TMI Blog2023 (11) TMI 996X X X X Extracts X X X X X X X X Extracts X X X X ..... sation as granted by the hon ble Supreme court and as paid by the assessee was by way of restitution as well as punitive, in terms of the rights of the victim under the Private Law. The remedy that was availed was by way of writ jurisdiction of Hon ble Delhi High Court, as determined finally by Hon ble Supreme Court. The damages were ordered against the theatre owner, Delhi Vidyut Boart, Municipal Corporation of Delhi, Fire Force and the Licensing Authority for their alleged callous disregard to their statutory obligations and to the fundamental inducible rights guaranteed under Article 21 of the Constitution of India, of the theatre coming public in failing to provide safe premises free from reasonably forcible hazards. There is no doubt that the compensation so granted by way of restitution was out of civil consequences only and had nothing to do with any criminal liability, which any of these parties may have incurred. Expression punitive implies involving or inflicting punishment. It is matter of common understating that damages awarded by the courts are different from fines, which are prescribed under law for any act or omission giving rise to penal consequences. Dam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been incurred wholly and exclusively for the purpose of business of the appellant company is not sustainable. The AO had made observation that legal and professional expenses claimed in P L A/c are in respect of closed-down business activities which has no relation with the income of the assessee. Thus, first thing is there is apparent diversion of opinion for making the disallowance. Secondly when the assessee company s business was closed due to loss of the theatre due to fire then there could have been no business as such the business was closed due to force majeure which cannot be attributed to any commercial decision to not work and claim expenses. As pointed above the fact of assessee litigating in courts is not disputed so legal and professional expenditure in absence of any business, needed to be allowed. Tax authorities below have not taken a prudent approach to understand the nature of litigation faced by the assessee that ran over the years and at different forums. Even if the business activities were stopped, the upcoming financial liabilities and even penal consequences required the assessee company to continue defending the cases in the courts and other forums. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... give justification of legal professional charges and compensation claimed keeping in view of the business activities carried on during the year and why the same should not be disallowed. 3.1 In response, the assessee company vide its letter dated 26 12 2016 submitted to Ld. AO as under- On 13.6 1997, a fire at Uphar theatre in Green Park resulted in death of 69 persons besides injuring 103 persons. In the Court cases filed by the Association of Victims of Uphaar Tragedy, Hon'ble Delhi High Court directed the Appellant to pay compensation of (i) Rs. 18 lakhs to each deceased aged more than 20 years, (ii)Rs. 15 lakhs to each deceased who was less than 20 years of age and (iii)Rs. 1 lakh to each of 103 injured persons. The compensation was to be paid with 9% interest and the liability to pay compensation was apportioned between the Appellant on one hand and Delhi Vidyut Board, MCD and the Licensing authority on the other hand. Appellant's liability was 55% and the remaining 45% was to be paid by Delhi Vidyut Board, MCD and the Licensing authority in the ratio of 15% each. Against the judgment of Delhi High Court dated 24.4.2003, appeals were filed by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts. The first is because the wrongdoing is outrageous in utter disregard of the safety of the patrons of the theatre. The second is the gravity of the breach requiring a deterrent to prevent similar further breaches. That based on the judgment of the Supreme Court dated 13.10.2011, the Appellant worked out its liability to pay compensation at Rs. 10,31,55, 150/-. Taking into Consideration the amount already charged to profit loss account i.e. Rs. 1,50,70,000/- net compensation of Rs. 8,80,85,150/- was debited under the head 'other expenses . That linked to the claim of compensation of Rs. 8,80,85,150/- is the claim of Rs. 1,64,88,500/- being legal and professional charges in connection with Court cases relating to Uphaar tragedy. The details of 'legal professional expenses' and 'legal professional (others)' are at pages 83 to 88 of the paper book. Ledger accounts at pages 83 to 88 provide complete details of the names of the professional (Advocates),bill No, cheque No. and tax deducted at source. In the audited accounts for the year ended 31.3.2014, following notes having bearing on the disputed issues were given: 1. The liability of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T v. Calcutta Agency Ltd. [1951] 19 ITR 191 (SC), wherein the Hon'ble Supreme Court has held that the onus of providing necessary facts in order to avail the deduction under section 37(1) is on the assessee. If, therefore, the assessee fails to establish the facts necessary to support his claim for deduction under section 37(1), the claim for deduction of expenditure is not admissible. The assessee did not furnish or produce any evidence as to what was the expenditure and why it was incurred. The assessee has thus failed to qualify the first test of section 37(1) of the Income- tax Act, 1961. Mere claiming that the expenses were incurred through bank and evidence of payment is available with bank did not itself make the expenditure allowable in the case of assessee as something more is required to allow the deduction U/s 37(1) of the Income-tax Act, 1961. In view of this, the expenses claimed by assessee under the head legal professional expenses are not allowable as such as claimed by assessee. 