Income Tax Appellate Tribunal - Nagpur
Central India Spininng, Weaving And ... vs Commissioner Of Income-Tax, C.P. And ... on 25 January, 1943
Equivalent citations: [1943]11ITR266(NAG)
JUDGMENT
Under Section 33 of the Indian Income-tax Act (XI of 1922) the Income-tax Appellate Tribunal, Bombay Bench, consisting of N. R. GUNDIL (Judicial Member) and P. C. MALHOTRA (Accountant Member) delivered the following Judgment on January 15, 1942.
These two appeals are taken by the Central India Spinning, Weaving and Manufacturing Company, Limited, Nagpur, known as the Empress Mills, and relate to its assessments for the years 1938-39 and 1939-40, respectively. The contest before us in appeal No.11 relating to the assessment of 1938-39) is in regard to two sums of Rs. 2,577 and Rs. 8,000; and that in appeal No. 12 (relating to the assessment of 1939-40) is in regard to only one item of Rs. 8,000. Both the appeals involve mostly common facts and may therefore be conveniently disposed of one judgment.
2. The facts material to the first item of Rs. 2,577 are briefly these. The appellant company manufactures dhoties and shirtings which it brands with its particular trade mark called "Nag Chhap" to which it has acquired an exclusive right by long user. In 1933, the Binod Mills Limited, Ujjain, which manufactures similar goods began to brand them with a colourable imitation of the appellants trade mark. The appellant company brought a suit against the latter complaining of infringement of its trade mark, and obtained a decree on October 3, 1936, restraining the defendant company from making use of the appellants trade mark or its imitation. In this litigation the appellant company incurred a legal expense of Rs. 2,577 which it sought to deduct from its income in the assessment year 1938-39. The Income-tax Officer, Nagpur, rejected the claim and added the amount to the appellants income without giving any particular reasons for doing so. In appeal, the Appellate Assistant Commissioner held that the expenditure was incurred to protect the appellants exclusive right to use the trade mark which, he said, was one of the valuable assets of the appellant company. In other words, he held that the expenditure was in the nature of capital expenditure and upheld the Income-tax Officers order.
3. The facts bearing on the appellants claim to deduction of Rs. 8,000 in each of the two assessment years are common. The appellant company has made a Scheme for the benefit of its employees with the object of keeping them in a state of efficiency and contentment. This is known as the Welfare Scheme. For that purpose the company took a large piece of land on lease from Government in 1925 on payment of a premium of Rs. 69,608. It has built on it a hospital, a school for its employees children and a number of tenements for the employees, besides providing facilities for sport and recreation. This is called the Bezon Bagh Settlement after the companys late manager Sir Bezonji Mehta. The appellant company bears the cost, or almost the whole of the cost, of maintaining the Settlement, and on this account it claimed a deduction of an expenditure of Rs. 45,973 in the assessment of 1938-39, and Rs. 43,626 in that of 1939-40. In each case, the Income-tax Officer allowed a greater part of the claim disallowing Rs. 8,000 in each year, on the ground that this part of the expenditure could not be deemed to have been incurred solely for the benefit of the companys employees. His view was accepted by the Appellate Assistant Commissioner.
