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TMI Blog2017 (1) TMI 1045X X X X Extracts X X X X X X X X Extracts X X X X ..... of providing directions, the Assessing Officer did not provide adequate opportunity to the assessee. On the other hand, the ld. DR, Shri Sushil Kumar Poddar, strongly defended the order of the Ld. Commissioner of Income Tax (Appeal) by contending that sufficient opportunity was provided to the assessee and rather the assessee could not substantiate his claim. 2.1. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee, an individual, is engaged in the business of shares and also having income from other sources. The assessee claimed certain legal expenses, which were disallowed by the Assessing Officer. The assessee also claimed short term capital gain, which was also denied by the Assessing Officer. It is noticed that the matter travelled to the Tribunal, wherein, vide order in ITA No.18/Mum/2004 and ITA No.7424/Mum/2005, order dated 30/04/2010, the Assessing Officer was directed to examine the claim of the assessee and the appeal was allowed for statistical purposes. 2.2. Pursuant to the direction of the Tribunal, the ld. Assessing Officer examined the claim of the assessee and on the reasons contained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 108 of the paper book. 3.2. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, we find that the assessee and his family members entered into a sale agreement for sale of shares of India Farmers Pvt. Ltd. with one M/s J. B. Holdings Ltd. On account of such agreement an amount of Rs. 3,46,52,000/- were obtained by the assessee as advanced due to dispute between the assessee and M/s J. B. Holdings. As per the assessee, M/s J. B. Holdings, failed to make full payment to the assessee in accordance with the terms and conditions of the said agreement. It is further noted that M/s J. B. Holdings lodged a criminal complaint against the assessee for refund of advances made to the assessee. The litigation even reached up to the Hon'ble Apex Court. The stand of the assessee is that legal expenses were incurred by the assessee to safeguard its business interest, whereas, the stand of the Revenue is that the litigation was not for business purposes rather it was with reference to transfer o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 of 2000 (arising out of SLP (Crl No.1097 of 1999) is available from pages 56 to 81 of the paper book. Another decision from Hon'ble Apex Court itself dated 04/08/2000 is available at pages 82 to 97 of the paper book. It is also noted that one decision from Hon'ble Apex Court is available at pages 93 to 104 of the paper book. The decision from the Tribunal (ITA No.18/Mum/2004) and (ITA No.7424/Mum/2005) is available at pages 105 to 109 of the paper book. The totality of facts clearly indicates that the assessee made the payment of legal fees to defends its case. 3.5. Now, question arises, whether the payment of legal fee is an allowable deduction. The obvious reply is yes. Section 57 of the Act speaks about income chargeable under the head "Income from Other Sources", which shall be computed after making the deductions mentioned therein. The section is reproduced hereunder for ready reference:- "57. The income chargeable under the head "Income from other sources" shall be computed after making the following deductions, namely :- (i) in the case of dividends, other than dividends referred to in section 115-O, or interest on securities, any reasonable sum paid by way of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Good Refining Co. Ltd. (1990) 185 ITR 564, 571 (Cal.) held that it is for the Tribunal to decide whether the expenditure is wholly incurred for the purpose of keeping the assessee company in operation and earning income in as much as the concept "wholly" pertains to quantum of the money expended. The Hon'ble Court further observed even if a particular expenditure is un-remunerative, such expenditure is nonetheless a proper deduction, if such expenditure is made wholly and exclusively for the purposes of earning such income. 3.7. If the issue is analyzed in the light of section 37(1) of the Act, broadly speaking, where litigation expenses are incurred for purposes of creating, curing or completing the assessee's title to the capital, then the such expenses are in the nature of capital expenditure. On the other hand, if the litigation expenses are incurred to protect the business of the assessee, it must be considered as revenue expenditure. This proposition is supported by Hon'ble Apex Court in Dalmia Jain & Co. Ltd. vs CIT (1971) 81 ITR 754 (SC) and Meenakshi Mills Ltd. vs CIT (1967) 63 ITR 207 (SC). To be more precise, the type of litigation, object or purpose of the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that expenditure. The ratio laid down in CIT v. Dhanrajgirji Raja Narsingirji, (1973) 91 ITR 544 (SC) supports our view. In that case His Lordship observed: "It is true that in some of the cases this court has held that an expenditure incurred by an accused assessee to defend himself against a criminal charge did not fall within the scope of section 1O(2)(xv)*. Those decisions were rendered on the facts of those cases. That is not the position in this case." Criminal litigation may be prosecuted to put pressure on the accused to make good the loss caused to the assessee, and expendi-ture incurred therefore, if having nexus with the profits or business, are allowable deduction Saharanpur Electric Supply Co. Ltd. v. CIT, (1971) 82 ITR 405 (All). Assessee defending himself-Expenses incurred by a person exercising a trade or profession in defending himself in a criminal prosecution, which arises out of his business or professional activities, cannot be deducted as business expenditure in the computation of his business income CIT v. H. Hirjee, (1953) 23 ITR 427, 431 (SC); CIT v. Gasper & Co., (1940) 8ITR 100 (Rang)]. In Hirjee's case [23 ITR 427], the assessee incurred expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, deductible [Rohtas Industries Ltd. v. CIT, (1968) 67 ITR 361 (Pat)]. 3.11. In Ananda Marga Pracharaka Sang ha v. CIT [(1996) 218 ITR 254, 258, 2 (Cal)] , the legal expenses incurred by the assessee for defending Marga Guru, the president of the association and other members of the association against criminal charges have been held allowable as a permissible expenditure while computing the income of the assessee. However, on the question of allowability of legal expenses incurred by the assessee for defending criminal charges arising out of the person civil rights and unconnected with the aims and objects of the assessee-organisation such, has been remanded to the Tribunal (p. 273) to determine that whether such expenses were related to the society's activity and then to decide such question about their allowability. 