Income Tax Appellate Tribunal - Mumbai
Dcit Cen Cir 7(3), Mumbai vs Cowtown Land Development P.Ltd, Mumbai on 27 December, 2017
आयकर अपील य अ धकरण, मुंबई यायपीठ, 'सी',मुंबई।
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES "C", MUMBAI ी जो ग दर संह, या यक सद य एवं ी जी. मंजूनाथ, लेखा सद य, के सम Before Shri JOGINDER SINGH, Judicial Member, and Shri G. MANJUNATHA, Accountant Member ITA NO.428/Mum/2016 Assessment Year: 2008-09 DCIT, M/s Cowtown Land CC-7(3), बनाम/ Development Pvt. Ltd.
Room No.655, 6th Floor, 216, Shah & Nahar
Aayakar Bhavan, Vs. Industrial Estate,
M.K. Road, Off Dr. E. Moses Road, Worli,
Mumbai-400020 Mumbai-400018
(राज व /Revenue) ( नधा!रती /Assessee)
P.A. No.AAACC4889L
राज व क ओर से / Revenue by Shri Rajat Mittal-DR
नधा!रती क ओर से / Assessee by Shri Vijay Mehta ु वाई क% तार&ख / Date of Hearing :
सन 30/11/2017
घोषणा क% तार&ख/Date of Pronouncement 27/12/2017
2 ITA No.428/Mum/2016
M/s Cowtown Land Development Pvt. Ltd.
आदे श / O R D E R
Per Joginder Singh (Judicial Member)
The Revenue is aggrieved by the impugned order dated 30/11/2015 of the Ld. First Appellate Authority, Mumbai. The only ground raised by the assessee pertains to disallowance of project expenses of Rs.6,50,50,000/- without appreciating the genuineness of the claim of payments as the payments were neither confirmed nor mentioned in pledged deed or mention in any other document filed by the assessee.
2. During hearing, the ld. DR, Shri Rajat Mittal, advanced arguments which is identical to the ground raised by contending that no independent confirmation were filed by the assessee. Our attention was invited to para-4.1 of the assessment order and page-15 (para-4.3) of the impugned order.
2.1. On the other hand, Shri Vijay Mehta, ld. counsel for the assessee, strongly defended the impugned order by inviting our attention to the Development agreement made on 29/10/2004 by explaining that the company was in 3 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
BIFR, since 1990, wherein, it was held that the company is to be wound up. It was contended that Seth Industries entered in to a development right agreement and our attention was invited to pages 64 to 67 of the paper book. It was submitted that litigation started and in the year 2005 discontented share holders filed petition before the Hon'ble High Court for which our attention was invited to order dated 28/04/2006. It was explained that the company opposed winding up and till 2006 (28/04/2006), no payment was made. It was pleaded that to sort out the differences with other parties, the payment was made to safeguard the business interest. Our attention was invited to page-94 to 101 of the paper book, evidencing the payment made to the different parties along with page-102 of the paper book, wherein the assessee got no objection from these parties and similar letters made available from 103 to 108 (other litigating parties to whom payment were made). It was claimed that Shri Naresh Seth wrote directly to the Hon'ble High Court mentioning his no objection and therefore, the amount of Rs.1.50 crores made to him. The crux of the argument was that the shareholders were made 4 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
the payments so that they may not create any problem and their shares were obtained through pledge agreements. It was explained that rest of the share holder were paid Rs.5 crores and they pledged their shares. Our attention was invited to page 118 of the paper book evidencing their signature. It was explained that the payment was made to obtained their shares for which our attention was invited to the indemnity filed by these parties. It was empathetically asserted that if the amount of Rs.6.5 crores would not have been paid to these parties, the assessee was likely to lose Rs. 25 crores, therefore, the purpose of payment is not in doubt. The amounts were duly claimed to be reflected in the books of account of the assessee (page-14 of the paper book and also page-24). It was explained that the payments were made through account payee cheque so as to get no objection from these parties. It was explained that there is no evidence till today that the amounts were received back from these parties and once Hon'ble Delhi High Court decided the issue in favour of the assessee, the purpose was achieved. All parties were claimed to have filed confirmation, therefore, their identity is not in dispute. The 5 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
entire transaction was claimed to be concluded during Assessment Year 2008-09, so the payment were made. The crux of the argument is that to safeguard business interest the payment were made. It was explained that the expenses so incurred were capitalized for which our attention was invited to page-17(Schedule-XII) as the entire amount was closing WIP.
