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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 ..... f the assessee were assessed as short term capital gain/long term capital gain. This factual matrix was not controverted by the Revenue, consequently we are of the that unless and until contrary material is brought on record no U-turn is expected from the Department. Considering the totality of facts, we are of the view, the assessee transacted the shares as investor, therefore, it cannot be treated as business income. This ground of the assessee is, therefore, allowed. - ITA NO.2830/Mum/2013 - - - Dated:- 18-11-2016 - Shri Joginder Singh, Judicial Member, and Shri N.K. Pradhan, Accountant Member For The Assessee : M/s. Keyuri Desai For The Revenue : Shri Sushil Kumar Poddar,DR ORDER Per Joginder Singh (Judicial Member) The assessee is aggrieved by the impugned order dated 16/01/2013 of the Ld. First Appellate Authority, Mumbai. The first ground raised by the assessee pertains to violation of principle of natural justice on the plea that proper and adequate opportunity of being heard was not provided to the assessee which is against the principle of natural justice. 2. During hearing, the ld. counsel for the assessee, M/s. Keyuri Desai, advanced argum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, therefore, this ground is dismissed. 3. Now, we shall deal with the merits of the appeal, wherein, vide ground no.2, the assessee has challenged the disallowance of legal expenses of ₹ 12,79,871/-, incurred by the assessee. The stand of the assessee is that the ld. Assessing Officer as well as the Ld. Commissioner of Income Tax (Appeal) did not appreciate the facts in a proper prospective as the legal expenses were incurred wholly and exclusively for the purposes of business/earning interest income. Our attention was invited to page-15, 106, 108 of the paper book. It was explained that the payment for incurring the legal expenses was made through banking channel for which our attention was invited to pages 46 to 51 of the paper book. It was also explained that even the matter went upto the Hon'ble Supreme Court as Criminal complaint was filed against the assessee (page-52 of the paper book). Our attention was further invited to pages 55, 56 and 93 of the paper book. 3.1. On the other hand, the ld. DR, strongly defended the impugned order by contending that the assessee is dealing in shares and the claimed legal expenses are not allowable as the same wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order, there is no dispute to the fact that some litigation was going on amongst the parties and the assessee incurred legal expenses to safeguard its business interest. The payment was made through banking channel to various persons/advocates as is evidenced from pages 46 to 51 of the paper book. It is noticed that the payments were made to advocates like Shri S. G. Surana, Shri Bharat Mehta, Shri R.T. Tiwari, Shri Mayank Chandan, S. K. Vyas, S.G. Paghe, Shri Milind Sakhardande, Shri Dhiraj Mirajkar, Narendra Thakore, P.R. Vakil, Ramakant Khalak, Shri Arun Jaitely, etc. The amounts paid to the respective advocates, date of payment, cheque number and the purpose has been duly mentioned at pages 46 to 41 of the paper book. The majority of the fee, which was paid is with respect to litigation with M/s J.B. Holding Ltd. for appearance/argument before Session Court, Hon'ble High Court/Apex Court. Thus, it is clear that the legal fee was paid to defend the suit/cases and to safeguard its business interest. It is not the case that bogus claim was made by the assessee rather we find that, as mentioned earlier, the payments were made through banking channel. The Copy of the suit/crimin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of family pension, a deduction of a sum equal to thirty-three and one-third per cent of such income or fifteen thousand rupees, whichever is less. Explanation. -For the purposes of this clause, family pension means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death ; ( iii ) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purposeof making or earning such income; ( iv ) in the case of income of the nature referred to in clause ( viii ) of sub-section (2) of section 56, a deduction of a sum equal to fifty per cent of such income and no deduction shall be allowed under any other clause of this section . 