11 Section 37(1) – Business expenditure – Capital or revenue – A. Ys. 2008-09 and 2009-10 – Assessee obtaining mining lease from Government – Writ petitions to quash lease – Legal expenditure to defend and protect lease – Is revenue expenditure

Dy. CIT vs. B. Kumara Gowda; 396 ITR 386
(Karn):

The assessee was in the business of mining
iron ore in lands taken on lease from the State Government. In the year 2006,
the Department of Geology had leased out certain lands to the assessee for the
purpose of mining iron ore. The assessee was working on the lease as a lessee
of the State Government. The grant of lease to the assessee was challenged by
third parties in writ petitions. In the A. Ys. 2008-09 and 2009-10, the
assessee incurred expenditure by way of legal fees to defend and sustain the
lease. The assessee claimed deduction of the expenditure as revenue
expenditure. The Assessing Officer disallowed the claim. The Tribunal allowed
the assessee’s claim.

On appeal by the Revenue, the Karnataka High
Court upheld the decision of the Tribunal and held as under:

 “i)  The test to decide whether
a particular expenditure is capital or revenue in nature, is to see 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 former, it is capital
expenditure; if it is later, it is revenue expenditure.

 ii)  The legal expenditure
incurred by the assessee to defend the writ petitions filed to quash the
Government notification and lease deed was not a capital expenditure and
deduction was allowable.”