Law: Income Tax Act, 1922

Section: 12(2)

Income-tax-Business expenditure-Tests-Legal expenses Expenses benefiting others also -Imprudent expenditure--Whether allowable-Indian Income-tax Act, 1922, S. 12(2). It is well settled that an expenditure incurred for preservation or protection of a capital asset is revenue in nature and not a capital expenditure. The test of allowability is not what a prudent man would do in similar circumstances. Though an assessee is an imprudent businessman, yet if he incurs an expenditure volunta rily for the purpose of his own business it would be allowable as a proper deduction. The fact that it was not necessary for the assessee to bear the entire expenditure or that the expenditure also enured to the benefit of others is entirely irrelevant in determining the question whether the expenditure ought to be allowed as a deduction. In the instant case it was held that the sums of Rs. 77,158 and Rs. 11,891, being the legal and travelling expenses respec tively incurred by the assessee for protecting its dividend income and to ensure the prospective dividend earning capacity of certain shares which it had purchased in a company for Rs. 15 lakhs, were necessary for the preservation of its invest ment and, hence, were allowable under section 12(2). [Case-Law referred].   JUDGMENT MUKHERJEE, J.----This is a case stated under section 66(1) of the Income-tax Act, 1922, by the Allahabad Bench of the Appel late Tribunal. The material facts are these: The Muir Mills Ltd. is a public limited company, having a share capital of Rs. 60,03,000 divided into 30001 ordinary shares of Rs. 100 each and 30000 preference shares of Rs. 100 each. Previously, one Mr. K. J. D. Price and Mr. T. 1. Smith were the managing directors of this company and they, along with the members of their family and friends, held the largest single block of shares in the company. Towards the end of the year 1945, they decided to leave India and sell away their shares. Their shares wore purchased by Major-General Mahabir Shamsher Jung Bahadur Rana, Major-General Madan Shamsher Jung Bahadur Rana and Shri Hanuman. Prasad Dhanuka. They also purchased some More shares in the open market and by May 1947, they…