2006 (3) TMI 536 - AT - Income Tax

Summary

Issues:
1. Disallowance of legal fees as revenue expenditure.
2. Treatment of loss on sale of shares as business loss.

Issue 1: Disallowance of Legal Fees
The Revenue appealed against the deletion of the disallowance of legal fees paid by the assessee, arguing it should be treated as capital expenditure due to protecting patent rights. The CIT(A) found that the legal fees were incurred to safeguard the brand name owned by the assessee, intimately connected with its business activity. Citing relevant case laws, the CIT(A) concluded the expenditure should be treated as revenue in nature. The ITAT considered the facts and legal precedents, emphasizing that expenses incurred to protect business assets are revenue expenditures. Referring to judicial pronouncements, the ITAT upheld the CIT(A)'s decision, stating any expenditure to maintain the status quo of business is deductible as revenue expenditure.

Issue 2: Treatment of Loss on Sale of Shares
The Revenue contended that the loss on the sale of shares should be treated as speculative loss, not a business loss, as the assessee was not engaged in trading shares. The CIT(A) noted that the assessee did not purchase any shares during the relevant year, making it an isolated transaction. The ITAT agreed with the CIT(A), highlighting that the loss could not be speculative since no shares were bought during the year. Referring to a tribunal decision, the ITAT emphasized that the provisions on speculative transactions apply only when there is an attempt to reduce taxable income. As the transaction was isolated, the ITAT upheld the CIT(A)'s decision, dismissing the Revenue's appeal.

In conclusion, the ITAT Mumbai dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The legal fees were considered revenue expenditure, given their connection to protecting business assets, while the loss on the sale of shares was not treated as speculative due to the isolated nature of the transaction.