1. This is a departmental reference under the I.T. Act, 1961. The assessee, Arunachala Nadar by name, and one John Samuel, acquired, in common, eighteen acres of punja lands in the year 1950. They developed the lands into salt pans and worked the pans under a partnership arrangement. The partnership was dissolved in the year 1957. Apart from his obligations under the partnership, John Samuel was indebted to the assessee under a mortgage. Subsequent to the dissolution of the partnership in 1957, disputes arose between the two individuals. The assessee retained possession of the entire eighteen acres of punja lands and was exploiting the lands as salt pans exclusively for his own benefit. He manufactured salt and derived income from all those lands. In 1958, John Samuel filed a suit against the assessee for a partition of the lands and separate possession of his half share. He also prayed for past mesne profits as respects his half share for the period during which the assessee was in possession. The suit was decreed by the trial court. The assessee appealed to the High Court but failed. The assessee had incurred legal expenses by way of court fees, advocate fees and other incidental expenses amounting in all to Rs. 13,164. While returning the profits from the salt pan business for the year ended January 16, 1962, relevant to the assessment year 1962-63, the assessee claimed that he was entitled to deduct this sum of Rs. 13,164 as business expenditure. This claim was negatived by the ITO. On appeal, both the AAC and the Income-tax Appellate Tribunal held that the disallowance was erroneous. The Department then required the Tribunal to state a case on the question of allowability of the legal expenses. The Tribunal has now stated the question of law in the following form :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was entitled to the deduction of Rs. 13,164, being the expenditure incurred by the assessee in connection with certain litigation proceedings ?'
2. The endeavor of Mr. A. N.Rangaswamy, learned standing counsel for the Department, before us was to urge that this expenditure was incurred by the assessee not in his character as a businessman, but only in his capacity as owner of lands. He put the same argument in another way by saying that the expenditure was not incurred wholly and exclusively for the purpose of the assessee's business, but on a resolution by the court of a dispute over title to property subsequent to the dissolution of the partnership. At one stage of the argument advanced before the Tribunal, it was contended that the assessee had put up a false case in resisting the suit of John Samuel for partition and, therefore, the assessee was not entitled to claim deduction of the legal expenses in the computation of his taxable profit from his business. The learned standing counsel, however, did not pursue this line of argument before us, and quite rightly so because the question of allowability of a deduction for legal expenses in the computation of an assessee's business income does not really depend upon the fortunes of the assessee in the litigation, nor even on the ethical character of the assessee's contention in the legal proceeding concerned.
3. The real question for our consideration is two-fold. The first one is whether the litigation expenses incurred by the assessee can be properly regarded as expenditure wholly and exclusively incurred for the purpose of the assessee's business. The other one is whether the expenditure can be regarded as revenue in character. Mr. Rangaswamy's contention on the first part of the question was that this expenditure cannot be regarded as one relating to the assessee's business. His thesis was that when the partnership business had already been dissolved, the subsequent suit the partnership business had already been dissolved, the subsequent suit and the appeal in which the assessee had incurred items of expenditure cannot be regarded as relating to any business. It is true that the litigation in question did not relate to the partnership business or to any interest claimed by the assessee as a partner in the business. But it cannot be denied that the assessee's resistance of the partition suit by John Samuel was motivated wholly with the intention of preserving for himself possession, not only of his own half share of the suit properties, but also of the other half share which was claimed by John Samuel. The defence put forward by the assessee in the partition proceedings was not that he was the exclusive owner of the entire area of the salt pans. What he claimed was that although the salt pans were acquired jointly by himself and John Samuel, yet he was given exclusive possession of the entirety of the lands by John Samuel, who agreed to that arrangement in lieu of payment of interest the one and only purpose which motivated the assessee while defending the suit was to preserve for himself the source of income from the salt pans. Admittedly, he was in possession of the entire area of salt pans including the half share belonging to John Samuel. Admittedly he worked own advantage the entire salt pans by manufacturing salt therefrom, which he subsequently disposed of at a profit. This profit was duly brought to account and returned for the purpose of income-tax as income from business. It is only in the computation of this business income that the assessee claimed the deduction towards the legal expenses. In the events that happened, it difficult to see how the expenses incurred by the assessee for resisting the suit cannot be allowed to be deducted for the computation of the taxable income. We do not accept the contention of Mr. Rangaswamy that the defence put forward by the assessee was unconnected with the business and his participation in the litigation must be attributed not to his role as a businessman, but to his role as an owner of immovable property, interested in holding on to his possession of some one else's property.
