V.S. Desai, J.
1. The question raised in this reference under section 66(2) of the Indian Income-tax Act, 1922, arises out of the assessment order for the assessment year 1958-59 corresponding to the previous year ended on 31st March, 1958, and is as follows :
'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that litigation expense amounting to Rs. 34,656 (Rupees thirty-four thousand, six hundred and fifty-six) were an admissible expenditure ?'
2. The assessee is a registered firm and carrier on abkari business. Its head office is in Bombay and it carries on business at several centres. At Wadala and Uran it has a business of manufacturer and sale of liquor at other places such as Bhopal, Ajmer, Jaipur, Raichur and Kolhapur. Its business in liquor at Kolhapur had been in existence since about 1917. In April, 1945, it obtained a licence from the erstwhile State of Kolhapur for the exclusive manufacture and supply of country spirit for a period of period of ten years commencing from April 1, 1945, in Kolhapur State territories and the jahagirs within the Kolhapur Darbar jurisdiction on terms and conditions mentioned in the licence agreement. Under the said terms the assessee was to be placed in possession of the Darbar distillery at Kolhapur at a monthly rent of Rs. 40 and was to manufacture spirit at the said distillery and issue 1,20,000 gallons every year in such quantities as may be required from time to time for the supply to retail vendors in the contract area of the assessee. Monies realised by the sale of the liquor, after deducting the cost, were to be apportioned between the Darbar and the assessee in the manner provided in the agreement. The agreement was made under the abkari laws, rules and regulation then in existence in the State. On the 1st March, 1949, the Kolhapur State merged with the then Bombay State and the Bombay Abkari Act was applied to the Kolhapur State on the 1st May, 1949. The Bombay Prohibition Act came to be applied to the territory with effect from 16th June, 1949, and the distillery was sealed by the Excise Department on the 16th July, 1949. Since these events had resulted in the cancellation of the assessee's licence, it entered into certain negotiation with the Bombay Government for the purpose of having the licence renewed on the same terms for the unexpired period of the original licence and the said negotiation having failed, it filed a civil suit in the year 1951, in the court of the Civil Judge (Senior Division) at Kolhapur, claiming damages for the loss cause to it by the cancellation of its licence agreement. A total amount of Rs. 3,50,000 was claimed as damages in the said suit. The particular of the claim shows that a sum of Rs. 84,787-13-0 was claimed for the value of the distillery plant, machinery and equipments installed by the assessee in connection with the business of manufacture of liquor and which had been rendered unsaleable and useless by reason of the manufacture and distillation having been completely stopped from April 1, 1949. Rs. 11,483-6-0 were claimed in respect of the items, which had been taken possession of from the store room by the excise inspector on 16th July, 1949. Rs. 13,102-4-8 was the value claimed of the stock of country liquor taken possession of by the excise department. Rs. 2,31,305-12-0 were claimed for the loss of profit for the unexpired period of the contract from April 1, 1949, to March 31, 1955, calculated at an average net profit of Rs. 38,550-15-4 per year on the average of the profits for the preceding four years for which the assessee had been able to run its business under the licence prior to its cancellation, and a sum of Rs. 9,320-12-4 was asked for as general damages suffered by reason of the wrongful conduct of the Government in the matter of cancellation of the agreement. In additional to this amount of Rs. 3,50,000 which was claimed as and by way of damages there was a further claim for Rs. 2,291-2-0 in respect of certain dues, which were due and payable to the assessee by the Government in respect of the liquor supplied under the licence and for Rs. 10,000 for the return of the deposit made by the assessee with the Government. The suit was transferred from Kolhapur to the original side of this court and was disposed of on the 23rd October, 1955, and was substantially dismissed except with regard to the claim for the return of the deposit and a part of the claim in respect of the value of the stock-in-trade taken possession of by the excise department. The assessee appealed against the side decree but the appeal was also dismissed on the 12th April, 1956. On February, 1958, a bill for Rs. 34,656 was submitted to the assessee by its solicitors. The assessee claimed the amount of the said bill as a deduction in its assessment for the assessment year 1958-59. The Income-tax Officer disallowed the claim holding that, since the amount pertained to the legal expenses incurred in connection with distillery case and the business of the distillery was closed, the expenditure could not be treated as incidental to business and was, therefore, a capital expenditure. The Appellate Assistant Commissioner upheld the disallowance holding that the expenditure was not incurred for the purpose of the business carried on by the assessee and the claim, therefore, could not be allowed. In further appeal to the Income-tax Appellate Tribunal it was contended on behalf of the assessee that the expenses were incurred for the maintenance of business or for the recovery of damages or loss of profit; that the suit, if decreed, would have brought into existence in it and that as the bill was rendered in the year of account by the solicitors, the amount was properly deductible in the said year. The Tribunal held that the object of the suit was to recover