4. Taking up the first item of Rs. 2,577 the appellants claim is based on Section 10(2)(ix) of the Income-tax Act, 1922. This clause has since been amended and now occurs as clause (xii) of Section 10(2) of the Act. But we are not concerned with the amended provision, inasmuch as this case is governed by the old clause which was in force in the assessment year under reference. It is contended on behalf of the appellant company that the civil suit against the Binod Mills Limited, was necessitated by their infringement of the appellants trade mark, and that therefore the legal expense was incurred for arresting losses or reduction of profits which might have resulted in the goods of the Binod Mills Limited, being accepted as those of the assessee company. This is the substance of the argument made by the learned Advocate for the appellant. As far as we can see, all that it means is that the expenditure incurred by the appellant company was directly connected with its trade and was incurred for the purpose of preventing their profits from being reduced by the illegal use of its trade mark by another company. But the mere fact that an expenditure is incurred in course of trade or that it is even connected with it can be no ground to claim it as a deduction under Section 10(2)(ix) of the Income-tax Act. The clause makes it perfectly clear that only such expenditure, not being in the nature of capital expenditure, that is incurred for the purpose of earning profits and gains is allowable. Therefore the point really is whether the legal expense claimed in this case was or was not in the nature of capital expenditure. What is or what is not a capital expenditure is, in the main, a question of fact, and must be decided with reference to the circumstances of each case. As remarked by their Lordships of the Privy Council in The Indian Radio and Cable Communications Company Ltd. v. Commissioner of Income-tax, Bombay Presidency & Aden, it is impossible to formulate a test which will always suffice to discriminate between the expenditure which is and which is not allowable for the purpose of income-tax.
5. The learned Advocate for the appellant cited two cases in support of his contention : Commissioner of Income-tax, Bihar & Orissa v. Maharajadhiraja Sir Kameshwar Singh of Darbhanja and G. Scammell and Nephew, Ltd. v. Rowles. In the Darbhanga case, the legal expenses that was claimed had been incurred for defending a suit brought against the assessees father, who was a money-lender, by the shareholders of the United Agra Mills Ltd., claiming damages for the breach of an alleged agreement made by the assessees father to take over the management and finance the mills. In other words, the plaintiffs complained that the assessees father had failed to supply a large sum of money. Their Lordships of the Patna High Court held that the dedction was admissible under Section 10(2)(ix) of the Income-tax Act, remarking that the money which a banker or a money lender employs in his business is his stock-in-trade, and that therefore the money expended for the purpose of insuring it was in the nature of revenue expenditure incurred solely for earning the profits of the business. It is thus clear that the expenditure was allowed because it was not a capital expenditure. The facts of the other case relied on by the appellant are complicated, and it is not necessary to relate them. But it is clear from the judgment of the Master of Rolls that the deduction claimed in that case was in respect of a payment that was made for, and was directly connected with, the procuring by the assessee company of the advantage of terminating a trading relation and was therefore held to be wholly and exclusively laid out for the purpose of the companys trade. On the other hand, the learned Departmental Representative has cited several cases in support of his contention and we shall notice only those that are more important than the rest. In Kangra Valley Slate Co., Ltd. v. Commissioner of Income-tax, Punjab, the assessee company incurred a legal expense for defending a suit, brought by a village proprietary body to eject the company from certain state quarries which were their capital asset. The companys claim to deduction of the expense was rejected on the ground that it was a non-recurring outlay required to retain a capital asset. The facts in Commissioner of Income-tax, Burma v. Gasper and Company Rangoon and Amrita Bazar Patrika, In re, were altogether different and do not furnish any parallel to the present case. In both the cases the expense was incurred for defending criminal charges, and it was held that the sum could not be deducted as an expenditure under Section 10(2)(ix) of the Income-tax Act. Another case relied on by the learned Departmental Representative was Magniram Bangor & Co., In re. The facts in that case were that the assessee who carried on a money lending business advanced a sum of money to another company which had taken a lease of certain coal bearing land from a zamindar and in order to secure a loan had taken a mortgage of 14 as. share of the salami and royalty of the lease hold and an assignment of the remaining 2 as. share. The assessee company obtained a decree on the mortgage, but, eventually, had to write off their share of the loan as irrecoverable as the mortgagor company had failed. In a suit brought by the zamindar against the assessee company for rents and royalties due to him under the lease the assessee company incurred a legal expense which, however, was disallowed on the ground that it was incurred to prevent a liability arising in the future.