3.3 Further, the assessee has also claimed an amount of Rs. 8,80,85,150/- towards Compensation in its P L account. During the course of assessment proceedings, the assessee was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Judgment in the case of MCD vs. Association of Victims of Uphaar Tragedy Ors. with CA 7116/2003 CA 6748/2004, Hon ble Supreme Court has held as under: The deaths were on account of the negligence and greed on the part of the licensee in regard to installation of additional seats, in regard to closing of an exit door, parking of cars in front of transformer room by increasing parking from 15 to 35 and other acts. Considering the above findings of Hon ble Supreme Court, I am of the view that liability to pay the compensation arising out of Uphaar Tragedy cannot be treated as business expenditure allowable u/s 37(1). The appellant company could not prove that legal professional expenses have been incurred wholly and exclusively for the purpose of the business of the appellant company. The AO has disallowed the compensation of Rs. 8,80,85,150/- and legal professional expenses of Rs. 1,64,88,500/- on the ground that these two expenses are not allowable u/s 37(1). Considering the facts of the case, I agree with the findings of the AO that these two expenses have hot been incurred wholly and exclusively for the purpose of the business of the appellant company and hence, are no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... simply for want of documents. In so upholding the disallowance, the CIT(A) did not appreciate that documents were lost in the fire that occurred in 1997, which fact is beyond doubt. 2.1 That on the facts and circumstances of the case and in law, the CIT(A) in sustaining disallowance of Rs. 7.35,750/- out of Rs. 16,74,900/- has erred in holding that the amount written off in the profit loss account did not relate to the business of the Appellant. That the appellant craves leave to add, alter, amend or vary any of the ground either at or before the hearing of the appeal. 7. Heard and perused the record. At the time of final arguments, learned Counsel stated at the Bar that on instructions of the appellant he is not pressing ground no.2 with its sub-grounds. 8. As regards ground no. 1, with its sub-grounds, learned Counsel at the outset relied on the judgment of the Third Member, Calcutta Bench of the Tribunal, in the case of Eveready Industries India Ltd. v. DCIT [2001] 78 ITD 175 (Cal.)(TM) , to submit, that was a case similar to the present assessee and that related to the compensation given as a consequence to Bhopal Gas Leak Disaster (Processing of Claims) Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Delhi Vs. Association of Victims of Uphaar Tragedy Ors. Dated 13.10.2011 is of vital consequence to understand as to what was the nature of compensation directed to be paid to the victims of Uphaar Tragedy. In this context as the Bench goes through the judgment of Hon ble Supreme Court, It comes up that Hon ble Apex Court, extensively examining the concept of sovereign immunity, statutory and absolute liability under the law of Torts awarded compensation. In para 38 of judgment, Hon ble Court has observed as under: 38. Therefore what can be awarded as compensation by way of public law remedy need not only be a nominal palliative amount, but something more. It can be by way of making monetary amounts for the wrong done or by way of exemplary damages, exclusive of any amount recoverable in a civil action based on tortuous liability. But in such a case it is improper to assume admittedly without any basis, that every person who visits a cinema theatre and purchases a balcony ticket should be of a high income group person. In the year 1997, Rs. 15,000 per month was rather a high income. The movie was a new movie with patriotic undertones. It is known that zealous movie goer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mplete justice. The calamity resulted in the death of 59 persons and injury to 103 persons. The matter related to a ghastly fire incident of 1997. The victims association has been fighting the cause of victims for more than 14 years. If at this stage, we require the victims to individually approach the civil court and claim compensation, it will cause hardship, apart from involving huge delay, as the matter will be fought in a hierarchy of courts. The incident is not disputed. The names and identity of the 59 persons who died and 103 persons who were injured are available and is not disputed. Insofar as death cases are concerned the principle of determining compensation is streamlined by several decisions of this court. (See for example Sarla Verma v. Delhi Transport Corporation (2009) 6 SCC 121. If three factors are available the compensation can be determined. The first is the age of the deceased, the second is the income of the deceased and the third is number of dependants (to determine the percentage of deduction for personal expenses). For convenience the third factor can also be excluded by adopting a standard deduction of one third towards personal expenses. Therefore just ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ble Supreme Court held as follows in relevant para 43: 43. What has been awarded is not exactly punitive damages with reference to the magnitude or capacity of the enterprise. All that the High Court pointed out was that the Licensee has installed additional seats illegally. That illegality contributed to the cause for the death and injuries, as they slowed down the exiting of the occupant's balcony. If people could have got out faster (which they could have if the gangway was wider as before, and if there had been two exits as before, instead of only one) many would not have died of asphyxiation. Therefore the Licensee is not only liable to pay compensation for the death and injuries, but should, in the least be denied the profits/benefits out of their illegal acts. In that sense it is not really punitive, but a kind of negative restitution. We therefore uphold in principle the liability of the Licensee to return and reimburse the profit from the illegally installed seats, but reduce it from Rs. 2.5 crores to Rs. 25 lakhs for the reasons stated in the earlier para. The award of the said sum, a additional punitive damages, covers two aspects. The first is because the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 367 delineated