2016 (8) TMI 1172 - AT - Income Tax

Allowable business expenditure u/s 37(1) - payment made by the assessee for legal opinion is allowable - Held that - The assessee, being a business concern, has to protect its capital base from misuse by other competing business houses. The expenditure incurred by the assessee is not for creating any enduring asset in the course of business activity. It is an expenditure incurred for protecting the registered software developed by the assessee. The business of the assessee appears to be providing outsourcing accountancy services. Therefore, when the Pakistan based company attempted to misuse the software in the United Kingdom, the assessee had to actually initiate legal proceeding for protecting its interest so that the assessee can carry on the business effectively and profitably. This Tribunal is of the considered opinion that the expenditure incurred by the assessee is not on the capital field since it was not to create any capital asset. It was incurred by the assessee for protecting the registered software in the course of its business activity. Merely because the assessee has paid on hourly basis to engage the service of M/s Hammonds UK for 643 hours that cannot be a reason to disallow the claim of the assessee. It is for the assessee to determine how long hours it has to retain or engage the service of M/s Hammonds UK. When the assessee has established fact of initiation of legal proceeding and payment of fee, this Tribunal is of the considered opinion that there is no reason to disallow the claim of the assessee. Payment made by Shri Brijnath from his HSBC bank account, the fact remains that Shri Brijnath is one of the Directors of the assessee-company. The compensation said to be received from M/s Charter House Accountants LLP was credited in the accounts of the assessee-company and it was also reflected in the Profit & Loss account for year ending 31.03.2006. In those circumstances, merely because the funds to the legal firm was paid from the individual account of one of the Directors Shri Brijnath, this Tribunal is of the considered opinion that there cannot be any reason to disallow the claim of the assessee. In view of the above, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Disallowance being the premium paid for professional indemnity insurance - payment was not substantiated and the assessee has not proved that the expenditure was for business purpose - Held that - When the assessee-company agreed to pay the premium for professional indemnity insurance as part of the fee paid to the legal firm, even though there was an obligation under the UK law that only the legal firm has to pay the professional indemnity premium, in view of the assurance given by the assessee to meet the expenditure for insurance premium, this Tribunal is of the considered opinion that such premium would form part of the payment made by the assessee towards fees. Therefore, it has to be naturally treated as expenditure for meeting the legal litigation initiated in the UK for preventing the misuse of registered software. In those circumstances, this Tribunal is of the considered opinion that the CIT(Appeals) has rightly allowed the claim of the assessee. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.

Summary

Issues:
1. Disallowance of legal fee paid to a firm in London.
2. Disallowance of premium paid for professional indemnity insurance.

Issue 1: Disallowance of legal fee paid to a firm in London:
The Revenue appealed against the disallowance of ?1,93,90,502 paid to a legal firm in London, claiming it was not genuine as the payment was not made from the company's bank account. The Revenue argued that the expenditure was excessive compared to the compensation received. The assessee contended that the payment was for protecting its software from misuse and provided invoices and payment details. The Tribunal found that the expenditure was not to create a capital asset but to protect the software, thus allowing the deduction under Section 37(1) of the Income-tax Act. The Tribunal also upheld the payment method on an hourly basis, as common in legal practice, and accepted the payment made by a director from personal funds as legitimate, as the compensation was credited to the company's account.

Issue 2: Disallowance of premium paid for professional indemnity insurance:
The Revenue challenged the deduction of ?1,87,327 paid for professional indemnity insurance, arguing it was the legal firm's obligation to pay. The assessee defended the payment, stating it was part of the fee paid to the firm and provided evidence of the payment. The Tribunal noted that the payment was made as part of the legal fees to prevent software misuse, and even though the legal firm was responsible under UK law, the assessee's agreement to pay made it a legitimate expense. Consequently, the Tribunal upheld the allowance of the claim, finding no reason to interfere with the lower authority's decision.

In conclusion, the Tribunal dismissed the Revenue's appeal on both issues, affirming the deductions for legal fees and professional indemnity insurance premium.