TMI Blog2017 (10) TMI 1587X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, we find that the claimed expenses amounting to ₹ 10,25,576/- are broadly with respect to legal and professional fees relating to legal proceedings/appeals and the same were incurred towards defending the legal rights with respect to the business activities carried out by the assessee. From page-64 of the paper book, we find that the assessee generated revenue from the business operation to the tune of ₹ 1,96,99,410/- and other income to the tune of ₹ 9,800/- as on 31/03/2011, which was not possible without doing any business activity. From page 74 of the paper book, there is opening inventory and the assessee was having stock and revenue was also generated during earlier year relevant to year under appeal and was offered for taxation. The disallowances made by the Ld. Assessing Officer is cannot be said to be inflated and are legal/professional expenses incurred to safeguard the interest of the business of the assessee, being legal and professional fees. Even otherwise, section 37(1) of the Act speaks about ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 . 2.5. 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, for the purposes of business or profession has a wider implication then the expression for the purposes of making or earning income used in section 57(iii) of the Act. The purpose contemplated by section 57(iii) is more specific in character. So far as, reasonableness of the expenditure envisaged by section 57(iii) depends upon the facts of particular case. The Hon'ble Court in CIT vs New Savan Sugar and Good Refining Co. Ltd. (1990) 185 ITR 564, 571 (Cal.) held that it is for the Tribunal to decide whether the expenditure is wholly incurred for the purpose of keeping the assessee company in operation and earning income i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 [see, CIT v. Birla Cotton Spng. Wvg. Mills Ltd., (1971) 82 ITR 166 (SC); CIT v. Dhanrajgirji Raja Narsingirji, (1973) 91 ITR 544, 549 (SC)]. 2.8. So far as, 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. The ratio laid down in CIT v. Dhanrajgirji Raja Narsingirji, (1973) 91 ITR 544 (SC) supports our view. In that case His Lordship observed: It is true that in some o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 57 (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. Ltd. v. CIT, (1967) ITR (Sh N) 21 (Delhi)]. Similarly, expenditure incurred in defending a criminal case against the directors and principal officers of the assessee-company on the allegation that the vegetable oil produced by the company did not contain 5% til oil as required by the Government rule was held to be an expenditure incurred with a view to proving the quality and standard of the manufactured goods produced by the assessee and, therefore, deductible [Rohtas Industries Ltd. v. CIT, (1968) 67 ITR 361 (Pat)]. 2.10. In Ananda Marga Pracharaka Sang ha v. CIT [(1996) 218 ITR 254, 258, 2 (Cal)] , the legal expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ITR 648 (Cal)]. Also see, Swadeshi Cotton Mills Co. Ltd. v. CIT, (1975) 100ITR (All), for facts and decision. 3. Now, we shall deal with the cases and the ratio laid down therein, where the expenditure was incurred but was not held to be not allowable deduction. (1) by a shareholder-assessee in suits filed against directors respecting matters of internal management of the company [Transport Co. P. Ltd. v. CIT, (1962) 46 ITR 1009 (Mad)]; (2) in an appeal with regard to the correctness of a ruling given by the president in the general meeting, with reference to the relative rights of the shareholders and the board of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 [Bengal Assam Investors Ltd. v. CIT, (1983) 142ITR 156 (Cal)]; (17) by the assessee, a major shareholder, in connection with application under section 186 of the Companies Act for calling meeting of its subsidiary company for removal of existing directors and appointment of new directors, etc. [United Breweries Ltd. v. CIT, (1986) 162 ITR 527 (Karn)]; (18) by the assessee towards fees for conducting an appeal before the Company Law Board in connection with the refusal of registration of certain shares in a company [Jaya Hind Industries (P.) Ltd. v. CIT, (1986) 161 ITR 842 (Bom)]; (19) in connection with seeking legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 earning such income must be the sole purpose for which the expenditure must have been incurred, that is to say, the expenditure should not have been incurred for such purpose as also for another purpose or for a mixed purpose; v) the distinction between purpose and motive must always be borne in mind in this connection, for, what is relevant is the manifest and immediate purpose and not the motive or personal considerations weighing in the mind of the assessee in incurring the expenditure; (vi) if the assessee has no option except to incur the expenditure in order to make the earning of the income poss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 prosecuting a civil proceeding depends upon the nature and purpose of the civil proceeding in relation to assessee's business and cannot be affected by the final outcome of that business. 3.3. In the case of CIT vs Gannon Dunkarlay and Co. Pvt. Ltd. (2000) 243 ITR 646 (Mad.), CIT vs Administrator General Of Madras (1998) 234 ITR 351 (Mad.), CIT vs Patiala Flour Mills Co. Ltd. (1989) 180 ITR 75 (P H), Hindustan Milk Food Manufacturing Ltd. 179 ITR 302 (P H), Palani Sir Murgun Textiles Ltd. vs ACIT (2002) 254 ITR 333 (Mad.) decided the issue in favour of the assessee. In the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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