2024 (8) TMI 1165 - AT - Income Tax

Allowability of business expenditure - Disallowance of legal and professional charges - AO observed that the expenses are incurred in respect of the ownership of the firm and takeover of its business assets and liabilities which is a capital expenditure as well as personal expenses cannot be allowed as expenses wholly and exclusively for business purposes - HELD THAT - No payment has been made by the assessee in the form of any penalty and that no penalty had been levied by any statutory authority for violation of any law for the time being in force. All the aforesaid payments are made only to the advocates who are defending the assessee company in the ordinary course of its business. These expenses are nothing but expenses incurred to protect the image of the assessee company and for ensuring the smooth conduct of the business of the assessee company. None of the explanations given by the assessee hereinabove were found to be false by the revenue and that all these payments together with the purpose of payments are duly covered by documentary evidences. All the payments are made by regular banking channels after due deduction of tax at source and the payees are identifiable. The assessee on its part had duly filed the details of payments, purpose of payments, name and address of the advocates, TDS details, details of litigation, court papers and the relevant court orders. None of the payments fall under the ambit of provisions of Explanation 1 to Section 37 of the Act. They are neither penal in nature nor capital or personal in nature. In our considered opinion, the entire payments made are only mere payments made to advocates for defending the case of the assessee company. This is similar to a lawyer being paid fees for appearance before the Tribunal, Commissioner (Appeals) or before the AO in connection with income tax dispute of the assessee company. Hence they are squarely allowable as deduction. We direct the ld. AO to allow deduction to the assessee.

Summary

Issues Involved:
1. Disallowance of legal and professional charges as business expenditure.
2. Treatment of legal expenses incurred under the PNDT Act.
3. Treatment of legal expenses incurred due to environmental clearance issues.

Issue-Wise Detailed Analysis:

1. Disallowance of Legal and Professional Charges as Business Expenditure:

The primary issue in both appeals was whether the Commissioner of Income Tax (Appeals) was justified in confirming the disallowance of legal and professional charges. The assessee, engaged in the business of a hospital and research center, had booked expenses on payments to advocates for several court cases under the head "legal and professional expenses." The Assessing Officer (AO) disallowed these expenses, considering them as capital and personal expenses, not incurred wholly and exclusively for business purposes.

The Tribunal noted that the assessee provided detailed explanations and documentary evidence supporting the payments made to advocates. These expenses were incurred to defend civil suits filed by ex-partners of the erstwhile firm, which the assessee company had taken over. The Tribunal emphasized that these expenses were necessary to protect the business and were not penal in nature. Citing the decision in CIT vs New Garage Ltd (129 ITR 122), the Tribunal concluded that the expenses were allowable as business expenditure.

2. Treatment of Legal Expenses Incurred Under the PNDT Act:

The assessee incurred legal expenses of Rs 3,76,069/- related to a case filed under the PNDT Act by the State Government against the company and its directors. The AO disallowed these expenses, considering them as penalties for violation of law, as per Explanation to Section 37 of the Income-tax Act.

The Tribunal found that the expenses were incurred for defending the company in the ordinary course of its business and were not in the nature of penalties. The Tribunal noted that the expenses were necessary to protect the company's business and ensure its smooth operation. Therefore, these expenses were also allowable as business expenditure.

3. Treatment of Legal Expenses Incurred Due to Environmental Clearance Issues:

The assessee incurred legal expenses of Rs 1,79,776/- in connection with a complaint filed by the Haryana State Pollution Control Board for not obtaining environmental clearance. The AO disallowed these expenses, considering them as incurred for violation of law, attracting Explanation 1 to Section 37 of the Act.

The Tribunal observed that the expenses were incurred to defend the company against allegations and were necessary to protect its business. The Tribunal emphasized that these expenses were not penal in nature and were incurred in the ordinary course of business. Hence, they were allowable as business expenditure.

Conclusion:

The Tribunal concluded that the legal and professional charges incurred by the assessee were necessary for protecting its business and were not penal in nature. The expenses were incurred in the ordinary course of business and were supported by documentary evidence. Therefore, the Tribunal directed the AO to allow the deduction of Rs 8,36,633/- for the assessee. The decision for the assessment year 2014-15 was applied mutatis mutandis to the assessment year 2015-16, with variance in figures. Both appeals of the assessee were allowed.