CPT V24P7-Art1 (Content).pmd - Taxmann

Direct Tax Laws
9. Legal expenses incurred by an assessee for
defending a claim for higher compensation in
respect of lands acquired by the assessee must
be treated as capital expenditures, since the
compensation payable in regard to the acquisition
of the land was clearly capital expenditure.
DEDUCTIBILITY OF EXPENSES UNDER
SECTION 10(2)(xv)
10. In CIT v. H. Hirjee 13 , the assessee was
carrying on business as a selling agent of a
company and was prosecuted under section
13 of Hoarding and Profiteering Ordinance on
a charge of selling goods at prices higher than
were reasonable in contravention of the legal
provisions. The prosecution ended in acquittal
and the assessee claimed deduction of expenses
spent on defending the case from the business
profits under section 10(2)(xv) of the Indian
Income-tax Act, 1922. The Hon’ble Supreme
Court held that in the circumstances of the
case the sum spent on defending the criminal
proceeding was not an expenditure laid out
or expended wholly and exclusively for the
purpose of the business and it was not an
allowable deduction under section 10(2)(xv).
648
The deductibility of such an expense under
section 10(2)(xv) must depend on the nature
and purpose of the legal proceedings in relation
to the business whose profits are under
computation and ‘cannot be affected by the
final outcome of that proceeding’ (emphasis
supplied).
CONCLUSION
11. The nature, causes and characteristics of
a Court or arbitration proceeding escapes all
attempts at concrete categorization. These
litigations are driven by an array of apparent
as well as ulterior motives which aggravate
the uncertainty around the issue as to whether
such expense was ‘exclusively’ for the business
purposes. Further, the fact as to whether the
assessee is the victim or the accused/defendant
in a litigation should also be given due
consideration while allowing these expenditures
as deductions. Thus, in this increasingly complex
business environment, availability of these
deductions must be scrutinized keeping in mind
the broad functioning of a particular industry
and on case-to-case basis.
1. Scottish Historian and Essayist, leading figure in the Victorian era. 1795-1881.
2. Addl. CIT v. Rustam Jehangir Vakil Mills Ltd. [1976] 103 ITR 298 (Guj.).
3. CIT v. Mihir Textiles Ltd. [1976] 104 ITR 167 (Guj.).
4. Hemraj Nebhomal Sons v. CIT [2005] 278 ITR 345/146 Taxman 345 (MP).
5. CIT v. Indian Molasses Co. (P.) Ltd. [1970] 78 ITR 474 (SC), J.K. Cotton Mfrs. Ltd. v. CIT [1975] 101 ITR 221 (SC).
6. [1966] 60 ITR 732 (Punj. & Har.).
7. [1950] 18 ITR 557 (Bom.).
8. [1985] 155 ITR 413/[1984] 19 Taxman 485 (Bom.).
9. (supra). Hereinafter referred as Haji Aziz & Abdul Shakoor Bros. case (supra).
10. [1998] 229 ITR 534/96 Taxman 643 (SC).
11. [1984] 10 ITD 240 (Bom.)(SB)
12. [1990] 184 ITR 542/[1989] 47 Taxman 436 (Cal.).
13. [1953] 23 ITR 427 (SC).
• DT - Sec. 37(1)
August 1 to 15, 2012 u TAXMANN’S CORPORATE PROFESSIONALS TODAY u Vol. 24 u 28
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