TaxTMI 
TaxTMI 
2023 (11) TMI 996
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Subsequently assessment u/s 143(3) of the Act, 1961 was completed vide order dated 27.12.2016 at NIL income after adjusting losses amounting to Rs 15,35,763/-. In the assessment order AO disallowed Rs 10,45,73,650/- on account of legal & professional expenses & compensation u/s 37(1) of the Act and Rs. 16,74,900/- on account of expense towards amounts written off u/s 36(2) of the Act. 3. The assessee company is owner of Uphaar Cinema situated in Green Park Extension Market, New Delhi. However, at the time of assessment, the cinema was not working and no business was conducted during the previous year. Unfortunately, in June 1997, Uphaar Cinema caught fire resulting in considerable damage to the property and loss of life. Thereafter, the premises was sealed by the Investigating agency and not operating since then. During the year under consideration, the assessee company has declared income of Rs. 41,151/- from interest and Rs. 66,960/- on account of Rent, lease & license fee. Against the other income of Rs. 22,66,351/, the assessee has claimed other expenses of Rs. 10,95,52, 138/- in its P&L account which includes Rs. 1,64,88,500/- on account of legal & professional charges and....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to disturb the award of Rs. 1 lakh each in the case of injured. The amount awarded as compensation will carry interest at the rate of 9% per annum from the date of writ petition as ordered by the High Court, reserve liberty to the victims or the LRS of the victims as the case may be to seek higher remedy wherever they are not satisfied with the compensation. Any increase shall be bome by the Licensee (theatre owner) exclusively." As far as, punitive damages of Rs. 2,50,00,000/- directed to be paid by the High Court is concerned, the Hon'ble Supreme Court taking into consideration, the profit / income derived from additional seats reduced the same to Rs. 25,00,000/- The following observations in para 43 of the judgment may be noted here: "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 profits from the illegally installed seats, but reduce it from Rs. 2.5 crores to Rs. 25 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....has, however, been provided in the accounts." 4. Ld. AO was however not satisfied and held in para 3.2 to 3.4 as follows; "3.2 The reply of the assessee company has been considered and found general in nature. On perusal of details filed by the assessee in respect of legal & professional charges, it is noticed that the same were incurred towards various court cases made by the assessee company. However, the assessee company has not furnished the reasons/justifications. It is also noticed that the above judicial/quasi judicial proceedings related with closed business activities of the assessee company. During the course of assessment proceedings, the assessee has apparently admitted that it has closed down its main business activities of operating cinema since long years back. Thus, it is clear that the legal &. professional expenses claimed in P&L account are in respect of the closed down business activities, which have no relation with the income of the assessee. I am afraid that mere making payment through bank will entitle the assessee for claiming expenditure U/s 37(1) of the Income-tax Act, 1961. It is the first and foremost liability of assessee to prove that the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s no relation with the business activities/income earned by the assessee. I, therefore, disallow the above expenses of Rs. 10,45,73,650/- and added back the same into the total income of the assessee. Penalty proceedings u/s 271(1)(c) of the Income Tax Act, 1961 for concealment of income as aforesaid and furnishing inaccurate particulars within the meaning of explanation 1 to the sub-section (1) of the section 271(1)(c) of the Income Tax Act, 1961 are initiated." 5. In appeal Ld. CIT(A) sustained the order of Ld. AO with following findings in para 9.1.5:- "9.1.5 I have carefully considered the facts of the case. Despite repeated opportunities, the appellant company did not furnish the details of compensations paid by it. I have also perused the ledger account of legal & professional expenses. As per the ledger accounts, payments have been made to different renowned lawyers such Mr. Ram Jethmalani, Mr. Aditya Kumar, Mr Sushil Kumar, Mr Sanjay Jain, Mr Bansuri Swaraj. Hon'ble Supreme Court had already passed the final judgement on October 13, 2011. There is no reason as to why such legal & professional expenses should be debited in the accounts of the appellant company in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....liability was not punitive and hence was allowable deduction. 1.3 That on the facts and circumstances of the case and in law, the CIT(A) did not appreciate that compensation of Rs. 8,80,85,150/- was fully discharged during the year as has been certified by the Auditors. 