certain amounts, which, if recovered, would have formed part of the revenue accounts of the assessee. The expenditure was not likely to bring into existence any capital asset or enduring benefit, and moreover it was incurred by the assessee in the capacity of a trader in connection with its abkari business. According to the Tribunal, therefore, having regard to the aim and object of the expenditure, it was a revenue or business expenditure. The Tribunal also held that the assessee's business had not ceased to exist in the account year and the bill having been submitted by its solicitor in the year of account, the assessee would be entitled to treat it as the business expenses incurred for the relevant assessment year. In view of these conclusions, the Tribunal allowed the assessee's appeal and directed the Income-tax Officer to allow the claim of the assessee for the deduction of the amount of Rs. 34,656 as claimed by it. The department's application under Section 66(1) for a reference having been rejected by the Tribunal, it applied to this Court under Section 66(2). In the said application it asked for two questions. This court, however, allowed only one of them, which has now been referred by the Tribunal on the present reference. The other question, which this court disallowed, was as to whether the Tribunal's finding that the assessee's business had continued during the year of assessment was supported by any evidence on record.
3. A notice of motion has been taken out by the department in which it is prayed that the statement of the case should be referred back to the Tribunal for the purpose of annexing thereto certain other documents or in the alternative that the said documents be taken on record and treated as part of the case.
4. Now, the documents, which the department wants to be taken on record, are, firstly, the assessment order passed by the Income-tax Officer for the assessment year 1953-54, the appellate order of the Appellate Assistant Commissioner for the assessment year 1953-54, the miscellaneous application along with its annexure which the department had made to the Tribunal for making certain corrections in its order and the order of the Tribunal made on the said application. Now, the reason mentioned by the department as to why it wants these additional document are as follows : In the order the Income-tax Officer in disallowing the claim of the assessee he has stated that he was disallowing the item for reasons given in his assessment orders in earlier years and the department claims that in order to understand the said reasons it is necessary to refer to the said earlier assessment orders. We find, however, from the agreed statement of the Tribunal that the assessment orders for the earlier years did not, in fact, contain any discussion or the reasons why the item was being disallowed. No further elucidation, therefore, can be provided by the said earlier orders. The Appellate Assistant Commissioner also, like the Income-tax Officer, relied on the reason given by him in his earlier appellate order. In the agreed statement of the case, however, the Tribunal has reproduced the relevant part of the said earlier appellate order of the Appellate Assistant Commissioner. It is, therefore, not necessary to make the whole of the said order a part of the record of the case. As to the last two documents, they do not relate to the question, which has been raised on the present reference and which we have to consider, but to the other question, which has been refused by this Court and on which no reference has been made to this court, viz., as to whether the business of the assessee had continued during the relevant assessment year. Those documents, therefore, are not relevant to the present reference and cannot, therefore, be allowed to be made a part of the statement of the case of the present reference. The notice of motion, therefore, will have to be dismissed and we order accordingly.
5. Coming now to the question under reference, what is claimed by the assessee is the litigation expenses incurred by it in relation to the suit, which it had filed against the Union of India and the State of Bombay to recover damages and certain other reliefs in connection with the cancellation of its licence agreement with erstwhile Kolhapur Government. The suit, as we have already mentioned earlier, substantially failed. That, however, will not matter because in considering whether the litigation expenses will be allowable, the result of the litigation cannot be a criterion. It is not the success or the failure of the litigation but the aim and object thereof which would determine the character of the expenditure of the litigation. What will, therefore, have to be seen in the present case is : What was the aim and object of the assessee in undertaking the litigation and what it would have got thereby if it had succeeded therein The Tribunal's view is that the object of the suit was to recover certain amounts, which would be on revenue account of the assessee. The litigation was undertaken by the assessee in the capacity of a trader in connection with the cancellation of the licence which was necessary to run its business and the expenditure, therefore, was incurred in connection with the running of the business of the assessee and, consequently, a revenue expenditure. If the Tribunal's view that what the assessee would have got if it had succeeded in its was an income receipt is correct, the litigation expenses incurred by the assessee would undoubtedly be an expenditure incurred by the assessee for the purpose of earning that income and, consequently, a business expenditure. What has, therefore, to be considered is what is the nature of the claim which the assessee had made in the suit : whether it was capital or revenue.