6. These several cases can only be read as illustrating the rule that while expense incurred for trading purposes or for the purpose of insuring or protecting stock-in trade of a business is allowable, any expenditure incurred for protecting or defending a capital asset cannot be admitted for deduction under Section 10(2)(ix) of the Income-tax Act. Beyond that they do not help to decide the particular point arising in this case as to whether the expense of the suit against the Binod Mills Limited was or was not in the nature of capital expenditure. The answer to the question would, in our opinion, depend upon the legl character of a trade mark and its value. Apart from making goods permanently identifiable in association with the name, the trade mark familiarises the public with them, so that the name remains fixed in the mind of the customer and the goods remain associated with certain quality or utility. Thus the trade mark has a permanent value as an asset of a business, that is to say, a capital assest. It cannot be regarded as stock-in-trde because a consumer of the goods does not buy the trade mark, "the Nag Chhap" in this case, but the goods which are branded with the trade mark which in his mind affords a guarantee of their quality. In this respect a trade mark fundamentally differs from a patent. In the case of the former the property and the right to protection are in the device or symbol adopted to designate the goods sold, and not in the article which is manufactured and sold. That article, i.e., dhoties and shirtings in the present case, is open to the whole world to manufacture and sell; and all that the owner of the trade mark is en titled to prevent is the use of his trade mark by other traders such as will lead purchasers to buy, as his, goods which are not his. On the other hand, a patent right protects the substance of the article, i.e., the stock-in-trade and any unauthoried manufacture is prohibited. We point out this distinction because it makes all the difference to the expenditure incurred for the protection of one or the other. In the present case we hold that the trade mark was a capital asset of the appellant company, and, consequently, the legal expense that it incurred for protecting it against infringement by the Binod Mills Limited was a capital expenditure. The Appellate Assistant Commissioner was therefore right in not admitting the deduction.
7. It only remains to dispose of one argument of the learned Advocate for the appellant. He pointed out that a similar expenditure of Rs. 830 was allowed by the Appellate Assistant Commissioner in the assessment of 1936-37. It is not suggested that the Appellate Assistant Commissioners decision is binding on us, nor that decisions in Income-tax matters are governed by the rule of res judicata. The argument of the learned Advocate was that the Department ought not to be allowed to take an inconsistent attitude. In this connection, he cited In the matter of Charusila Dassi. That was the case of an assessee who had made inconsistent statements regarding the nature of certain income intended to be assessed, and cannot be regarded as an authority on the point urged by the learned Advocate. It must be borne in mind that each years assessment for the purposes of income-tax is a distinct proceeding, and, therefore, the decision of an Income-tax authority on a particular point in one assessment year can in no sense be regarded as binding upon another authority making the assessment in a subsequent year. The question of finality does not at all arise in such a case. Apart from this, it seems to us that the conclusion reached by the Appellate Assistant Commissioner in the assessment of 1936-37 was inconsistent with the admitted premise with which we started. It was conceded before him that the trade mark was a capital assest of the appellant company and yet the Appellant Assistant Commissioner held that the expense incurred was for the purpose of earning profits or gains and allowable under Section 10(2)(ix). He appears to have been impressed by the argument that the expense was necessary for the purpose of continuing the profits of the company or protecting them from reduction by the Binod Mills Limited having infringed the trade mark. The same argument is addressed to us although in a somewhat different form. But the basis fact still remains that the trade mark is a capital asset of the assessee company; and that being so, any expenditure incurred over it must be regarded as a capital expenditure.
