RAJAGOPALAN, J. - The question referred to this Court under section 66(1) of the Income-tax Act, 'whether the litigation expense of Rs. 12,429 is capital expenditure,' arose out of the proceedings to assess Veerappa Pillai, the proprietor of the Sathi Vilas Bus Service, to tax on his income during the accounting year ending with 31st December, 1945, during the assessment year 1946-47.
The assessee claimed a deduction of Rs. 12,429 under section 10(2) (xv) of the Act. That represented the money he had spent during the year of account in conducting O. S. No. 37 of 1944, which he had filed in the Court of the Subordinate Judge of Kumbakonam. The claim was disallowed by the taxing authorities, and the tribunal to which the assessee appealed agreed with them. None of them, however, ever doubted the fact that the assessee had spent the amount.
Chamundeswari Bus Service had permits to ply five buses from Kumbakonam to Karaikal. The 'G' permits for these vehicles stood in the name of Balasubramania Pillai. The route permits granted by the Regional Transport Authority, Tanjore, also stood in his name. Of the permits obtained from the French authorities in Karaikal, three stood in the name of Balasubramania, while two stood in the name of Muthuramalingam. It was, however, common ground, that Muthuramalingam had no proprietary interest in the buses or in the transport service. Gnanasambandam claimed that the buses and the route rights belonged to him, and that his brother-in-law Balasubramania as well as Muthuramalingam merely lent their names. Gnanasambandam appears to have been marked down by the authorities as a smuggler. He was in jail in Karaikal during the period relevant for our purposes, March and April, 1944.
Raman and Raman Ltd., whose managing director was P. S. Narayana Ayyar, were also bus operators in Tanjore district. On 9th March, 1944, Balasubramania executed an agreement in favour of Raman and Raman Ltd. Balasubramania claimed to be the sole and exclusive owner of those five buses. He transferred those five buses and the route rights to Raman and Raman Ltd., for Rs. 31,001. The vendees obtained possession of the five buses the same day. On 10th March, 1944, Balasubramania and the firm of Raman and Raman preferred a joint application to the Regional Transport Authority, Tanjore, to transfer the route rights to Raman and Raman Ltd. Pending the sanction of that transfer, Raman and Raman Ltd. plied the buses for about ten days, though the buses themselves and the route permits still stood registered in the name of Balasubramania. On 15th March, 1944, Balasubramania resiled from the agreement and refused a tender of Rs. 10,000 which was part of the purchase price. He followed this up with a letter to the Regional Transport Authority, Tanjore, on 17th March, 1944, alleging that the agreement dated 9th March, 1944, and the application dated 10th March, 1944, had been obtained from him by fraud by Narayana Ayyar. On 19th March, 1944, the Regional Transport Authority rejected the application for transfer of registry, and on 28th March, 1944, it suspended the permits as the registered permit holder Balasubramania was no longer in possession of the buses. Raman and Raman Ltd. were in actual possession of the buses after 9th March, 1944, but in the absence of permits they could not ply those buses. Balasubramania instituted criminal proceedings against Narayana Ayyar, but the details thereof are not relevant for our present purpose.
Purporting to act under the directions of Gnanasambanda, who claimed to be the real owner of the buses and who was in jail then, Balasubramania and Muthuramalingam executed an agreement on 10th April, 1944, in favour of the assessee Veerappa, by which the five buses were sold to Veerappa for Rs. 35,001. A joint application was preferred by Veerappa and Balasubramania to the Regional Transport Authority, Tanjore, to transfer the 'G' permits and the route permits for these five buses to Veerappa. The Regional Authority ordered the transfer. Raman and Raman Ltd., appealed to the Central Road Traffic Board, and on 16th August, 1944, it set aside the order of the Regional Transport Authority which had recognised the transfer of the ownership of the buses. That was left untouched by the further order of the Central Road Traffic Board dated 27th November, 1944, passed on the application by the assessee for a review of its order dated 16th August, 1944. The Tribunal was not quite correct in its statement in paragraph 5 of its statement of the case, which implied that the transfer of ownership was recognised by the Central Road Traffic Board on 27th November, 1944.
It should be remembered that from 9th March, 1944, it was Raman and Raman Ltd. that were in actual possession of the five buses. On 3rd October, 1944, Veerappa filed O. S. No. 37 of 1944 against Raman and Raman Ltd. among others to establish his title to these five buses and to recover possession of them. On 17th March, 1945, the Court appointed Veerappa receiver of the properties, title to which was in dispute in the suit. As receiver, Veerappa obtained possession of the buses on 26th April, 1945.