3.6. If the provision of the Act, which is corresponding to the section 12(2) of 1922 Act, used in this context, the expression incurred solely for the purposes of making or earning such income , the use of expression laid out or expanded wholly and exclusively in section 57(iii) of the 1961 Act is to secure uniformity with the language of section 37(1) of the 1961 Act. At the same time, the expression, fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 558, 569-70 (Mad). Also see, Lachminarayan Modi v. CIT, (1955) 28 ITR 322 (Orissa); h) J. B. Advani Co. Ltd. v. CIT, (1950) 18 ITR 557 (Bom); i) Mahabir Prasad Sons v. CIT, (1945) 13 ITR 340 (Lah); j) Central India Spinning, Weaving Manufacturing Co. Ltd. v. CIT, (1943) 11 ITR 266 (Nag); k) CIT v. Maharajadhiraja Sir Kameshwar Singh (1942) 10 ITR 214 (PC) l) Southern V. Borax consolidated Ltd. (1942) 10 ITR (Sup) 1 (KB) m) Associated Portland Cement Manufacturers Ltd. v. Kerr, (1946) 27 Tax Cas 103, 118 (CA) n) Ebrahim Aboobaker v CIT (1971) 81 ITR 664 (Bom.) 3.8. In the cases of defending the criminal litigation, we find that Section 37(1) does not make any distinction between expenditure incurred in civil litigation and that incurred in criminal litigation. All that the court has to see is whether the legal expenses were incurred by the assessee in his character as a trader, in other words, whether the transaction in respect of which proceedings are taken arose out of and was incidential to assessee's business. Further, it is to be seen whether the expenditure was bonafidely incurred wholly and exclusively for the purpose of the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has not only to prove that the expenditure was incidental to the business but also to show that the expenditure was laid out or expended wholly and exclusively for the purpose of the business [Indermani Jatia v. CIT, (1951) 19 ITR 342 (All) on appeal, see, (1959) 35 ITR 298 (SC)]. 3.10. Assessee defending an employee, etc.-When an employee is prosecuted in respect of transaction in the course of his employment, expenditure incurred in or about his defence is incurred for the protection of the good name of the business and is an allowable business expenditure [ J.B. Advani Co. Ltd. v. CIT EPT, (1950) 18 ITR 557 (Bom) considered in CIT v. H. Hirjee, (1953) 23 ITR 427 (SC), where the correctness of its ultimate decision was not doubted; J.N. Singb Co. Pr. Ltd. v. CIT. (1966) 60 ITR 732 (Punj)]. Legal expenses incurred by assessee-company, a sugar mill, in defending a criminal prosecution launched against its director-manager and some employees on charge of conspiracy between the assessee and the railway employees to give and accept bribes in regard to transport of sugarcane from various stations to mill were held to be allowable deductions [Lakshmiji Sugar Mills Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olating Mines Regulations]. 6) CIT v. National Rayon Corporation Ltd., (1985) 155 ITR 413 (Bom) [expenditure incurred in defending a senior employee of the assessee was held deductible]. 7) CIT v. Indian Copper Corporation Ltd., (1986) 162 ITR 905 (Pat) [expenditure incurred in defending watchmen and other employees who guarded the premises of company]. 8) Atlas Cycle Industries Ltd. v. CIT, (1990) 181 ITR 18 (Punj) [expenditure incurred in connection with criminal litigation pertaining to criminal conspiracy commission of offence under the Essential Commodities Act, 1955, was held deductible]. 3.13. However, the amount spent in defending directors who were prosecuted under the Mines Act was held not deductible because there was no evidence to show that the amount was spent for preserving the reputation of the assessee [CIT v. Indian Copper Corporation Ltd., (1986) 162 ITR 905 (Pat)]. Similarly, expenses incurred by a Newspaper company in defending the editor and printer in proceedings for contempt of court were held, on facts, not to be expenditure incurred for the purpose of earning profits or gains and consequently not allowable [Amrita Bazar Patrika, In re, (1937) 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT, (1978) III ITR 942 (Bom)]; (10) in resisting transfer of shares without assigning or disclosing reasons [Harinagar Sugar Mills Ltd. v. CIT, (1979) 117 ITR 945 Born)]; (11) in attempting to prevent investigation into the affairs of the company [Harinagar Sugar Mills Ltd. v. CIT, (1979) 117 ITR 945 (Born)]; (12) by the assessee-amalgamated-company in reimbursing the amount of legal expenses incurred by the shareholders who attempted stayal of declaration of dividends [Raza Buland Sugar Co. Ltd. v. CIT, (1980) 122 ITR 817 (All)]; (l3) for the purposes of the amalgamation of two companies [Raza Buland Sugar Co. Ltd. v. CIT, (1980) 122 ITR 817 (All); Raza Buland Sugar Co. Ltd. v. CIT, (1980) 123 ITR 24 (All)]; (14) in defending a suit instituted by certain shareholders seeking an injunction restraining the company from proceeding to distribute dividends in specie [Buland Sugar Co. Ltd. v. CIT, (1981) l30 ITR 434 (Del)]; (15) by the company in defending a suit instituted by a director against another director [Albert David Ltd. v. CIT, (1981) l31 ITR 192 (Cal)]; (16) in legal proceedings in connection with a scheme of amalgamation which did not materialise [Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue expenditure because there were no findings that the two companies were carrying on complementary business and the amalgamation was necessary for the smooth and efficient conduct of business [Triveni Engineering Works Ltd. v. CIT, (1998) 232 ITR 639, 645 (Del)]. (26) in connection with issuance of share certificates and bonds as a part of the amalgamation scheme [CIT v. Official Liquidator, Ahmedabad Manufacturing Calico Printing Co. Ltd., (2000) 244 ITR 156, 160, 162-63 (Guj)]. 