DALMIA JAIN & CO. LTD. versus COMMISSIONER OF INCOME-TAX, BIHAR & ORISSA, PATNA

Citation: [1971] SUPP. 1 S.C.R. 963 · Decided: 29-07-1971 · Supreme Court of India · Bench: K.S. HEGDE · Disposal: Appeal(s) allowed

Judgment (excerpt)

DALMIA J'AIN & CO. LTD. 
v. 
COMMISSIONER OF INCOME-TAX, 
BIHAR & ORISSA, PATNA 
July 29, 1971 
[K. S. HEGDE AND A. N. GROVER, JJ.] 
Income Tax-Litigation .expenses-Capital expenditure or Revenue 
-expenditure-Tests for determining. 
• 
The appellant-assessee, one of whose business activities was quarry· 
ing lime~stone, was working a quarry as agent of the government with an 
understanding that the quarry would be leased out to the assessee if the 
:government succeeded in the litigation in respect of it. Whtn the assessee 
was in possession, a company instituted a suit against the government for 
!pecific performance of an agreement to lease the quarry. The assessee 
was made a party to the suit and a claim for damages was made against 
the government as well as the assessee. This Court granted a decree for 
damages and the assessee was also made liable to pay damages. On tl:ie 
question whether the litigation expenses incurred by the asscssee constitut-
ed expenditure laid out wholly and exclusively for the purpose of the 
.assessee's business or whether it was incurred for the purpose of acquir-
ing a new asset, 
HELD : (j) Where the expenditure laid out for the acquisition or im-
provement of a fixed capital asset is attributable to capital, it is capital 
expenditure but if it is incurred to protect the trade or business of the 
assessee, it is a revenue expenditure. In deciding whether a particular ex-
penditure is capital or revenue in nature, what the courts have to see is 
V.'hether the expenditure in question was incurred to create any new assrt 
or was incurred for maintaining the business of the company. If it is the 
former it is capital expenditure; if it is the latter, it is revenue expenditure. 
[965A-966B] 
(ii) In the present case the expenditure was incurred for the purpose 
of protecting the assessee's business and, therefore, was revenue expenditure. 
The assessee was dracged into the litigation and a claim for damages was 
·made against the assessee also. The litigation came to be instituted against 
'the assessee because the assessee was working the quarry and it was work-
ing the same at the time of the litigation. Therefore, the only reasonable 
inference that could be drawn was that the assessee resisted the suit in 
order to protect its business and not with a view to safeguarding its pro!l-
pects of getting a new lease. [9660] 
Shree Meenakshi Mills Ltd. v. Commissioner of Income-Tax, Madras, 
(;3 I.T.R. 207, referred to. 
OvlL APPELLATE JURISDICilON : Civil Appeal No. 1812 of 
1967. 
Appeal from the judgment and order dated January 13 1966 
of the Patna High Court in Misc. Judicial Case No. 66S ot' 1962. 
t63 
B 
c 
D 
E 
F 
G 
• 
964 
SUPREME COURT RBPORTS 
[197IJ SOPP. s.c.R. 
A 
M. C. Chagla and R Gopalakrishnan, for the appellant. 
Jagadish Swarup, Solicitor-General, B. B. Ahu;a and B. D. 
Sharma, for the respondent. 
The Judgment of the Court was delivered by 
B 
Hegde J.-This appeal a.rises from the decision of the High 
Court of Patna in a reference under s. 66(1) of the Indian Income 
tax Act, 1922 (to be hereinafter referred to as the Act). In that 
reference several questions of law were referred to the High Court 
for its opinion. In this appeal we are concerned with only one 
of those questions and that question is : 
C 
"Whether on the facts and circumstances of the case 
D 
E 
F 
G 
H 
the Tribunal was justified in holding that litigation ex-
penses of Rs. 1,29,994/· incurred by the assessee for the 
assessment year 1951-52 constitute expenditure laid out 
wholly and exclusively for the purpose of the assessee's 
business"? 
The relevant facts as found by the tribunal may now be 
briefly stated. The litigation expenses in question relate to the 
protracted litigation in respect of Murli Hills. Those Hills were 
owned by the Sta.le of Bihar. On April I, 1928, the State Govern-
ment gave a lease of those Hills to Kutchwar Lime Company 
for 20 years for the purpose of quarrying limestone therein. In 
the lease deed entered into between the parties, there was a clause 
preventing the lessee from assigning its rights to a.ny third party 
without the consent of the lessor. 
In January 1933, Kutchwar 
Lime Co. went into voluntary liquidation and the liquidators 
assigned the lease-hold right to Subodh Gopal Bose in September 
1933 without the permission of the State Government. 
The 
assignee took possession of the property on March 9, 1933 but 
wa6 topped from working the quarry 

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