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5. 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 :

10. In Dalmia Jain & Co. v. Commissioner of Income-tax , the question of litigation expenses was again considered by the Supreme Court. The assessee in that case took on lease from the Government the Murli Hills for the purpose of quarrying limestone for a period of one year. Thereafter, the assessee worked the quarry as agent of the Government with an understanding that the Murli Hills would be ultimately leased out to the assessee. While the assessee was in possession of the Murli Hills as agent of the Government, the Kalyanpur Lime Co., on the basis of an earlier agreement with the Government, filed a suit for specific performance and in the alternative damages against the Government impleading the assessee also as a defendant. The suit was resisted by the Government as well as by the assessee. The assessee incurred the sum of Rs. 1,29,994 in resisting the suit, in which ultimately the Supreme Court granted a decree for damages, and the question was whether the litigation expenses constituted expenditure laid out wholly and exclusively for the purpose of the business. On these facts, the Supreme Court held that the assessee resisted the suit in order to protect its business and not to safe-

guard its prospects of getting a new lease. It did not initiate the proceedings ; it merely defended the claim made against it. The suit was launched against it because of one of its business activities and, therefore, the litigation expenses were revenue expenditure laid out wholly and exclusively for the purpose of the business. The Supreme Court further held that, where litigation expenses are incurred by the assessee for the purpose of creating, curing or completing the assessee's title to the capital, tnen the expenses incurred must be considered as capital expenditure. But if the litigation expenses, are incurred to protect the business of the assessee, they must be considered as revenue expenditure.

28. The next question is whether this amount of Rs. 69,190 was allowable as revenue expenditure in the year of account relevant to the assessment year 1966-67. It is obvious that, till the decision of the City Civil Court, which was rendered on December 30, 1964, it could not have been known as to what was the amount of expenditure incurred in fighting this litigation and whether a part of the costs would or would not be recovered from the other side, viz., from Harnath. It is not possible to accept the contention urged on behalf of the revenue based on the observations of the Supreme Court in Kedarnath Jute Manufacturing Co, Ltd. v. Commissioner of Income-tax and the observations of the Kerala High Court in L. J. Patel & Company v. Commissioner of Income-tax [1974] 97 ITR 152, that the amount should have been debited in the books of account as and when the actual expenditure was incurred. It must not be forgotten that the initial expenses were incurred from time to time by the Hindu undivided family of Boorugu Mahadev. It was after the entire amount up to the stage of the trial court was ascertained after the decision of the City Civil Court on December 30, 1964, that, by way of transfer entries, the amount of Rs. 69,190 came to be debited by the assessee-firm as litigation expenses in connection with this particular litigation. Therefore, it is not correct to say that any portion of the amount of Rs. 69,190 is allowable as deduction to the assessee in any year other than the assess-ment year 1966-67. The liability of the assessee-firm to pay this amount of Rs. 69,190 by way of its share of litigation expenses arose by virtue of the entries made after December 30, 1964. Under these circumstances, the entire amount of Rs. 69,190 was certainly allowable as revenue expenditure in the year of account relevant to the assessment year 1966-67. It may be pointed out that a similar question arose before the Gujarat High Court in Topandas Kundanmal v. Commissioner of Income-tax . In that case, in the year 1956, the assessee purchased two pieces of land for Rs. 1,000. A part of the land was acquired by the Government under the Land Acquisition Act and the Special Land Acquisition Officer made an award in 1962, offering an amount of Rs. 24,293 by way of compensation. The assessee being dissatisfied with the offer, sought a reference under Section 18 of the Land Acquisition Act and the court of the civil judge determined the amount of compensation at Rs. 5,04,824 and the civil judge also directed the Government to pay the interest at the rate of 4 per cent. for the period from August 15, 1960, to August 31, 1963. The State Government appealed to the High Court which set aside the judgment and award of the civil judge with the result that the State Government became entitled to the return of the amount withdrawn by the assessee. The assessee was granted certificate to appeal to the Supreme Court. In the assessment proceedings for the assessment year 1964-65, the assessee contended that no income or capital gains could be said to have accrued to him during the year of account ending on March 31, 1964, relevant to the assessment year 1964-65, and that in any case since the lands in question were agricultural lands there was no question of any capital gains. On these facts, the Division Bench of the High Court of Gujarat of which one of us was a member, held that if an aggrieved party whose lands were acquired does not accept the offer made by the Land Acquisition Officer in his award, he had a right to seek reference under Section 18 for getting the question of the compensation determined by the court and it was on the amount thus determined judicially that the owner would be entitled to enforce that right for a particular sum. It was on the final determination of the amount of compensation that the right to that income in the nature of compensation would arise or accrue and till then there was no liability in praesenti in respect of the additional amount of compensation claimed by the owner of the lands sought to be acquired.