Indian Copper Corporation Ltd. vs Commissioner of Income Tax

S.N.P. Singh, C.J.—All the three references made by the Income Tax Appellate Tribunal, " E " Bench, Calcutta, have been heard together and they are being disposed of by this common judgment.

The references relate to the assessment years 1960-61 to 1962-63, the relevant previous years being the calandar years 1959, 1960 and 1961. The common question of law which has been referred by the Tribunal for the opinion of this court is as follows :

" Whether, on the facts and in the circumstances of the case, there was a capital element in the 50% of the litigation expenses referable to the kyanite suit filed by the assessee-company for specific performance in terms of the contract so that it was not an admissible deduction in computing the total income of the assessee for the assessment years 1960-61, 1961-62 and 1962-63?"

The assessee is a public limited company carrying on business in mining of copper ore and kyanite and manufacture of copper and brass. The assessee claimed before the Income Tax Officer certain deductions as and by way of legal charges. For the assessment year 1960-61 it claimed Rs. 2,38,264, for the assessment year 1961-62 a sum of Rs. 14,810 was claimed and fat. the assessment year 1962-63, it claimed deduction of Rs. 43,494.

It appears that by the registered lease dated the 15th November, 1926, the Ruler of the then Kharsawan State granted a mining lease to the assessee-company with effect from 1st of February, 1925, for a period of thirty years. The lease was thus to expire on the 31st of January, 1955. There was an option for renewal for a further period of thirty years given to the lessee "at such rent as shall be agreed upon between the parties". The option for renewal had to be exercised by giving six calendar months'' previous notice. Clause 14 of the lease prohibited the lessee from direct or indirect financial arrangement with any third party without the written consent of the lessor. The assessee entered into certain agreements with a firm named Messrs. Pawle and Berelick of London and later with Messrs. Pawle and Berelick Silimanate Co. Ltd. (hereinafter to be called " London company ") in the United Kingdom. The Ruler of Kharsawan State suspected that he was being denied proper royalty by the company because of such agreements. It was agreed in 1938 between the Ruler and the assessee that additional royalty would be paid on the FOB prices plus the freight to London and also on local sales. Regarding sales for foreign treatment the royalty would be calculated on the average London price of the foreign sales made by the London company. On the aforesaid basis additional royalty was being paid by the assessee and accepted by the Ruler of Kharsawan State up to the year 1952. Thereafter, it was not accepted. On the 18th of May, 1948, the Kharsawan State merged with the State of Bihar. The assessee made an application for renewal of the lease on the 6th of May 1954. The State Government, however, by its letter dated the 17th of June, 1954, complained that the assessee had committed several breaches of the terms of the lease as mentioned therein. The State Government wanted rectification of these mistakes and, in case the assessee disputed the demands, to concur in the appointment of the Commissioner, Chotanagpur Division, as the arbitrator. By its letter dated the 17th of August, 1954, in reply the assessee disputed the demands and took the stand that there was no dispute to go for arbitration. The State Government thereafter filed a suit which was numbered as Title Suit No. 18 of 1954 in the court of the Subordinate Judge at Jamshedpur on the 25th of September, 1954. In that suit several reliefs were prayed for including, (a) for a declaration that the lease was forfeited and that the State was entitled to re-enter; and (b) for khas possession of the lands by evicting the lessee. The assessee also issued a notice on the 24th of September, 1954, u/s 80 of the CPC for instituting a suit for a declaration that the State was not entitled to determine the lease dated the 15th of November, 1926, and for an injunction restraining the State from re-entering the leasehold properties and for specific performance of the contract contained in the clause for renewal. The suit was thereafter filed on the 17th of January, 1955, in the court of the Subordinate Judge of Singhbhum at Chaibasa and it was numbered as Title Suit No. 1 of 1965. After the expiry of the lease on the 31st of January, 1955, the State of Bihar applied for amendment of the plaint for adding the prayer for declaration to the effect that the lease had expired on the 31st of January, 1955, and that with effect from the 1st of February, 1955, the assessee was a trespasser and liable to be evicted and for grant of mesne profits of a sum of Rs. 20,00,000. Both the suits were ultimately transferred to the court of the Subordinate Judge at Patna. In the suit filed by the State Government the defence taken by the assessee was that there were no breaches or violation of the lease terms and that the suit for declaration of forfeiture of the lease was not maintainable. In the suit filed by the assessee, the Bihar Government took the stand, inter alia, that there could be no specific performance of the clause for renewal as the clause was vague and required agreement on future royalty and as the Mines and Minerals (Regulation and Development) Act (53 of 1948), rendered the renewal in favour of the assessee impossible. The Subordinate Judge decreed the assessee''s suit for specific performance and dismissed the suit filed by the State Government. Being aggrieved, the State filed appeals in this court which were numbered as First Appeals Nos. 443 and 444 of 1956. They were heard together and decided on the 14th of July, 1959. The State won and the assessee lost in both the appeals. This court came to the following conclusion :--