4. Mr. Rangaswamy cited a few decisions such as N. Selvarajulu Chetty & Co. v. CIT : 56ITR29(Mad) and Adarsha Dugdhalaya v. CIT : 80ITR49(Bom) . These decisions largely turn on their own individual facts. Both raise questions relating to litigation expenses incurred in legal proceedings about disputed claims to ownership of business after the cessation of partnerships. In those factual circumstances, it might be a reasonable conclusion to hold that litigation expenses could not be allowed since those expenses do not relate to any business actually being carried on. In the present case, however, the expenses which were claimed by the assessee were expenses incurred in the course of carrying on the business of salt pans, and the main intention for the assessee in resisting the suit for partition was to protect his continued possession of the other half share in the salt pans with a view to continue to earn income therefrom. The facts in the present case are in no way parallel to the facts in the two cases cited by the learned counsel for the Department.
5. Mr. Rangaswamy also cited CIT v. Malayalam Plantations Ltd. : 53ITR140(SC) rendered by the Supreme Court. In this case, several decisions, both English and Indian, were referred to in extenso by the Supreme Court. One of the English decisions cited was Southern v. Borax consolidated Ltd. : 10ITR1(Mad) . That was a case where a company carrying on business in England incurred expenditure in defending its title to property situated in the United States. It was held that the amount was spent wholly and exclusively for the purpose of the company's trade and, therefore, the expenditure was an allow able deduction for computing the profits of the company for income-tax purposes. While citing this decision, the Supreme Court observed that expenditure incurred for the 'purpose' of the trade includes expenditure made to protect the assets of the person carrying on the trade.
6. we are satisfied that both on principle and on authority any legal expenditure incurred by an assessee to protect the source of his income or the title to his business or to preserve or maintain his business assets must be regarded as expenditure incurred wholly and exclusively for the purpose of his business and, therefore, eminently allowable as a deduction for the purpose of computing the profits for income-tax purposes.
7. Mr. Rangaswamy then urged that the expenditure incurred by the assessee in the present case, although it might be connected with the assessee's business, must nevertheless be disallowed on the ground that it was capital in nature. In T.C. No. 620 of 1975, judgment dated July 10, 1981 reported at p. 601 (supra) a Bench of this court had occasion to go in to the question whether litigation expenditure incurred by a taxpayer for protecting title to his capital asset in his business is or is not a revenue item of expenditure. After a review of the decisions of the courts, both in our country and abroad, in what may be called 'protection money'cases, this court expressed the view that the expenditure was revenue in character. This court made a distinction between expenditure incurred for the acquisition of a capital asset as well as expenditure incurred for the substantial expansion or improvement of a capital asset on the one hand, and expenditure incurred for merely protecting and maintaining the title to an existing capital asset on the other. The Bench held that the former expenditure was capital in nature, whereas the latter expenditure was revenue in character. Following this decision, we are satisfied that the legal expenditure amounting to Rs. 13,164 cannot be disallowed on the ground that it was capital i nature. Our answer to the question which we have set out earlier must, therefore, be in favour of the assessee.
8. One other question which has been referred to us in this case relates to another item of deduction claimed by the assessee, which was disallowed by the ITO in the first instance, but subsequently allowed by the appellate authorities. The claim for allowance related to the mesne profits decreed in the partition suit as payable by the assessee to his erstwhile partner, John Samuel. The mesne profits, as ascertained by the court, amounted to Rs. 8,000. It is needless to say that this amount related to past mesne profits of more than one year. The ground on which the ITO refused to allow this amount to be deducted in the computation of the profits for the subsequent account year with which we are now concerned was that they related to 1957 and onwards and cannot, therefore, come in for deduction during any subsequent years, let alone in the account year in question relevant to 1962-63. Both the AAC and the Tribunal took a different view. They held that it was not possible to envisage any liability on the part of the assessee for payment of mesne profits until the court gave a decree against him in that regard. They further held that the liability for mesne profits accrued only after the judgment was rendered against the assessee in the partition suit. Accordingly, they held that the claim for allowing deduction of mesne profits was properly laid by the assessee as arising or accruing only in the year in which the judgment was rendered against the assessee. We did not hear such argument from learned counsel for the department on this question. There may be a limited class of cases in income-tax law where the theory of relation back may be applied both for the purpose of fixing the year of receipt of income and for the purpose of determining the year for allowance of expenditure. But, in this case, the very peculiar conception of mesne profits can be consistent only with the position that the person in possession is in unlawful occupation of property which actually products or is capable of producing profits. So long as the assessee in this case was claiming that he was in lawful occupation not only of his own half share of the salt pans, but also of the half share belonging to John Samuel, he could not, consistent with that stand, be expected to claim as allowance in his income-tax assessments of a deduction in respect of the so-called mesne profits as having accrued year by year. It is only when the court gave its verdict on the unlawful nature of his possession that the income accruing from the half share of lands took upon itself the character of mesne profits. therefore, it was only when the judgment was rendered in this regard that the liability itself has properly accrued. We, therefore agree with the conclusion of the Tribunal that the sum of Rs. 8,000 was properly allowable in the year of account relevant to the assessment year 1962-63. Since we have answered both the question in this reference in favour of the assessee, the Department will pay the assessee's costs. Counsel's fee Rs. 500.