Business expenditure: Capital or revenue: Section 37: Settlement charges and legal expenses for settlement of dispute is revenue expenditure allowable as business deduction:

Assessee was carrying on the business of conducting and managing a restautant. Under an agreement, assessee had granted a licence and permission to J to conduct and manage the restaurant business. Dispute arose between the assessee and J, which resulted in the filing of a suit before the City Civil Court, in which consent terms were arrived at and a decree was passed by consent. As per the consent decree, the assessee made payment to J which included settlement charges of Rs. 5,50,750/-. The assessee had also incurred legal expenditure of Rs. 1,65,500/- in that respect. The assessee claimed both these amounts as deduction as revenue expenditure. The Assessing Officer disallowed the claim. The Tribunal allowed the claim.

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

“i) The payment which assessee made to the conductor J included settlement charges of Rs. 5,50,750/- as recorded in the settlement of account. This payment was a payment which the assessee effected for resolving disputes and removing the hindrance which was caused in the management and conducting of the restaurant.

ii) The conductor was a bare licensee and had no interest by way of tenancy or otherwise, in respect of the premises. Consequently, the payment which was made by the assessee was one which in the true sense of the term was for removing the obstruction or hindrance in conducting and managing the restaurant and must be regarded as a matter of commercial expediency.

iii) The legal expenses in the amount of Rs. 1,65,500/- are also clearly an allowable deduction for the same reason.

iv) In this view of the matter, the view which has been taken by the Tribunal is correct.”