2022 (7) TMI 1083 - AT - Income Tax

Tax Appeals Remitted for Fresh Assessment after Considering Special CBI Court Judgment

Kalaignar TV Pvt. Ltd. Versus The Assistant Commissioner of Income Tax, Non Corporate Circle 20 (1), Chennai

The Tribunal allowed the appeals for the assessment years 2012-13 and 2013-14 for statistical purposes and remitted the matter back to the AO to decide ... Allowable business expenditure - legal and travel expenses incurred as eligible for deduction u/s 37 or not? - AO has disallowed the expenses claimed by the assessee on the ground that the expenditures incurred by the assessee was not for the business purposes and it was relating to 2G Spectrum case and the Directors and shareholders are involved and the expenditures incurred are not for the business of the assessee and it was only relating to legal and travelling expenses to persue the Directors and shareholders’ case before the Special CBI Court, New Delhi HELD THAT:- As at the time of assessment proceedings, the CBI judgement was not available before the Assessing Officer as the assessment order under section 143(3) of the Act was posted on 27.03.2015 and therefore, there was no occasion for the Assessing Officer to examine the judgement of the CBI Court and consider the issue of legal and travelling expenses incurred by the assessee company are eligible under section 37(1) - Whereas, the ld. CIT(A) passed the appellate order on 30.05.2018 by the time the judgement dated 21.12.2017 of the Hon’ble Special CBI Court was available. However, the ld. CIT(A), without considering the same, confirmed the order of the Assessing Officer by noting that the expenses are relating to 2G Spectrum Scam. In our opinion, both the authorities below have disallowed the expenditure claimed by the assessee on the ground that it was relating to 2G Spectrum case. Both the authorities below have not examined the outcome of the Special CBI Court judgement. Further, we are of the opinion that whether the expenses incurred by the assessee relating to business and eligible for claiming deduction or not, one must look into the judgement of the Special CBI Court, where, the Directors and shareholders of the assessee company are accused and both the authorities below have failed to consider the judgement of the Hon’ble Special CBI Court. We set aside the order of the ld. CIT(A) and remit the matter back to the Assessing Officer to decide the issue afresh in accordance with law after examining the judgement of Hon’ble Special CBI Court. Appeal allowed for statistical purposes. Issues Involved:1. Disallowance of legal expenses.2. Disallowance of traveling and conveyance expenses.3. Eligibility of expenses under Section 37(1) of the Income Tax Act, 1961.4. Examination of the judgment of the Special CBI Court.5. Limitation issue for the assessment year 2014-15.Detailed Analysis:1. Disallowance of Legal Expenses:The primary issue under consideration was whether the legal expenses of Rs. 6,76,14,470/- incurred by the assessee to defend its Director-cum-shareholder in an ongoing case at the Special CBI Court, New Delhi, were allowable under Section 37(1) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed the expenses, stating that these were personal expenses of the Director and not incurred 'wholly and exclusively' for the purpose of business. The AO referenced the case of Commissioner of Income Tax vs. Hirjee, which held that expenses incurred for defending criminal prosecution arising out of business activities are not deductible.2. Disallowance of Traveling and Conveyance Expenses:The assessee also claimed traveling and conveyance expenses of Rs. 25,60,449/- for a Director attending court proceedings in Delhi. The AO disallowed these expenses on similar grounds, stating they were personal expenses and not for the business's benefit. The CIT(A) upheld the AO's decision, stating the expenditures were related to the 2G Spectrum Scam and did not enhance the business activity or profit-making capability of the company.3. Eligibility of Expenses under Section 37(1):The assessee argued that the legal and traveling expenses were incurred to defend its business reputation and were thus eligible for deduction under Section 37(1). The assessee cited several judicial precedents, including the Supreme Court's decision in Birla Cotton Spinning and Weaving Mills, which held that expenses for preserving business reputation are allowable. The Tribunal noted that the AO and CIT(A) did not consider the judgment of the Special CBI Court, which acquitted all the accused, and therefore, the expenses should be re-examined in light of this judgment.4. Examination of the Judgment of the Special CBI Court:The Tribunal observed that the judgment of the Special CBI Court, which acquitted the Directors and shareholders, was not available during the assessment proceedings but was available before the CIT(A). The Tribunal emphasized that the judgment's outcome is crucial in determining whether the expenses were incurred for business purposes. The Tribunal remitted the matter back to the AO to re-examine the expenses in light of the Special CBI Court's judgment.5. Limitation Issue for the Assessment Year 2014-15:The assessee raised a limitation issue for the assessment year 2014-15 but did not press this ground during the hearing. Consequently, the Tribunal dismissed this ground as not pressed.Conclusion:The Tribunal allowed the appeals for the assessment years 2012-13 and 2013-14 for statistical purposes and remitted the matter back to the AO to decide the issue afresh after examining the Special CBI Court's judgment. The appeal for the assessment year 2014-15 was partly allowed for statistical purposes, with the limitation issue dismissed as not pressed. The Tribunal emphasized the need to consider the judgment of the Special CBI Court to determine the eligibility of the expenses under Section 37(1).