2018 (2) TMI 344 - AT - Income Tax

Disallowance of the legal and professional expenses - assessee claimed that said amount has been paid to the Government account as TDS, and therefore it is a business expenditure allowable to the assessee - whether TDS paid to the Government account without incurring expenditure cannot be held to be a business expenditure for earning income? - Held that - The tax has been deducted as tax liability of the deductee and it is not the tax liability of the assessee. In other words the tax deducted at source is the amount paid to the government on behalf of those parties, which means the said amount has been paid to those parties. Now the question arises whether this amount paid to those parties is allowable to the assessee, when those parties have not rendered any services and the balance liability of ₹ 43, 89, 165/-has already been written back by the assessee in subsequent assessment year. In our view, the amount of ₹ 5, 60, 835/-deposited as TDS, is an expenditure, which the assessee has failed to explain as incurred wholly and exclusively for the purpose of business. We also note that the assessee has failed to explain before the Assessing Officer whether this amount of tax deducted at source was deposited in Government account. - Decided against assessee Disallowance of the legal and professional expenses on the ground that same was incurred in connection with issue of preference shares and thus it was in the nature of capital expenditure - Held that - CIT-(A) has given the finding that said expenditure was incurred for issue of redeemable preferential shares to M/s Kitson PTE Ltd and though the said express was incurred during financial year 2006-07 but has been claimed during the year as liability to pay these expenses crystallised during the year. This factual finding of the Ld. CIT-(A) has not been rebutted by the Ld. counsel of the assessee. Thus, in view of the finding of the Ld. CIT-(A) that expenses are in relation to issue of share capital, same are not allowable. In our opinion finding of the Ld. CIT-(A) on the issue in dispute is well reasoned and we do not find any error in the same. Accordingly, we uphold the same. The ground of the appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Legality of the impugned order dated 22.05.2012.
2. Disallowance of ?5,60,835/- out of Legal & Professional Expenses.
3. Disallowance of ?67,62,806/- out of Legal and Professional Expenses for being capital in nature.
4. General grounds of appeal.

Detailed Analysis:

1. Legality of the Impugned Order:
- The first ground of appeal was general in nature and did not require specific adjudication. Therefore, it was dismissed as infructuous.

2. Disallowance of ?5,60,835/- out of Legal & Professional Expenses:
- Facts: The assessee debited a provision of ?49.50 lakhs towards legal and professional expenses, deducted TDS of ?5,60,835/-, and showed the balance as a liability. The liability was written back in the subsequent year and offered for tax.
- Assessing Officer's View: The provision was considered an unascertained liability. Since the assessee did not confirm the issuance of TDS certificates or whether the parties claimed TDS credit, the AO disallowed ?5,60,835/-.
- CIT-(A)'s Decision: The CIT-(A) confirmed the disallowance, stating that TDS paid without incurring actual expenditure cannot be considered a business expense.
- Tribunal's Analysis: The tribunal upheld the CIT-(A)'s decision, agreeing that the TDS amount was not incurred wholly and exclusively for business purposes. The tribunal noted that the assessee failed to explain the business purpose of the TDS amount and did not provide evidence of TDS deposit.

3. Disallowance of ?67,62,806/- out of Legal and Professional Expenses:
- Facts: The amount was incurred as professional fees for issuing preference shares. The bill was raised in the preceding year but received and paid in the year under consideration.
- Assessing Officer's View: The AO disallowed the amount as it was related to raising preference shares, which is a capital expenditure.
- CIT-(A)'s Decision: The CIT-(A) confirmed the disallowance, stating that the expenses were for raising share capital and thus capital in nature. The CIT-(A) cited judicial precedents, including Hindustan Gas & Industries Ltd. and Punjab State Industrial Development Corpn. Ltd., to support the decision.
- Tribunal's Analysis: The tribunal upheld the CIT-(A)'s decision, agreeing that the expenses were related to raising share capital and thus not allowable as revenue expenditure. The tribunal found the CIT-(A)'s findings well-reasoned and without error.

4. General Grounds of Appeal:
- The fourth ground of appeal was also general in nature and dismissed as infructuous.

Conclusion:
- The appeal of the assessee was dismissed in its entirety. The tribunal upheld the CIT-(A)'s decisions on both disallowances, finding them well-reasoned and supported by relevant judicial precedents. The decision was pronounced in the open court on 31st January 2018.