5. To sum of the issue we find that Hon'ble Justice P.D. Desai, in Smt. Virmati Ramkrishna vs CIT (1981) 131 ITR 659, 672-73(Guj.), has analyzed the statutory language and laid down various principles, in various decided cases and made following propositions. (i) in order to decide whether an expenditure is a permissible deduction under section 57(iii), the nature of the expenditure must be examined; (ii) the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee; (iii) the expenditure must have been laid out or expended wholly and exclusively for the purpose of making or earning Income from other sources ; (iv) the purpose of making or e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion whether the expenditure was laid out or expended for making or earning the income must be decided on the facts of each case, the final conclusion being one of law'. In the aforesaid propositions (vi) it has been clearly held/observed that incurring of legal expenses for preserving and maintaining of source of income would be allowable deduction. 6. Likewise, Hon'ble Apex Court in Sree Meenakshi Mills Ltd. v. CIT, (1967) 63 ITR 207 (SC), where expenses were incurred in filing a suit for obtaining an order restraining seizure of goods delivered in contravention of the control order were held allowable deduction. It follows from this decision that: (i) litigation expenses to secure an order from the court for enabling an assessee to carry on its business without interference is an allowable deduction; (ii) expenditure incurred to resist, in a civil proceeding, the enforcement of a measure, legislative or executive, which imposes restrictions on the carriage of a business or to obtain a declaration that the measure was invalid, would, if other conditions are satisfied, be admissible as deduction; and (iii) the deductibility of expenditure incurred in prosecu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod. Reliance was placed upon the decision in ITA No.6497/Mum/2009 order dated 15/06/2011 and ITA No.605/Jp/2013 dated 18/03/2016. 7.2. On the other hand, the ld. DR invited our attention to page-11 of the impugned order and also the order of the Tribunal (page-108 of the paper book), by defending the addition made by the Assessing Officer and sustained by the Ld. Commissioner of Income Tax (Appeal). 7.3. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that it is worth mentioning that this issue even travelled to the Tribunal and vide order dated 30/04/2010 (ITA No.18/Mum/2004) direction was granted to the Assessing Officer to examine the factual matrix and also whether the shares were actually delivered at the time of sale. The claim of the assessee with respect to addition of ₹ 6,12,711/- arose from share transaction made by the assessee. Even during set-aside proceedings, the ld. Assessing Officer maintained the addition, which was affirmed by the Ld. Commissioner of Income Tax (Appeal). The assessee duly participated before the Assessing Officer during set-aside proceedings and filed various informati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09) order dated 03/12/2010, ACIT vs Naishadh v. Vachharajani (ITA No.6429/Mum/2009) order dated 25/02/2011, Nagindas P. Shah (HUF) vs ACIT (ITA No.961 1836/Mum/2010) order dated 05/04/2011, Ramesh Babu Rao vs ACIT (ITA No.3719, 4084, 5318 5319/Mum/2009) order dated 13/04/2011, Hitesh Satishchandra Doshi Etemai vs JCIT (ITA No.6497/Mum/2009) order dated 15/06/2011, CBDT Instruction No.1827 dated 31/08/1999 along with supplementary instruction supports the case of the assessee. The ratio laid down in the aforementioned cases is that when the assessee treated the transactions as investments in the books of accounts, which includes both long term and short term, the intention of the assessee for acquiring the shares, source of acquisition are out of own funds/family funds, the assessee valued the shares under investment portfolio at cost and never valued them at market price or realization value, it has to be treated as short term capital gain. During hearing, the ld. counsel for the assessee claimed that in earlier years, such transaction of the assessee were assessed as short term capital gain/long term capital gain. This factual matrix was not controverted by the Revenue, conseq ..... X X X X Extracts X X X X X X X X Extracts X X X X
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