BOORUGU NAGAIAH RAJANNA Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN this case, at the instance of the assessee, the following question has been referred to us for our opinion :

(2.) THE facts leading to this case are as follows : THE assessment year under consideration is 1966-67. THE assessee before us is a partnership firm registered under the provisions of the Income-tax Act, 1961. One Sri Boorugu Rajanna died leaving three sons, Boorugu Viswanatham, Boorugu Veeraiah and Boorugu Mahadev. Out of these three sons, Boorugu Viswanatham died issueless. Boorugu Veeraiah died leaving behind him his widow, Smt. Sakuntalamma, but without leaving a male issue. Boorugu Mahadev had five sons and five grandsons. After the death of Boorugu Rajanna, all his properties were taken over by survivorship by Boorugu Mahadev and his sons. Smt. Sakuntalamma, the widow of Boorugu Veeraiah, was given only the right of maintenance. THE sons and grandsons of Boorugu Mahadev formed themselves into a partnership and that partnership is the assessee-firm before us. On February 15, 1954, Smt. Sakuntalamma purported to adopt one Harnath as a son to her deceased husband, Boorugu Veeraiah, and a deed of adoption was executed on March 2, 1954, After the adoption, Harnath filed a suit claiming half share of the property of the joint family of Boorugu Rajanna. This suit, being O.S. No. 31 of 1957, was filed in the court of the Chief Judge, City Civil Court, Hyderabad. It appears that, on February 14, 1952, there was a partial partition of the assets of the family of Boorugu Rajanna and, as a result of that partition, the assets which came to the share of Boorugu Mahadev and his sons, were utilised by them as assets of the assessee-partnership firm, which was formed on February 14, 1952, and thus a substantial part of the assets of Boorugu Rajanna were utilised as business assets of the assessee-firm. THE partition suit was resisted on several grounds, one of them being that the adoption was not valid since the consent of the sapindas of Boorugu Veeraiah was obtained after the adoption and not before as required by law. THE defendants succeeded in the suit in the trial court and by the judgment delivered on December 30, 1964, the City Civil Court, Hyderabad, held that the adoption was invalid and the suit for partition filed by Harnath was dismissed, but there was no order as to costs of the suit. THEreafter, it appears that Harnath filed an appeal against the decision of the City Civil Court and that appeal was also dismissed. In the accounting year relevant to the assessment year 1966-67, the assessee-firm claimed an expenditure of Rs. 94,587 as legal expenses incurred by it in connection with the partition suit filed by Harnath. It appears that the parties to the suit were not merely some of the partners of the assessee-firm, but also the Hindu undivided family of Sri Boorugu Mahadev and also another firm of M/s. Boorugu Viswanatham Bros., Guntur. It was found that the partners of the firm, the Hindu undivided family of Boorugu Mahadev and M/s. Boorugu-Viswanatham Bros., had each got some of the assets left by Boorugu Rajanna; on the basis of the proportionate assets coming to each of these three groups or entities, the legal expenses amounting to Rs. 94,587 were proportionately divided between the assessee-firm, the Hindu undivided family of Boorugu Mahadev and the firm of M/s. B. Viswanatham Bros., Guntur, On the basis of proportionate apportionment, the assessee-firm's share came to Rs. 69,190 and this amount of Rs. 69,190 was claimed by the assessee as a deduction on the ground that it was a business expenditure incurred by it wholly and exclusively for the purpose of the business, i.e., in order to protect its assets. THE Income-tax Officer disallowed the claim on the ground that the firm was not included as a defendant in the suit, but only some of the partners of the firm pursued the suit. According to the Income-tax Officer, the assets of the firm were not in jeopardy, but only part of the assets. He held that there was no litigation by the firm to protect its business assets against a hostile title, but only some of the partners were trying to protect their ownership over the properties. THE Income-tax Officer, therefore, disallowed the claim for deduction. He did not discuss whether the claim should be allowed during the assessment year 1966-67 or any other year nor did he discuss whether the total assets of the concerned partnerships should be taxed and if so on what date.

(3.) THE question of what is known as "litigation expenses" has been engaging the attention of the courts in England and India for many years. As far back as 1940, in Southern (H. M. Inspector of Taxes) v. Borax Consolidated Ltd. [1942] 10 ITR (Suppl) 1 (KB), the question of litigation expenses arose under these circumstances. A company acquired land in America for the purpose of its business and subsequently an action was brought in the American courts against the company claiming that the company's title to the land and buildings erected thereon was invalid and in defending the action the company incurred costs amounting to 6,249. Lawrence J. held that the sum of 6,249 was wholly and exclusively laid out by the company for the purposes of its trade and was an allowable deduction in computing the profits of the company for income-tax purposes. It was held that the legal expenses incurred by the company did not create any new asset at all, but were expenses incurred in the ordinary course of maintaining the assets of the company and the fact that it was maintaining the title, and not the value, of the company's business did not make any difference. At page 5 of the report, Lawrence J. observed :