VISWANATHA SASTRI. J.

The following question has been referred to us by the income-tax Appellate Tribunal at the instance of the Commissioner of Income-tax

" Whether on the facts and in the circumstances of the case, the litigation expenses of Rs. 1,392 incurred by the assessee company are allowable as business expenditure under Section 10(2)(xv) of the Income-tax Act

The assessee is Raman and Raman Ltd., a private limited company carrying on business at Kumbakonam in the Tanjore District, and will hereafter be referred to us " the company ". The company owns a number of motor buses plying for hire on specific routes in the Tanjore District. Another bus service run under the name of Chamundeswari Bus Service had five buses plying between Kumbakonam in the Tanjore District and Karaikal in the French territory. On 9th March, 1944, the company through its managing director entered into an agreement for the purchase of the 5 buses of the Chamundeswari Bus Service with one T. D. Balasubramania Pillai in whose name the buses were registered and the permits for running the buses on the routes specified therein stood. The material portion of the agreement was in these terms : ---

" The five buses owned by T. D. Balasubramania Pillai and detailed, below have been purchased by Raman and Raman Ltd. for Rs. 31,00

1. On this date Raman and Raman Ltd. have paid Rs. 1,001 to T.D.Balasubramania Pillai. The managing director, P.S. Narayanan, has agreed to pay the balance of Rs.30,000 by giving on 15th March, 1944, a sum of Rs. 10,000, the remaining Rs. 20,000 to be paid by him within a week after the transfer of ownership of the said five buses and the relative route permits in his name. These five buses belong solely to T. D. Balasubramania Pillai and nobody else has absolutely any right whatever to these buses .............. The tin shed in Post Office Road where the five buses are now parked and which belongs to T. D. Balasubramania Pillai has now been sold for Rs. 700 to Raman and Raman Ltd ................ The spare parts, accessories, lubricating oils, grease, batteries, tools, charcoal etc. relating to the buses of T. D. Balasubramania Pillai will be listed and evaluated according to the current prices and taken over within three days by Raman and Raman Ltd. after paying their valueThen undermentioned five buses have already been on this date handed over by T. D. Balasubramania Pillai to P. S. Narayanan, the managing director of Raman and Raman Ltd. "

Then follows a detailed description of the five buses with their registration numbers and other particulars

Pursuant to this agreement the five buses were handed over to the company and they were plying for hire, on the Kumbakonam-Karaikal route, for about 10 days. On the day following the agreement, that is, on 10th March, 1944, the managing director of the company and Balasubramania Pillai signed a joint application to the Secretary, Road Traffic Board, Tanjore, for the transfer of G permits of the five buses to the name of the company. The previous G permits for the buses to the name of the company. The previous G permits for the buses standing in the name of the third defendant were delivered over to the company and they ran the bus service in the name of T.D. Balasubramania Pillai pending recognition of the transfer. The company made the necessary payments for the issue of fitness certificates in respect of these buses and by way of taxes. When the sum of Rs. 10,000 the first instalment of the price payable on 15th March, 1944, was tendered by the company to Balasubramania Pillai, the latter refused to accept the cheque tendered and put forward the plea that he had been cheated by the company into entering into the bargain. Moreover, one Veerappa Pillai filed a suit on 3rd October, 1944, on the file of the Court of the Subordinate Judge of Kumbakonam claiming title to these five buses and seeking to recover possession of them on the ground that on 10th April 1944, they had been sold to him by Balasubramania Pillai with the consent and express authority of Gnanasundaram Pillai who, according to the plaintiff, was the real owner of the buses but who was undergoing imprisonment in jail at Karaikal. The plaintiff in the suit impugned the contract for the sale of these buses to the company entered into by T. D. Balasubramania Pillai as not having been authorised by Gnanasundaram Pillai, the real owner of the buses. The buses were run by the company from 10th March, 1944, till 19th March, 1944. Thereafter, the buses remained idle in the possession of the company. From 14th August, 1945, the buses were run by Veerappa Pillai as receiver appointed by the Court. The buses, therefore, were in custodia legis till the end of the litigation. The Subordinate Judge found that the five buses belonged both to Balasubramania Pillai and Gnanasundaram Pillai as joint owners and the plaintiff Veerappa Pillai was entitled to a decree for possession of the buses. On appeal the decision of the Subordinate Judge was reversed and this Court held that the plaintiff had not established that T. D. Subramania Pillai was a benamidar or agent for Gnanasundaram Pillai or that he was not the real owner of the buses. This Court, therefore, dismissed the suit of the plaintiff on the ground that he was attempting in concert with Balasubramania Pillai to sabotage the contract entered into between the company and Balasubramania Pillai. Further into the merits of the dispute it is unnecessary for us to enter as the litigation has now been carried to the Supreme Court. In defending the above suit and other proceedings in Courts connected with the transfer of the buses, the company incurred an expenditure of Rs. 1,392-2-0 during the year of account and claimed this sum as a revenue expenditure in the course of its assessment of income-tax. The claim of the company for treating this expenditure as revenue expenditure was upheld by the Appellate Tribunal differing from the Income-tax Officer and the Appellate Assistant Commissioner. Hence this reference at the instance of the Commissioner of Income-taxMr. C. S. Rama Rao Saheb for the Commissioner of Income-tax argued that this sum of Rs. 1,392-2-0 was a capital expenditure and therefore not allowable as a deduction under Section 10(2)(xv) of the Income-tax Act. He put his case this way : The company sought to acquire capital asset in the shape of five buses, and what was more valuable than the buses themselves, the right to ply these buses for hire along the routes already assigned to them by the Road Traffic Board. The right to ply these buses on the routes designated by the Road Transport Authority is a valuable right and in the nature of monopoly. For the acquisition of the buses along with this right the company agreed to pay a sum of Rs. 31,00

