2018 (8) TMI 715 - HC - Income Tax

Claim of expenses u/s 37(1) - litigation and settlement expenses - during the legal proceedings, the appellant switched gear and became a lawyer in order to settle the dues of the company and discharge his personal guarantee. - He entered into One Time Settlement with the bankers and paid up the agreed amount - Held that - The discharge of that liability was claimed by him to be business expenditure in relation to subsequent income generated through legal profession. In our opinion, such claim is clearly inadmissible. The kind of expenditure which a legal professional can legitimately and justly claim is entirely different from the basic expenditure which a commercial entity can claim. Moreover, the commonality sought to be urged, i.e. the persona of the assessee that obscures the fact is that the hat donned by the assessee in the past was of a business entrepreneur whereas he is now a legal professional; crossing of line is impermissible as the law stands today. - Decided against the assessee.

Summary

Issues: Claim of litigation expenses under Section 37 of the Income Tax Act.

Analysis:
The appellant claimed &8377; 39,01,750/- as litigation/settlement expenses under Section 37 of the Income Tax Act. The appellant, initially a managing director of a company, became a lawyer to settle the company's dues and discharge personal guarantees. Lower authorities disallowed the claimed expenditure, which the ITAT upheld, stating it was not wholly and exclusively for business purposes under Section 37. The ITAT referenced the judgment in Shanti Bhushan v. Commissioner of Income Tax 336 ITR 26. The appellant argued that without the expenses, continuing as an advocate would have been impossible, citing the same judgment to support the claim that seemingly personal expenses could be deductible under Section 37 for professionals. However, the Court found the claim inadmissible, distinguishing between business and professional expenditures. The Court emphasized that the nature of expenses claimable by a legal professional differs from those of a commercial entity. The Court held that the appellant's transition from a business entrepreneur to a legal professional did not permit claiming the expenses as business expenditure related to subsequent income from the legal profession. The Court concluded that no substantial question of law arose, resulting in the dismissal of the appeal.