9911796707
TMI Blog2019 (3) TMI 1600X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessment year under consideration declaring Nil income. During the year under consideration the appellant incurred certain legal expenses amounting to Rs. 91,27,129/-in relation to a suit filed in connection with MMS case which had been filed prior to the entering into the agreement with e-Bay AG. It was mutually agreed between e-Bay AG and appellant that any legal expenses incurred on the MMS case would not from part of the cost of operation of the assessee for determining the cost plus remuneration of the services provided by the assessee to e-Bay AG as it pertains to erstwhile business of the assessee and not incurred while rendering services to AE. During the assessment proceedings, the assessee was asked to explain as to why expenses incurred on the MMS case should not be disallowed as an expenses u/s 37 (1) read with explanation 1 to section 37(1) of the Act. The assessee contended that the said expense is allowable u/s 37 of the Act and not hit by the explanation. Without prejudice the assessee submitted that the Ld. The AO rejecting the contentions of the assessee held that the expenses of Rs. 91,27,129/- are not allowable as per the provisions of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uashing of the proceedings before the Additional Chief Metropolitan Magistrate. The Hon'ble Court quashed the proceedings qua the offences u/s 292 and 294 of the IPC, however, declined to quash proceedings in respect of offences under the Information Technology Act and further passed certain adverse remarks. Mr. Avanish Bajaj and e-Bay India filed SLP before the Hon'ble Supreme Court against the aforesaid order of the Delhi High Court. The Hon'ble Supreme Court allowed the petition and quashed all the criminal charges against Avanish Bajaj and e-Bay India. The Ld. counsel placing reliance on the various decisions of the Tribunal as well as the High Courts, submitted that since the expenditure had been incurred in connection of the business the Ld. CIT(A) has rightly allowed the expenditure in question u/s 37 of the Act and deleted the addition. The Ld. counsel further contended that since the findings of the Ld. CIT(A) are based on the settled law, there is no merit in the appeal of the revenue. The Ld. counsel relied on the following cases to substantiate the contention of the assessee:- 1. Maruti Udyog Limited (92 ITD 119) Delhi Tribunal. 2. J B Advani & Company Limited (18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fence committed by any individual employee of the company which have been sought to be defended by the appellant and the legal expenditure has been incurred for that purpose. The AO has relied upon certain case laws which have been summarized hereinabove at para6.2. In all these cases the offence committed had been in respect of such individuals who were occupying the positions and the offences were directly related to actions of such individuals in those organizations. In the case on had the offence in person was committed by an individual who had entered into an agreement with the appellant to use its web platform as intermediary. The primary offence in this case therefore would be against the person who uploads such MMS in the web platform of the appellant for its gains. The appellant as an intermediary and owner of the website became party to such incidence. vi) In respect of any legal proceedings which is intimated against the designated employees of the company for any purported offence which either the company or such designated employees have not committed in their individual and separate capacity and where appellant feels it necessary to defend its position which cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of Total Income given by the AO at para 6 page 9 of his order that he has further added Rs. 91,27,129/- on account of legal fee as per the discussions at para 5 of the order which means that the protective additions so made by the AO has been added to the total income of the appellant over and above the adjustment arrived at by the TPO. xiii) In view of the facts and circumstances of the case and discussion hereinabove such addition made by the AO is not found to be sustainable and accordingly Ground No. 10 & 11 so raised by the appellant are allowed". 7. The only contention of the revenue is that the relief granted by the Ld. CIT(A) is in contravention of explanation 1 to section 37 of the Act which says that "for the removal of doubts, it is hereby declare that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or disallowance shall be made in respect of such expenditure." So, in order to determine as to whether the expenditure claimed by the assessee is allowable u/s 37 of the Act or the same is hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employer does not defend the case of employees who had acted in good faith on behalf of the employer. It is not the case of misappropriation of funds by the employees. It is a case where the transactions were effected between the assessee-company and UCO Bank through a broker Harshad Mehta. In fact, the company had appreciated the work of Pramod Kumar by giving him promotion. As far as Ambuj Jain is concerned, he has gone on training and, therefore, had no involvement in such transactions. In fact, he was acquitted on this ground. Considering the facts of the case, we are of the view that the company had incurred the expenditure to safeguard its goodwill and image by defending its employees and, therefore, such expenditure can be said to have been incurred for the purpose of business. Consequently, such expenses were allowable as revenue expenditure. The order of the CIT (A) is, therefore, set aside on this issue and the addition sustained by her is hereby deleted." 9. In J.B. Advani & Co. Ltd vs. CIT (supra) the Hon'ble Bombay High Court has held that litigation expenses incurred for defending directors and salesman who were prosecuted for offences committed in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds of cross objection." 2. Before us, the Ld. counsel for the assessee submitted that as per the agreement dated March 17, 2005 entered into between the assessee and e-Bay AG agreed to remunerate the assessee @ 108% of operating costs incurred by the assessee in providing these services. The operating cost for the said purpose has been defined in the agreement as all costs of operations of service provider as defined for the purposes of generally accepted accounting principles of the local jurisdiction of service provider, including operating expenses and cost of net revenues except interest expenses, foreign exchange gain or loss, income tax, expenses of third parties that are in the nature of pass-through expense and such other expenses as shall be determined by the parties in the annual budget preparation process. The Ld. counsel further submitted that from the agreement itself it is apparent that the expenses incurred by the appellant towards legal expenses has no nexus with the services rendered by the assessee. Therefore, no cost plus mark-up should be recovered on the legal expenses incurred in connection with the MMS case discussed in the revenue's appeal. The Ld. c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the preceding year then the claim of such expenses by way of write off made during the year cannot be considered as operating cost of the current year. Hence, the date on which such expenses were incurred is crucial to find out if the expenditure were incurred before or after the date of start of rendering services to its AEs. In the present case, admittedly the expenses incurred pertain to the period prior to the entering into agreement with e-Bay AG, the same cannot be treated as part of operating cost incurred by the assessee for rendering services. Secondly, as pointed out by the Ld. counsel, the expenditure in question is not relatable to the services rendered by the assessee so as to include the same to the operating cost. Hence, the findings of the authorities below are not based on the sound reasoning. We, therefore, allow the objection filed by the assessee in the present case and direct the AO to allow the legal expenses amounting to Rs. 91,27,129/- incurred during the year 2007-08 as deduction u/s 37(1) of the Act and not to include the said amount in the operating cost. In the result, appeal filed by the revenue is dismissed and cr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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