8. Coming to the deduction of Rs. 8,000 claimed by the assessee company in each of the two assessment years, we have stated before that the appellant claimed the deduction of Rs. 45,973 and Rs. 43,626, as expenditure of the Welfare Scheme in the assessments of 1938-39 and 1939-40, respectively. This claim was allowed except the expenditure of Rs. 8,000 in each year. Now it is admitted that this amount includes a sum of Rs. 2,546 debited on account of depreciation of premium of the land on which the Bezon Bagh Settlement stands; Rs. 964 paid for municipal taxes and Rs. 749 for farm expenses, leaving a balance of Rs. 3,741 generally spent on the Welfare Scheme. The first item is an instalment of the premium orginally paid by the appellant company to the Governmnet and sprad over the period of lease. Besides being a captial outlay, the expense cannot be allowed because it was dmittedly incurred as long ago as 1925. The learned Advocate condeded the point and gave up further contest. No argument was addressed to us in regard to the second item of Rs. 964 paid for municipal taxes. As regards to the third item of Rs. 749 it was claimed as a part of the expenses of the Welfare Scheme being spent upon drainage, etc. But that was not the case made before the Applleate Assistant Commissioner who was told that it was an expense in respect of a vegetable farm miantained by the assessee company for the benefit of its employees. Now there in nothing to show that the company is making a free gift of the vegetables grown upon the land. The contest on this point, too, was practically given up. Then there remains the balance of Rs. 3,741. This was disallowed on the ground that all this money could not be deemed to have been spent solely for the benefit of the companys employees. The amount represents the general expenses in curred on the maintenance of the Bezon Bagh Settlement. It was pointed out that some of the tenements in the Settlement are in the occupation of nonemplyoees. It is, however, common ground that out of the above 220 tenements only 11 are occupied by non-emplyoees. The remaining 4 are respectively allotted to the post-office, the postmaster, a doctor and a nurse attached to the Settlement. Obviously, these persons are accommodated in the Settlement for the benefit of the emplyoees. All that can be said is that the benefit extends to 11 ex-emplyoees of the company. If the total expense were apportioned between the two sets, the deemed to have been incurred for the non-emplyoees would come to a negligible sum. It is, however, difficult to make an apportionment. Accordingly we disallow a sum of Rs. 741 on that account and allowth balance of Rs. 3,000.
9. The result is that we partially accept the appeals and allow the appellant company a deduction of a further sum of Rs. 3,000 in each of the assessments of 1938-39 and 1939-40, and dismiss the rest of the claim in each case.
On the application of the assessee under Section 66(1) of the Indian Income-tax Act (XI of 1922) the Appellate Tribunal referred the case of the Nagpur High Court.
NIYOGI, J. - This case arises on a reference made by the Income-tax Appellate Tribunal (Bombay Bench) under Section 66(1) of the Indian Income-tax (Amendment) Act, 1922. The question submitted for our opinion is as follows :-
"Whether on the facts of the case the legal expense of Rs. 2,577 is a revenue expenditure and a proper deduction in computing the taxable income of the assessee company from business ?"
In the year of account 1938-39 the assessee company incurred an expenses of Rs. 2,577 in connection with a suit which they had brought against Binod Mills Ltd., Ujjain, to restrain them from using a trademark to which the assessee had acquired exclusive right by long user. The assessee company claimed deduction of that amount under Section 10(2)(ix) of the Act of 1922. Their claim was rejected by the Appellate Assistant Commissioner holding that it was capital expenditure being a non-recurring outlay for retaining a valuable asset of the company. That view was upheld by the Income-tax Appellate Tribunal on the ground that the trade-mark was a capital asset of the assessee company any that consequently the legal expense incurred for protecting it against infringement was capital expenditure.
2. The Tribunal rested their decision on Kangra Valley Slate Co. Ltd. v. Commissioner of Income-tax, Punjab, in which the Lahore High Court held a non-recurring outlay required to retain a capital asset is capital expenditure and it declined to follow Southern v. Borax Consolidated Ltd., which is an English case in which a single Judge of the Kings Bench Division held that legal expense incurred by a company for maintenance of a capital asset is properly attributable to revenue for the reason that such expense does not create any new asset. It is because of the conflict between the two cases and the absence of any authoritative decision by any other High Court in India that the Appellate Tribunal thought it necessary to submit the aforesaid question for the opinion of this Court.
