Leonard Stone, Kt., C.J.
1. This is a reference under Section 66(2) of the Indian Income-tax Act. The short question which the Tribunal has framed is as follows:-
Whether, on the facts of the case, the legal expense of Rs. 7,500 incurred by the assessee in defending a suit brought to unseat him was rightly allowed as a deduction in computing his total income for the charge year 1940-41, under Section 12(2) of the Indian Income-tax (Amendment) Act, 1939?
2. The facts can be shortly stated as set out in the case. Sir Purshottamdas Thakurdas, who is the assessee in this case, was a director of a number of limited companies in the year of account Samvat 1995. On November 12, 1935, he was elected a Member of the Local Board for the Western Area of the Reserve Bank of India, which office is ordinarily held for five years. Sometime after his election one Mr. P. D. Shamdasani brought a suit against him for a declaration that the election was invalid and that he himself should be declared duly elected. The suit was dismissed both in the first Court and in the Appeal Court. In defending the suit the assessee incurred a legal expense of Rs. 7,500 in the year of account These facts are undisputed.
3. The relevant section of the Indian Income-tax Act under which head directors' fees come is Section 12 of the Act. Sub-section (2) provides:
Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains,..
And then there is a proviso with regard to certain excluded matters.
4. Mr. Setalvad on behalf of the Crown has taken two points. The first is that the expenditure is a capital expenditure. In my opinion this is not so. It was not an expenditure incurred in creating or in originating the source of income or in bringing it into being, but in preserving it when it was already there. The expenditure was incurred in refuting the attack upon the directorship and might or might not be an expense which recurred at some future time. In my opinion the matter is really covered by the judgment of the Lord Chancellor, Lord Cave, in Atherton v. British Insulated and Helsby Cables, Ltd. In that case the respondent company claimed as a deduction in computing its profits for income-tax purposes a lump sum of 31,784 which it had contributed irrevocably as the nucleus of a pension fund established by trust deed for the benefit of its clerical and technical salaried staff, that being the sum actuarially ascertained to be necessary to enable past years of service of the then existing staff to rank for pension, and it was held that the sum in question was not an admissible deduction in arriving at the company's profits for income-tax purposes. The Lord Chancellor said this (p. 192),:
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 expenditure as properly, attributable not to revenue but to capital.
5. There is a decision of, the High Court of Lahore to a contrary effect and, as it is a decision on the Income-tax Act which we have to construe, it is a case to which this Court will give the very closest attention: Kangra Valley Slate Co., Ltd. v. Commissioner of Income-tax I.L.R. (1984) Lah. 479. In that case the assessees carried on the business of manufacturing slates and for this purpose had obtained under a lease the exclusive right of quarrying slate in a particular village. The proprietors of the village instituted a suit to eject the assessees and to restrain them by injunction from quarrying and the assessees incurred expenses of Rs. 13,397 in defending this before the Courts, and then the question was raised whether that came within the provisions of Section 10(2)(w) of the Indian Income-tax Act, and it was held that the expenditure incurred, being a non-recurring outlay required to retain a capital asset, was in the nature of capital expenditure.
6. I do not think it is essential to go into the judgments in that case, because the Court which decided it was made up of Mr. Justice Addison and Mr. Justice Sale and in a later case (Mahabir Parshad and Sons v. Commr. of Inc-Tax when sitting as a member: of a full bench, Mr. Justice Sale said of his previous decision that it was not intended to be an authoritative exposition of the question of what is on what is not capital expenditure. To the effect that such an expenditure is an income expenditure and not a capital one is also the case of Income-Tax Appellate Tribunal, New Delhi v. The Central India Spinning, Weaving and Manufacturing Company, Limited, The Empress Mitts, Nagpur [1943] Nag. 307. On this first question, therefore, in my opinion on the authorities, which draw a clear distinction between the bringing into being of an asset and its maintenance and preservation, this case falls within the maintenance and preservation of an existing asset and, therefore, the appeal fails on this point.
7. The second question which arises is whether the costs of this litigation were incurred ' solely ' for the purpose of making and earning the income. Various English cases have been examined in this Court, but the wording of the Schedule to the English Income-tax Act is very different and II do not think that any use is to be derived from them. Mr. Setalvad on behalf of the Crown submits that what the assessee did in defending this litigation was not only to secure his fees as a director but was also to secure the privileges attributable to that office and he points out that under Section 9 of the Reserve Bank of India Act, 1934, the Members of the Local Board are given certain rights of franchise and other rights and he says that there is attached to the office of the director a status carrying certain privileges, the right for example to influence and shape the policy of the Reserve Bank and therefore the monetary policy of India.
