|CORAM:||B. C. Meena (AM), C. M. Garg (JM)|
|CATCH WORDS:||business expenditure, criminal proceedings, legal fees|
|DATE:||October 31, 2014 (Date of pronouncement)|
|DATE:||November 4, 2014 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 37(1): Law on deductibility of expenditure incurred on legal fees to defend criminal proceedings explained|
(i) The ratio of the decisions in CIT vs. Birla Brothers 82 ITR 166 (SC), CIT vs. Dhanrajgiri Raja Narsinghgiri (1973) 91 ITR 544 (SC), CIT Vs. H. Hirjee (1953) 23 ITR 427 (SC) and CIT Vs. Chaman Lal & Brothers (1970) 77 ITR 383 (Del) can be summarized as follows. In the cases where assessee is able to demonstrate positively that the claimed expenditure on legal fees and proceedings is in extricably or proximately related to caring on the business of the assessee more effectively then the same shall be allowable. However, in the cases where the given or claimed expenditure on legal fees and proceedings is remotely connected or unconnected to caring on of business of the assessee, then the same may not be allowable u/s 37 of the Act. Applying this to the facts in extant case, it can be safely inferred that expenditure to defend in custom duty evasion criminal case, having no connection with caring on of business, is held to rightly disallowed by the AO and same disallowance was upheld by the CIT(A) on cogent and reasonable basis.
(ii) As 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. In this situation following the decision of Hon’ble Supreme Court in the case of CIT Vs. H. Hirjee, we reach the logical conclusion that 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.