3. The question, how far the expenses incurred in litigation are permissible diductions under the law of Income-tax, is not free from difficulty as the law of Income-tax in British India like that in England makes no express provision in that behalf. The Indian Income-tax Act no doubt gives certain positive directions in Section 10(2) as regards the deductions that are allowed in computing profits or gains of business, profession or vocation, but the item of legal expenses is not included among those enumerated in that section. It is therefore to be considered whether the deduction for legal expenses could properly be allowed under the omnibus provision embodied in clause (ix) of sub-section (2) of Section 10. It was amended in 1939. Before it was amended it ran as follows :-
"Section 10(2). Such profits or gains shall be computed after making the following allowances, namely :-
(ix) any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains."
As a consequence of the amendment made in 1939 its present form is as under :-
"(xii) any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out expended wholly and exclusively for the purpose of such business, profession, or vocation."
The wording of the amended enactment resembles that of the corresponding provision found in Cases I and II, Schedule D, Rule 3, of the English Income-tax Act of 1918 which runs as follows :-
"In computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of -
(a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purpose of the trade, profession, employment or vocation."
For the purpose of this case we are concerned with clause (ix) of Section 10(2) as it stood before the amendment of 1939. Comparing the terminology of this clause with that of the amended clause (xii) of the Indian Income-tax Act, and the provision in the English Income-tax Act it would be clear that while the Indian Act makes no express provision for legal expenses the English Act does not make express prohibition against them.
4. The main problem for consideration is whether in India or in England the legal expenses are such as are attributable to revenue account. On that point as pointed out by Pollock, M.R., in Atherton v. British Insulated and Helsby Cables, Ltd., it is not possible to lay down any satisfactory definition. Nevertheless attempts in that direction have been made in England. In Vallambrosa Rubber Co. Ltd. v. Farmer, Lord Dunedin laid down a broad test in these words :-
"Now, I dont say that this consideration (namely, that the expenses are all expenses which are necessary every year) is absolutely final or determinative, but in rough way I think it is not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year."
But the efficacy of this test was doubted in Ounsworth v. Vickers Limited, where Mr. Justice Rowlatt observed that the real test was between expenditure which is made to meet a continuous demand for expenditure as opposed to an expenditure which is made once and for all. In British Insulated and Helsby Cables v. Atherton, Viscount Cave, L.C., pointed out that the criterion suggested by Lord Dunedin was not a decisive one in every case for the obvious reason that in many cases in which the payment though made "once and for all" would be properly chargeable against the receipts for the year and the noble and learned Lord Chancellor sought to lay down the test in these words :-
"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 expenditures as properly attributable not to revenue but to capital."
In that case the assessee company had established a pension fund for its clerical and technical salaried staff. The fund was constituted by a trust deed which provided that members should contribute a percentage of their salaries to the fund, that the company should contribute an amount equal to half the contributions of the memebers and that the company should contribute a sum of Pounds 31,784 to form nucleus of the fund. The company paid that sum (Pounds 31,784) out of current profits and claimed that it was an admissible deduction in computing its profits. Rowlatt, J., on a case stated by the Commissioners for the Special Purposes of the Income-tax Act held that the contribution made by the company out of its current profits was revenue and not capital expenditure. The case came up before the Court of Appeal. At the hearing the Attorney-General suggested a definition of capital expenditure as follows :-
"Any money expended upon a business which is intended to and does result in an asset is capital."
