TMI Blog2014 (11) TMI 135X X X X Extracts X X X X X X X X Extracts X X X X ..... t his criminal case before the Hon’ble High Court and Lower Courts to get the bail order - the assessee was arrested in Custom Duty Evasion criminal case by the DRI and the payment of legal expenses and fees to the lawyers was made to defend and to secure bail for the assessee in that case - the authorities below were right in holding that the payment of legal fees and expenses towards defending in a criminal prosecution not allowable as business expenditure because the same was not expended wholly and exclusively for the purpose of business – Decided against assessee. Payment which was considered as penalty disallowed – Allowability of expenses as per Explanation to section 37 - Held that:- The assessee made payment of ₹ 70 lacs as per direction of Hon’ble High Court of Delhi given in the bail order dated 01.02.2007 which enlarged the assessee on bail in a criminal case of Custom Duty Evasion - At the time of payment the custom duty assessment was pending and yet to be completed in future - Obviously, when it is found that the assessee has evasioned custom duty then the penalty is obvious and leviable as per the relevant provisions of the Act but until and unless assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mills Ltd (1971) 82 ITR 166 (SC) and Dhanrajgiri Raja Nursinghgiri (1973) 91 ITR 564 (SC). 3. Apropos above grounds the ld. counsel for the assessee submitted that the ld. CIT(A) has wrongly upheld the disallowance of ₹ 6,45,000/- being fee paid to the lawyers on the ground that the same was incurred for defending the criminal proceedings initiated by the Department of Revenue Intelligence (DRI). 3.1 The ld. counsel for the assessee also submitted that the authorities below wrongly held that the fee paid to the lawyers was of personal in nature and not allowable under the provisions of the Income Tax Act, 1961 (for short the Act ). The ld. counsel for the assessee placed his reliance on the decision of Hon ble Supreme Court in the case of CIT vs. Birla Brothers Pvt. Ltd., (1971) 82 ITR 166 (SC); and CIT vs. Dhanrajgiri Raja Narsinghgiri (1973) 91 ITR 544 (SC) and contended that the fee paid to the lawyers was on account of assessee s arrest by the DRI on the allegation on evasion of Custom Duty on import of palm oil as the assessee was in DRI custody / judicial custody subsequent the arrest of the assessee by the DRI in the Custom Duty Evasion case. The ld. counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fend himself in a criminal case is allowable under the provisions of the Act. The authorities below has relied and followed the ratio of the decision of Hon ble Supreme Court in the case of CIT vs. H. Hirjee (Supra) wherein it was held that the sum/amount spend in defending the criminal proceeding was not an expenditure laid down or expanded wholly and exclusively for the purpose of business and therefore, it was not an allowable deduction u/s 10(2)(XV) of the IT Act, 1922. The AO has also followed the decision of Hon ble Delhi High Court in the case of CIT Vs. Chaman Lal Brothers (Supra) wherein it was held that the amount expenditure incurred by the assessee firm on the defence of its partner in the criminal case for alleged contravention of the provisions of the Foreign Exchange Regulation Act, 1947 (FERA) was not deductible u/s 10(2)(XV) of the IT Act, 1922. In this case their lord ship also made it clear that the fact of the acquittal of the partner was important for the reputation of the assessee-firm did not detract from this legal position. 7. The relevant operative para (at page 391) reads thus: In our opinion, the assessee cannot derive much help from the above a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plied that prosecution by the assessee to protect tax and other liability is different from a case wherein the assessee is charged with criminal mala fide act in a criminal prosecution against the assessee. 10. In the present case the ld. CIT(A) upheld the disallowance with the following observation and conclusion: 5.5 The next ground of appeal relates to the disallowance of ₹ 6,45,000/- being fee paid to the lawyers. The Ld. Counsel has submitted that the legal fee paid to the lawyers is in respect of appellant s case before lower court and High Court in connection with the search conducted by the DRI on 21.11.2006. The appellant was arrested by the DRI on the alleged charge of evading duty on import of palm oil. The business of import of palm oil is being carried on as proprietary concern by the name Nova International. The appellant was arrested on preemptive basis without there being any established charge of duty evasion by his proprietary concern. The appellant was acting not in his individual capacity but as sole business head of the proprietary concern. The continued arrest of the appellant would not only have spelt financial ruin of the business but would hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore upheld. Ground no. 3 is held against the appellant. 