2018 (1) TMI 733 - AT - Income Tax

Expenditure laid out or expended wholly and exclusively for the purpose of the business or profession of the assessee u/s 37 - one-time settlement charges paid to banks - benefit for becoming a guarantor - Held that - The assessee was carrying on profession of advocate. The assessee had given the guarantee for obtaining loan by the Company M/s India Magnetics Ltd. There is no direct/indirect nexus between the assessee s profession and the company for which he gave his guarantee. The assessee is also unable to prove that the assessee has received any direct indirect benefit for becoming a guarantor for the above company. CIT(A) has, therefore, done good reasoned order on this account, which needs no interference. The assessee could not controvert the test laid down for claiming deduction u/s. 37(1), as discussed by the ld. CIT(A). The assessee also failed to prove that they had got any benefit for becoming a guarantor of the said company. Therefore, one-time settlement charges paid to banks is not an allowable expenditure under section 37 of the Income Tax Act - Decided against assessee. Disallowance out of expenditures claimed - Held that - We find that the ld. Authorities below have made the disallowance on adhoc basis, that too without rejecting the books of account of the assessee. Moreover, the ld. Authorities below have failed to pin point any particular expenditure which was of disallowable nature. Therefore, adhoc disallowance made by the authorities below deserves to be deleted - Decided against revenue

Issues Involved:

1. Deductibility of litigation settlement expenses under Section 37(1) of the Income Tax Act, 1961.
2. Ad-hoc disallowance of 10% of expenses on vehicle repair and maintenance, interest on car loan, conveyance, and depreciation.

Detailed Analysis:

1. Deductibility of Litigation Settlement Expenses:

The primary issue was whether the litigation settlement expenses incurred by the assessee could be allowed as a deduction under Section 37(1) of the Income Tax Act, 1961. The assessee, a practicing lawyer, had incurred expenses amounting to ?39,01,750/- for a one-time settlement to release personal guarantees given for a loan taken by M/s India Magnetics Limited. The Assessing Officer (AO) disallowed this expense, arguing that it was not incurred wholly and exclusively for the purpose of the assessee's profession. The AO noted that M/s India Magnetics Limited was not related to the assessee's profession and that the assessee did not derive any benefit from the company.

The assessee contended that the settlement was necessary to avoid detention and loss of reputation, which would have adversely affected his professional commitments and income. He argued that the expense was commercially expedient and essential for maintaining his professional standing.

The CIT(A) upheld the AO's decision, referencing the Delhi High Court's judgment in the case of Mr. Shanti Bhushan, which emphasized that expenses must be incurred wholly and exclusively for business purposes to be deductible under Section 37(1). The CIT(A) concluded that there was no direct nexus between the litigation expenses and the assessee's profession, and therefore, the expenses could not be allowed as a business expense.

The Tribunal agreed with the CIT(A), noting that the assessee failed to prove any direct or indirect benefit from the guarantee provided to M/s India Magnetics Limited. The Tribunal held that the one-time settlement charges paid to banks were not allowable under Section 37 of the Income Tax Act.

2. Ad-hoc Disallowance of 10% of Expenses:

The second issue involved the ad-hoc disallowance of 10% of expenses on vehicle repair and maintenance, interest on car loan, conveyance, and depreciation, amounting to ?1,28,617/-. The AO made this disallowance on the grounds that these expenses were of a personal nature and not fully utilized for business purposes.

The assessee argued that the disallowance was made on an ad-hoc basis without rejecting the books of account and without identifying any specific defects in the expenses claimed. The CIT(A) confirmed the AO's decision.

The Tribunal, however, found that the authorities below had made the disallowance without rejecting the books of account and without pinpointing any particular disallowable expenditure. Citing various judicial pronouncements, the Tribunal held that such an ad-hoc disallowance was not justified. Consequently, the Tribunal allowed this ground of appeal raised by the assessee.

Conclusion:

In conclusion, the Tribunal partly allowed the appeal of the assessee. The claim for litigation settlement expenses under Section 37(1) was disallowed, while the ad-hoc disallowance of 10% of vehicle-related and other expenses was deleted. The order was pronounced in the open court on 12.01.2018.

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