certain circumstances which satisfy the test for awarding punitive damages such as the conduct must have been oppressive, arbitrary, or unconstitutional, the conduct was calculated to make profit for the wrong doer and that the statute expressly authorizes awarding of punitive damages. Above principles are, however, not uniformly followed by English Courts though the House of Lords in a decision in Attorney-General Vs. Blake [2001] 1 AC 268, awarded punitive damages when it was found the defendant had profited from publishing a book and was asked to give an account of his profits gained from writing the book. In this case where the wrong doer was made to give up the profits made, through restitution for wrongs, certainly the claimant gained damages. In United States, in a few States, punitive damages are determined based on statutes. But often criticisms are raised because of the high imposition of punitive damages by courts. The Supreme Court of United States has rendered several decisions limiting the awards of punitive damages through the due process of law clauses of the Fifth and Fourteenth Amendments. In BMW of North America Inc. v. Gore 517 U.S. 559 (1996) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hing to do with any criminal liability, which any of these parties may have incurred. However, punitive damages granted by Hon ble Delhi High Court of Rs. 2.5 Crore was reduced by Hon ble Supreme Court to Rs. 25 Lacs. Learned AR has relied the case of Eveready Industries India Ltd. (supra), submitting the same was in similar facts and circumstances. Certainly in that order, it was held specifically that the happening or mis-happening, incident or accident, if arises in the course of operation of business, it cannot be treated to be criminal liability or an liability for criminal negligence, disentitling the assessee for claim of the expenditure. However, it was also held that provided such compensation paid is not in the form of any fine or penalty or punitive damages . 20. Thus with regard to the punitive damages component in the disallowance the Bench intends to further examine the issue and see if Punitive Damages fall in the category which Explanation 1 to Section 37(1) of the Act, as expressly disallowed being any expenditure incurred by an assessee for any purpose which is an offence or is prohibited by law, which may be claimed as an expenditure incurred for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ily in order to make up for the times he gets away Hon ble High court observed, This Court feels that this approach is necessitated further for the reason that it is very difficult for a plaintiff to give proof of actual damages suffered by him as the defendants who indulge in such activities never maintain proper accounts of their transactions since they know that the same are objectionable and unlawful. Thus while defendants in civil cases can t be punished with imprisonment, punitive damages can be used to punish a defendant who s acted reprehensibly toward the plaintiff. Further, Punitive damages are also awarded as a form of specific deterrence that is, they re meant to deter the defendant from engaging in the misconduct again and also as General deterrence to deter other individuals and entities from engaging in the same kind of misconduct the defendant was found guilty of. 22. In M/s. Haji Aziz And Abdul Shakoor vs The Commissioner Of Income-Tax, 1961 AIR 663, referring to words for the purpose of such business , Hon ble Supreme Court relied what has been construed in Inland Revenue v. Anglo Brewing Co. Ltd. ((1925) 12 T.C. 803, 813) to mean for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atory component of the impost. 25. Lately Hon ble Supreme court in The Commissioner Of Income Tax vs Prakash Chand Lunia (D) Thr Lrs decided on 24 April, 2023, CIVIL APPEAL NOS.7689-90 OF 2022, after taking cognizance of various judicial precedents in regard to nature of penalty imposed and claim of same as deduction by an assessee observed as follows: Reference was also made during the course of arguments to Commissioner of Income- tax v. Hirjee [(1953) SCR 714]. In that case the assessee was prosecuted under the Hoarding and Profiteering Ordinance but was finally acquitted and claimed the amount spent in defending himself under s. 10(2)(xv) in his assessment. It was held that the distinction between the legal expenses on a successful and unsuccessful defence was not sound and that the deductibility of such expenses under s. 10(2)(xv) must depend on the nature and purpose of the legal proceedings in relation to the business whose profits are in computation and are unaffected by the final outcome of the proceedings. A review of these cases shows that expenses which are permitted as deductions are such as are made for the purpose of carrying on the business i.e. to en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amage is being allowed as negative restitution for the reason what Hon ble Supreme Court said was by way of least be denied the profits/benefits out of their illegal act . 28. Thus Learned Tax Authorities and especially learned CIT(A) had fallen in error to failing to distinguish the two components of the damages. First being by way of restitution and second being negative restitution. The former is allowable as business expenditure allowable u/s 37(1). As if any assessee is directed to make payment under law or orders of courts by way of compensation arising out of civil consequence the same has to be considered to be allowable business expenditure. However, the Punitative damages as awarded cannot be allowed as expenditure. 29. In regard to second issue, it comes up that Revenue does not dispute the genuineness of payment. Revenue also does not dispute the checkered history of assessee, litigating in various courts to defend the civil and criminal consequences of the tragedy. The bills raised by the lawyers and as shown in the ledger account are not disputed nor alleged to be exorbitant or inflated. The bald assertion of the learned CIT(A) that assessee could not prove ..... X X X X Extracts X X X X X X X X Extracts X X X X
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