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2024 (10) TMI 691 - AT - Income TaxDisallowance of out-of-court settlement amount paid and legal fees paid for defending a criminal complaint under Explanation 1 to section 37(1) - HELD THAT -The assessee is a stock broker and was in the business as stock broking services and due to trading in the clients account, the client has filed the criminal case. AO has relied only on the facts in respect to the transactions of exceptional items claimed but there is no findings or information with respect to the FIR and report of the criminal case as it was not submitted by the asssessee mentioned in the order of the CIT(A) and pointed out by the DR in the course of hearing. The assessee could not establish with the supporting evidences, that the claim of the asssessee is a civil expenditure allowable under the Act. Therefore, submissions and to meet the ends of justice, we shall provide with one more opportunity of hearing to the asssessee to substantiate with the details, accordingly we set aside the order of the CIT(A) and restore the disputed issues to the file of the AO to decide afresh on merits and the assessee should be provided adequate opportunity of hearing and to file the information and evidences on the disputed issue and shall cooperate in submitting the information. And we allow the grounds of appeal of the assessee for statistical purposes.
Issues:
1. Disallowance of out-of-court settlement amount and legal fees under Explanation 1 to section 37(1) of the Income Tax Act. 2. Violation of principles of natural justice in passing the order. 3. Disallowance of loss on fixed assets. 4. Initiation of penalty proceedings under section 271(1)(C) of the Act. Analysis: Issue 1: Disallowance of out-of-court settlement amount and legal fees The assessee, a stockbroking company, claimed deductions for an out-of-court settlement amount of Rs. 85,00,000 and legal fees of Rs. 38,30,000 under section 37(1) of the Act. The Assessing Officer (AO) disallowed these deductions under Explanation 1 to section 37(1) as the expenses were incurred due to a criminal complaint filed against the assessee by a client. The CIT(A) upheld the AO's decision, stating that the expenditure incurred for any purpose which is an offense or prohibited by law cannot be allowed as a deduction. The Tribunal, after considering the submissions, set aside the CIT(A)'s order and allowed the appeal for statistical purposes. The Tribunal found that the assessee should be given another opportunity to substantiate the nature of the expenditure and provide supporting evidence before the AO. Issue 2: Violation of principles of natural justice The assessee contended that the CIT(A) violated the principles of natural justice by passing the order without considering all relevant documents and submissions. The CIT(A) dismissed the appeal based on the submissions provided by the appellant, which included consent terms with the client but did not include original complaints or court orders. The Tribunal acknowledged this issue and provided the assessee with another opportunity to present all necessary information and evidence before the AO. Issue 3: Disallowance of loss on fixed assets The AO disallowed the loss on fixed assets claimed by the assessee, resulting in a total assessed income of Rs. 83,19,019. This disallowance was not a primary focus of the appeal, and the Tribunal did not provide a specific ruling on this issue in the judgment. Issue 4: Initiation of penalty proceedings The AO initiated penalty proceedings under section 271(1)(C) of the Act, which was challenged by the assessee. The Tribunal did not address this issue in detail in the judgment, as the primary focus was on the disallowance of the out-of-court settlement amount and legal fees. In conclusion, the Tribunal allowed the appeal for statistical purposes, providing the assessee with another opportunity to present evidence and substantiate the nature of the expenses before the AO. The judgment emphasized the importance of complying with legal provisions and providing necessary documentation to support deductions claimed under the Income Tax Act.
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