2.2. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee company, during the relevant time, carried out business of land development and construction of building. The assessee company purchased/obtained development rights of a property at Dahisar vide agreement dated 29/10/2004 with Seth Industries Pvt. Ltd. Subsequent to the agreement (as per the assessee) the assessee company came to know that there were dispute among the shareholders of Seth Industries and such shareholders had filed petition before the Hon'ble High Court of Bombay for relief and winding up of Seth Industries. In the event of winding up of Seth Industries, it would have affected the business rights of the assessee 6 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
company over the property and in order to clear the title of the property from these legal entanglements, the assessee made payments through account payee cheque to various shareholders aggregating 6.50 crores. The crux of argument of the assessee is that the payment was made to such litigating shareholders to safeguard the business interest in order to secure Dahisar Land free from all legal encumbrances so that they can be developed as a housing project and in the absence of such payments, the whole project including other payments would have also jeopardized and as such the payment was made for commercial consideration. While framing the assessment u/s 143(3) of the Income Tax Act, 1961 (hereinafter the Act) from the notes of accounts to the audit report, it was found by the Ld. Assessing Officer that the assessee made payment of Rs.6,50, 50,000/- to various shareholders from whom development rights were obtained. The assessee was asked to justify the payment of this amount with complete addresses of the person to whom such payments were made along with documentary evidence. The assessee made the following submissions:-
7 ITA No.428/Mum/2016
M/s Cowtown Land Development Pvt. Ltd.
"1. The assessee company is engaged in the business of development and construction of residential building. The assessee company purchased development rights for property at Dahisar, Dist, Thane vide Development Agreement dated 29 October 2004 with Seth Industries Pvt. Ltd. ('Seller Company'). The said agreement was registered with the Sub-Registrar of Assurance at Thane under Serial No.8752 of 2004. The Seller Company was declared sick company under the provisions of section 20(1) of SICA, 1985. The appeal filed before AAIFR was dismissed of AAIFR.
In 2005, the above facts came to the knowledge of the assessee company. Due to various disputes among shareholder the certain shareholders filed a company petition before the Bombay High Court in 2005 for various reliefs including winding up of the Seller Company. In this context, we enclose herewith the copy of index filed with the Bombay High Court including synopsis and letter received from the shareholders. It can be observed from the letter received from Shri Janak Seth where the sale of developments rights by the seller company to the assessee company has been challenged.
In the meantime, the assessee company had made various payments to the Seller company for Development rights on land belonging to the seller company. Now to remove hindrance of all legal cases and winding up petition pending before Delhi High court and to safeguard interest of the company in securing possession and clear title to Dahisar Land, the assessee company made payments to various shareholders aggregating to Rs.6.5 crores. After making above payments to the shareholders, the assessee company obtained NOC from the shareholders for filing same before Delhi High Court so that seller company can be taken outside the purview of BIFR.
We humbly submit that additional payments made to the shareholders are for the purpose of securing Dahisar Land free from any legal cases so that same can 8 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
be developed as a housing project for sale to customers. Without such payments to shareholders, all expenditure incurred including towards development would have been also jeopardized had the seller company been wound up. Hence, it was utmost necessary that all shareholders comply with court directives of filing affidavit for no objection before the Delhi High Court. As such, there was commercial and business consideration in making payments to the shareholders of Rs.6.5 crore in addition to the payment to the seller company. We submit that reliance can be placed on the following decisions:-
A. CIT vs Delhi Safe Deposit Ltd. (1982) 133 ITR 756 where it is held that to settle dispute amicably, to save its reputation and to protect source of income, any payment made as incidental to his trade for the purpose of keeping trade going and of making it pay and not in other capacity them of a trader.
B. Bombay Steam Navigation Co. vs CIT (1953) 56 ITR 52 where it is held as allowable expenses if expenditure is made under a integral part of the conduct of business.
C. CIT vs Sinnar Bidi Udyog Ltd. (2002) 123 taxman 559 (Bom) where it is held that payment made to settle controversy, the assessee accepted pat of employees claim and made additional retirement compensation."
