2023 (11) TMI 996 - AT - Income Tax

Allowable revenue expenditure - Uphaar Cinema fire case - compensation liability - nature lo liability - whether was not punitive, therefore, allowable deduction? - HELD THAT - We are of the considered view that the judgment of the Hon ble Supreme Court in the case of Municipal Corporation of Delhi Vs. Association of Victims of Uphaar Tragedy Ors. 2011 (10) TMI 712 - SUPREME COURT is of vital consequence to understand as to what was the nature of compensation directed to be paid to the victims of Uphaar Tragedy. It further comes up that thereafter the Hon ble Supreme Court examined the question of damages beyond the tortuous liability for granting punitive damages wherein the Hon ble Supreme Court took into cognizance the illegal profits derived by the theatre owner by selling tickets in regard to extra seats unauthorizedly and illegally sanctioned by the Authorities and installed by the licensee. There is no doubt in the mind of this Bench that the compensation as granted by the hon ble Supreme court and as paid by the assessee was by way of restitution as well as punitive, in terms of the rights of the victim under the Private Law. The remedy that was availed was by way of writ jurisdiction of Hon ble Delhi High Court, as determined finally by Hon ble Supreme Court. The damages were ordered against the theatre owner, Delhi Vidyut Boart, Municipal Corporation of Delhi, Fire Force and the Licensing Authority for their alleged callous disregard to their statutory obligations and to the fundamental inducible rights guaranteed under Article 21 of the Constitution of India, of the theatre coming public in failing to provide safe premises free from reasonably forcible hazards. There is no doubt that the compensation so granted by way of restitution was out of civil consequences only and had nothing to do with any criminal liability, which any of these parties may have incurred. Expression punitive implies involving or inflicting punishment. It is matter of common understating that damages awarded by the courts are different from fines, which are prescribed under law for any act or omission giving rise to penal consequences. Damages, liquidated or unliquidated, generally arise out of acts or omission giving rise to civil consequences. They are primarily based on principle of restitution or reasonable and adequate compensation but are not punitive in nature. The essential condition of allowance is that the expenditure should have been laid out or expended wholly and exclusively for the purpose of such business. The view of the Hon ble Supreme Court in the case of Haji Aziz Abdul Shakoor Bros. 1960 (11) TMI 15 - SUPREME COURT was that no expense which is paid by way of penalty for breach of the law can be said to be an amount wholly and exclusively laid for the purpose of the business. Thus in present assessee, Hon ble Supreme Court had reasoned that punitive damages could be granted only in very limited circumstances. In the pertinent part of the judgment, Hon ble Apex court stated Punitive damages can be awarded when the wrongdoers' conduct 'shocks the conscience' or is 'outrageous' or there is a willful and 'wanton disregard' for safety requirements. Normally, there must be a direct connection between the wrongdoer's conduct and the victim's injury. This punitive damages of Rs. 25 lacs, paid by the assessee, is one which cannot be said be one which was out of natural course of events of business activity. Rather Hon ble Supreme Court has said that this punitive damage is being allowed as negative restitution for the reason what Hon ble Supreme Court said was by way of least be denied the profits/benefits out of their illegal act . Thus Tax Authorities and especially learned CIT(A) had fallen in error to failing to distinguish the two components of the damages. First being by way of restitution and second being negative restitution. The former is allowable as business expenditure allowable u/s 37(1). As if any assessee is directed to make payment under law or orders of courts by way of compensation arising out of civil consequence the same has to be considered to be allowable business expenditure. However, the Punitative damages as awarded cannot be allowed as expenditure. Legal and professional charges - Whether were in relation to the business activity of the assessee for the current financial year? - The bald assertion of the learned CIT(A) that assessee could not prove that legal and professional expenses have been incurred wholly and exclusively for the purpose of business of the appellant company is not sustainable. The AO had made observation that legal and professional expenses claimed in P L A/c are in respect of closed-down business activities which has no relation with the income of the assessee. Thus, first thing is there is apparent diversion of opinion for making the disallowance. Secondly when the assessee company s business was closed due to loss of the theatre due to fire then there could have been no business as such the business was closed due to force majeure which cannot be attributed to any commercial decision to not work and claim expenses. As pointed above the fact of assessee litigating in courts is not disputed so legal and professional expenditure in absence of any business, needed to be allowed. Tax authorities below have not taken a prudent approach to understand the nature of litigation faced by the assessee that ran over the years and at different forums. Even if the business activities were stopped, the upcoming financial liabilities and even penal consequences required the assessee company to continue defending the cases in the courts and other forums. Thus, legal and professional expenses were erroneously disallowed by the learned tax authorities. Issue is decided in favour of the assessee.

Summary

Issues Involved:
1. Whether the compensation of Rs. 10,45,73,650/- was not punitive and therefore allowable as a deduction.
2. Whether legal and professional charges amounting to Rs. 1,64,88,500/- were related to the business activity of the assessee for the current financial year.

Summary:

Issue 1: Compensation Deduction

The compensation in question stems from the Uphaar Cinema tragedy, where the Hon'ble Supreme Court mandated the payment of compensation to victims. The Tribunal examined whether this compensation was punitive or compensatory. The Hon'ble Supreme Court had awarded compensation as a public law remedy, which included both compensatory and punitive elements. The Tribunal noted that punitive damages were specifically awarded to deter future misconduct and were not compensatory in nature. The Tribunal held that punitive damages of Rs. 25 lakhs could not be allowed as a business expenditure under Section 37(1) of the Income-tax Act, 1961, as they were not incurred wholly and exclusively for business purposes. However, the remaining compensation amount was considered compensatory and allowable as a business expenditure.

Issue 2: Legal and Professional Charges

The legal and professional charges were incurred in defending the assessee company in various court cases related to the Uphaar tragedy. The Tribunal noted that the genuineness of the payments was not disputed, nor was the necessity of defending the company in court. Despite the cinema business being closed, the Tribunal found that the legal and professional expenses were necessary to manage the ongoing financial and legal liabilities arising from the tragedy. The Tribunal held that these expenses were incurred wholly and exclusively for the purpose of the business and were thus allowable under Section 37(1) of the Income-tax Act, 1961.

Conclusion:

The Tribunal allowed the appeal of the assessee partly, disallowing only the punitive damages of Rs. 25 lakhs while allowing the remaining compensation and legal and professional expenses as business deductions. The order pronounced on 22.11.2023.