6. We have already pointed out earlier that the claim made in the suit consisted of five items. The first item of Rs. 84,787-13-0 was for damages for sterilisation of the plant, machinery, equipments, etc., of the distillery. The second item of Rs. 11,483-6-0 was in respect of the dead-stock. The third item of Rs. 13,102-4-8 was in respect of the stock-in-trade. The fourth item of Rs. 2,31,305-12-0 was in respect of the loss of profits for the unexpired period of the contract and the fifth item of Rs. 9,320-12-4 was claimed by the assessee by way of general damages suffered by it. There were two other items of comparatively small amounts : one of Rs. 2,000 and odd for unrealised dues from the Government under the licence and the other for Rs. 10,000 for the return of the deposit. It will thus be seen that the major items claimed by the assessee in the suit are the items of Rs. 2,31,305-12-0 for loss of profits and Rs. 84,787-13-0 for the damages caused to the assessee by rendering the plant, machinery and equipments as unsaleable and useless. The character of the litigation expenditure incurred by the assessee, therefore, will be determined mainly by the character of the claim made by the assessee in the suit having regard to the particular of the claim, which we have already set out above. The claim made in the suit is based on the allegations that although the Kolhapur Darbar had entered into an agreement with the assessee on April 12, 1945, for a period of ten years and in pursuance thereof had granted it a licence to run the distillery an carry on the business of manufacture and sale of liquor, by the application of the Bombay Prohibition Act to the Kolhapur State, the assessee had been prevented from continuing its trade and business under the said agreement from the said date and he was informed that the chief Administrator of the State had been instructed to stop the further manufacture of liquor in the said Kolhapur State distillery after the 15th of June, 1949, and to seal the sock of liquor and other articles lying therein unless the plaintiffs applied for the necessary licence under the Bombay Prohibition Act before that date. According to the assessee, the Provincial Government had committed breaches of the said agreement and acted wrongly and illegally and in violation and infringement of the plaintiffs' rights under the said agreement in taking charge of and sealing the plaintiffs' stock of liquor, vats and other articles lying at the said distillery. It was further stated that the cause of action for the suit arose on the 16th July, 1949, when the Provincial Government wrongfully and illegally took charge of and sealed the plaintiff's stock of liquor, vats and other articles lying in the said distillery premises and by wrongfully repudiating the said agreement. It would thus be seen that the plaintiffs' case in the suit was that the government by cancellation of the licence and sealing of the distillery and stoppage of the manufacture and sale of liquor by the assessee had disabled the assessee from carrying on its business if manufacture and sale of liquor under the licence and had prevented it from earning profits. The assessee, therefore, claimed in the suit damages worked out on the basis of the profits which it would have earned if it had been allowed to run it business under the licence along with certain other losses caused to it by the plaint, machinery and equipments having been rendered useless and unworkable.
7. It is urged on behalf of the assessee that since the main claim of the assessee was for loss of profits, which it would have earned if it was allowed to run its business in accordance with the terms and condition of the licence, by the premature termination of its licence, its claim was for the recovery of the profits lost to it by the concession of the agreement and the claim, therefore, was for revenue and not for capital. It is claimed, on the other hand, by the department that the mere circumstance that the damage is measured by the profits does not give the character of revenue to the amount claimed. What the assessee is claiming is for the sterilisation of its business and for the damage caused by the sterilisation or stoppage of its profit-making apparatus. The aim and object of the litigation undertaken by the assessee was not to maintain the running of its business, nor to avoid a threat to its existence or continuance but for the damages for its total destruction. The claim of the assessee, therefore, is not what may be termed as revenue and consequently the litigation expense undertaken for the purpose cannot be business expenses. Both sided have sought to support their submissions by decided cases.
