THE DEPUTY COMMISSIONER OF INCOME TAX vs. SRI.B.KUMAR GOWDA MINE OWNERS

5 the lease was granted by the Department of Mines and Geology in the year 2006 to the assessee, which was assailed in writ petitions filed by the aforesaid parties. Reliance was placed on the decision of the Hon’ble Supreme Court, in Dalmia Jain & Co., Ltd., vs. CIT [81 ITR 754 (SC)] [Dalmia Jain & Co.Ltd.] and Sree Meenakshi Mills Ltd., vs. CIT [63 ITR 207 (SC)] [Meenakshi Mills Ltd]. The Assessing Officer not being satisfied with the contention of the assessee, held that the expenditure had to be construed to be capital expenditure, as it was an expenditure having nexus to earning of profits in business. Accordingly, the claim was disallowed. 3. The assessee filed an appeal before the Commissioner of Income Tax, Appeals (CIT-Appeals), which allowed the claim of the assessee. As against the order of the Appellate Commissioner, the Department filed appeals before the Income-tax Appellate Tribunal, Bangalore Bench-A, Bangalore (hereinafter, referred to as the “Tribunal”, for the sake

6 of brevity). While reconsidering the matter, the Tribunal held that the Appellate Commissioner had not looked into the aspect as to whether the expenditure incurred long back could be allowed on piecemeal basis in subsequent years and that the approach of the Appellate Commissioner in deciding the matter was not proper. Therefore, the appeals were remanded for reconsideration by the Appellate Commissioner. 4. Being aggrieved by the order of Tribunal, department has preferred this appeal, seeking to raise the aforesaid substantial question of law. 5. We have heard learned counsel for appellant - Department and learned counsel for respondent – assessee and perused the material on record. 6. Appellant’s counsel contended that for the Assessment Years 2008-09 and 2009-10, the assessee had disclosed legal expenditure of Rs.2,35,64,266/-

7 and Rs.98,11,890/- and had sought for allowing the said expenditure as revenue expenditure. The said expenditure was incurred in order to defend a claim made by third parties in respect of a mining lease granted to the respondent – assessee. That the purpose of incurring the aforesaid expenditure towards litigation was for defending grant of mining lease and not merely a business expenditure or expenditure arising during the course of business. Such an expenditure cannot be treated as revenue expenditure, but it is a capital expenditure. Therefore, the expenditure cannot be treated wholly and exclusively incurred to protect the interest of business or for the purpose of business within the meaning of Section 34 of the Income Tax Act, 1961 [hereinafter, referred to as the ‘Act”]. 7. In support of his submission, appellant’s counsel placed reliance on a judgment of the Hon’ble Supreme Court in case of V.Jaganmohan Rao and Others vs. Commissioner of Income Tax and

8 Excess Profits Tax, Andhra Pradesh [(1970) 75 ITR 373 (SC)] [Jaganmohan Rao]. Appellant’s counsel contended that where money is paid to perfect a title or as consideration for getting rid of a defect in the title or a threat of litigation, the payment would be capital payment and not revenue payment. 8. Per contra, learned counsel for respondent – assessee, supporting the order of the Tribunal, contended that no substantial question of law would arise in this appeal, as the question as to whether the litigation expenditure incurred in the instant case is a revenue expenditure or a capital expenditure is not a question of law or for that matter, a substantial question of law, but it is purely a question of fact which cannot be gone into in an appeal under Section 260-A of the Act. 9. In support of his submission, respondent’s counsel placed reliance on a decision of the Hon’ble Supreme Court in case of M/s.Mangalore Ganesh Beedi Works vs. Commissioner of Income Tax,

9 Mysore and Another [2015-TIOL-241-SC-IT], [M/s.Mangalore Ganesh Beedi Works], wherein it has been held, where the Tribunal has held that where legal expenses incurred by the assessee were for protecting its business, then such a finding would not be a finding in law, but a pure finding of fact and no appeal could be filed on that aspect on such a finding before this court. 10. Respondent’s counsel also relied upon decisions of the Hon’ble Supreme Court in case of Dalmia Jain & Co. and Sri Meenakshi Mills Ltd., to contend that the test to decide whether a particular expenditure is capital or revenue in nature, is to see whether the expenditure in question was incurred to create any new asset or was incurred for maintaining the business of the company, if it is a former, it is capital expenditure; if it is the latter, it is revenue expenditure. According to respondent’s counsel in the instant case, the expenditure incurred was to protect

10 the leasehold rights, which was a business expenditure and thus, revenue expenditure. 11. Reliance was also placed on another decision of this court in case of Commissioner of Income Tax vs. M/s.ITC Hotels Ltd., (in I.T.A.No. 405/2003 disposed of on 23/02/2004), to contend that once the Tribunal has found that “litigation expenses are revenue expenditure, when it was incurred to protect lease hold rights, the same is a pure finding of fact and would not involve any question of law.” He, thus, sought for dismissal of the appeals. 12. Before proceeding in the matter, it would be useful to state the material facts, which arise in these appeals. That one of the business activities of the assessee is mining of iron ore by taking lands on lease from the State Government. That certain lands were leased out to assessee for the purpose of mining iron ore by the Department of Mines and Geology in the year 2006. The assessee was working on the said

