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TMI Blog2010 (11) TMI 379X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenses are allowable under section 37(1) – Appeals are allowed for statistical purpose - ITA NOS. 6250 & 6251/MUM/2008 - - - Dated:- 4-11-2010 - D.K. AGARWAL, JUDICIAL MEMBER AND B. RAMAKOTAIAH, ACCOUNTANT MEMBER Vimal Punmiya for the Appellant. R.M. Tiwari for the Respondent. ORDER Per B. Ramakotaiah, A.M. These appeals are by the assessee against the order of the CIT(A) Central VI, Mumbai dated 16.07.2008. 2. Assessee has raised the issue of assessment of house property income in both the assessment years and the issue of claim of legal fees of Rs. 65,000/- in A.Y. 2004-05. Issue of Income from House Property 3. Briefly stated the assessee is share owner in property at Tilak Nagar, New Delhi for which house property income is shown at Rs. 16,480/- and 50% share in court chambers, Mumbai for which the income was shown at Rs. 6,826/-. The A.O. enquired why the annual rent cannot be enhanced at a reasonable value as the rent received by letting out the property to the company in which the assessee is a Director was fixed at Rs. 19,502/- per annum. The assessee submitted that the municipal valuation was at Rs. 9,600/- per ann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d relied upon by the learned counsel are established in the cases where Rent Control Act is applicable. However, in the present case the A.O. has given a finding that Rent Control Act is not applicable without referring to any particular provision or the capital of the company. It is the contention of the assessee that the property was let out in 1967 and the same rent was being allowed in the hands of the company. In our view these aspects have not been examined properly. It is also not known whether the assessee has received any deposit and whether it has any bearing in fixing the rent at that level. These aspects require examination by the A.O. In case the property is controlled by Rent Control Act the A.O. has no option than to accept the actual rent received or the municipal rateable value, whichever is higher under the provisions of section 23(1)(a) as per the legal principles in this regard. In case the property is not controlled by the Rent Control Act then the A.O. is free to determine the annual letting value after giving due opportunity to the assessee to submit the possible rateable value/market rent as it is one of the contentions that the value adopted by the A.O. was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure when the case is against the company. 11. We have considered the issue and examined the record. The A.O. noticed that the payment made is pertaining to the proceedings of violation of FERA before the Enforcement Authorities. The letter addressed by Mr. Ajay Majithia, Advocate of Supreme Court dated 29,12.2003 is with reference to the appeal No. 549 of 2003 titled Shri Vivek Talwar v. Assistant Director of Enforcement Directorate, Mumbai. However, in the written submission the learned counsel submits that the fees was paid for the purpose of Customs Department at which the assessee succeeded in obtaining refund. There seems to be some confusion with reference to the nature of professional fees paid and the purpose for which it is paid. Even the letter referred to filed on page No. 7 is addressed to one Mr. Anup K. Parashar of Nitco Tiles Limited and there is a noting dated 03.10.2004 on the same paper asking the V.P. (Finance) to arrange for cheque of Rs. 10,000/- payable in New Delhi to file an appeal in Delhi High Court. It is not sure whether the said expenditure was paid in the hands of the company or in the hands of the assessee. The exact nature of the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was a trading company. A further fact to note is that the expenses for the litigation were not incurred by the persons charged with the offences themselves but they were incurred by the company in order to save those persons from the consequences of the prosecution. The Court then referred to the decision in the case of Strong v. Woodifiled (1906) AC 448 : 5 Tax Cases 215 and two tests to the satisfied viz., that the loss must be incidental to the trade itself and it must fall on the trader in his character as a trader. The Court applied those two tests to the case of the assessee and held that both the tests were satisfied because the loss was incidental to the trade because it was in the course of its business of selling stationery that the directors were charged with having contravened the law and it was also in its capacity as a trader that the company was called upon to defend its directors and the salesman. The court also dealt with regard to allowability of such expenses as deduction where the prosecution ultimately results in conviction and held that when a criminal prosecution ends in a conviction there is no difficulty because the assessee who is guilty of a bre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Hon ble Bombay High Court in the case of J.B. Advani co. Ltd. v. CIT, 18 ITR 557 (Bom), was not accepted as laying down the correct legal position with regard to allowability of expenses in defending criminal proceedings based on the outcome thereof. The Hon ble Supreme Court in this regard held that Income tax assessments have to be made every year and cannot be held up until the final result of a legal proceeding, which may pass through several courts, is announced. 15. In the case of CIT v. Dhanrajgiri Raja Narsinghraiji, 91 ITR 544 (SC) the question was with regard to deductibility of Legal expenses in a case where managing agency and selling agency was transferred to a third party under a tripartite agreement. Subsequently, third party removed assessee from chairmanship of board of directors of the company. The assessee instituted civil suit seeking reinstatement and sought to establish right to selling agency. Criminal proceedings were also launched. Expenditure incurred by the assessee in connection with the criminal proceedings was held allowable as expenditure as on the findings arrived at by the Tribunal it was clear that the assessee had incurred the expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness and the same was deductible. It can be seen that on the facts of the case, the court took a view that the expenses were incurred by the assessee in his capacity as a business and therefore allowed the claim for deduction. 17. The principles that can be culled out from the aforesaid decisions are that generally expenses incurred in defending criminal proceedings are regarded as personal expenses. The deductibility of such expenses will depend on the nature and purpose of the legal proceeding in relation to the business whose profits are under computation and cannot be affected by the final outcome of that proceeding. 18. In view of the legal principles above, the A.O. is directed to verify the purpose for which these expenses are incurred and in case the expenses are in the nature relating to the business of the assessee then the expenses are allowable under section 37(1). After examining the nature of the charges and result of the appeal proceedings, if any, the A.O. is free to consider the amount whether the same is incurred wholly and exclusively for the purpose of assessee s business. The expenses cannot be allowed as deduction if it was not incurred wholly and exclusiv ..... 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