11. In view of above observations and conclusion of the CIT (A) we note that the ld. CIT (A) uphold the disallowance by holding that the expenditure incurred on counsels for defending the criminal proceedings initiated by the Department of Revenue Intelligence (DRI) is an expenditure which is of personal in nature and cannot be said to be allowable under any provisions of the Act. 12. At the same time, we also note that the legal expenses were incurred by the assessee to defend and to secure bail for him, as the assessee was arrested by the DRI in the Custom Duty Evasion case. 13. On careful consideration of the decisions relied by the assessee, we respectfully hold that the benefit of ratio of the decision of Hon ble Apex Court in the case of CIT vs. Birla Brothers Pvt. Ltd. (Supra) is not available for the assessee as in this case the law charges so incurred in connection with the proceedings before the Investigation Commission were incurred for the preservation and protection of the assessee s business from any process or proceedings which might have resulted in the reduction or lowering its income and profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any proceedings or prosecution to defend his business and the claimed expenditure was incurred wholly and exclusively for the purpose of business of the assessee. 16. The ratio of the above decisions can be summarized as follows. In the cases where assessee is able to demonstrate positively that the claimed expenditure on legal fees and proceedings is in extricably or proximately related to caring on the business of the assessee more effectively then the same shall be allowable. However, in the cases where the given or claimed expenditure on legal fees and proceedings is remotely connected or unconnected to caring on of business of the assessee, then the same may not be allowable u/s 37 of the Act. Applying this to the facts in extant case, it can be safely inferred that expenditure to defend in custom duty evasion criminal case, having no connection with caring on of business, is held to rightly disallowed by the AO and same disallowance was upheld by the CIT(A) on cogent and reasonable basis. Ergo the assessee s contentions are jettisoned. 17. Per contra, we clearly observed that the assessee was arrested in Custom Duty Evasion criminal case by the DRI and the payment of le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld. counsel for the assessee supported the impugned order and submitted that the AO made impugned disallowance of ₹ 70 lac by wrongly holding that the amount paid by the assessee is being treated as penal in nature and was liable to be disallowed. 23. The ld. counsel for the assessee drawn our attention towards relevant portion of the impugned order and submitted that the AO was wrong in disallowing the payment towards Custom Duty by treating the same as penal in nature by invoking the provisions of Explanation to section 37(1) of the Act because the payment was made by the assessee on the direction of the Hon ble High Court which was given while granting bail to the assessee and the payment of ₹ 70 lacs was incurred towards advance payment of extra / additional Custom Duty that may have arisen subsequently. 24. The ld. counsel for the assessee vehemently contended that the ld. CIT(A) was right in holding that the amount of ₹ 70 lacs paid by the assessee was nothing but an advance towards payment of additional Customs Duty which cannot be said to be a payment of penal nature or penalty. The ld. counsel for the assessee placed his reliance on the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case of the appellant has taken place by the DRI authorities. This fact has been got independently verified by me with the DRI authorities. Therefore, till the time the adjudication takes place, the ascertainment of duty and penalty, if any, cannot be determined. As and when such a determination takes place, the amount deposited by the appellant shall first be appropriated towards the payment of Duty and the balance shall go towards interest, if any. The balance if any, shall be thereafter appropriated towards Penalty, if levied, in the case of the appellant. 5.2 In my considered opinion, the Assessing Officer has wrongly disallowed the amount of ₹ 70 lacs by treating the same as penal in nature, by invoking the provisions under Explanation to section 37(1) of the Income-tax Act, 1961 in this regard, even though, as discussed above, the nature of payment that was made by the appellant on the directions of the High Court given while granting bail to the appellant, was advance towards payment of Customs Duty, that may have arisen subsequently. I therefore, hold that the amount of ₹ 70 lacs paid by the appellant was nothing but an advance towards payment of additiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ituation impugned payment made by the assessee cannot be held as penalty or penal in nature at any stretch of imagination. 29. Under above facts and circumstances the ld. CIT(A) rightly hold that till the time the adjudication takes place ascertained of duty and penalty, if any, cannot be determined. The ld. CIT(A) further went to hold that as such situation takes place the amount deposited by the assessee shall first be appropriated towards the custom duty and balance shall go towards interest, if any, and the balance amount so paid, if any, shall be thereafter appropriated towards penalty, if levied, in the case of assessee. We are also in agreement with the findings of the ld. CIT(A) wherein he accepted the alternate argument of the assessee that the additional custom duty of ₹ 70 lacs paid by the assessee is an allowable expenditure u/s 43B of the Act. Respectfully following the decision of Special Bench of the ITAT, Chandigarh in the case of DCIT Vs. Glaxo Smithkline Consumer Healthcare Ltd. (Supra) we hold that section 43B allow deduction of impugned payment as additional custom duty irrespective of the previous year in which the liability to pay such sum was raised ..... X X X X Extracts X X X X X X X X Extracts X X X X
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