8. It is no doubt true that the main item of Rs. 2,31,305-12-0 claimed by the assessee is for loss of profits for the unexpired period of the licence but the mere circumstance that the damage is measured by the loss of profits that would be caused would to make the claim the profits of the business. As has been observed in Van den Berghs Ltd. v. Clark (H. M. Inspector of Taxes) there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of the test, and as pointed out by the Supreme Court in Senairam Doongarmall v. Commissioner of Income-tax it is the quality of the payment the is decisive of the character of the payment and not the method or its measure that makes it fall within capital or revenue. In Senairam Doongarmal v. Commissioner of Income-tax the factory and other buildings on the tea estate belonging to the assessee were requisitioned for defence purposes by the military authorities, with the result that although the assessee continued to be in possession of the tea gardens and tended them to preserve the plants, the manufacture of tea was stopped completely. The assessee was paid compensation for the years 1944 and 1945 under the Defence of India Rules calculated on the basis of the out-turn of tea that would have been manufactured by the assessee during that period. On the question as to whether the compensation paid to the assessee was capital or revenue, it was held that it was the former. Having regard to the facts of the case it was held that a direct an immediate result of the requisition of the factory and other building was to stop the business. The entire structure of the business was affected to such an extent that no business was left or was done in the two years. Moreover, the case was not one where the interruption was caused by the act of a contracting party so that the payment could be regarded as an adjustment of a contract by payment. It was a case of compulsory requisition resulting in the discontinuance of the business. The assessee did not carry on the business of manufacture of tea as result of the requisition and the compensation paid to the assessee did not partake of the character of profits because business not having been done by the assessment, no question of profits taxable under section 10 arose.
9. Mr. Joshi, for the revenue, has very strongly relied on this case in support of his submission that what was claimed by the assessee in the suit, if recovered, would have been a capital receipt and not an item of business income. He says that, as in this case, in the case before us also the licence had been cancelled not as a result of the voluntary act of the contracting party but as an inevitable result of the operation of the Prohibition Act. The cancellation of the licence, therefore, cannot be treated as adjustment of relations between the contracting parties. The result of the cancellation of the licence, therefore, cannot be treated as adjustment of relations between the contracting parties. The result of the cancellation of the licence was the stoppage of the source of income of the assessee and also the sterilisation of his assets in the shape of plant, machinery and equipments. It may be, he says, that on the finding of the Tribunal the assessee's entire business activity of manufacture and sale of liquor, however, was concerned, the can be no doubt whatsoever that the said business activity had been completely stopped and destroyed as a result of the cancellation of the licence. Mr. Joshi, therefore, says that what was claimed by way of damages the suit could not possibly be termed the profits of the business : what was claimed was the damages for compulsory cessation of the business, for the stoppage of the working of the profit-making apparatus and consequently the aim and object of the litigation undertaken by the assessee was for the purpose of obtaining what would have been a capital receipt and expenditure incurred for the litigation could not be treated as revenue.
10. Another case relied upon by him is Kettlewell Bullen & Co. Ltd. v. Commissioner of Income-tax. In this case the assessee-company, which had been formed with the object, inter alia, of carrying on the business of managing agencies, was the managing agent of six companies including the Fort William Jute Co. It surrendered the meaning agency and received in consideration certain things including compensation of Rs. 3,50,000 for loss of office. It was held that the compensation was for loss of capital asset and was not, therefore, in the case laws dealing with the question, it was observed by the Supreme Court as follows :
'On an analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed. Where, on a consideration of the circumstances payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (free from the contract terminated) the receipt is revenue. Where by the cancellation of an agency the trading structure of the assessee impaired, or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate or cancellation of the agency agreement is normally a capital receipt.'
11. Mr. Joshi says, relying on this authority, that by the cancellation of the liquor licence at Kolhapur, the business of manufacture and sale of liquor at Kolhapur is completely stopped and the source of the assessee's income has, therefore, vanished. The damage claimed in the suit was in respect of this source of income, and, consequently, the claim of the assessee was in respect of the capital and not revenue.