"(i) The clause for renewal was not void for uncertainty and the royalty payable would be determined by agreement and if not, on the same terms as to the amount, subject to arbitration.

(ii) By the renewal clause, there was no present demise or an interest in the land from November 15, 1926.

(iii) The right of renewal did not create an equitable interest but was only a contractual right.

(iv) Central Act 53 of 1948 did forbid the grant of lease except in accordance therewith."

This court further held that there was a breach of Clause 14 of Part VII of the lease because of the agreement with the London company. Thereafter, the assessee filed an application for leave to appeal to the Supreme Court against the judgment and decree of this court. Ultimately, the parties agreed to compromise the litigation, inter alia, on the following terms:

" (a) The State of Bihar has passed orders for the grant of the certi ficate of approval to the Indian Copper Corporation Ltd. on their application. The same will be handed over forthwith.

(b) The State of Bihar has further agreed to grant the Indian Copper Corporation Ltd., with effect from the 1st September, 1961, a lease for the mining of kyanite over an area of 61/4 square miles in accordance with the terms of the draft filed herewith.

(c) The claim of the State of Bihar against the Indian Copper Corporation Ltd., on account of mesne profits and damages and costs shall be decreed for a sum of rupees one crore."

The assessee claimed the entire expenses which were incurred in the two suits as revenue expenditure, eligible for deduction. Before the Income Tax Officer it was contended on behalf of the assessee that the entire cost for prosecution of the case before the two courts was incurred with a view to retain the existing asset, namely, the lease. The Income Tax Officer, however, took the view that the expenses were partly incurred in defending the suit filed by the Bihar Government for ejecting the asses-see and partly in connection with the suit filed by the assessee for renewal of the lease for 30 years. In incurring the expenses on the suit filed by it, the assessee was creating an asset of enduring benefit for the coming 30 years and the expenses incurred on that account were clearly in the nature of capital expenditure. Accordingly, the Income Tax Officer apportioned 50 per cent. of the expenses incurred as being expenses of capital nature. In appeals filed by the assessee, the Appellate Assistant Commissioner took the view that the suit which was filed by the assessee was for specific performance of a clause of the original contract and as such it was not a new benefit of an enduring nature which was to be brought into existence. The expenditure, on the contrary, was incurred for defending the title of the assessee in the leasehold right. Accordingly, the Appellate Assistant Commissioner held that the disallowance of a part of the expenses was not justified. The department thereafter filed appeals before the Income Tax Appellate Tribunal, " E " Bench, Calcutta, and the Tribunal taking all the relevant facts into consideration held that without the aid of the suit the assessee could not have had an extension of the lease and further observed that the issue of the certificate of approval which enabled the assessee to qualify for the renewal was also ascribable to the suit. The Tribunal did not accept the contention raised on behalf of the petitioner that the assessee had an indefeasible or existing title to the mines which it was protecting or preserving by the expenditure. Accordingly, the Tribunal restored the order of apportionment passed by the Income Tax Officer. The petitioner thereafter filed applications before the Tribunal for making references to this court for a decision of the questions of law and the Tribunal has made the references in the three cases.