2.3. It is also noted that the assessee vide another communication 23/12/2010 submitted the copies of letter acknowledging the payments amounting to Rs.6.50 crores and confirmation from recipient of such payments were filed. This contention of the assessee was declined by the Ld. Assessing Officer on the ground that such confirmation is not on Stamp Papers. It is noted that on these 9 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
confirmation, the details like cheque Nos., date and bank and the amount paid were duly mentioned. This factual matrix is oozing out from the assessment order itself. It is also noted that the assessee also filed affidavit from One Shri Naresh Seth (one of the recipient). The Ld. Assessing Officer disallowed the claimed expenditure of Rs.6,50,50,000/- debited in the Profit & Loss Account. 2.4. On appeal before the First Appellate Authority, the factual matrix was considered and on examining the facts held/observed (para 4.3 onwards) as under:-
4.3. Decision I have considered the assessment order, the submissions made by the appellant and the cases relied upon. 4.4. The appellant has entered in to a development agreement on 29/10/2004 with Seth Industries Private Limited, proprietor of M/s. Simplex Woolen Mills, tile owners and other confirming parties in respect of property comprising of land, buildings at Village Mahaianwadi in Taluka Thane for a consideration of RS.14.50 crores. This was followed by the Supplemental Agreement dated 22-2-2006 and a deed of conveyance made on 8/11/2006 for purchase price agreed to be Rs.
23,04,80,219/-. From the submissions made by the appellant, it is noted that payment of RS.6.50 crores has been made to seven shareholders in respect of which supporting documents aye been filed in the course of assessment as well as appeal proceedings, which include copies of letters acknowledging, payments, receipts from the company amounting to RS.6.50 crores, copies of 10 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
letters dated 13-2-2007 addressed to the appellant company from the said shareholder stating that they were satisfied with the sale deed of Simplex Woolen Mills at Dahisar, Mumbai, copy of affidavit filed by Mr Naresh Seth on behalf of Seth industries Ltd and other petitioner, dated 13/2/2007 before the High Court of Delhi requesting to withdraw their application in respect of CWP No. 3326 of 1992. The appellant has also filed copy of Deed of pledge dated 14/2/2007 wherein the Pie gee Shri iI1angal Prabhat Lodha agreed to lend and advance to the Pledgors a sum of Rs. 5 crores for a period of six months from the date of deed together with interest at the rate of 6% per annum and the pledgors Mrs Shukla Seth, Mrs. Bela Sahcal. Ms. Nayantara Sahgal, Ms. Vasudna Sahgal, Mrs Benu Bharany, Mr Udhav Bharany and Mr. Umed Bharany, have agreed to pledge 2750 number of shares of Seth Industries Pvt. Ltd with the pledgees. This has been followed by a declaration cum indemnity dated 14.3.2007 with respect to shares pledged vide deed of pledge dated 14.2.2007 and Addendum to pledge dated 15.2.2007 The appellant has also filed copy of High Court of Delhi order dated 07.03.2007 in WP(C) 3326/1992 setting aside the order of BIFR and AAIFR recommending winding up of Seth Industries Ltd.
4.5. I find merit in the submissions made by the appellant that the payment of RS.6.50 crores was made to various shareholders of the Seth Industries Pvt Ltd in order to ensure the withdrawal of various litigations and suits filed before the High Court of Delhi and High Court of Mumbai so that the development of the said property could be undertaken by the appellant company without any hindrance. Therefore, the appellant has rightly claimed it as business expenditure towards the cost of land/premium for development rights since these payments were made to protect the business interest of the appellant and to safeguard itself from the losses, following the disputes from the shareholders. The objection taken by the AO. that the confirmation are not on stamp paper is found to be without merit in light of the supporting evidence, as noted above filed by the appellant.
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M/s Cowtown Land Development Pvt. Ltd.
