1988 (1) TMI 82 - AT - Income Tax

Summary

Issues Involved:

1. Allowability of legal fees paid for defending the company's president in a personal criminal case.
2. Admissibility of depreciation and investment allowance on preliminary expenses.

Issue-wise Detailed Analysis:

1. Allowability of Legal Fees Paid for Defending the Company's President in a Personal Criminal Case:

The first issue pertains to whether the legal fees of Rs. 76,790 paid by the assessee company for defending its president in a criminal case in Mauritius should be allowed as a business expenditure. The IAC and ITO disallowed this expense, reasoning that the fees were paid in connection with the president's personal case and not for the company's business. The CIT(A) reversed this decision, allowing the expense on the grounds that defending the president was necessary to protect the company's reputation, as the president was involved in a case of mistaken identification while on a business tour.

The Revenue contested this decision, arguing that the expenditure was personal to the president and not related to the company's business. The assessee's counsel supported the CIT(A)'s decision, citing various judgments to argue that the expenditure was a legitimate business expense. However, the Tribunal found that there was no evidence provided to support the claim that the president's trip was for business purposes or that the smuggling charge was related to the company's business. The Tribunal concluded that the expenditure was personal and not allowable as a business expense, thereby reversing the CIT(A)'s order.

2. Admissibility of Depreciation and Investment Allowance on Preliminary Expenses:

The second issue involves the admissibility of depreciation and investment allowance on preliminary expenses amounting to Rs. 15,44,378. The ITO disallowed these expenses, stating they were not spent towards the installation of machinery or creating tangible assets. The expenses included insurance premium, salary and wages, traveling expenses, and telephone charges, which were considered revenue expenses by the assessee itself.

The CIT(A) overturned the ITO's decision, stating that these expenses, though of a revenue nature, should be capitalized as per the Supreme Court's decision in Challapalli Sugar Mills Ltd. vs. CIT. The Tribunal, however, noted that the CIT(A) misinterpreted the Supreme Court's judgment, which requires careful scrutiny to determine if the expenses were necessary to bring the assets into existence and put them in working condition. The Tribunal found that the CIT(A) did not examine whether the expenses were related to the erection of the plant and machinery. Consequently, the Tribunal set aside the CIT(A)'s order and remanded the matter for re-examination in light of the Supreme Court's judgment.

Conclusion:

The Tribunal concluded that the legal fees paid for defending the company's president were personal expenses and not allowable as business expenses. Additionally, the Tribunal remanded the issue of admissibility of depreciation and investment allowance on preliminary expenses back to the CIT(A) for re-examination, emphasizing the need to determine if the expenses were related to the erection or acquisition of the plant and machinery.