2019 (11) TMI 465 - HC - Income Tax

Disallowance of legal expenses - Allowable revenue expenses u/s 37 - HELD THAT - Legal expenses incurred by the appellant company was not for the purpose of carrying out its business and, therefore, was not allowable as expenditure under Section 37 . It held that these legal expenses were incurred so as to protect the Directors / Shareholders of the company in respect of the complaints filed against them in their individual capacity and not in respect of their conduct in the course of carrying on the business of the appellant company. In fact, the complaint filed before the Chief Metropolitan Magistrate Court has been made against the Directors / Shareholders in individual capacities. The entire dispute between the various group of shareholders was only to acquire the management and control of the appellant company and, therefore, these expenses are not expenses incurred for and on behalf of the company but expenses incurred for the Directors / Shareholders for their individual benefit so as to retain control and management of the appellant company. Tribunal has observed the fact that legal proceedings were also commenced against its Auditors / Company Secretary were only on off-shoot of the inter se dispute between different shareholders of the appellant company. Assessing Officer as well as the CIT(A) recorded the fact that the details of the nature of the legal expenses was not forthcoming from the appellant. In the aforesaid facts, the view taken by the Authorities under the Act including the Tribunal, is a possible view on facts and cannot be said to be perverse. In these circumstances, the questions as proposed in all the four appeals do not give rise to any substantial question of law. Thus, not entertained.

Summary

Issues:
Challenge to the impugned order of the Income Tax Appellate Tribunal regarding the disallowance of legal expenses claimed by the appellant company in four assessment years under Section 37(1) of the Income Tax Act, 1961.

Analysis:
The appellant company, engaged in the business of precious metals, filed its return of income for Assessment Year 2005-06, declaring an income of ?12.36 lakhs. The Assessing Officer disallowed legal expenses of ?11.72 lakhs claimed in connection with complaints between different groups of shareholders/directors. It was found that these expenses were not for business purposes but to defend individual directors/shareholders. The Assessing Officer added the disallowed amount to the taxable income, leading to an appeal to the Commissioner of Income Tax (Appeals) who upheld the disallowance due to lack of evidence on the nature of services rendered. The Tribunal concurred, emphasizing that the legal expenses were not related to the business activities of the company but were for individual directors/shareholders' benefit in a shareholder dispute. The Tribunal found no evidence linking the legal expenses to the business operations of the company.

The appellant contended that the legal expenses were incurred to protect the company's reputation and ensure smooth business operations, including defending against criminal and Company Law Board proceedings. However, all authorities, including the Tribunal, concluded that the expenses were not for business purposes but to safeguard individual directors/shareholders in a dispute over company management. The legal proceedings against auditors and company secretary were seen as part of the shareholder conflict, not directly related to the company's business operations. The lack of details on the nature of legal expenses further supported the disallowance. The court found the authorities' view reasonable and not perverse, as the legal expenses were deemed personal in nature, unrelated to the company's business activities. Consequently, the appeals were dismissed, with no costs awarded.

In conclusion, the judgment upholds the disallowance of legal expenses claimed by the appellant company in four assessment years, emphasizing that the expenses were not incurred for business purposes but to protect individual directors/shareholders in a shareholder dispute, leading to the rejection of the appeals challenging the Tribunal's order.