1.4 That on the facts and circumstances of the case and in law, the CIT(A) has erred in holding that legal & professional expenses were in relation to Uphaar Cinema but this business activity was closed down and had no relation with the income of the Appellant for the relevant year, therefore, expenditure of Rs. 1,64,88,500/- was not incurred wholly and exclusively for the purpose of business. 1.5 That on the facts and circumstances of the case and in law, the CTT(A) has erred in disallowing legal & professional expenses of Rs. 1,64,88,500/- allegedly for the reason that since judgment in Uphaar tragedy was passed by Hon'ble Supreme Court in October 2011, therefore, legal & professional expense was not expense for the financial year 2013-14. 2. That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding disallowance of Rs. 16,74,900/- on accou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....expenses, learned AR drew attention of the Bench towards ledger account, copy available at page nos. 112-117, containing details of legal and professional expenses. It was submitted that the expenses were only part of the major expenses which had already been paid in the earlier years. He drew attention to the fact that legal and professional charges are paid for defending the assessee company of its prospective liability and there is no dispute with regard to the genuineness of the payments as the same are made to top lawyers of the country by banking channels. 12. Learned DR, however, relied on the orders of learned tax authorities below to submit that they are not related to the present year and are in respect of the business which was closed down long back. 13. Giving thoughtful consideration to the matter on record and the submissions we proceed to decide the grounds, as raised, on following two issues - (i) Whether, the compensation of Rs. 10,45,73,650/- was not punitive, therefore, allowable deduction? (ii) Whether, legal and professional charges amounting to Rs. 1,64,88,500/- were in relation to the business activity of the assessee for the current f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cases reserving liberty to the legal heirs of deceased victims to claim additional amount wherever they were not satisfied with the amount awarded. Taking note of the facts and circumstances, the amount of compensation awarded in public law remedy cases, and the need to provide a deterrent, we are of the view that award of Rs. 10 lakhs in the case of persons aged above 20 years and Rs. 7.5 lakhs in regard to those who were 20 years or below as on the date of the incident would be appropriate. We do not propose to disturb the award of Rs. 1 lakh each in the case of injured. The amount awarded as compensation will carry interest at the rate of 9% per annum from the date of writ petition as ordered by the High Court, reserve liberty to the victims or the LRS. of the victims as the case may be to seek higher remedy wherever they are not satisfied with the compensation. Any increase shall be borne by the Licensee (theatre owner) exclusively." 15. Thereafter the Hon'ble Supreme Court decided the compensation granted on the basis of dependency arrived by the multiplier as laid down in the case of Sarla Verma v. Delhi Transport Corporation (2009) 6 SCC 121. It will be appropriate to rep....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ith their respective counsel shall appear before the Registrar without further notice. For this purpose the claimants and the theatre owner may appear before the Registrar on 10.1.2012 and take further orders in the matter. The hearing and determination of compensation may be assigned to any Registrar or other Senior Judge nominated by the Learned Chief Justice/Acting Chief Justice of the Delhi High Court. As far as the injured are concerned if they are not satisfied with the sum of Rs. 1 lakh which has been awarded it is open to them to approach the civil court for ckuming higher compensation and if they do so within 3 months from today, the same shall be entertained and disposed of in accordance with law. It is not possible to refer the injury cases for summary determination like death cases, as the principles are different and determination may require a more detailed enquiry." 16. It further comes up that thereafter the Hon'ble Supreme Court examined the question of damages beyond the tortuous liability for granting punitive damages wherein the Hon'ble Supreme Court took into cognizance the illegal profits derived by the theatre owner by selling tickets in regard to extra se....