Scrutton, L.J., referring to that definition observed that it could not apply to the circulating capital of a trade or business and held that the payment of a large sum of Pounds 31,784 by the company which they were not under any liability to make was either withdrawal of capital from the business for the purposes of the fund, or capital employed in creating an asset or advantage in the business, something added to the business not in discharge of any existing liability but in the result creating a new asset. Lord Atkinson accepted accepted the view Scrutton, L.J. That means that the expenditure must be of a kind which is calculated to return an asset to the company or in some particular advantage which would enure permanelty or for longs series of years. This test was accepted as sound in Rhodesia Railways v. Income-tax Collector, Bechunaland, which was a case of an expenditure of Pounds 252,174 made in renewing 74 miles of railway track including the supply of new rails, sleepers and fastenings wherever necessary. The renewal brought back the worn track to normal condition and as renewed it was not capable of giving more service than the original line. Lord Macmillan after stating that the expenditure did not result in the creation of any new asset but that it was incurred to maintain the assessees existing line in a state to earn revenue, observed "Non do their Lordships agree that expenditure in order to form a permissible deduction must have been incurred in the production of the actual years income which is the subject of the assessment, if by this it is meant that the benefit of the expenditure must not extend beyond the year of assessment, for every many repairs have the result of enabling income to be earned in future years as well as in the year in which they are effected."
5. The test propounded by Lord Dunedin in Vallambrosa Rubber Co., Ltd. v. Farmer, which was found to be inconclusive in England was applied in the Kangra Valley case. In the case the question was whether the expenditure incurred by the assessee company in defending, as lessee of certain land in a village, the suit for possession and injunction instituted by the lessors was deductible under Section 10(2)(ix) of the Income-tax Act as expenditure incurred solely for earning such profits or gains. The assessee company had secured in prepetuity the land which was the subject-matter of the suit by lease for the purpose of quarrying slate. The land therefore was clearly part of the capital and any attack made on that capital if successful would have resulted in its being a loss to the company. Consequently it would with some propriety be said that it was capital expenditure in the case sense that by expending money in defending the suit once and for all it ensured the land permanently to the company. If the test laid down by Viscount Cave in British Insulated and Helsby Cables v. Atherton were applied perhaps the decision would have been otherwise inasmuch as there was no addition of any asset to the company but only maintenance of its already existing asset.
6. The Lahore case was distinguished in Income-tax Commissioner v. Kameshwar Singh. In that case the facts were that a person, who was a share-holder in a company any carried on extensive money-lending business, advanced a loan of rupees ten lacs to the company at a time in serious financial difficulties. Some of the share-holders brought a suit against him that the loan of 10 lacs was only a part of the promise made in an alleged agreement under which he was to finance the company and that he had failed to implement his promise. He was therefore sought to be made liable to the extent of Rs. 60 lacs as damages for breach of his agreement. The defendant died pending the suit and was succeeded by the assessee, his son, who was substituted in his place. The suit was eventually dismissed and the assessee claimed to deduct the costs of defending the suit as expenses incurred in the money-lending business. It was held that the money which a banker or a money-lender employed in his business, while it was in one sense capital, was also his stock-in-trade of a business must be considered to be expenditure in the nature of revenue expenditure, incurred solely to earning the profits in the business. It was argued on behalf of he for earning the profits in the business. It was argued on behalf of he Commissioner of Income-tax that, had the suit succeeded, the assessee would have had to part with a large part of his capital and that his primary object in defending the suit was to prevent this loss of capital. Agarwala, J., repelled the contention by saying that the expenditure incurred for securing the assessee against possible loss of his business stock and stores (that is, his stock-in-trade) was allowable and that the purpose of repelling an actual attack on the assessees stock-in-trade an held that the deduction claimed fell within Section 10(2)(ix) of the Income-tax Act. Meredith, J., agreed with the learned Judge on the ground that defence of such suits must be regarded as a necessary though unpleasant part of the business. The case went up to the Privy Council whose decision is reported in Income-tax Commissioner, Bihar v. Kameshwar Singh. Lord Thankerton, who pronounced the judgment agreed with the Patna High Court that the money advanced by the money-lender to the company was his stock-in-trade and that the expenditure incurred by him in defending the suit was an expenditure incurred solely for the purpose of profits or gains of the money-lending business.