8. The case of Commr., of Inc.-Tax v. Sir Homi M. Mehta : [1943]11ITR142(Bom) is also relied upon. Now the circumstances in that case were rather special, for the assessee who was the promoter, managing director and principal shareholder of a company made a gift of Rs. 3 lacs to the company when it was in financial difficulties and he then claimed this sum as a deduction from his/ assessable income on the ground that if he had not made the gift the company would have failed and he would have lost his capital invested in the company, his salary, his business reputation and credit. The passage relied upon is at p. 148 in which the learned Chief Justice, Sir John Beaumont, says this:
It seems to me quite impossible to say that this payment was made to the Company solely for the purpose of enabling the assessee to maintain his income derived from the Director's and Managing Director's fees and dividends on shares. The object of the expenditure must have been also to preserve the value of the other 75 per cent of the shares in the-Company which the assessee did not hold. If his sole purpose had been to preserve his income derived from that particular company, obviously a more business-like arrangement would have been to make to the Company a loan, which could have been repaid to the assessee as. a debt. But the main object was to keep the Company going, to maintain his own reputation as the man who had promoted the Company.
9. Mr. Setalvad further submits that a man of the status of the assessee did not defend this action solely for the purpose of getting his director's fees but also to maintain his status. On the other hand, the case for the assessee is put thus by Sir Jamshedji Kanga. He says that payment is not only for attending the directors' meetings but for services and duties performed and that what Mr. Setalvad points out as being privileges are in fact duties laid down by the Act which it is incumbent for the directors to carry out. The Income-tax Act has no regard to status and privileges, and does not quantify them in moneys, therefore, says Sir Jamshedji Kanga, what it taxes is the director's fees and the costs of the litigation are in defending those fees. It is also pointed out that it is a pure matter of speculation what was the assessee's motive in defending the action and further that there is no evidence at all on the record as to what that motive was other than to defend his directorship. In this respect it should be observed that in the proceedings the personal reputation and honour of the assessee were not attacked. Sir Jamshedji Kanga also relies upon the case of Commissioner of Income-tax, Bihar & Orissa v. Sir Kameshwar Singh (1941) 44 Bom. L.R. 778: C. L.R. 69 IndAp 15. In that case the assessee was a money-lender and he had lent a large sum of money to a company and he sued the company and obtained a decree. After that some of the shareholders of the company sued him for damages and that suit was decided also in favour of the assessee. Subsequently in making his return for income-tax for the year 1931-32 the assessee claimed to deduct the expenses incurred by him in defending the second suit under Section 10(2) (ix) of the Indian Income-tax Act, 1922, and it was held by the Privy Council that the assessee's defence to the second suit was just as essential for the full protection of his rights as the creditor in the loan, as was his earlier suit for the recovery of the loan; and that therefore he was entitled to the deduction claimed, because the expenses were incurred by him solely for the purpose of earning the profits or gains of the money-lending business. Lord Thankerton in delivering the judgment of the Judicial Committee said (p. 781):
It has to be remembered that money is the stock-in-trade of a money-lender. The appellant might well have come to at different conclusion, if he had realised the close connection of this loan with the transactions alleged in the Agra, suit. If it really added anything, their Lordships would agree with the High Court that at least three of the other transactions referred to in the appellant's further statement of case provide evidence that the alleged transaction with the Agra United Mills was not foreign to the money-lending business of the respondent and his father.
' Their Lordships are, therefore, of opinion that the facts stated by the Commissioner cannot justify the opinion expressed by him, but that the expenditure in question was incurred solely for the purpose of earning the profits or gains of the money-lending business, and that the High Court were right in holding the respondent entitled to the deduction claimed, and in answering the question of law asked by the Commissioner in favour of the respondent.
10. In my judgment the only purpose of incurring expenditure in this case was for the assessee to preserve his directorship. There was no personal attack upon him which he was seeking to defend. What his own private motive, if any, in preserving his position as a director may have been does not seem to me to be relevant. So far as the Revenue Authorities are concerned, the directorship only sounds in fees and the only purpose of defending the action was to preserve the office and therefore the fees. Accordingly in my opinion the Crown fails on this question also. The Commissioner to pay the costs of the assessee.
Chagla, J.