12. In our opinion, on the facts of the case before us, Mr. Joshi is right in his submission that the claim of the assessee in the suit was for, what may be termed 'capital' and not 'revenue'. The claim was based on the stoppage of the source of income by disabling him to work his profit-making apparatus, and earn profits. The cancellation of the licence was not as a result of the voluntary act on the part of the Government, but was the inevitable result of the operation of the Prohibition Act. The assessee, again, by the suit, which he had filed, was not attempting to see that his business should continue and he made profits therefrom. He was accepting the position that business had come to a stop an would not run. He was, however, holding the other party to the suit responsible for the wrongful stoppage of business and asking it to compensate him for the loss caused by the cancellation of the licence.
13. Mr. Dwarkadas, the learned advocate appearing for the assessee, on the other hand, has contended that the claim of the assessee in the suit was based on the cancellation of a licence agreement. In the ordinary course of business the compensation claimed thereof was what may be treated as by way of adjusting the relation between the parties. He has in that connection invited our attention, firstly, to the case in Commissioner of Income-tax and Excess Profits Tax v. South India Pictures Ltd. In that case the assessee, which carried on the business of distribution of films, had entered into certain agreements for advancing monies to certain motion picture producers towards the production of three fields and acquiring the rights of distribution thereof. These agreements, which were for five years, were cancelled towards the end of their period and an agreed compensation of Rs. 26,000 was paid to the assessee. The question was whether the receipt was revenue or capital, and the supreme court held that it was revenue because the sum paid to the assessee was not compensation for not carrying on its business, but was a sum paid in the ordinary course of business to adjust the relation between the assessee and the producers; the termination of the agreements did not radically or at all affect or alter the structure of the assessee's business; the amount received by the assessee was only so received 'towards commission', i.e., as compensation for the los of the commission which it would have earned had the agreements not been terminated; the amount was not received by the assessee as the price of any capital assets sole or surrendered or destroyed but the amount was simply received by the assessee in the course of its gong distributing agency business from that going business; and that, therefore, the sum was an income receipt. In out opinion, the facts of this case are clearly distinguishable from the case before us. In that case the assessee's business consisted of entering into distribution agreements and working them out and the agreements in question were agreements entered into in the ordinary course of business, which, after they had run for a major portion of their period, had come to be cancelled by the voluntary acts of the parties to the agreement. The compensation paid in the circumstances was for the purpose of working out the results of the agreement before their full period had expired. It being the regular business of the assessee to enter into such contracts, the cancellation of these agreements did not affect the structure of the assessee's business and the compensation paid was not so much for the stoppage of the assessee's business but was paid in lieu of the commission, which the assessee would have earned provided it had continued the agreements. In the case before us, however, the position is entire different. The manufacture and sale of liquor at Kolhapur was carried on solely on the basis of the licence agreement. The licence agreement formed the very foundation of the business of manufacture and sale of liquor. The premature termination of the licence when it had six years more to run resulted in a complete stoppage of the business apparatus so far as the manufacture and sale of liquor was concerned. It may be that the assessee might have similar trade elsewhere. It may also be, on the finding of the Tribunal, that the business at Kolhapur may not have altogether stooped. However, so far as the activity of manufacture and sale of liquor was concerned, the activity came to a complete standstill as a result of the cancellation of the said agreement. Moreover, the cancellation was not by the voluntary act of the parties to the agreement but as a result of the operation of the Prohibition Act. It is not possible, therefore to look upon the cancellation of the agreement in the case before us as in the ordinary course of business. The compensation claimed in the present case was for the stoppage of the source of income or for the stoppage of the profit-making apparatus.
