2014 (11) TMI 135 - AT - Income Tax

Tribunal Rules Legal Fees Not Business Expenses, Allows Rs. 70 Lacs Payment

Mr. Praveen Saxena Versus JCIT, Range-32, New Delhi

The Tribunal dismissed both the assessee's and the Revenue's appeals. The legal fees incurred for defending criminal proceedings were not allowable as ... Fee paid to lawyers disallowed – Expenses incurred for defending the criminal proceedings initiated by the DRI personal in nature or not – Held that:- The assessee incurred expenditure for hiring lawyers and other support services to get the bail for him, as the assessee was in judicial custody due to his arrest by DRI in the Custom Duty Evasion criminal case - 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 - 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. The ratio in the case of CIT Vs. H. Hirjee [1953 (4) TMI 1 - SUPREME Court] was rightly followed by the authorities - there was a criminal case against the assessee with an allegation of custom duty evasion and he incurred expenditure of legal fees for hiring lawyers to represent 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 assessment is not completed the amount of custom duty/additional custom duty, interest thereon and penalty cannot be ascertained and in this situation impugned payment made by the assessee cannot be held as penalty or penal in nature at any stretch of imagination. CIT(A) rightly hold that till the time the adjudication takes place ascertained of duty and penalty, if any, cannot be determined - 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 - the additional custom duty paid by the assessee is an allowable expenditure u/s 43B of the Act – following the decision in DCIT Vs. Glaxo Smithkline Consumer Healthcare Ltd. [2007 (7) TMI 334 - ITAT CHANDIGARH] - 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 against the assessee – the order of the CIT(A) is upheld – Decided against revenue. Issues Involved:1. Disallowance of legal fees paid to defend criminal proceedings.2. Allowability of payment considered as penalty under Income Tax Law.Issue-wise Detailed Analysis:1. Disallowance of Legal Fees Paid to Defend Criminal Proceedings:The assessee contested the disallowance of Rs. 6,45,000/- incurred as legal fees for defending criminal proceedings initiated by the Department of Revenue Intelligence (DRI). The assessee argued that the legal fees were a business expense, citing Supreme Court decisions in CIT vs. Birla Brothers Pvt. Ltd. and CIT vs. Dhanrajgiri Raja Narsinghgiri, which allowed deductions for legal expenses incurred to protect business interests.The Revenue, however, relied on the Supreme Court decision in CIT Vs. H. Hirjee and the Delhi High Court decision in CIT Vs. Chaman Lal & Brothers, which held that expenses incurred in defending criminal proceedings are not allowable as they are not wholly and exclusively for business purposes. The Tribunal noted that the legal fees were incurred to secure bail for the assessee in a criminal case of custom duty evasion, which was personal and not related to business activities.The Tribunal concluded that the legal fees were not allowable under the Income Tax Act, following the precedent set by CIT Vs. H. Hirjee and CIT Vs. Chaman Lal & Brothers. The Tribunal dismissed the assessee's grounds, affirming the disallowance of the legal fees.2. Allowability of Payment Considered as Penalty under Income Tax Law:The Revenue appealed against the deletion of an addition of Rs. 70 lacs by the CIT(A), which the AO had disallowed, considering it a penalty for custom duty evasion. The Revenue argued that the payment was not allowable under Explanation to section 37 of the Income Tax Act, as it was not incurred for business purposes.The assessee contended that the payment was made as per the Delhi High Court's bail order and was an advance payment towards additional custom duty, not a penalty. The CIT(A) found that the payment was made before the adjudication of the custom duty assessment, and thus, it could not be considered a penalty. The CIT(A) also held that the payment was allowable under section 43B of the Act, which permits deductions for taxes and duties actually paid.The Tribunal upheld the CIT(A)'s decision, agreeing that the payment was not penal in nature and was an advance towards custom duty. The Tribunal also supported the CIT(A)'s application of section 43B, allowing the deduction of the payment irrespective of the year in which the liability arose. Consequently, the Tribunal dismissed the Revenue's appeal.Conclusion:The Tribunal dismissed both the assessee's and the Revenue's appeals. The legal fees incurred for defending criminal proceedings were not allowable as business expenses. The payment of Rs. 70 lacs was considered an advance towards custom duty, not a penalty, and was allowable under section 43B of the Income Tax Act. The Tribunal upheld the CIT(A)'s findings and dismissed the appeals.