It is really against this background we have to determine the claim of the assessee, Veerappa, that the expense he incurred during the accounting year in the conduct of this suit could be lawfully deducted by his under section 10(2) (xv) from his assessable income that year. The ultimate result of the litigation cannot and should not affect the determination of this question. To complete the narration, however, we shall set out some more facts.
Independent of the suit in which title to and the right to possession of the five buses were in issue, there were other proceedings in which also the assessee had to incur expenses. Even in March, 1944, the assessee applied to the Regional Transport Authority, Tanjore, for temporary permits for plying his own buses on the Kumbakonam Karaikal route. He was first granted permission for two buses on 16th March, 1944. After the five buses of the Chamundeswari Bus Service stopped running the assessee was granted temporary permits for three more of his own buses. None of those permits applied to the five buses, title to which was in dispute in O. S. No. 37 of 1944. Permanent route permits were granted on 18th April, 1949, to Veerappa, and that grant was confirmed by the Government on 7th November, 1950. On an application for the issue of a writ of certiorari filed by Raman and Raman Ltd. this Court set aside on 13th April, 1951, the order of the Government and directed the issue of permits to Raman and Raman Ltd. Veerappa appealed to the Supreme Court. On 17th March, 1952, the Supreme Court set aside the direction of this Court, that permanent route permits should be granted to Raman and Raman Ltd.
The suit also had a chequered career. On appeal by Raman and Raman Ltd., the High Court reversed the judgment and dismissed the assessees suit, O. S. No. 37 of 1944. The assessee appealed to the Supreme Court. The litigation terminated in 1953, at the stage by a compromise between Veerappa, the assessee, and Raman and Raman Ltd. By then the five buses which had constituted the subject-matter of the suit had become really valueless. The title of Raman and Raman Ltd., to these buses was recognised by the compromise. Veerappa however retained the more valuable route rights which he had meanwhile obtained in other proceedings. The value of even these route rights would appear to have been affected by the subsequent merger of Karaikal with the Indian Union.
Rs. 12,429 was the money that assessee had expended in the year of account in conducting the suit he had filed. No part of the expenses he had to incur in the other proceedings to which we have referred was included in this sum. In deciding whether the claim of the assessee under section 10(2) (xv) was well founded, that it was an expenditure 'not in the nature of capital expenditure, laid out wholly and exclusively for the purpose of the assessees business,' the transport business he was conducting, what was the nature of the suit in which he spent the money has to be determined first.
The Income-tax Officer found :
'But the suit is against ownership of the suit buses. Though, he (assessee) has paid the value to Gnanasambandam Pillai, the real ownership has yet to be established. As the expenses are spent for the acquisition of the capital asset, they will be treated as capital expenditure.'
The Assistant Commissioner recorded :
'The prospect of getting the route permit permanently in his own name was involved in the suit. Hence the very acquisition of the valuable right was involved in the litigation and the consequent legal expenditure. The appellant should have anticipated that the purchase transaction would cost him not only the cash consideration of Rs. 35, 001 but also the cost of the litigation. Hence the expenditure incurred is part of the cost of the acquisition of the asset, and, therefore, capital in nature.'
The Tribunal took a different view. After referring to the finding of the High Court in the appeal preferred against the decree in O. S. No. 37 of 1944, that the assessee was acting in concert with Balasubramania to sabotage the contract entered into between the company (Raman and Raman Ltd.) and Balasubramania the Tribunal recorded :
'A suit filed in collusion with the vendor to sabotage an existing contract entered into earlier, can never be for the purpose of maintaining, preserving or defending any existing rights.'
The Tribunal negatived the contention of the assessee, that the litigation was embarked upon to protect and maintain the permits which the assessee had obtained. The Tribunal ultimately reached the conclusion, that the expenditure was of a capital nature. On the nature of the suit itself, the finding of the Tribunal was that it was to claim title to these five buses and to recover possession of them.
The Income-tax Officer, with whom the Tribunal, apparently agreed, found that the suit was to establish the assessees title to the five buses and to recover possession of those five buses from Raman and Raman Ltd. The correctness of that finding could not be assailed. Whether the expenditure incurred in conducting that suit was, in the circumstances of this case, an expenditure of a capital nature is the next question.
The test to apply is, in our opinion, that formulated by Lawrence, J., in Southern v. Borax Consolidated Ltd.