11 lease as a lessee of the State Government. The grant of lease to the assessee was challenged in writ petitions filed before this court by M/s.J.S.W. Steels Ltd., and M/s.Sathawahana Ispat Ltd. In the said writ petitions, the assessee was made a respondent. It is in order to defend and sustain the said lease that the assessee had to incur expenditure towards legal fee and other allied expenditure. The assessee was dragged into litigation before this court by writ petitions filed by third parties. The assessee had to resist the writ petitions in order to protect his mining rights in respect of the contentious lease. Therefore, the expenditure incurred towards legal fee and other litigation charges was to protect its business interests in relation to the mining lease. The expenditure was not incurred to acquire the mining lease or to get rid of a defect in the title. While resisting the writ petitions, the assessee did not bring into existence any asset or create any capital asset. Therefore, the question, is, whether, the expenditure has to be

12 attributed to be revenue expenditure or capital expenditure. 13. Before we proceed further, we shall refer to the following judgments cited at the Bar:- (a) In Dalmia Jain & Co., Ltd., it has been observed thus:- “The question for decision is whether the litigation expenses incurred by the assessee were for the purpose of creating, curing or completing the assessee’s title to capital or whether it was for the purpose of protecting its business. If it is the former then the expenses incurred must be considered as capital expenditure. But, on the other hand, if it is held that the expenses were incurred to protect the business of the assessee, then it must be considered as a business loss. The principle which has to be deduced from decided cases is that, where the expenditure laid out for the acquisition or improvement of a fixed capital asset is attributable to capital, it is a capital expenditure but if it is incurred to protect the trade or business of the assessee then

13 it is a revenue expenditure. In deciding whether the particular expenditure is capital or revenue in nature, what the courts have to see is whether the expenditure in question was incurred to create any new asset or was incurred for maintaining the business of the company. If it is the former it is the capital expenditure; if it is the latter, it is the revenue expenditure.” (b) In Dalmia Jain, this Court relied upon Shree Meenakshi Mills and held that “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 the same cannot be affected by the final outcome of that proceeding. However wrong-headed, ill advised, unduly optimistic or overconfident in his conviction the assessee might appear in the light of the ultimate decision; expenditure in starting and prosecuting a civil proceeding cannot be denied as a permissible deduction in computing the taxable income merely

14 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. Persistence of the assessee in launching the proceeding and carrying it from Court to Court and incurring expenditure is not a ground for disallowing the claim.” (c) In B.Jaganmohan Rao, it has been held, it is well established that where money is paid to perfect a title or as consideration for getting rid of a defect in the title or a threat of litigation the payment would be capital payment and not revenue payment. What is essential to be seen is whether the amount was paid for bringing into existence a right or an asset of an enduring nature. In other words, if the asset which is acquired is in its character a capital asset, then any sum paid to acquire it must surely be capital outlay. Money paid in consideration of the acquisition of a

15 source of profit of income is capital expenditure. In the aforesaid judgment, reliance has been placed on Atherton vs. British Insulated and Helsby Cables Ltd. [1926] A.C. 205, wherein, Viscount Cave has said as under:- But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as property attributable not to revenue but to capital. 7. In Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1964] A.C. 948 [1965] 58 I.T.R. 241. Lord Radcliffe observed at page 960:

16 …. courts have stressed the importance of observing a demarcation between the cost of creating, acquiring or enlarging the permanent (which does not mean perpetual) structure of which the income is to be the produce or fruit and the cost of earning that income itself or performing the income-earning operations. Probably this is as illuminating a line of distinction as the law by itself is likely to achieve….” (d) In M/s.Mangalore Ganesh Beedi Works, it has been observed at Paragraph No.17, that on a consideration of the issues placed before the Tribunal, including the decision of this Court in Dalmia Jain, it is held that the expenses incurred by the Assesee were honest and reasonable and were incurred for the purpose of protecting the business of the firm as a going concern.

17 (e) In M/s.ITC Hotels Ltd., it has been observed that on a consideration of the facts in detail, the Tribunal has recorded a finding that the litigation expenses were incurred not to protect the lease hold rights or to protect its title, but were incurred to defend its right to carry on business of a hotel and therefore, the expenses are revenue in nature and it is purely a finding of fact and does not involve any question of law. (f) Similarly, in M/s.Assam Bengal Cement Co. Ltd., vs. Commr. of Income-tax, West Bengal [AIR 1955 SC 89], it has been held that the question as to whether any expenditure is capital or revenue in nature has all along been considered to be a question of fact to be determined by the Income-tax Authorities on an application of the broad principles laid down and the courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles. It has also been held in the said decision that the aim and object of the

18 expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. 14. In B.Jaganmohan Rao, facts were that payment of money made by the assessee therein was in order to perfect his title to the capital asset. It was a lump sum payment for acquisition of a capital asset and therefore, the Hon’ble Supreme Court held that the amount should be treated as capital payment and the assessee was not entitled to exclude from the income sought to be assessed in his hands any portion of that amount. But having regard to the facts in the present case noted above and by applying the decisions in the aforementioned judgments, we find that the Tribunal was justified in holding in favour of the assessee and thereby, dismissing Department’s appeal. 15. The substantial question of law sought to be raised by the Department is answered by holding that

19 the legal expenditure incurred by the assessee to defend the writ petitions filed to quash the Government notification and lease deed is not a capital expenditure and deduction is allowable within the meaning of Section 37 of the Act, as it is revenue expenditure. These appeals are hence, dismissed. No costs. Sd/-

JUDGE Sd/- JUDGE *mvs