2002 (10) TMI 87 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the expenditure incurred by the assessee in connection with the writ petition under article 226 of the Constitution for quashing proceeding,; under section 147 of the Income-tax Act, 1961, and obtaining advice from tax experts in regard thereto fell within the purview of section 80VV of the Income-tax Act, 1961? - Support to this view is lent by a decision of the Calcutta High Court in Grindlays Bank PLC v. CIT which is the only decision directly on the point at issue. In this case also it has been held that the expenditure incurred by an assessee in connection with challenging the validity of notice issued under section 148 of the Act could not be disallowed under section 80VV of the Act. No contrary view by any High Court has been brought to our notice by learned counsel for the Revenue. - In the result, the question referred is answered in the negative, i.e., in favour of the assessee and against the Revenue.

Issues involved:
Interpretation of section 80VV of the Income-tax Act, 1961 regarding the deduction of expenditure incurred by the assessee in connection with legal proceedings challenging the reopening of assessments under section 147/148 of the Act.

Detailed Analysis:

1. Issue: Interpretation of Section 80VV of the Income-tax Act, 1961
The primary issue in this case revolves around the interpretation of Section 80VV of the Income-tax Act, 1961, concerning the allowance of deductions for expenditures incurred by the assessee in legal proceedings related to the determination of liability under the Act. The question arises whether the expenses incurred by the assessee in challenging the initiation of reassessment proceedings under section 147/148 of the Act fall within the purview of Section 80VV.

2. Facts and Background
The assessee, engaged in arranging charters for ship owners, claimed legal expenses for filing writ petitions challenging the actions of the Assessing Officer under section 147 of the Income-tax Act for the assessment years 1976-77 and 1977-78. The Assessing Officer disallowed a portion of the claimed expenses, citing Section 80VV, which limits deductions to Rs. 5,000 for proceedings related to determining liability under the Act.

3. Tribunal's Decision
The Tribunal upheld the assessee's contention that the legal fees for filing and prosecuting writ petitions challenging the reopening of assessments did not fall under Section 80VV. It reasoned that such proceedings were not directly related to determining tax liability under the Act, as the objective was annulment rather than liability determination.

4. Court's Analysis and Decision
The Court analyzed the provisions of Section 80VV, emphasizing that the expenditure must be related to proceedings determining liability under the Act by way of tax, penalty, or interest. It concluded that challenging the initiation of reassessment proceedings did not constitute proceedings relating to determining liability. The Court differentiated between actions connected to the Act and those directly involving liability determination.

5. Precedent and Supporting Decisions
The Court referenced a decision by the Calcutta High Court in Grindlays Bank PLC v. CIT, which held that expenses incurred in challenging the validity of notices under section 148 could not be disallowed under Section 80VV. No contradictory judgments were presented to challenge this interpretation.

6. Conclusion
The Court ruled in favor of the assessee, stating that the expenses incurred for challenging the validity of notices issued under section 147/148 did not fall within the ambit of Section 80VV. The Court aligned with the Tribunal's decision, emphasizing the distinction between proceedings related to liability determination and those merely connected to the Act.

7. Final Verdict
The Court answered the referred question in the negative, supporting the assessee and rejecting the Revenue's claim. No costs were awarded in the judgment.

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