14. Another case relied upon by Mr. Dwarkadas is Gillanders Arbutnot & Co. Ltd. v. Commissioner of Income-tax. In that case the appellant-company carried on business in diverse lines : besides acting as managing agents, shipping agents, purchasing agents and secretaries, the company also acted as importers and distributors on behalf of foreign principals and bought and sold on its own account. Under an unwritten agreement, which was terminable at will, the appellant acted as sole agents an distributors of explosives manufactured by the Imperial Chemicals Industries (Export) Ltd. That agency was terminated and by way of compensation the imperial Chemical Industries (Export) Ltd. paid for the first three years after the termination of the agency two-fifths of the commission accrued on its sales in the territory of the appellant's agency computed at the rates at which the appellant had formerly been paid and in addition in the third year full commission for the sales effected in that year at the same rates. On the question whether the amounts received by the assessee for the three years were of the nature of capital or revenue, it was held that, having regard to the vast area of business done by the appellant as agents, the acquisition of agencies in the normal course of business and determination of individual agencies a normal incident not affecting or impairing its trading structure. The amounts received by the appellant for the cancellation of the explosives agency, therefore, did not represent the price paid for the loss of a capital asset : they were, therefore, of the nature of income. In addressing itself to the question as to where the compensation paid was capital or revenue, the Supreme courts reiterated the principle, which it had laid down in Kettlewell Bullen & Co. Ltd. v. Commissioner of Income-tax, and which we have already reproduced and, applying the test laid down to the facts of the case before them, observed that the compensation received by the appellant in the case before them was for cancellation of the explosives agency, which was terminable at will, and the appellation was to be paid an amount which was to be computed on the basis of the profits of the business. The Supreme Court further observed as follows :
'The appellant was conducting business as selling or distributory agent of numerous principals. The agency which was terminated was one of many such agencies in which the appellant functioned as distributing agent of a foreign principal. There is not even a suggestion, that by the determination of the agency held the appellant in explosives from the principal company, the trading structure of the assessee's business was impaired...... It may reasonably he held, having regard the vast area of business done by the appellant as agents, that the acquisition of agencies was in the normal course of business and determination of individual agencies, a normal incident, not affecting or impairing the trading structure of the appellant. The appellant was compensated by payment to it for the loss of profit it suffered by the cancellation of its agency, leaving it free to conduct its remaining business.'
15. Repelling the argument that the compensation received on cancellation of agency must always be regarded as capital their Lordships observed that there was no such immutable principal and in each case the question had to be determined in the light of the attendant circumstances. In our opinion, the facts of this case are again distinguishable from the facts of the case before us. In the case before us the assessee's structure of business of manufacture and sale of liquor at Kolhapur was not only impaired but brought to a standstill. Although the assessee may be having similar kinds of business elsewhere, it cannot be said that the licence obtained by it in Kolhapur for the running of the business in Kolhapur was an incident of the trading operations of the assessee and in the normal course of its business. It was a distinct and separate business which the assessee was carrying on at Kolhapur on the basis of the licence granted to it by the Kolhapur Darbar and, so far as that business was concerned, the source of income it provided had been lost to the assessee and the compensation claimed by it was for the said loss.
16. Another case referred to by Mr. Dwarkadas is Commissioner of Income-tax v. Best & Co. (Pvt.) Ltd. This case again was very similar to the Gillanders Arbutnot & Co. Ltd. v. Commissioner of Income-tax, already referred to. In this case also an agency at will was terminated by a notice and compensation paid. The assessee, whose agency was terminated, was carrying on business in innumerable lines. It was contended in that case that the compensation, being for the loss of the agency, must be treated as a capital receipt. it was held, after reiterating principal laid down in Kettlewell Bullen and Co. Ltd. v. Commissioner of Income-tax, already referred to, that whether the compensation received is a capital receipt or a revenue receipt must depend upon the circumstances of each case. Before coming to a conclusion one way or the other many questions had to be asked and answered. What was the scope of the earning apparatus or structure, from physical, financial, commercial and administrative standpoints If it was a business of taking agencies, how many agencies had it, what was their name and variety, how were they acquired, how were one or some of them lost and what was the total income they were yielding If one of them was given up, what was the average income of the agency lost What was is proportion in relation to the total income of the company What was the impact of giving it up on the structure of the entire business Did it amount to a loss of an enduring asset causing an unabsorbed shock dislocating the entire or a part of the earning apparatus or structure Or, was the loss an ordinary incident in the course of the business The answers to these questions would enable one to come to a conclusion whether the loss of a particular agency was incidental to the business or whether it amounted to a loss of an enduring asset. If it was the former, the compensation paid would be a revenue receipt; if it was the latter, it would be a capital receipt.