1. The company purchased not only the buses but also the garage where they were parked and the accessories, tools and implements. What was sought to be purchased was substantially a new asset for the benefit of the assessees trade in the way of fixed capital. The contract for sale did not pass the property in the buses to the company, and many things had to be done before the company could acquire an effective title to these buses, namely, the payment of the balance of the consideration, the transfer of permits and so on. In order to acquire a free and clear title to this asset, the company had to spend a sum of Rs. 1,392-2-0 and this sum must be deemed to be a part of the total cost of the acquisition to the capital asset. Even if it was an extension of the existing business of the company by the acquisition of new buses and the right to new routes the same principle would apply. He maintained that the five buses had not become the property of the company under the contract of sale and that it had only an inchoate or imperfect title which had to be perfected by having it established in a court of law in the suit already referred to. He argued that this was not a case where money had to be spent for the protection of the assessees title to an existing business asset against hostile litigous attacks but a case where money was spent in the process of acquiring title to a capital asset and it was therefore part of the cost of acquisition of that asset itself. He compared the expenditure in this case to the preliminary expenses in connection with the floatation of a company which are regarded as capital expenditure incurred not earning profits, but in bringing into existence the profit earning machinery. He also referred to some English and Indian decisions which will be noticed presentlyIn our view, it is important to consider the rights of the company which flow from the contract. The contention of Mr. Rama Rao Saheb was that the property in the buses would pass to the company only on payment of the remaining consideration of Rs. 30,000 on the due dates. He also maintained that having regard to the object of the contract, namely the acquisition of the right to play the buses along the routes assigned to them, the transfer of registry of these buses in the name of the company and the issue of fresh permits to the company for plying on the routes would be necessary to implement its title to the property agreed to be sold under the contract. We cannot accept this contention. Under Section 32 of the Sale of Goods Act, in the absence of a contract to the contrary, delivery of the goods and payment of the price are concurrent conditions. But here we have got a definite contract to the contrary, namely, that the price was to be paid ill specified instalments. Under Section 20 of the Sale of Goods Act where, as in this case, there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment of the price is postponed. In our opinion, there was here an unconditional contract for the sale of the five specified buses for Rs. 31,001 and the contract itself recited, what indeed was a fact, that the buses had been delivered into the possession of the buyer on that date. Mr. Rama Rao Saheb refers to the clause in the contract relating to the payment of Rs. 20,000 within a week after the transfer of ownership of the said five buses and the relative route permits in the name of the company as indicating that the title to the buses was not to pass to the purchaser until the payment of Rs. 20,000 was made, the registry was changed and the route permits also issued in the name of the purchaser. In our opinion, this is not a proper reading of the clause in the contract. All that is indicated by this clause is that the balance of the price, namely, Rs. 20,000 was to be paid by the purchaser to the seller within a week after the transfer of the registry of the buses in the name of the purchaser and the issue of permits in the name of the purchaser for plying these buses along the routes assigned to them. It has to be remembered in this connection that the transfer of registry and the issue of permits in the name of the purchaser require the co-operation and the joint endeavour of the seller and in order to ensure that the seller would perform his part of the contract the balance of Rs. 20,000 out of the purchase price was agreed to be paid after the registry had been transferred and the route permits also issued in the name of the purchaser. We hold, therefore, on a construction of the contract that the title to the five buses passed to the purchaser on the date of the contract itself and thereafter the property in the buses was in the company. It is no doubt true that for about 10 days after the contract the