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and circumstances of each case. Constitutional Torts and Punitive Damages 18. Constitutional Courts' actions not only strive to compensate the victims and vindicate the constitutional rights, but also to deter future constitutional misconduct without proper excuse or with some collateral or improper motive. Constitutional courts can in appropriate cases of serious violation of life and liberty of the individuals award punitive damages. However, the same generally requires the presence of malicious intent on the side of the wrong doer, i.e. an intentional doing of some wrongful act. Compensatory damages are intended to provide the claimant with a monetary amount necessary to recoup/replace what was lost, since damages in tort are generally awarded to place the claimants in the position he would have been in, had the tort not taken place which are generally quantified under the heads of general damages and special damages. Punitive damages are intended to reform or to deter the wrong doer from indulging in conduct similar to that which formed the basis for the claim. Punitive damages are not intended to compensate the claimant which he can claim in an ordinary ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ances etc. Punitive damages can be awarded when the wrongdoers' conduct 'shocks the conscience' or is 'outrageous' or there is a willful and "wanton disregard' for safety requirements. Normally, there must be a direct connection between the wrongdoer's conduct and the victim's injury." 18. Now, as we take into consideration the aforesaid observations of Hon'ble Supreme Court of India and the manner in which Hon'ble Supreme Court proceeded to determine the compensation, there is no doubt in the mind of this Bench that the compensation 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 th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by him whereas punitive damages are aimed at deterring a wrong doer and the like minded from indulging in such unlawful activities. Whenever an action has criminal propensity also the punitive damages are clearly called for so that the tendency to violate the laws and infringe the rights of others with a view to make money is curbed. The punitive damages are founded on the philosophy of corrective justice ad as such, in appropriate cases these must be awarded to give a signal to the wrong doers that law does not take a breach merely as a matter between rival parties but feels concerned about those also who are not party to the list but suffer on account of the breach." In this judgment Hon'ble Delhi High Court relied the findings in Mathias v. Accor Economy Lodging, Inc. reported in 347 F.3d 672 (7th Cir. 2003) where in the factors underlying the grant of punitive damages were discussed and it was observed that one function of punitive damages is to relieve the pressure on an overloaded system of criminal justice by providing a civil alternative to criminal prosecution of minor crimes. It was further observed that the award of punitive damages serves the additional purpose of limit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wed, provided of course there is no prohibition against it, express or implied, in the Act. The loss for which a deduction could be made under Section 10(1) must be one that springs directly from the carrying on of the business and is incidental to it, and not any loss sustained by the assessee, even if it has some connection with his business." 24. Further, in the case of Prakash Cotton Mills Pvt. Ltd. v. Commissioner of Income Tax - [1993] 201 ITR 68, Hon'ble Supreme Court, relying decision in the case of Mahalakshmi Sugar Mills Co. reported in [1980] 123 ITR429 and the decision of the Andhra Pradesh High Court in Hyderabad Allwyn Metal Works Ltd. reported in [1988] 172 ITR 113, held that whenever any statutory amount is paid by an assessee by way of damages or penalty or interest and same is claimed as an allowable expenditure under Section 37(1) of the Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such payment notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature. If the amount so paid be of compensatory nature the assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nfraction of the law is not a normal incident of business and therefore only such disbursements can be deducted as are really incidental to the business itself. They cannot be deducted if they fall on the assessee in some character other than that of a trader. Therefore where a penalty is incurred for the contravention of any specific statutory provision, it cannot be said to be a commercial loss falling on the assessee as a trader the test being that the expenses which are for the purpose of enabling a person to carry on trade for making profits in the business are permitted but not if they are merely connected with the business." 26. Now coming back to the case of present assessee, Hon'ble Supreme Court had reasoned that punitive damages could be granted only in very limited circumstances. In the pertinent part of the judgment, Hon'ble Apex court stated: "Punitive damages can be awarded when the wrongdoers' conduct 'shocks the conscience' or is 'outrageous' or there is a willful and 'wanton disregard' for safety requirements. Normally, there must be a direct connection between the wrongdoer's conduct and the victim's injury." 27. This pun....