11. I agree.
12. Two questions arise on this reference. The first is whether the expense incurred by Sir Purshottamdas Thakurdas in defending the suit filed against him by Mr. Shamdasani was 'incurred solely for the purpose of making or earning an income 'which he derived from being a Member of the Local Board of the Reserve Bank of India; and the second question is whether such an expenditure was in the nature of capital expenditure.
13. Now in this case it cannot be disputed that Sir Purshottamdas Thakurdas incurred the expenditure for the purpose of earning the income as a Member of the Local Board of the Reserve Bank. The question that we have got to determine is whether it was incurred solely for that purpose. Now whether it was solely incurred or not is essentially a question of fact, and we have to consider what are the findings of fact of the Tribunal as set out in the statement of the case. The first fact which has been found by the Tribunal is that Sir Purshottamdas defended this litigation in 'order that he should not be unseated as a Member of the Local Board of the Reserve Bank; and the second finding of fact is that income was derived by Sir Purshottamdas as a member of the Local, Board of the Reserve Bank and which is shown under Section 12 of the Indian Income-tax Act as having been derived from other sources. It is not disputed by Mr. Setalvad for the Department that the sole purpose of Sir Purshottamdas in fighting this litigation was to preserve his seat. It is not suggested that there were any personal allegations against him or that he was defending the suit for his personal honour or integrity. Once that is conceded and once it is found that the sole purpose of defending this litigation was to preserve his seat, and if it is also found that the seat yielded income, then it follows that the expenses of the litigation were incurred solely for the purpose of earning that income. It may be that Sir Purshottamdas's seat on the Board might not only have given him income but might have given him other rights and privileges. It might have given him a status and a position; but to my mind those are irrelevant considerations. The source which is taxed is the directorship, and if the litigation is fought for the sole purpose of preserving that source, then in my judgment it is immaterial what other benefits the assessee may derive from that particular source. The purpose and the sole purpose for incurring this expenditure was to preserve and maintain the source which yielded the income which is shown as being derived from other sources under Section 12 of the Indian Income-tax Act. Mr. Setalvad has also argued that, looking to the provisions of the Reserve Bank of India Act, a director or a member of the Local Board not merely gets fees but also gets certain rights and privileges and he has certain functions and obligations to discharge. Now it is patent that Sir Purshottamdas was paid his fees as a director or a member of the Local Board for discharging the functions and obligations which were made incumbent upon him by the provisions of the Reserve Bank of India Act, and as such director or member he also enjoyed certain rights and privileges. That, to my mind, would be true of any office to which a salary or an emolument is attached. Every office not only gives to its holder a monetary remuneration but also confers upon him certain rights and privileges and also casts upon him certain duties and obligations. Therefore there is nothing peculiar about the position of a director of the Reserve Bank.
14. Mr. Setalvad has relied on a decision of our Court in Commr. of Inc.-Tax v. Sir Homi M. Mehta : [1943]11ITR142(Bom) . In that case Sir Homi Mehta made a gift of rupees three lakhs to a company of which he was the promoter, managing director and principal shareholder when that company was in financial difficulties and Sir Homi Mehta claimed that, sum as a deduction from his assessable income on the ground that if he had opt made the gift the company would have failed and he would have lost his capital invested in the company, his salary, and his business reputation and credit. Sir John Beaumont, Chief Justice, held that this sum of rupees three lakhs was not paid solely for the purpose of earning such income, profits or gains as required by Section 12, Sub-section (2), of the Indian Income-tax Act. Now it is to be noted that both in the statement of the case and at the bar when that case was argued it was conceded on behalf of the assessee that his sole purpose in making that gift was not to earn income as a director or to earn dividends on his shares but one of his objects-and the main object -was to save his business reputation. As was pointed out, Sir Homi Mehta felt that if the company failed 75 per cent, of the shareholders would lose and he having promoted the company he was actuated to make a gift of rupees three lakhs in order to save the company. On those facts only one decision was possible at which the Court arrived, namely, that the sum of rupees three lakhs paid by Sir Homi Mehta was not solely for the purpose required by Section 12, Sub-section (2), of the Indian Income-tax Act. The difference between the case we have and the case which Sir John Beaumont, Chief Justice, and Mr. Justice Kania had before them is obvious and apparent. In this case the assessee has throughout maintained that his sole purpose in fighting the litigation was to earn the income as a member of the Local Board of the Reserve Bank of India; and as I have pointed out, the Tribunal in their statement of the case have not found that the assessee had any other purpose than the purpose of earning the income. It Would be entirely irrelevant to enter into the motives of Sir Purshottamdas why he fought this litigation. Mr. Setalvad has invited us into the attractive region of speculation. He wants us to consider what might have moved the assessee in defending his seat on the Local Board of the Reserve Bank. He asks us to speculate and to hold that Sir Purshottamdas might have thought of his honour, reputation, position and status as a member of that important body. But after all, as has been pointed out over and over again, we are merely an advisory body and we must advise on the facts found by the Tribunal. There is not even a suggestion that there was any other purpose on the part of the assessee for defending the suit, brought by Mr. Shamdasani except the pure business and monetary purpose of earning his fees as a member of the Local Board of the Reserve Bank. Sir Jamshedji Kariga at the bar has reiterated and re-emphasised this purpose of his client, and as no other purpose appears on the face of the record we must accept that and hold that in this case the object and purpose with which this expenditure was incurred Was solely as required by Section 12, Sub-section (2), of the Indian Income-tax Act, for earning the income as a member of the Local Board of the Reserve Bank of India.