3.12. There are some other cases, where the expenditure incurred in criminal litigation was held allowable, are:- (1) Hingir Rampur Coal Co. Ltd. v. CIT, (1971) 81 ITR 633 (Bom) [rioting by assessee's workmen resulting in injury and death of manager-sums spent by assessee in assisting State prosecution of accused]. (2) CIT v. Dhanrajgirji Raja Narasingir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the correctness of a ruling given by the president in the general meeting, with reference to the relative rights of the shareholders and the board of directors under the Companies Act, which had nothing to do with the company's business [Premier Construction Co. Ltd. v. CIT, (1966) 62 ITR 176 (Born), where the expenses of the original suit were held allowable as the plaintiff had claimed for reliefs which, if granted, would have affected the carrying on of the business of the company]; (3) in defending an application to the court by the shareholders under section 153C of the Indian Companies Act, 1913, questioning the appointment of some of the directors of the company [CIT v. Shiwalik Talkies Ltd., (1967) 63 ITR 83 (Punj)]; (4) in a suit for amending the articles of association of the company and thereby acquiring the voting rights in respect of each and every share [CIT v. Bengal Assam Investors Ltd., (1969) 72 ITR 319 (Cal)]; (5) in proceedings for compelling a company to register its shares in the name of the assessee, which were purchased earlier in an auction sale [CIT v. Bengal Assam Investors Ltd., (1969) 72 ITR 319 (Cal)]; (6) in connection with the dispute betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a company [Jaya Hind Industries (P.) Ltd. v. CIT, (1986) 161 ITR 842 (Bom)]; (19) in connection with seeking legal advice in the matter of certain irregularities and fictitious transactions as revealed in the auditors' reports [CIT v. Mcleod & Co. Ltd., (1987) 164 ITR 681 (Cal)]. (20) in defending the appeal filed by B Co. in the Supreme Court challenging the order of the Company Law Board ordering the transfer of shares of B Co. to the assessee [CIT v. Jaya Hind Industries (P.) Ltd., (1993) 201 ITR 934,938 (Bom)]. (21) in connection with amalgamation of company M with the assessee-company which resulted in a radical alteration in the framework of the business of the as-sessee-company [Godfrey Phillips India Ltd. v. CIT, (1994) 206 ITR 23,35 (Bom)]. Also see, Lalitmani Pvt. Ltd. v. CIT, (1997) Tax LR 543,544 (Born). (22) for obtaining advice of solicitors in regard to dilution of shareholding in pursuance of the provisions of the Foreign Exchange Regulation Act, 1973, as the expenditure resulted in augmentation of the capital base of the assessee-company [CIT v. Hayward Waldia Refinery Ltd., (1994) 209 ITR 159, 161 (Cal)]. (23) in paying fees to the lawyers in connection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o incur the expenditure in order to make the earning of the income possible, such as when he has to incur legal expense for preserving and maintaining the source of income, then, undoubtedly, such expenditure would be an allowable deduction; however, where the assessee has an option and the option which he exercises has no connection with the making or earning of the income and the option depends upon personal considerations or motives of the assessee, the expenditure incurred in consequence of the exercise of such option cannot be treated as an allowable deduction; (vii) it is not necessary, however, that the expenditure incurred must have been obligatory; it is enough to show that the money was expended not of necessity and with a view to an immediate benefit to the assessee but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the making or earning of the income; (viii) if, therefore, it is found on application of the principles of ordinary commercial trading that there is some connection, direct or indirect, but not remote, between the expenditure incurred and the income earned, the expenditure must be treated as an allowable deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. In the case of Gannon Dunkarlay and Co. Pvt. Ltd., the Hon'ble Madras High Court, where the expenditure was incurred by the official liquidator to maintain the infrastructure of the company held that the expenditure was deductible u/s 57(iii), as it would not have been possible to earn the interest income without incurring such expenditure. In the light of the foregoing discussion, ratio laid down by various Hon'ble High Courts/Hon'ble Apex Court and the facts available on record, we are of the considered opinion that in defending the litigation, the fee/legal expenses paid by the assessee is an allowable deduction, more specifically when the same was paid through banking channel and the Assessing Officer has neither contradicted the genuineness of payment and has also not brought any contrary material on record, evidencing that no such payment was made by the assessee, therefore, this ground of the assessee is allowed. 7. The next ground raised by the assessee pertains to computing the income from share transaction under the head "business and profession" as against Short Term Capital Gain of Rs. 6,12,711/-, offered by the assessee under the head "Capital Ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee. The assessee is consistently following the same method of account and no fault was ever found. The shares transacted by the assessee are listed one (page-42 of the paper book) and the average holding period is 43.61 days. The shares were actually delivered and the intention of the assessee is investment only. So far as, the contention of the ld. DR as well as the observation made in the assessment order that the intention of the assessee is to earn profit, is concerned, we are of the view that while doing the business or even investment, the intention is always to earn the profit and not a loss, therefore, this contention of the ld. Assessing Officer cannot be said to be justified. We find that the case of the assessee is covered in his favour by the ratio laid down in CIT vs Trishul Investment Ltd. (2008) 305 ITR 434 (Mad.), CIT vs Ramamirtham (2008) 306 ITR 239 (Mad.), CIT vs N.S. S. Investment Pvt. Ltd. 277 ITR 149 (Mad.), CIT vs Jubilant Security Pvt. Ltd. (2011) 333 ITR 445 (Del.), Janak S. Rangwala vs ACIT 11 SOT 627 (Mum.), Bombay Gymkhana Ltd. vs Income Tax Officer (2008) 5 DTR (Mum) 401, CIT vs Gopal Purohit (2011) 336 ITR 287 (Bom.)(SLP dismissed by Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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