7. In Southern v. Borax Consolidated Ltd., the facts were similar to those in the Lahore case. A company required land in America for purpose of its business. The company had to defend an action challenging its title to the land and in doing so incurred heavy expenses of Pounds 6,249. Lawrence, J., who heard the appeal from the General Commissioners, adopted the test laid down in British Insulated and Helsby Cables v. Atherton and applied in Rhodesia Railways v. Income-tax Collector, Bechuanaland and on a review of the authorities came to the conclusion that the legal expenses which were incurred by the company in defending their title to the land did not created any new asset at all but were expenses incurred in the ordinary course of maintaining the assets of the company. The learned Judge referred to B.W. Noble, Ltd. v. Mitchell, in which Lord Hanworth at page 420 made an observation which is very helpful in the decision of the present case. It is as follows :-
"It is a payment made in the course of business, dealing with a particular difficulty which arose in the course of the year, and was made not in order to secure an actual asset to the Company but to enable them to continue, as they had in the past, to carry on the same type and high quality of business unfettered and unimperilled by the presence of one who, if the public had known about it, might have caused difficulty to their business and whom it was necessary to deal with and settle with at once."
That was a case in which very large payment had been made to get rid of a director and it was held to be an income payment.
Sargant, L.J., at page 421 said :
"The object, as disclosed by paragraph 9 of the Case, was that of preserving the status and reputation of the Company, which the directors felt would be imperilled either by the other director remaining in the business or by a dismissal of him against his will, involving proceedings by way of action in which the good name of the Company might suffer. To avoid that and to preserve the status and dividend-earning power of the Company seems to me a purpose which is well within the ordinary purposes of the trade, profession of vocation of the Company."
The judgment in Southern v. Borax Consolidated Ltd., though delivered by a single judge has the support of a long line of authorities which hold that an expenditure to be capital expenditure must one which is made with a view to bring into existence an asset or advantage for the enduring benefit of a trade and not an expenditure which is incurred in the ordinary course of maintaining the assets of the company or to preserve the status and dividend-earning power of the company.
8. Our attention is invited to, In re Magniram Bangor & Co., where the assessee was joined as defendant as an assignee of the original grantee of the mining leases in a suit for arrears of rent and royalty by the superior landlord. In defending the suit successfully the assessee as costs the sum of Rs. 2,15,176 which he claimed to deduct from his profits. It was held that such expenditure being money spent to prevent further liability for rent and royalty in the future was not deductible expenditure within the meaning of Section 10(2)(ix) of the Income-tax Act, 1922. Their Lordships of the Calcutta High Court declined to follow the cases arising under the English Income-tax Act as a safe guide and held that the legal expenses incurred by the assessee were expenses not incurred solely for the purpose of earning such profits or gains but that they were incurred to prevent losses in the future. The case of Ward and Company v. Commissioner of Taxes, which was a case decided by the Privy Council on an appeal form New Zealand was followed as the provisions in the New Zealand Land and Income-tax Act, 1916, were in terms similar to clause (ix) of Section 10(2) of the Indian Income-tax Act, 1922, before its amendment in 1939. In that case a brewery company in New Zealand spent money on publishing anti-prohibition literature just before a poll in which the issue was whether there should be prohibition or not. Lord Cave, who delivered the judgment of the Privy Council, pointed out that the expenditure was not necessary for he production of profit, nor was it in fact incurred for that purpose but that it was a purely voluntary expense incurred with a view to influencing public opinion and consequently that it has not been incurred for the direct purpose of producing profit. Panckridge, J., in the Calcutta case stresses the fact that the incurring of expenses by the assessee was a voluntary act meant a to dispose once for all of the claim of the superior landlord for rent and royalty against him. This case can be easily distinguished on the ground that the legal expenses had no direct bearing upon the profits and gains of the business but were intended to secure an enduring benefit of a capital nature which was the test laid down by their Lordships of the Privy Council in Commissioner of Income-tax, Central and United Provinces v. Messrs. Motiram Nandram.
