1. The question referred for our opinion is :--
'Whether in the circumstances and on the facts of the case the litigation expenses amounting to Rs. 29,997 incurred by the appellant company for the protection of its cash resources was an expenditure allowable under Section 10(2)(xv)?'
2. The statement of the case and the judgment of the Income-tax Appellate Tribunal show that the assessee was negotiating with Messrs Potta Engineers Ltd. Leeds, in United Kingdom (hereinafter referred to as the United Kingdom Company) for supply of moulds required in the manufacturing of plastic goods by the assessee. The United Kingdom Company brought a suit for damages against the assessee claiming that the assessee had committed breach of contract in respect of the purchase of the moulds. The suit was decreed by the Queens Bench Division for 8,410 as damages along with 2000 as costs. After the decision of the suit which took place on the 18th December 1953, there was a compromise between the two litigating parties under which the assessee agreed to accept moulds worth 6000, and there was the further condition that the judgment given by the Queens Bench Division would thereafter be settled as desired by the assessee. It seems to have been urged that a sum of Rs. 29,997 was incurred as litigation expenses in that suit by the assessee and the assessee claimed this amount as a revenue expenditure deductible from the income under Section 10(2)(xv) of the Income-tax Act. This claim was disallowed by the Income-tax Tribunal and hence the question mentioned above has been referred to us.
3. In this case, it is clearly stated in the statement of the case that the transaction between the United Kingdom Company and the assessee related to purchase of moulds which were being acquired in the nature of capital assets. It is to be noted that the litigation occurred while the process of acquiring those moulds was still going on. There had been correspondence between the parties and, according to the United Kingdom Company, some moulds were supplied to the assessee and the assessee wrongly refused to accept those moulds and committed breach of contract. Ultimately the matter was settled by a compromise under which the assessee did acquire moulds of the value of 6000 and that was the capital asset finally acquired by the assessee.
In these circumstances, it is clear that all the litigation expenses that were incurred by the assessee were incurred in the course of the acquisition of those moulds as capital assets. The expenditure was not incurred after the acquisition of those moulds as capital assets and was not for the protection of capital assets which might have already been acquired by the assessee Company. The expenditure having been incurred in the course of acquisition of capital assets it must be held to be expenditure of a capital nature.
The cases that have been brought to our notice by the learned counsel for the assessee only deal with the aspect where litigation expenses have been incurred for protection of capital assets which already existed in the bauds of the assessee or had already been acquired by the assessee. In those, it has been held that litigation expenses incurred for the protection of capital assets were a legitimate charge as revenue expenditure. The facts of the case before us are quite different. Here no capital assets had been acquired when these litigation expenses were incurred. The litigation arose in the*course of the proceedings for acquisition of the capital assets. In these circumstances we have no hesitation in holding that these litigation expenses were not expenditure 'allowable' under Section 10(2)(xv) of the Income-tax Act, being expenses of a capital nature.
4. The question referred is answered in the negative and against the assessee. The assessee shall pay costs to the Department.Counsel's fee is assessed at Rs. 200.