buses plied for hire on the routes assigned to them as if Balasubramania Pillai, the seller, was entitled to ply them for hire. That was because the registry of the buses had not been transferred and the permits for running the buses on the specified routes had not been issued to the purchaser. It was merely in order to avoid a transgression of the Motor Vehicles Rules that this procedure was adopted. But that had nothing to do with the passing of the title in the buses to the purchaser. Thereafter when the vendor himself started criminal proceedings and purported to enter into an agreement for sale of these five buses to Veerappa Pillai, the plaintiff in the suit in the Sub-Court, the Company had no option but to defend its title to the valuable property which it had acquired under the contract. Not only the buses but also the routes which had been assigned to the buses and which were usually recognised by the Road Transport Authority, not as a matter of law but in practice, as entitling the purchasers to ply along the routes assigned to the buses, were sought to be taken away from the company by Veerappa Pillai. The companys possession of the buses was not unlawful and it had a right therefore to defend its title as well as possession. As we already stated it is unnecessary now to determine whether Balasubramania Pillai or Gnanasundaram Pillai or both were the real owners of the buses. Suffice it to say that the vendor Balasubramania Pillai was in possession of the buses which had been registered in his name. The permits for plying these buses also stood in his name. The company dealt with him as a person entitled to dispose of the buses, paid valuable consideration and also took possession of the buses and plied them for some time on the routes assigned to these buses. It was in order to defend this right of the company both to the buses and the routes, which usually followed the ownership of the buses as a matter of practice, that the company had spent the moneyIt is clear that the sum of Rs. 31,001 paid by the company to the seller for the five buses together with the prospective advantage of plying these buses on the routes assigned to them, was an expenditure incurred in connection with the trade or business of the company. It was clearly a capital expenditure and its deduction is not permitted under Section 10(2)(xv) of the Income-tax Act. The position is, in our opinion, different with regard to the sum of Rs. 1,392-2-0 expended in connection with the litigation. It is conceded that the expenditure was incurred in the course of the business or trade of the company and in its character as trader. The only question is whether or not it was in the nature of a capital expenditure. In our opinion it is an expenditure incurred for the purpose of retaining the capital asset something which was vital to the business of the company something that would enable the company to earn more profits in the future. The company honestly considered it was entitled so to do that it should take steps necessary or proper for protecting its interests and to engage in litigation for the protection or preservation of valuable assets acquired by it for the purpose of its trade or business. If the company succeeded in the litigation, the profits from its business would increase and a company which spends money for increasing its profits spends it for the purpose of its business. Litigation is often conducted by businessmen in order to maintain, preserve or defend an existing right or title to property or to prevent the invasion of such right in future. Legal expenses incurred in such litigation do not create a new capital asset or stock-in-trade but are incurred in the ordinary course of preserving or maintaining the assets or stock-in-trade of the business. We, therefore, think that such expenses are part of the revenue expenditure of the business and their deduction is permissible under Section 10(2)(xv) of the Income-tax Act. This is our opinion unassisted by authorityIn Ushers Wiltshire Brewery, Ltd. v. Bruce, it was held by the House of Lords reversing the decision of the Court of Appeal that a brewery company was entitled to deduct legal expenses incurred in connection with the renewal of licences, preferring of complaints against tenants and obtaining advice as regards thefts of beer etc. Such expenses had the effect of preserving the brewery companys interests just as much as the defending of an action attacking the title of the company to the property in which it carried on its business. The leading modern authority on the subject of what is a business expenditure and what is not is the judgment of Lord Cave in British Insulated and Helsby Cables, Ltd. v. Atherton. The learned Lord says

