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2017 (10) TMI 1587 - AT - Income TaxDisallowance of expenses incurred - assessee did not had any business activity - legal and professional fees relating to legal proceedings/appeals incurred towards defending the legal rights with respect to the business activities carried out by the assessee - assessee explained that the expenses involved are broadly legal expenses and the assessee was continuously doing business activities for which he took us to various pages of the paper book - whether the payment of legal fee is an allowable deduction? - HELD THAT:- 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. Issue of quantum of the expenditure to be incurred is concerned, we are of the view, it is for the assessee to decide how best to protect his own interest. It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. In the case of Gannon Dunkarlay and Co. Pvt. Ltd. [1997 (12) TMI 22 - 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. As 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 expenses were incurred to safeguard the business of the assessee. The payment of legal expenses even has not been disputed by the Revenue and were merely disallowed that during the period, no business activity was carried out by the assessee. However, as mentioned earlier, we find that the assessee did business activity, therefore, in the absence of any contrary material, we allow this ground as the legal expenses/fees were incurred by the assessee wholly and exclusively to safeguard its business interest - as admitted by assessee that professional fee stand disallowed u/s 40(a)(ia) as tax deducted at source was not deposited to the credit of Central Government before the due date of filing of return of income u/s 139(1) of the Act. This ground of the assessee is partly allowed.
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