2017 (1) TMI 1045 - AT - Income Tax

Allowability of legal expenses - allowable business expenditure - Held that - The fee/legal expenses paid by the assessee is an allowable deduction, more specifically when the same was paid through banking channel and the Assessing Officer has neither contradicted the genuineness of payment and has also not brought any contrary material on record, evidencing that no such payment was made by the assessee, therefore, this ground of the assessee is allowed. Computing the income from share transaction - business and profession OR Capital Gain - Held that - When the assessee treated the transactions as investments in the books of accounts, which includes both long term and short term, the intention of the assessee for acquiring the shares, source of acquisition are out of own funds/family funds, the assessee valued the shares under investment portfolio at cost and never valued them at market price or realization value, it has to be treated as short term capital gain. During hearing, the ld. counsel for the assessee claimed that in earlier years, such transaction of the assessee were assessed as short term capital gain/long term capital gain. This factual matrix was not controverted by the Revenue, consequently we are of the that unless and until contrary material is brought on record no U-turn is expected from the Department. Considering the totality of facts, we are of the view, the assessee transacted the shares as investor, therefore, it cannot be treated as business income. This ground of the assessee is, therefore, allowed.

Issues involved:
1. Violation of the principle of natural justice.
2. Disallowance of legal expenses.
3. Computation of income from share transactions under the head "business and profession" versus "short term capital gain."

Issue-wise detailed analysis:

1. Violation of the principle of natural justice:

The assessee contended that the Assessing Officer (AO) did not provide adequate opportunity to be heard, violating the principle of natural justice. The Tribunal examined the records and found that the assessee was provided sufficient opportunity by both the AO and the Commissioner of Income Tax (Appeal) (CIT(A)). The Tribunal concluded that there was no violation of the principle of natural justice and dismissed this ground.

2. Disallowance of legal expenses:

The assessee challenged the disallowance of legal expenses amounting to ?12,79,871/-, claiming they were incurred for business purposes. The Tribunal analyzed the facts and found that the legal expenses were incurred to safeguard the assessee’s business interests, particularly in litigation related to a sale agreement of shares with M/s J.B. Holdings Ltd. The Tribunal noted that the payments were made through banking channels to various advocates for defending the assessee in different courts, including the Hon'ble Supreme Court.

The Tribunal referred to Section 57 of the Income Tax Act, which allows deductions for expenses incurred wholly and exclusively for earning income under the head "Income from Other Sources." The Tribunal cited various judicial precedents supporting the view that legal expenses incurred to protect business interests are allowable deductions. It was concluded that the legal expenses were legitimate and bona fide, incurred to defend the assessee's business interests. Consequently, this ground was allowed in favor of the assessee.

3. Computation of income from share transactions:

The assessee argued that the income from share transactions should be treated as "short term capital gain" rather than "business income." The Tribunal examined the nature of the transactions, noting that the shares were delivery-based, purchased through banking channels, and consistently shown as investments in the assessee's books of accounts. The average holding period was 43.61 days, and the assessee did not use borrowed funds for these transactions.

The Tribunal referred to various judicial decisions and CBDT instructions, which support the treatment of transactions as investments if they are shown as such in the books of accounts and held for a reasonable period. The Tribunal found that the assessee's transactions were consistent with the treatment of investments and not trading. Therefore, it ruled that the income from share transactions should be treated as "short term capital gain." This ground was allowed in favor of the assessee.

Conclusion:

The appeal of the assessee was partly allowed, with the Tribunal ruling in favor of the assessee on the grounds of disallowance of legal expenses and computation of income from share transactions. The ground related to the violation of the principle of natural justice was dismissed. The order was pronounced in the open court on 16/11/2016.

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