2014 (1) TMI 702 - AT - Income Tax

Addition of expenses u/s 37(1) of the Act - expenses incurred for the purpose of an offence Purpose of incurring expenses ignored Held that - The expenditure was incurred as a professional fees to defend two directors of the assessee company who were arrested under NDPS Act on being found guilty of the offences under the relevant sections of the said Act assessee contended that since the two directors were released on bail, it indicated that they were not at fault - no final order on their conviction or acquittal was passed so far - It shows that the charge is still continuing, which is otherwise an offence under the NDPS Act - there can be no reason for allowing deduction towards such an expenditure which has been incurred for the purpose of an offence prohibited by law, covered within the meaning of the Explanation to section 37(1) of the Act - Mandate of the Explanation is crystal clear that, any expenditure incurred for any purpose which is an offence or which is prohibited by law cannot be allowed as deduction - It does not make any difference, whether expenditure is direct or indirect - So long as there exists a nexus of the expenditure with the offence, it will continue to be hit by the Explanation Decided against Assessee. Disallowance on account of discrepancy in ledger s Account Held that - The AO made disallowance towards the interest income which was not accounted for by the assessee in its books of account - certain details were promised to be filed by HSBC Bank and ICICI Bank, which appear not to have been filed in time matter remitted back to the AO for fresh adjudication - the assessee proposes to file to show that there was no interest income which was not offered for taxation Decided partly in favour of Assessee.

Summary

Issues:
1. Addition of expenditure incurred for a purpose which is an offence.
2. Disallowance of interest income not accounted for in the books of account.

Issue 1: Addition of expenditure incurred for a purpose which is an offence:

The appeal concerns the confirmation of the addition of Rs. 53,86,538 as expenditure incurred for a purpose considered an offence. The assessee debited this amount as professional fees, which was actually legal expenses related to a narcotics case involving the company's directors. The AO disallowed the expense despite the explanation provided by the assessee that it was spent on legal fees for securing the release of the directors on bail. The Tribunal noted that the expenditure was incurred to defend the directors in a case related to narcotic drugs, falling under the NDPS Act. The Tribunal referred to Section 37(1), which prohibits deduction of any expenditure incurred for an offence or prohibited by law. It emphasized that the charge against the directors was ongoing, indicating a nexus with the offence under the NDPS Act. The Tribunal rejected the argument that the bail indicated innocence, citing precedents and the Explanation to Section 37(1). Consequently, the Tribunal upheld the disallowance of the expenditure, dismissing the appeal on this ground.

Issue 2: Disallowance of interest income not accounted for in the books of account:

The second ground of the appeal relates to the disallowance of Rs. 4,23,816 based on discrepancies in the assessee's ledger account and the AIR Report regarding interest income credited by banks but not offered for taxation. The AO found disparities between the AIR Report and the ledger account, leading to the disallowance. The assessee submitted letters from banks providing details of the interest income, but the revised returns were not filed in time. The CIT(A) upheld the disallowance due to the unchanged AIR details. The Tribunal observed that the interest income in question was allegedly not accounted for by the assessee. However, considering the promised details from the banks not being filed in time, the Tribunal set aside the impugned order and directed the AO to reexamine the issue based on the material the assessee intended to submit. Consequently, the appeal was partly allowed for statistical purposes, with the matter being restored to the AO for fresh consideration.

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