Mr. Awadh Bihari Prasad, learned counsel appearing for the petitioner, submitted before us that the view which the Tribunal has, taken is erroneous. According to the learned counsel, there was an element of capital expenditure in the entire litigation expenses. The petitioner had to file a suit for specific performance in order to preserve the existing mining lease which has been granted in its favour. In support of his contention, learned counsel placed reliance on the decisions of the Supreme Court in the cases of Commissioner of Income Tax, Kerala Vs. Malayalam Plantation Ltd., , Shree Meenakshi Mills Ltd., Madurai Vs. Commissioner of Income Tax, Madras, , Commissioner of Income Tax, West Bengal Vs. Indian Mica Supply Co. P. Ltd., , Dalmia Jain and Co. Ltd. Vs. Commissioner of Income Tax, Bihar, Orissa and Patna, . In the case reported in Commissioner of Income Tax, Kerala Vs. Malayalam Plantation Ltd., , the Supreme Court after considering a number of decisions held that the expression " for the purpose of the business " is wider in scope than the expression " for the purpose of earning profits " and observed as follows (page 150):

" Its range is wide ; it may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernization of its machinery, it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business ; it may comprehend many other acts incidental to the carrying on of a business. "

In the case of Shree Meenakshi Mills Ltd., Madurai Vs. Commissioner of Income Tax, Madras, , it was held by the Supreme Court that expenditure incurred to resist in a civil proceeding the enforcement of a measure, legislative or executive, which imposes restrictions on the carrying on of a business or to obtain a declaration that the measure is invalid, would, if other conditions are satisfied, be admissible u/s 10(2)(xv) of the Indian Income Tax Act, 1922, as permissible deductions in the computation of taxable income. In that case, the Supreme Court reiterated the principle laid down in the case of Commissioner of Income Tax, West Bengal Vs. H. Hirjee, , that the deducibility of expenditure u/s 10(2)(xv) must depend upon the nature and purpose of the legal proceedings in relation to the business whose profits are under computation and cannot be affected by the final outcome of that proceeding. The Supreme Court further observed as follows (page 213):

" However wrong-headed, ill-advised, unduly optimistic, or over-confident in his conviction the assessee may appear in the light of the ultimate decision, expenditure in starting and prosecuting the proceeding may not be denied admission as permissible deduction in computing the taxable income, merely because the proceeding has failed, if otherwise the expenditure is laid out for the purpose of the business wholly and exclusively, i.e., 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 for that purpose again cannot be a ground for disallowing the claim. "

In the case of Commissioner of Income Tax, West Bengal Vs. Indian Mica Supply Co. P. Ltd., , the Supreme Court did not deal with the question of admissibility of legal expenses. In that case the assessee-company, which was engaged in mica mining, was the sub-lessee of a mica mine. The lease expired on March 31, 1943, and though under the terms of the lease the lessee had an option to renew the lease for a further period of 20 years, the lessor refused to renew it. The lessee sued the lessor for specific performance and a compromise was arrived at whereby the lease was to be renewed with restrospective effect from April 1, 1943. The assessee had to pay during the relevant previous year the sum of Rs. 42,000 and odd being rent from April 1, 1943, to March 31, 1953, out of which a sum of Rs. 2,341 was allowed as rent for the previous year and the question was whether the balance of Rs. 40,000 and odd was deductible as business expenditure in computing the assessee''s profits. The Tribunal held that after the expiry of the lease and the refusal of the lessor to renew it the assessee-company was in the position of a tresspasser particularly after the dismissal of the suit for specific performance by the trial court and until the suit was compromised in the High Court in 1953, it could not be said that the assessee''s liability had become ascertained. According to the Tribunal, it was only as a result of the compromise in the year 1953 that the assessee became entitled to remain in possession of the land on payment of rent and the entire payment of Rs. 42,000 and odd represented revenue expenditure. The Supreme Court accepted the view of the Tribunal and held that the assessee in incurring the expenses had acted in the interest of and for the purpose of its business and the expenditure was not laid out for any purpose other than that of carrying on the business. The deduction was, therefore, admissible u/s 10(2)(xv) of the Indian Income Tax Act, 1922. In my opinion, the decision of the above-mentioned case has no bearing on the point under consideration. The last case of Dalmia Jain and Co. Ltd. Vs. Commissioner of Income Tax, Bihar, Orissa and Patna, is very important as the Supreme Court has made a distinction between litigation expenses incurred for the purpose of creating, curing or completing the assessee''s title to the capital and the expenses incurred for the purpose of protecting the business and held that in that former case the expenses incurred must be considered as capital expenditure. The following observation of the Supreme Court in that case is a settler on the question (page 757) :