" When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or advantage for the enduring benefit of a trade, I think there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. " *

The next decision which need be noticed is Van den Berghs case, where the House of Lords held that a sum of money paid upon the cancellation of a contract was a capital expenditure, the contract in that case not being an ordinary contract entered into in the course of the business but one which related to the whole structure of the companys business, and the totality of its capital assets. The House of Lords held that the payment made was for a radical alteration of those capital assets and was therefore a capital payment

These decisions were relied on on behalf of the Crown in Southern v. Borax Consolidated Ltd., where the question was whether legal expenses incurred by a company in defending its title to a property where its business was partly carried on were admissible deductions in computing its profits. Lawrence, J., held that as the land in connection with which the expenditure was incurred was used by the assessee in connection with its business the profits of which were taxed, the expenses incurred in defending the title to the property were allowable deductions in computing the profits of the company for income-tax purposes, being in the nature of revenue expenditure. This decision is very instructive as showing on which side of the line the present case falls. The learned Judge considered that the principle deductible from the cases was that where a sum of money was laid out for the acquisition or the improvement of a fixed capital asset, it was attributable to capital, but that if no alteration was made in the fixed capital asset by the payment, then it was properly attributable to revenue being in substance a matter of maintenance, the maintenance of the capital structure or the capital assets of the company. In the present case the only way in which it can be said that there was anything like an alteration in the capital assets of the respondent company was that Veerappa Pillai, the plaintiff in the suit filed in the Court of the Subordinate Judge of Kumbakonam, was removed from the category of possible litigants who might challenge the title of the company to the buses. In our opinion it could not be said that this expenditure in any way altered the original character of the capital asset which was acquired by the company. If it had done so, certainly it would be a payment in respect of capital. As the capital assets of the company remained absolutely unaltered and all that was done was to retain the capital assets in the hands of the company by resisting attempts to deprive the company of such assets, expenses incurred in connection with the defence of a litigation threatening the title to these assets would properly be attributable to revenue. The decision of Lawrence, J., was summed up in the last paragraph of the judgment in these terms : ---

" It appears to me that the legal expenses which were incurred by the respondent company did not create any new asset at all, but were expenses which were 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 companys business does not, in my opinion, make it any different. "

We respectfully follow this reasoning of the learned judge and hold that the present case is similar in its facts to the decision in Southern v. Borax Consolidated Ltd

The learned advocate for the revenue authority referred to the decision of the Court of Appeal in Associated Portland Cement Manufacturers Ltd. v. Kerr. Lord Greene, M. R., who delivered the leading judgment in this case quoted with approval the decision of Lawrence, J., in Southern v. Borax Consolidated Ltd. and observed as follows : --- The money that you spend in defending the title to a capital asset, which is assailed unjustly, is obviously a revenue expenditure. There, again, there is all the difference in the world between defending your assets against the claim of somebody who has no claim against them and the acquiring of a new asset or adding to an existing asset. If you acquire the benefit of a covenant which improves the value of your goodwill, in my opinion, you have acquired a capital asset."

This decision clearly approves of the reasoning in Southern v. Borax Consolidated, Ltd. and merely decides that acquisition of or addition to goodwill is acquisition of a capital asset

As regards Indian decisions we need only refer to the decision of the Lahore High Court in Mahabir Prashad and Sons v. Commissioner of Income-tax, Punjab, overruling an earlier decision of the same Court in Kangra Valley State Company Ltd. v. Commissioner of Income-tax. The Court there held that the expenses of defending a suit for pre-emption in respect of property acquired for the purpose of storing its stock-in-trade was a revenue expenditure. It is not necessary that the litigation should be even of a defensive character to enable the assessee to deduct the expenses incurred in connection therewith. In Central India Spinning, Weaving and Manufacturing Co. Ltd., v. Commissioner of Income-tax, C. P., the Nagpur High Court held that legal expenses incurred in connection with a suit brought by the assessee against another company to restrain the latter from using the trade mark to which the assessee claimed exclusive right was deductible as revenue expenditure. It may be said that at least in the opinion of Digby, J., one of the learned judges who decided that case, the threat was directed not against the capital of the assessee, but against its trade and the object of the litigation was to prevent a drop in the sales and a loss of profits. The attack on trade mark by infringement was treated as an attack not on capital asset but rather as an attack on the existing and future trade and on the value of the stock-in-trade existing and in the course of manufacture and to be manufactured in future. It may be that a trade mark is in the nature of a capital asset and expenses incurred in repelling an attack on an existing capital asset must be attributed to revenue. Legal expenses incurred in connection with the acquisition or protection of stock-in-trade are clearing in the nature of revenue expenditure. It is on this ground that litigation expenses incurred by a money-lender in connection which loans advanced or capital invested in the course of his business have been held to be admissible deductions, money being his stock-in-trade---See Commissioner of Income-tax, Bihar and Orissa v. Sri Kameswar Singh of DarbhangaWe are unable to accept the contention of the revenue authority that the expenditure in this case was incurred for the acquisition of fixed capital assets. The expenditure, as we already stated, did not create any new asset nor did it alter the character of the capital asset that had been acquired by the company under the contract. That remained unaltered. The asset, to defend the title to which the expenditure was incurred was an existing asset and was not acquired in consequence of the expenditure. Nor was there any improvement of the capital assets of the company by reason of the litigation

For these reasons we hold that the decision of the Appellate Tribunal was correct and that the reference must be answered in the affirmative and in favour of the company. The Commissioner of Income-tax shall pay a sum of Rs. 250 as costs of this reference to the assessee

Reference answered in the affirmative.