15. The second question is whether this expenditure is in the nature of a capital expenditure, because if it is that, even though it was incurred solely for the purpose of earning the income, the assessee would not be entitled to claim the exemption. Mr. Setalvad has strongly relied, as he was entitled to, on the case of the Lahore High Court in Kangra Valley Slate Co., Ltd. v. Commissioner of Income-tax I.L.R. (1934) Lah. 479; and I admit that it is very difficult to distinguish that case from the facts of the case before us. If the principle enunciated in that case be a sound one, then undoubtedly that principle applies to the facts of this case as well. In that case the assessees were carrying on a business of manufacturing slates and they had obtained a lease for the exclusive right of quarrying slate in that particular village. The proprietors of the village filed a suit to eject them, and the assessees resisted the suit and incurred an expense in doing so; and the question was whether they were entitled to claim the exemption with regard to that expense; and the Court held that the expenditure, being a non-recurring outlay required to retain a capital asset, was in the nature of a capital expenditure. In coming to that conclusion the bench was largely influenced by an observation of Lord Dunedin in Vallambrosa Rubber Co., Ltd. v. Farmer (1910) 5 T.C. 529, The particular observation of Lord Dunedin which is set out in the judgment of the Lahore High Court, is as follows (p. 484):-. 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.
Now in this bald form this observation of Lord Dunedin seems to suggest that the only test to be applied in order to, find out whether a particular expenditure is a capital or income expenditure is whether it is recurring or non-recurring in its character. Now, with respect to the learned Judges, it was hardly fair to the learned Law Lord to have quoted him in this incomplete fashion, because, when you turn to the judgment itself, we find that Lord Dunedinl qualifies his remark; by saying (p. 536):
Now, I don't say that this consideration is absolutely final or determinative, but in a rough way I think it is not a bad criterion of what is capital expenditure as against what is income expenditure.
Once this qualification and reservation is borne in mind, it would immediately be seen that what Lord Dunedin was laying down was one of the several tests which have got to be applied in order to determine what is capital expenditure and what is income expenditure. Fortunately it is not necessary for us to differ from a judgment of another High Court on an all-India statute because that very High Court seriously doubted the validity of that judgment when it came to be considered by a full bench of that High Court in Mahabir Par shad and Sons v. Commr. of Inc.-Tax , and although Mr. Justice Sale who was a party to both the judgments did not wholly repudiate his own judgment, he did say that his exposition of the question of what was and what was not capital expenditure was not an authoritative exposition as stated in the Kangra Valley State Company's case. The most that one can say is that it remains an exposition but not an authoritative one. But to my mind the proper test as to what is capital expenditure is laid down in two English cases, one Atherton v. British Insulated and Helsby Cables, Ltd. (1925) 10 T. C. 155 and the other in the judgment of Mr. Justice Lawrence in Southern v. Borax Consolidated, Ld. a The observations of Viscount Cave in Athertoris case have already been referred to in the judgment of the learned Chief Justice; and what is to be remembered is that Viscount Cave points out that the test to be applied in order to determine whether an expenditure is a capital expenditure is not merely that it should be non-recurring but it should be an expenditure to bring into existence an asset or an advantage for the enduring benefit of a trade. To maintain an existing asset or to preserve an existing asset is not enough. The expenditure must be to bring into existence an asset which did not already exist or a new advantage which must endure for the benefit of that particular business or trade.
