2016 (9) TMI 1061 - AT - Income Tax

Disallowance of legal expenditure and travelling, hotel expenditure - Held that - From the record we found that that the expenditure is incurred by the assessee in his character as a professional and is not an expenditure which is personal in nature. The assessee has in his professional capacity been a director of various limited companies has earned professional fees for the services rendered to these companies. He was a director of Nagarjuna Finance Limited (NFL) from 14-12-1982 to 28-04-1999. The assessee has earned professional income during all the years, he was, a director of NFL. The details of professional income earned during the said years are given in annexure A which is placed on record. The assessee serves as an Independent Director on the Board of several leading Indian Companies such as Apollo Tyres Limited, Britannia Industries Limited, Deepak Nitrite Limited and KSB Pumps Limited and also a member of various Governing Boards of Centre for Policy Research, Indian Institute of Capital Markets, CII, SEBI etc. He regularly gets sitting fees and commission from many of these Companies. The assessee was also an independent Director on the board of Nagarjuna Finance Limited. Nagarjuna Finance Limited had collected Fixed Deposits from the public. Nagarjuna Finance Limited was charged with default in repayment of fixed deposits and interest thereon. Mr. Nimesh Kampani has been mentioned as one of the accused among several others, for non-payment of these fixed deposits by Nagarjuna Finance Limited. The Andhra Pradesh Government had since filed suit against directors of Nagarjuna Finance Limited including Mr. Kampani. To defend himself, Mr. Kampani has appointed various advocates to represent his case before various courts viz, District Court, High Court of Andhra Pradesh, Supreme Court of India. As the expenditure is incurred to protect his business interest the same is required to be allowed u/s. 37(1) of the Act. Accordingly we direct the A.O. to allow legal expenses. In respect of travelling expenditure, it appears that the assessee has filed details before the CIT(A) under Rule 46A, which was declined by the CIT(A) as additional evidence. Since the impugned expenditure also partake the character of professional expenses and which goes to the root of the issue while deciding allowability of hotel and travelling expenses, we restore the matter back to the file of the A.O. for considering the additional evidence filed with reference to expenditure incurred on travel and hotel and for deciding the same afresh after giving due opportunity to the assessee. - Decided partly in favour of assessee.

Summary

Issues:
- Disallowance of legal expenditure
- Disallowance of travelling and hotel expenditure

Analysis:
1. Disallowance of Legal Expenditure:
The appeal was filed against the disallowance of legal expenditure and travelling/hotel expenses for the assessment year 2009-10. The assessee debited an amount under "legal fees and related expenses" and explained that it was incurred to defend against accusations related to non-payment of fixed deposits by a company where the assessee served as a director. The Assessing Officer disallowed the expenditure as personal, but the ITAT found it to be professional expenditure not of a personal nature. The assessee, a merchant broker, earned professional income from various directorships and services rendered. The ITAT directed the Assessing Officer to allow the legal expenses of &8377;40,72,750 as they were incurred to protect the assessee's business interest and were fully allowable under section 37(1) of the Income Tax Act.

2. Disallowance of Travelling and Hotel Expenditure:
The assessee also claimed travelling and hotel expenses of &8377;14,93,188, which were initially declined as additional evidence by the CIT(A). Since these expenses were considered professional and crucial in determining the allowability of the expenses, the ITAT remanded the matter back to the Assessing Officer for reconsideration based on the additional evidence filed. The ITAT instructed the Assessing Officer to provide the assessee with a fair opportunity to present these expenses for fresh consideration. Consequently, the ITAT allowed the appeal in part, directing the Assessing Officer to review the travelling and hotel expenses afresh.

In conclusion, the ITAT ruled in favor of the assessee, allowing the legal expenses and instructing a reevaluation of the travelling and hotel expenses. The judgment highlighted the distinction between personal and professional expenses, emphasizing the deductibility of expenses incurred in the course of conducting business activities.