Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Assessee was engaged in business of cultivation and manufacture of tea - It owned and ran a tea estate 'Z' - Later on, it sought to purchase another tea estate 'B' and for that purpose it entered into an agreement with 'R', a tea company - It paid earnest money to 'R' out of its own funds in its existing business - Subsequently, shareholders of 'R' filed a suit for setting aside said sale agreement - As such 'R' failed to execute conveyance in favour of assessee within stipulated time and assessee filed a suit against 'R' for specific performance of contract - Whether, expenses incurred in defending suit filed by shareholders of 'R', were to be allowed as deduction because by defending such suit, assessee was seeking solely to preserve an existing right - Held, yes - Whether expenditure incurred on suit filed by assessee against 'R' for specific performance of agreement, was not an allowable deduction because success of assessee in said litigation would have resulted in a lawful conveyance of said tea estate in favour of assessee and would have conferred an enduring benefit to assessee who would thereby acquire a fresh capital asset - Held, yes - Whether, Commissioner (Appeals) was right in holding that as earnest money had been paid out of a fresh issue of shares and not out of borrowed funds, no amount could be added back in taxable income of assessee on account of interest on earnest money on presumption that if such payment of earnest money had not been made interest to bank could have been avoided on overdraft to such an extent - Held, yes Facts The assessee carried on the business of cultivation and manufacture of tea. At the material time it owned and ran a tea estate known as 'Z'.Later on, it sought to purchase another tea estate known as 'B' and for that it entered into an agreement on 19-3-1975 with 'R' another tea company. The assessee paid the earnest amount of Rs. 4 lakhs to 'R' out of its own funds in its existing business and the balance amount was payable at the time of execution of the conveyance. Meanwhile, the shareholders of 'R' disputed the said sale agreement and filed suit…

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