'.... where a sum of money is laid out for the acquisition or the improvement of a fixed capital asset it is attributable to capital, but that if no alternation is made in the fixed capital asset by the payment, then it is properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital assets of the company.'
That principle has been approved of by Courts both in England and in India. In Commissioner of Income-tax v. Raman and Raman Ltd. a Bench of this Court accepted the principle and applied it to claim of the assessee under section 10 (2) (xv). It was this very litigation, O. S. No. 37 of 1944, the scope of which had to be considered in Commissioner of Income-tax v. Raman and Raman Ltd. : only it was from the point of view of Raman and Raman Ltd. The claim of Raman and Raman Ltd. was upheld in that case. The learned Judges observed :
'We are unable to accept the contention of the revenue authority that the expenditure in this case was incurred for the acquisition of fixed capital assets. The expenditure, as we already stated, did not create any new asset nor did it alter the character of the capital asset that had been acquired by the company (Raman and Raman Ltd.) under the contract. That remained unaltered. The asset, to defend the title to which the expenditure was incurred was an existing asset and was not acquired in consequence of the expenditure. Nor was there any improvement of the capital assets of the company by reason of the litigation.'
No. doubt, Raman and Raman Ltd. were the defendants in that suit. But that did not really affect the question. The test would have been the same had they figured as plaintiffs in that suit. In applying the test to decide whether the expenditure was of a capital or revenue nature, the question whether the assessee who claimed the deduction under section 10 (2) (xv) of the Act figured as a plaintiff or as a defendant is immaterial. The ultimate result of the litigation is also irrelevant. That was laid down by the supreme Court in Commissioner of Income-tax v. Hirjee. The learned Chief Justice observed :
'Nor are we satisfied, as at present advised, that a distinction drawn in the Bombay case between the legal expenses of a successful and unsuccessful defence is sound. The deductibility of such expenses under section 10 (2) (xv) must depend on the nature and purpose of the legal proceeding in relation to the business whose profits are under computation, and cannot be affected by the final outcome of that proceeding. Income-tax assessments have to be made for every year and cannot be held up until the final result of a legal proceeding, which may pass through several courts, is announced.'
In the suit O. S. No. 37 of 1944, whoever ultimately won, nothing would have been added to the existing capital assets, the five buses, even taking the route rights tacked on them into consideration. The acquisition of title was antecedent to the litigation and could never be treated as the result either of the litigation or of the expenses incurred in the litigation. The expenses in the litigation were not for acquiring capital assets. They had already been acquired, and the suit was to establish title to those capital assets, which title the assessee claimed he had already acquired.
In its appellate order the Tribunal recorded :
'In view of the aforesaid reason given by the High Court, which is binding upon us, for dismissing the suit of the plaintiff (assessee) , there can be no question of the assessee being allowed the litigation expenses incurred in such a suit as revenue expenditure. A suit filed in collusion with the vendor to sabotage an existing contract entered into earlier, can never be for the purpose of maintaining, preserving or defending any existing rights.'
As we pointed out earlier, the Tribunal eventually came to the conclusion that the expenditure incurred by the assessee was of a capital nature. The approach to the question and the conclusion the Tribunal reached are, in our opinion, wrong. The result of the litigation was not a relevant factor. Secondly, the finding, though it was that of the High Court, that the assessee had entered into the contract to sabotage the earlier contract which Raman and Raman Ltd. had obtained, was not conclusive. There was an appeal to the Supreme Court. Further, even if that finding had been reached by the Tribunal on the material placed before it -and there was no evidence of that - that would not support the conclusion that the expenditure was of a capital nature. Spite, whether it was satisfied or not by the contract dated 10th April, 1944, and the litigation that ensued, did not result in any accretion to any of the capital assets of the assessee in his transport business. In our opinion, the finding of the Tribunal, that the expenditure in question was of a capital nature, was not supported by any evidence on record.
The main question at issue in the suit was whether it was the title of the assessee, founded on the contract dated 19th April, 1944, or that of the rival claimant Raman and Raman Ltd. based on the earlier contract of 9th March, 1944, that should prevail. The Tribunal never doubted the claim of the assessee that he paid Rs. 35,001 as the purchase price of the five buses. That was to acquire a capital asset for his business, the transport business. Both parties to the suit bona fide litigated their respective claims of title. In the case of neither of them was the expenditure incurred in conducting the suit of a capital nature. Each party could and did claim that the expenditure was of a revenue nature, incurred to sustain the claim of title that party had put forward bona fide. The expenditure was not incurred by either of them to add to the title it claimed. It could not be revenue expenditure for one party and capital expenditure for another. In the case of Raman and Raman Ltd. it was held by this Court in Commissioner of Income-tax v. Raman and Raman Ltd. to be a revenue expenditure satisfying the requirements of section 10 (2) (xv). We are unable to see any real basis for holding that in the case of the assessee it was not a revenue expenditure but a capital expenditure.