" 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 it is a revenue expenditure. In deciding whether a 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."

On the facts of that case, the Supreme Court, however, held that the litigation expenses were incurred by the assessee to protect its business and as such they were revenue expenditure.

Keeping in view the principles which have been laid down by the Supreme Court in Dalmia Jain and Co. Ltd. Vs. Commissioner of Income Tax, Bihar, Orissa and Patna, it is to be seen whether the entire litigation expenses were for the purpose of protecting the business of the assessee or for the purpose of creating, curing or completing its title to the capital. The relevant facts which were not in dispute in the instant case may be enumerated as follows :

(1) The Ruler of Kharsawan granted a mining lease to the assessee-company for the period of 30 years with effect from the 1st of February, 1925, and the lease was to expire on the 31st of January, 1955.

(2) Under the terms of the lease option was given to the lessee for the renewal of the lease for a further term of 30 years at such rent as shall be agreed upon between the parties.

(3) The application for the renewal of the lease was filed by the assessee-company on the 6th of May, 1954, but the State Government instead of renewing the lease issued a letter dated the 17th June, 1954, complaining that the assessee had committed several breaches of the terms of the lease as stated therein. The State Government further demanded rectification of the breaches and in case the assessee disputed the demands to concur in the appointment of the Commissioner, Chotanagpur Division, as the arbitrator.

(4) The assessee by a letter dated the 17th of August, 1954, disputed the demands made by the State Government and asserted that there was no dispute to go for arbitration.

(5) The State Government then filed Title Suit No. 18 of 1954 on the 25th of September, 1954, for various reliefs including the relief that the lease was forfeited and the State was entitled to re-enter.

(6) Thereafter, the assessee after serving notice u/s 80 of the CPC instituted a suit that the State was not entitled to determine the lease dated the 15th of November, 1926, and for injunction restraining the State from re-entering the leasehold properties and for specific performance of the contract as contained in the clause for renewal. As I have already stated, the subordinate judge decreed the suit of the assessee and dismissed the suit of the Government but in appeals filed by State in the High Court, the State won and the assessee lost. Thereafter, there was a compromise when the matter was pending before the Supreme Court.

From the facts which I have stated above, it is clear that there were two types of litigations between the partners. In the suit, which was filed by the State of Bihar, there might have been a question of preservation of business and protection of the assets of the petitioner-company but in the litigation which cropped up as a result of the filing of the suit by the petitioner-company there was no question of preservation of business or protection of the existing assets of the company. Under the terms of the lease in favour of the petitioner-company, the lease could be renewed for a further term of 30 years only if there was an agreement between the parties with regard to rent. The State of Bihar was not prepared to renew the lease of the petitioner-company, and, therefore, the assessee had to file a suit for creation and for completion of its title to the capital. That title suit had not been filed for the preservation of the business or for the protection of the assets of the petitioner company. That being the position, on the facts and in the circumstances of the instant case, the Tribunal was justified in holding that there was a capital element in the 50% of the litigation expenses referable to the kyanite suit filed by the assessee-company. I may state here that before the Tribunal it was conceded on behalf of the assessee that the apportionment of the 50% basis was proper.

For the reasons stated above, I would answer the question of law framed in the three cases in the affirmative and in favour of the revenue and against the assessee-company. The references are answered accordingly. In the circumstances, the parties are directed to bear their own costs.

S.K. Jha, J.

I agree.