2012 (4) TMI 218 - HC - Income Tax

Business expenditure Settlement charges and legal expenses - assessee owning and conducting hotel handed over bar & restaurant to conductor against payment of royalty dispute arose between assessee and conductor - settlement charges and legal expenses incurred for getting a Consent Decree from the High Court - Held that - Tribunal order of allowing such expenditure is upheld since payment was made for resolving disputes and removing the hindrance which was caused in the management and conducting of the restaurant. The conductor was a bare licensee and had no interest by way of tenancy or otherwise in respect of the premises. Consequently, payment was in true sense the revenue expenditure Decided in favor of assessee.

Summary

Issues:
1. Whether settlement charges and legal expenses incurred for obtaining a Consent Decree from the High Court are deductible expenses under the Income-tax Act, 1961.

Analysis:
The case involved a dispute regarding the deductibility of settlement charges and legal expenses incurred by an assessee for obtaining a Consent Decree from the High Court. The assessee, owning and conducting a hotel, entered into an agreement with another party for managing the bar and restaurant of the hotel. Litigation ensued between the parties, leading to a Consent Decree in 1983. The Revenue contended that the payment made by the assessee for securing vacant possession of the premises was of a capital nature. On the other hand, the assessee argued that the expenditure was of a revenue nature due to commercial expediency, as it removed hindrances in conducting the business.

The agreement between the parties granted permission to manage the restaurant, with the assessee having goodwill in the business and holding necessary licenses. The agreement specified payment of royalty and compliance with licensing terms. The court noted that the payment made by the assessee to settle the disputes and remove hindrances was for commercial expediency, as the other party was a bare licensee without any tenancy rights. Therefore, the settlement charges and legal expenses were considered allowable deductions under the Income-tax Act.

The Tribunal had allowed the deductions, and the High Court upheld this decision, stating that the payments were made to resolve disputes and facilitate the smooth operation of the business. The judgment concluded that the expenses were incurred for commercial expediency and were thus deductible under the Income-tax Act. Consequently, the question of law was answered in favor of the assessee, and the reference was disposed of with no order as to costs.