4.6. Further, I am inclined to agree that the pledge deed is only a device to secure he shares of the shareholders and to ensure withdrawal of objection filed by these shareholders. The said agreement lapsed due to expiry of time in F.Y.2007-08 relevant to AY.2008-09. Therefore, the claim of expenditure for AY.2008-09 is found to be correct. The appellant has claimed the expenses in schedule XII (i.e. land construction and development) of the profit and loss account. In view of the above discussion, the aid expenditure is held to be towards business expenditure incurred for AY. 2008-09. The addition, made on the ground that the cost of RS.6.50 crores of land/premium of developments rights was unsubstantiated expenditure and not incurred during the previous year 2007-08 relevant to AY. 2008-09, is found to be without merit. Accordingly, the addition of Rs.6,50,50,000/- is deleted and this ground is allowed." 2.5. If the aforesaid finding of the Ld. Commissioner of Income Tax (Appeal) is analyzed, there is no dispute that the amount of Rs.6.50 cores was made to seven litigating shareholders even the Ld. Assessing Officer has not disputed the payments. There is uncontroverted finding (para 4.4) of the impugned order that supporting documents were duly filed during assessment stage as well as First Appellate Stage, which includes copies of letters acknowledging payments, wherein, such recipients were satisfied with the sale deed of Simplex Woolen Mills at Dahisar and one of the recipient namely Shri Naresh Seth (on behalf of Seth Industries and other petitioners) filed 12 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
affidavit dated 13/02/2007 before the Hon'ble High Court of Delhi requesting to withdraw the application in respect of CWP No.3326/1992. The assessee also filed copy of deed of pledge dated 14/02/2007, wherein, the pledgee agreed to land and advance to pledgers a sum of Rs.5 cores to Mrs. Shukla Seth, Mrs. Bela Sahgal, Ms. Nayantara Sahagal, Ms. Vasudha Sahgal, Mrs. Benu Bharny, Mr. Udhav Bharany and Mr. Umed Bharany and all the person agrees to pledge 2750 shares of Seth Industries Pvt. Ltd. with the pledges, followed by a declaration cum indemnity dated 14/03/2007 with respect to pledge shares vide deed of pledge dated 14/02/2007 and addendum to pledge dated 15/02/2007. The assessee before the revenue authorities including First Appellate Authority and also before this Tribunal copy of the order of the Hon'ble Delhi High Court dated 07/03/2007 in WP(C)3326 of 1992 setting aside the order of BIFR and AAIFR recommending winding up of Seth Industries Ltd. The totality of facts clearly indicates that the payment of Rs.6.50 cores was made to various shareholders of Seth Industries Pvt. Ltd. in order to withdrawal of various litigations and suits filed 13 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
before the Hon'ble High Courts of Delhi & Bombay, so that development of the said property could be undertaken by the assessee company. In view of this uncontroverted finding, we are in agreement with the conclusion of the Ld. Commissioner of Income Tax (Appeal) in allowing the claimed business expenditure towards cost of land/development rights to safeguard its business interest.
3. Now, we shall deal with the expenditure with the help of certain case laws from Hon'ble High Courts/Hon'ble Apex Courts. Broadly speaking, where litigation expenses are incurred for the purposes of creating, curing or completing the title of the assessee to the capital, then expenses are in the nature of capital expenditure and if the litigation expenses are incurred to protect the business of the assessee it may considered as revenue expenditure (Dalmia Jain Company Ltd. vs CIT (1971) 81 IR 754 (SC). Expenditure on civil litigation commenced or carried out by an assessee for protecting the business is admissible as a business expenditure, where the object of the litigation was to secure a declaration that certain orders as so far as they sought to put to restriction upon the rights of the assessee 14 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
to carry on its business in the manner in which it was accustomed to do so and to prevent enforcement of such orders, the expenditure incurred in that behalf would, without doubt, be expenditure laid out wholly and exclusively for the purpose of business of the assessee (Minakshi Mills Ltd. vs CIT 63 ITR 207)(SC)). From these decisions, it follows that:-
(a) Litigation expenses to secure an order from the Court for enabling an assessee to carry on its business without interference is an allowable deduction
(b) Expenditure incurred to resist, in civil proceedings, the enforcement of measure, legislative or executive, which imposes restrictions on the carries of a business or to obtain a declaration that the measure was invalid, would, if other conditions was satisfied, be admissible deduction and
(c) The deductibility of expenditure incurred in prosecuting a civil proceedings depends upon the nature and purpose of civil proceedings in relation to business of the assessee and cannot be affected by the final outcome of that business. (Birla Cotton Mills & Spinning and weaving Mills 15 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
Ltd. vs CIT 64 ITR 568, 586(Cal.) and affirmed by Hon'ble Apex Court in (1971) 82 ITR 166 (SC). This our view find support from the ratio laid down in following cases.
