Helsby Cables Ltd. v. Atherton ((1925) 10 T C 155) is that in determining whether litigation expenses are in a particular case capital expenditure is to see whether such expenses were incurred in acquiring a new capital asset or in improving or altering an existing capital asset. Applying that test on the facts of this reference the answer can only be that the legal expenses in this case were capital expenditure. Even in the Lahore case the observation is there that where an assessee purchases a property with an acknowledge of defect in title and perfects it by further payment, the expenditure incurred is attributable to capital. A purchaser being an auction‑purchaser under certificate proceedings under the Public Demands Recovery Act purchases with all the risks and hazards of attack recognised by the statute and expenses incurred in connection therewith for completing and perfecting the title must, on the principles laid down by the authorities discussed, be regarded as capital expenditure. No doubt, all legal expenses relating to the protection of the capital are not capital expenditure and some of these expenses maybe and very often are revenue expenditure. Litigation expenses incurred by an assessee in litigation concerning his property or capital asset may arise independently of his purchase or the document or root of his title such as attacks from a trespasser or a superior title (as in the case of Southern v. Borax Consolidated Ltd. ((1941) 1 K B 111) already mentioned.) Such expenses will not ordinarily be capital expenses. In such cases the attack really is de hors the root of the title of the assessee on which the assessee depends. Legal expenses incurred for such litigation on grounds indepen?dently of or de hors the root of the title on which the assessee relies will ordinarily be revenue expenditure. But a statutory sale with statutory condition and with statutory features that the sale has to be confirmed and made absolute with liberty to aggrieved persons to come in to attack and set aside the sale within a specified period and when, therefore, the attack is made on the very root of the title itself and within the permissible procedure of statutory provision for setting aside such sale stands on a different footing. Then the legal expenses in connection therewith are clearly attributable to capital and must be regarded as capital expenditure. The result, therefore, is that the facts in each case must govern whether legal expenses in an individual instance are capital expenditure or revenue expenditure. There can be no rigid formula nor any invariable test for such legal expenses. For instance the Nagpur High Court in Central Spinning, Weaving & Manufacturing Co. Ltd. v. Commissioner of Income‑tax ((1943) 11 I T R 266) and in Income‑tax Appellate Tribunal, Bombay v. Chhaganmal Mangilal ((1946) 14 I T R 206) allowed legal expenses as revenue expenditure on the particular facts of these cases, while the Lucknow Bench of the Allahabad High Court in Anand Beharilal v. Commissioner of Income‑tax ((1952) 22 I T R 205) held on the particular facts that legal expenses there incurred did not amount to revenue expenditure and did not permit their deduction. In the last‑mentioned case the learned Chief Justice, at page 207, observed: "He chose to purchase the property in present with all such defects of title as there might be in it for a consideration which was to be utilised in financing the litigation." This observation shows that legal expenses that follow in instances where purchaser knowingly "purchases litigations" with a view to perfect known defects of title by litigation may not be revenue expenditure. On the authorities discussed above, we do not consider it appropriate to lay down any rigid or narrow test and this Court is content in expressing its concurrence with the broad principles indicated above. For reasons stated above we hold that the two sums of money, (1) Rs. 24,498‑12‑6 and (2) Rs. 9,890, cannot be deducted as an allowance under section 10 (2) of the Indian Income‑tax Act either under sub‑clause (v) thereof of under sub‑clause (xv) thereof. We accordingly answer the question in the negative. The assessee will pay the costs of this reference. Certified for two counsel. LAIK, J.‑I agree. Question answered in the negative.