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2022 (5) TMI 324 - AT - Income TaxNature of expenses - legal and professional expenses and other expenses defending the directors and their relatives - treating the same as capital and personal expenditure not pertaining to the business of the assessee - HELD THAT - Assessee has incurred these expenses by way of legal and professional fee, travelling expenses and staying and boarding expenses in connection defending the matters before the special court. This is also undisputed that the assessee has huge business interest in other entity in which huge investments to the extent of Rs.593/- crores were made by the assessee. Under these circumstances, we are certainly of the belief that if these directors/their relatives are not defended, the business interest of the assessee will be jeopardized and it may be put the assessee to huge financial and commercial losses. As the business of the related concern is not similar to that of the assessee s business of construction, however, undoubtedly the interest of the assessee is certainly there in the success of these criminal cases in defending its directors/their relatives. Therefore, we are not in agreement with the conclusion drawn by the Ld. CIT(A)/AO that these expenses are not wholly and exclusively incurred for the purpose of business of the assessee and are of capital in nature as the business of Etisalat DB Telecom Pvt. Ltd. has not commenced or personal nature of the directors and their relatives. The expenses incurred even for defending the directors and their relatives in criminal litigations are admissible expenses provided that are incurred in order to protect the business interest of the assessee. As in the case of CIT vs. Ahmedabad Controlled Iron and Steel Reg. Stockholders Association Pvt. Ltd. 1973 (9) TMI 45 - GUJARAT HIGH COURT held that the money spent in defending the managing director of the assessee company in a criminal prosecution under Essential Commodities Act is an expenditure wholly and exclusively for the purpose of business of the assessee and as such allowable. Appeal of assessee allowed.
Issues Involved:
1. Disallowance of legal and professional expenses by treating them as capital and personal expenditure. 2. Whether the expenses were incurred wholly and exclusively for the purpose of the business. Detailed Analysis: 1. Disallowance of Legal and Professional Expenses: The assessee filed appeals against the orders of the Commissioner of Income Tax (Appeals) [CIT(A)] for assessment years 2013-14 and 2014-15. The primary issue was the disallowance of Rs. 19,85,60,980/- in legal and professional expenses by the Assessing Officer (AO), which was upheld by the CIT(A). The AO categorized these expenses as capital and personal expenditures, not pertaining to the business of the assessee, who is engaged in civil construction. The AO's rationale included: - The expenses were not incurred wholly and exclusively for business purposes as required under section 37 of the Income Tax Act. - The investments in Etisalat DB Telecom Pvt. Ltd. were shown as non-current investments and the company had not started its business operations, making the expenses capital in nature. - The expenses were personal in nature, incurred to defend the promoters and their relatives in criminal cases related to the 2G spectrum case. 2. Whether the Expenses Were Incurred Wholly and Exclusively for Business Purposes: The CIT(A) upheld the AO's decision, stating that the expenses were not incidental to the assessee's business of construction and were related to safeguarding investments in Etisalat DB Telecom Pvt. Ltd. The CIT(A) noted that the expenses were for defending the promoters in criminal cases, which is not the business of the assessee. The CIT(A) emphasized that the expenses were personal responsibilities of the directors/promoters of Etisalat DB Telecom Pvt. Ltd. and not of the assessee. Appellate Tribunal's Findings: The Tribunal examined the arguments and evidence presented by both parties. The assessee argued that the expenses were incurred to protect its business interest in Etisalat DB Telecom Pvt. Ltd., where it had invested Rs. 593 crores. The Tribunal found that the expenses were indeed connected to the business interest of the assessee, as the outcome of the criminal cases could impact the financial and commercial interests of the assessee. The Tribunal referred to the Supreme Court's decision in Dhanrajgiriji Raju Narasingiriji and the Gujarat High Court's decision in CIT vs. Ahmedabad Controlled Iron and Steel Reg. Stockholders Association Pvt. Ltd., which held that business expenditure incurred in connection with criminal litigation for the purpose of business is deductible. The Tribunal concluded that the expenses incurred for defending the directors and their relatives in criminal litigations were admissible, as they were aimed at protecting the business interest of the assessee. Conclusion: The Tribunal set aside the orders of the CIT(A) and directed the AO to delete the disallowance of the legal, professional, travelling, and boarding expenses. The appeals for both assessment years were allowed, with the Tribunal emphasizing that the expenses were incurred wholly and exclusively for the purpose of the assessee's business.
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