9. It is indeed difficult to draw a line of demarcation between what is capital expenditure and what a revenue expenditure. The question assumes ostensibly the form of a question of fact. But since the decision of the question turns upon a principle which the legislature has left it to the judiciary to evolve and apply, it must be treated as involving a point of law. That is how the matter has been regarded in the numerous decisions relevant to the issue. It must be noticed that though the provisions of the Income-tax Act may in their terms appear to be different from those in the English Act the question, whether legal expenses should be treated as capital expenditure or revenue expenditure, is one that arises in both countries and in respect of which the law has made no specific provision. The matter therefore has to be considered on some principle of general application. Whether that principle is evolved by the British or by the Indian Courts is immaterial. If it is found to answer a judicial purpose it cannot be rejected for the simple reason that the letter of the laws in the two countries is different. The highest judicial authority in England, viz., the House of Lords, has on full discussion propounded two tests, one that of Lord Dunedin in Vallambrosa Rubber Co. Ltd. v. Farmer and the other that of Lord Cave in British Insulated and Helsby Cables v. Atherton. The criterion propounded by Lord Cave has received general support in England and according to it the real test is not whether the money spent once and for all is for the enduring benefit of a trade but whether the money so spent makes an addition to the asset to brings an advantage for the enduring benefit of a trade or, as laid down in B. W. Noble Ltd. v. Mitchell by Lord Hanworth, it served to remove a particular difficulty and to enable the assessee to continue to carry on the same type and high quality of business or as Sargant, L.J., said, to preserve the status and dividend-earning power of the company.
10. In the present case the assessee had to displace a counterfeit trade-mark which prejudicially affected the sale of its goods. The threat was not directed against the capital of the company but against its trade. The capital is concerned with production, while the trade is concerned manufactured. The counterfeit trade-mark introduced into the market by the assessees unscrupulous rival must be deemed to have had serious effect on the volume of the sale of the goods manufactured by the assessee. The object of launching legal proceedings against the competitor was to restore the trade to its original standard. It was not merely a voluntary act intended to improve the sales but an act necessary to prevent actual loss in the sales. The drop in the sales impaired directly the dividend-earning power of the company not to speak of its status or reputation, and had nothing to do with its capacity to manufacture them and had no bearing on the capital. The assessee was hit not as an industrialist but as a trader; the explosion of the counterfiet trade-mark from the market by means of litigation in Court did not make any addition to the capital of the company or bring any additional advantage but only removed an impediment in the way of earning legitimate profits by sale of the goods produced by the assessee.
11. In view of the foregoing discussion the answer is that the legal expense of Rs. 2,577 is a revenue expenditure and is a proper deduction in computing the taxable income of the assessee company from the business. The applicant will pay the costs of the non-applicant. Counsels fee Rs. 50.
DIGBY, J. - I have had the advantage of reading the judgment of my brother Niyogi, J., and concur with his conclusion. I think, though I do not decide, that expenditure incurred in defending a capital asset may some cases be expenditure of a capital nature, and aconsider that a trade-mark is a capital asset, but I also feel that an attack on a trade-mark made by infringement is to be regarded not as an attack on a capital asset but rather as an attack on existing and future trade and on the value of stock-in-trade , existing and in course of manufacture and to be manufactured in the future. Hence I think that this case falls within the ambit of the Privy Council decision cited (Income-tax Commissioner, Bihar v. Kameshwar Singh. The word "solely" in Section 10(2)(ix) of the Act under construction is related to the object of expenditure, the earning of profits and gains, and not to the profits and gains of the particular year in which the expenditure is made and deducted. For, obviously, expenditure of one year, not of a capital nature, may often be intended to have a favorable effect on the next years profits. A good example would be the ordinary expenses of advertisement. I agree that the expenditure was not in the nature of capital expenditure.
Reference answered accordingly.