17. We may point out that the case before the Supreme Court was one of cancellation of one of the many agencies of the assessee, whose business was carried on in innumerable lines including the acquisition of agencies and working them out. The termination of the agency was within the framework of the business of the assessee, it being a necessary incident of the business that existing agencies may terminated and fresh agencies may be taken and did not impair the profit-making apparatus of the assessee. Such is not the case before us. Although the assessee took up the abkari business at several different places its business at each of the several places was separate and distinct, each constituting a separate profit earning apparatus. The case before us cannot be equated with the case of a transaction of cancellation of an agreement in the ordinary course of business. It was not the cancellation of an agreement in the ordinary course of business but the disruption of a business itself and the loss claimed for was not in lieu of profits, which the working of the agreement would have produced but for the loss of the business itself, which the cancellation of the agreement brought about. In our opinion, therefore, the case in Commissioner of Income-tax v. Best & Co. (Pvt.) Ltd., referred to by Mr. Dwarkadas also does not help him. There are some other cases also referred to by the learned counsel on either side. It is, however, not necessary to refer to all of them except making a mention of a case of this court on Manna Ramji and Co. v. Commissioner of Income-tax, referred to by Mr. Joshi. In that case during the war six sheds used by the assessee-firm doing business as timber merchants for storing timber were requisitioned. On a claim by the assessee for compensation it was finally awarded during the relevant assessment year a certain sum as a lump for los earnings. The assessee claimed that the receipt was a capital receipt. It was held by this court that since the assessee could not carry on its timber business without the requisitioned godowns and the business had practically closed down as no alternative premises were available, and the loss of the premises necessarily involved loss of earnings and the compensation was awarded after determining the present value of a number of years purchase, and only two years' purchase of the net average profits was awarded as compensation, the compensation received by the assessee was only a capital receipt and not assessable as income. In the case before us, the licence having been cancelled as a result of the operation of the Prohibition Act, the business had come to a standstill and was not capable of being carried on any more, and the compensation paid was for the loss caused by the stoppage of the business and not in respect of the profits that would had been earned by the running of the business.
18. Mr. Dwarkadas has urged that the expenses incurred by the assessee were civil litigation expenses which he had incurred as a trader in connection with the trade and were, therefore, revenue expenditure. His argument was that irrespective of the character of the claim made in the suit and the nature of the amount, which the assessee would have recovered in the suit, the expenditure having been incurred in connection with trade and the capacity of a trader were entitled to be treated as revenue expenditure, and in the connection he has invited our attention to the decisions in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax and Birla Cotton Spinning and Weaving Mills Ltd. v. Commissioner of Income-tax. We do not think that expenses of any civil legation incurred by a trader in connection with his business must always be retarded as revenue expenditure. It must, as observed by the Supreme Court in Commissioner of Income-tax v. Ravi Bahadur Jairam Valji, depend upon the aim and object of the litigation as also the nature and character of the expenditure.
19. The case in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, referred to by Mr. Dwarkadas, does not support the proposition which he has urged. There the principle laid down was that the expenditure incurred to resist in a civil proceeding the enforcement of a measure, legislative or executive, which imposes restriction on the carrying on the carrying on of a business, or to obtain a declaration that the measure is invalid, would, if other conditions are satisfied, be admissible as a deduction under section 10(2) (xv). It has been observed in the said case :
'The 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 cannot be affected 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 staring 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.'
20. In the present case the litigation expenses were incurred not for the promotion of the business, not for the purpose of continuing its existence so as to enable the assessee to earn profits nor for the purpose of avoiding a threat to its destruction. The object of the litigation was to recover by way of damages what the assessee had been made to lose by the stoppage of its business.
21. The other case in Birla Cotton Spinning & Weaving Mills Ltd. v. Commissioner of Income-tax related to the expenses incurred by the assessee in making representations before the Income-tax Investigation Commission and also for challenging the validity of the Taxation of Income (Investigation Commission) Act, 1947. It was held that as the expenditure was incurred by the assessee-company in opposing an illegal and coercive governmental action with the object of saving taxation and safeguarding the business it was justified by commercial expediency and was, therefore, allowable expenditure. It will thus be seen that the expenditure incurred in that case was to safeguard the business from coercive governmental action and saving it from being taxed. The expenditure incurred was for the purpose of the running of the business. In the case before us, however, the litigation undertaken by assessee was not for challenging the governmental action in canceling the licence, nor for challenging the Prohibition Act, which had the effect of causing a stoppage of its business, but for loss or damage on the basis of its business already having been stopped. In our opinion, therefore, this submission of Mr. Dwarkadas cannot be sustained.
22. In the result, therefore, the view taken by the Tribunal that the litigation expenditure could be allowed as an admissible revenue expenditure is not correct and the question, therefore, will have to be answered in the negative. We order accordingly. The assessee will pay the costs of the Commissioner.
23. Question answered in the negative.