The learned counsel for the Commissioner pointed out that the assessee never obtained possession of the buses either on the date of the contract, 10th April, 1944, or even on the date he filed the suit. The learned counsel urged that made all the difference between the claim of Raman and Raman Ltd., which this court considered in Commissioner of Income-tax v. Raman and Raman Ltd., and the claim of the assessee. That on the date of the suit Raman and Raman Ltd. were in possession did not affect the nature of the suit or the nature of the expenditure incurred by either party. The title to the five buses had yet to be recognised. That was the scope of the suit. Whoever obtained recognition of title would have been entitled to possession. We have already pointed out the result of the suit did not affect the question for determination, whether the claim of the assessee in this case and the claim of Raman and Raman Ltd. in the other case came within the scope of section 10(2) (xv). Lack of possession did not make the title or the claim to title put forward by either side defective. It was not a case of outlay by the assessee to cure a defective title in which case, of course, it would have been of a capital nature. We see therefore no scope for applying the principles laid down by the Privy Council in Raghunandan Prasad v. Commissioner of Income-tax where their Lordships held that the expenses incurred by the assesses in completing their title and entering into possession after the sales had become absolute were not deductible be the assesses from their taxable profits. They further observed with reference to the circumstances of that case :
'The assessees in bidding for the property must have had in view that they would incur these expenses if they were the successful purchasers and doubtless estimated accordingly the price which they thought it worth their while to bid.'
Though the Assistant Commissioner of Income-tax was of the view that the assessee should have anticipated that the purchase transaction would cost him not only the cash consideration of Rs. 35,001 but also the cost of the litigation, and that the expenditure incurred was part of the cost of the acquisition of the asset, there was really no basis for that; and that was apparently not the view that prevailed with the Tribunal. Raman and Raman Ltd., it should be remembered, had offered to pay Rs. 31,001; the assessee paid in full Rs. 35,001. Even before the assessee paid that amount, Balasubramania had repudiated the contract dated 9th March, 1944. There was really nothing in the evidence to show that the assessee contemplated a litigation. Certainly there was no basis for holding that any litigation he had to undertake was to perfect a defect in title. The Court could find the claim of the assessees title good or bad. It was not a case of a partially defective title which could be cured by the litigation.
The Tribunal did not negative the contention of the assessee that he had laid out Rs. 35,001 as capital expenditure in the course of his business. Nor did it negative the contention of the assessee, that he had laid out an expenditure of Rs. 12,429 in the course of the business. The Tribunal was of the view that the expenditure of Rs. 12,429 was of a capital nature. That view was wrong. It is true that the elimination of the alternative, capital expenditure, need not by itself prove in every case that the expenditure was of a revenue nature. The Tribunal was of the view that if the permits were assets which had to be protected by the litigation, the 'object of the litigation was to effect an improvement of the so-called capital assets, the permits.' Even that view was wrong. The suit was not to defend or to establish, or even to obtain recognition of the claim to the route permits. With that a civil Court had nothing to do. That constituted the subject-matter of the other proceedings before the Tribunals constituted under the Motor Vehicles Act. As we have already pointed out, the suit was to maintain the title to the buses claimed to have been acquired as capital assets, and the expenditure incurred in maintaining that claim of title was not of a capital nature but of a revenue nature.
The next question to be considered is whether the expenditure was incurred by the assessee slowly and exclusively for his business. There cannot however be any serious dispute as regards this matter and indeed even the Tribunal did not hold against the assessee on this head. The business of the assessee was as a transport operator. He expanded his business by expenditure of new capital which resulted in the acquisition of the five buses with their route permits. The cost of acquisition was of course expenditure of a capital nature. But to assert the rights to this business which he acquired, he incurred the expenses in dispute. If that expenditure was not of a capital but of a revenue nature, it was certainly laid out for his business and solely and exclusively for it.
This question refereed to us is answered in the negative and in favour of the assessee. The assessee will be entitled to his costs in this reference. Counsels fee Rs. 250
Reference answered in the negative.