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TMI Blog2019 (3) TMI 1600X X X X Extracts X X X X X X X X Extracts X X X X ..... PUNJAB HIGH COURT] the Hon ble High Court of Gujarat in the case of Ahmadabad Controlled Iron Steel Reg. Stockholders Association Pvt. Ltd. [ 1973 (9) TMI 45 - GUJARAT HIGH COURT] have also held that the expenses for criminal litigation for the purpose of protecting business interest of the assessee-company are allowable as business expenditure. Legal expenses incurred should be considered to be the part of the operating cost for computing margins of the assessee for benchmarking the international transaction with its AEs - HELD THAT:- In the case of Corporate Executive Board vs. ITO [ 2015 (9) TMI 1170 - ITAT DELHI] has held that if the revenue arising from incurring of such expenses is linked with 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 trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 91,27,129/- are not allowable as per the provisions of section 37 and added the said amount to the income of the assessee. In the first appeal, the Ld. CIT (A) allowed the said legal expenses holding that the addition was on protective basis and that the AO has added the same to the total income of the assessee over and above the adjustment arrived by the TPO. However, the Ld. CIT (A) further held that the legal expenses incurred by the appellant on the MMS case should be considered at a part of operating cost of the appellant for computing margins of the appellant for benchmarking the international transaction with AEs. The revenue is in appeal against the findings of the Ld. CIT (A) that the legal expenses are allowable u/s 37 of the Act. 3. The revenue has challenged the impugned order on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ITR 557) (Bombay High Court) 3. National Rayon Corporation (155 ITR 413) (Bombay High Court) 4. J N Singh Company Private Limited (60 ITR 732) (Punjab Haryana High Court) 5. Ahmedabad Controlled Iron Steel Reg. Stockholders Association Private Limited (99 ITR 567) (Gujarat High Court). 6. We have heard the rival submissions and also perused the material on record including the cases relied upon by the parties. The only grievance of the department is that the Ld. CIT (A) has wrongly deleted the addition of ₹ 91,27,129/- made by the AO on account of disallowance of claim made by the assessee towards legal expenses. The Ld. CIT (A) has allowed this ground of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 could have significant impact on its business goodwill, reputation and continuity of operations could only be termed as a business expenses incurred by the company. vii) It is further seen that the appellant in its submission as extracted portion from memorandum explaining the provisions of the Finance Bill, 1998 which has explained insertion of the explanation to Sc. 37(1) of the Act that such amendment has been brought to result in disallowance of the claim made by the certain tax payers on account of protection money, extortion, hafta, bribes, etc. as business expenditure. The expenditure incurred in the defense against any legal proceedings instituted agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 hit by explanation 1 to section 37 of the Act, it is necessary to ascertain the nature of expenses incurred in the present case. Admittedly, the assessee has incurred the expenses in connection with the criminal case lodged against the User of the website, MD and the head of the Trust and Safety Functions (TSF). Now the question arises as to whether the MD and the Head of the TSF have in fact committed any offence individually or in connivance with the User who posted the objectionable item? In our considered view, the answer is no. Since the Hon ble Supreme Court has quashed the entire proceedings against the Assessee Company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 course of company s business are allowable deduction being incidental to the business of the assessee company. Similarly, in the case of Commissioner of Income Tax vs. Rayon Corporation Ltd. the Hon ble Bombay High Court has held that litigation expenses incurred for defending an employee in criminal proceedings is in the interest of business of the assessee company therefore deductible as business expenditure. The Hon ble High Court of Punjab and Haryana in the case of J N Singh Company Pvt. Ltd.(supra), the Hon ble High Court of Gujarat in the case of Ahmadabad Controlled Iron Steel Reg. Stockholders Associatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gn 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. counsel placing reliance on the decision of ITAT, Delhi in the case of Corporation Executive Board India Pvt. Ltd. ITA No. 4986/Del/2010, Exxon Mobile Gas (India) Pvt. Ltd. ITA No. 417/Del/2011, decision of Hyderabad Tribunal in the case of Plannet Online Ltd. ITA No. 464/Hyd/2014, Pune Tribunal in the case of Bobst India Pvt. Ltd. ITA No. 512/PN/2012, Mumbai Tribunal in the case of Emerson Process Management India Pvt. Ltd. and the decision of the Hon ble Delhi High Court in the case of the Marubeni India Pvt. Ltd. ITA No. 1114/2011, submitted that the legal expenses amounting to ₹ 91,27,129/- incurred during ..... X X X X Extracts X X X X X X X X Extracts X X X X
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