Legal expenses incurred for directors can’t be treated as personal without examining outcome of proceedings

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Case Details: Kalaignar TV (P.) Ltd. v. ACIT – [2022] 144 taxmann.com 114 (Chennai-Trib.)

Judiciary and Counsel Details

V. Durga Rao, Judicial Member & G. Manjunatha, Accountant Member
Sandeep Bagmar, Advocate for the Appellant.
M. Swaminathan, Sr. Standing Counsel & Ms Pushpa, Jr. Standing Counsel for the Respondent.

Facts of the Case

Assessee-company claimed certain legal expenses in respect of an ongoing case at the special court. During the assessment, Assessing Officer (AO) observed that the expenses were incurred by the assessee in the cases where directors and shareholders were involved in misconduct in their individual capacities. As the expenses incurred were not exclusively for business, AO disallowed the deduction of legal expenses.

The aggrieved assessee preferred an appeal to CIT(A) which in turn upheld the order of AO and the matter reached Chennai Tribunal.

ITAT Held

The Tribunal held that the AO mainly disallowed expenditure on the ground that legal proceedings were undertaken against directors & shareholders and not against the company. In the given case, an illegal gratification of Rs. 200 crores was received by the company on account of the misdemeanors alleged to have been undertaken by the directors and shareholders.

Thus, the treatment of the reimbursement of legal and travel expenses of the directors and shareholders to pursue their case against the judicial proceedings at the special CBI Court as business expenditure by the company was in dispute.

One must look into the judgment of the special CBI court to decide whether such expenses incurred by the assessee relate to business and are eligible for claiming a deduction or not.
It should be noted that AO disallowed the legal expenses incurred for the case of the director and shareholders of the company without considering the outcome of the judgment passed by the Special Court.

AO was justified in making disallowance as the judgment of the Special Court was not available at the time of passing the assessment order. However, the same was available when the CIT(A) passed the order but it failed to consider it. Since both authorities failed to consider the judgement, the matter was remanded back to the AO for fresh consideration.

List of Cases Referred to

J.B. Advani & Co. Ltd. v. CIT/CEPT [1950] 18 ITR 557 (Bom.) (para 4)
CIT v. H. Hirjee [1951] 19 ITR 612 (Cal.) (para 4)
CIT v. H. Hirjee [1953] 23 ITR 427 (SC) (para 4)
J.N. Singh & Co. (P.) Ltd. v. CIT [1966] 60 ITR 732 (Punj. & Har.) (para 4)
Hingir Rampur Coal Co. Ltd. v. CIT [1971] 81 ITR 633 (Bom.) (para 4)
Lakshmiji Sugar Mills Co. (P.) Ltd. v. CIT [1975] 98 ITR 568 (Delhi) (para 4)
Rohtas Industries Ltd. v. CIT [1968] 67 ITR 361 (Pat.) (para 4)
CIT v. Birla Cotton Spg. & Wvg. Mills Ltd. [1971] 82 ITR 166 (SC) (para 4)
CIT v. Dhanrajgirji Raja Narasingirji [1973] 91 ITR 544 (SC) (para 4)
CIT v. Ahmedabad Controlled Iron & Steel Reg. Stockholders Association (P.) Ltd. [1975] 99 ITR 567 (Guj.) (para 4)
Parshva Properties Ltd. v. CIT [1976] 104 ITR 631 (Cal.) (para 4)
Atlas Cycle Industries Ltd. v. CIT [1989] 47 Taxman 244/[1990] 181 ITR 18 (Punj. & Har.) (para 4)
Gujarat Agro Oil Enterprises Ltd. v. CIT [2002] 125 Taxman 912/256 ITR 230 (Guj.) (para 4)
Hiranandani Akruti JV v. Dy. CIT [2017] 88 taxmann.com 209 (Mum. – Trib.) (para 4)
CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC) (para 4)
Sree Meenakshi Mills Ltd. v. CIT [1967] 63 ITR 207 (SC) (para 4)
Weavers Mills Ltd. v. Balkis Ammal AIR 1969 Mad 462 (para 4)
McKnight (Inspector of Taxes) v. Sheppard [1999] 1 WLR 1333 (para 4)
ICB Ltd. v. ITO [2005] 93 ITD 418 (Mum.) (para 5)
National Refinery (P.) Ltd. v. Asstt. CIT [2020] 114 taxmann.com 614/272 Taxman 160/424 ITR 267 (Bom.) (para 5).

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