16. Now in this case when Sir Purshottamdas Thakurdas defended Mr. Shamdasani's suit, the asset, viz. the directorship or the seat on the Local Board of the Reserve Bank, already existed. All that he was doing was to preserve and maintain an already existing asset. It is not suggested that as a result of the litigation any new asset came into existence or he obtained any new advantage for the purpose of the directorship. I can also understand a case where an assessee has to fight a litigation for the purpose of perfecting his title. It may then be contended that to perfect one's title is to bring into existence a fresh advantage which did not exist before. But in this case the title of Sir Purshottamdas Thakurdas was already complete; he was merely resisting the attack of a litigant who was trying to unseat him; and having succeeded, he did not in any way improve his position or acquire any fresh benefit hut merely succeeded in preserving and maintaining an asset which he already possessed.
17. Mr. Justice Lawrence also in Southern v. Borax Consolidated, Ld. [1941] 1 K.B. 111:(1940) 10 I.T.R. 1 observed that (p. 5): .where a sum of money is laid out for the acquisition or the improvement of a fixed capital asset it is attributable to capital, but that if: no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital assets of the Company.
18. Therefore, according to this learned Judge, there must be an acquisition or an improvement of a fixed capital asset before an expenditure can be considered to be a capital expenditure; 'but if the expenditure is incurred merely for maintenance of a capital asset, then it is not a capital expenditure. If we were to apply this test to the facts of this case, as I have already pointed out, it cannot be contended that what Sir Purshottamdas was doing was anything more than trying to maintain his capital asset. It may be noted that in that particular case in which Mr. Justice Lawrence made these observations (Southern v. Borax Consolidated, Ld.), a company acquired land in America for the purpose of its business. 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 6,000 and; odd, and it was this sum of 6,000 and odd that the company was claiming as an expenditure which it was entitled to have exempted from the application of the tax.
19. Sir Jamshedji Kanga has also drawn our attention to a Nagpur case, Income-tax Appellate Tribunal, New Delhi v. The Central Spinning, Weaving and ., The Empress Mills, Nagpur [1943] Nag. 307. In that case the assessee company incurred a certain expenditure as legal expenses in connection with a suit which it had brought against another company to restrain the latter from using a trade mark to which the assessee had acquired exclusive right by long usage; and the Court consisting of Mr. Justice Niyogi and Mr. Justice Digby held that the expenditure was revenue expenditure and was allowable in computing the taxable income of the assessee company from the business. It will be noticed that what the company was trying to do was to preserve and maintain its most important capital asset, namely, the trade mark to which it had acquired exclusive right. Notwithstanding that, the Court came to the conclusion that the assessee was entitled to the exemption.
20. Now Mr. Setalvad has strongly relied for this point also on the judgment of our Court to which J have already referred, namely, Commissioner of Income Tax v. Sir Homi M. Mehta. In that case the Court not only held that the sum of rupees three lakhs paid by Sir Homi Mehta was not solely for the purpose of earning an income but they also came to the conclusion that the expenditure was in the nature of a capital expenditure; and Sir John Beaumont, Chief Justice, came to that conclusion on the ground that one of the purposes for which that sum had been expended was the maintenance of the business reputation of the assessee. Now Mr. Setalvad has seized upon this observation of the learned Chief Justice and he argues that just as much as in that case so in this case also if moneys are spent for the maintenance of a capital asset then the expenditure is in the nature of a capital expenditure. Now reading the judgment of the learned Chief Justice as a whole, it is clear that he did come to the conclusion that when Sir Homi Mehta paid the sum of rupees three lakhs, his business reputation did not remain exactly the same after the payment as it was before and he in terms holds that the object of the payment was to enhance the reputation of the assessee and to avoid his being associated with a company which had failed. Therefore the assessee in that case, Sir Homi Mehta, obtained an advantage for an enduring benefit of his business or trade which brings the case within the definition of Viscount Cave in Atherton v. British Insulated and Helsby Cables, Ltd., to which I have already referred. It cannot be said in this case that in succeeding in this litigation Sir Purshottamdas Thakurdas in any way enhanced his business reputation. His business reputation remained 'exactly where it was and all that he gained was that he succeeded in keeping the seat from which Mr. Shamdasani was trying to oust him.
21. Under the circumstances I agree with the learned Chief Justice that the Commissioner must fail on this reference and we should answer the question referred to us in the affirmative. Commissioner to pay the costs of the reference.