2000 (9) TMI 220 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of legal and professional charges u/s 37 of the Income-tax Act.

Summary:

Disallowance of Legal and Professional Charges u/s 37:
In ground No. 2(b), the assessee challenged the disallowance of Rs. 1,65,425 by the CIT(A) on account of legal and professional charges paid to M/s. J.B. Dadachandji, arguing that it was not connected with the business of the company.

The assessee contended that the expenditure was incurred for securing legal opinions on RBI circulars related to non-resident investments and the registration of shares, as well as for a writ filed in the Bombay High Court challenging the legality of such registration. The Assessing Officer disallowed the claim, stating that the expenditure did not have a direct or proximate nexus with the running of the business, as required by Section 37 of the Income-tax Act.

The CIT(A) upheld the disallowance, relying on the Supreme Court decision in LIC of India v. Escorts Ltd., which suggested that the litigation costs should be borne personally by Mr. Nanda, not the company.

The assessee argued that the legal expenses were necessary to comply with the laws of the land, particularly FERA 1973, and to avoid severe penalties and imprisonment for contraventions. They emphasized that the expenses were incurred to seek legal opinions from eminent jurists to ensure the company's actions were lawful.

The DR countered that the dispute was between shareholders and not related to the business of the company, citing several case laws to support the contention that such expenses are not allowable under section 37.

After considering the submissions and case laws, the Tribunal concluded that the legal expenses were incurred to protect the company's business from potential legal and financial consequences under FERA 1973. The Tribunal allowed the assessee's claim, distinguishing the 'costs' referred to by the Supreme Court from the professional fees paid for legal opinions. The Tribunal held that the expenses were bona fide and necessary for the business, thus allowable u/s 37 of the Income-tax Act.