(i) CIT vs Bengal Assam Investors Ltd. (1969) 72 ITR 319
(ii) Premier Construction Co. Ltd. vs CIT (1966) 62 ITR 176 (Bom.)
(iii) Transport Co. Pr. Ltd. vs CIT (1962) 46 ITR 1009, 1016 (Mad.)
(iv) CIT vs Maharajadhiraja Sir Kameshwar Singh (1942) 10 ITR 214 (PC)
(v) Southern vs. Borax Consolidated Ltd. (1942) 10 ITR (Supp.) 1 (KB),
(vi) Associated Portland Cement Manufacturers Ltd. vs Kerr. (1946) 27 Tax Cas 103 117 (CA),
(vii) Ebrahim Aboobaker v. CIT (1971) 81 ITR 664 (Bom.) 3.1. If the provision of the Act, which is corresponding to the section 12(2) of 1922 Act, used in this context, the expression "incurred solely for the purposes of making or earning such income", the use of expression "laid out or expanded wholly and exclusively" in section 57(iii) of the 1961 Act is to secure uniformity with the language of section 37(1) of the 1961 Act. At the same time, the expression, "for the purposes of business or profession"
has a wider implication then the expression "for the 16 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd. purposes of making or earning income" used in section 57(iii) of the Act. The purpose contemplated by section 57(iii) is more specific in character. So far as, reasonableness of the expenditure envisaged by section 57(iii) depends upon the facts of particular case. The Hon'ble Court in CIT vs New Savan Sugar and Good Refining Co. Ltd. (1990) 185 ITR 564, 571 (Cal.) held that it is for the Tribunal to decide whether the expenditure is wholly incurred for the purpose of keeping the assessee company in operation and earning income in as much as the concept "wholly" pertains to quantum of the money expended. The Hon'ble Court further observed even if a particular expenditure is un-remunerative, such expenditure is nonetheless a proper deduction, if such expenditure is made wholly and exclusively for the purposes of earning such income.
3.2. If the issue is analyzed in the light of section 37(1) of the Act, broadly speaking, where litigation expenses are incurred for purposes of creating, curing or completing the assessee's title to the capital, then the such expenses are in the nature of capital expenditure. On the 17 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd. other hand, if the litigation expenses are incurred to protect the business of the assessee, it must be considered as revenue expenditure. This proposition is supported by Hon'ble Apex Court in Dalmia Jain & Co. Ltd. vs CIT (1971) 81 ITR 754 (SC) and Meenakshi Mills Ltd. vs CIT (1967) 63 ITR 207 (SC). To be more precise, the type of litigation, object or purpose of the litigation has to be ascertained from the facts of each case. If the object or purpose is to defend or maintain existing title to the capital asset of the business of the assessee, the expenditure would be of revenue in nature. The ratio laid down in following cases supports our view:-
a) CIT v. Bengal Assam Investors Ltd., (1969) 72 ITR 319, 325 (Cal);
b) CIT v. Life Insurance Corporation of India, (1966) 62 ITR 827 (Cal);
c) Premier Construction Co. Ltd. v. CIT, (1966) 62 ITR 176 (Bom);
d) Liberty Cinema v. CIT, (1964) 52 ITR 153, 167 (Cal); Transport Co. Pr. Ltd. v. CIT, (1962) 46 ITR
e) 1009, 1016 (Mad); Transport Co. Ltd. v. CIT, (1957) 31 ITR 259, 266-7 (Mad);
f) G. Veerappa Pillai v. CIT, (1955) 28 ITR 636 (Mad); 18 ITA No.428/Mum/2016
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g) CIT v. Raman & Raman Ltd.,(1951) 19 ITR 558, 569-70 (Mad). Also see, Lachminarayan Modi v. CIT, (1955) 28 ITR 322 (Orissa);
h) J. B. Advani & Co. Ltd. v. CIT, (1950) 18 ITR 557 (Bom);
i) Mahabir Prasad & Sons v. CIT, (1945) 13 ITR 340 (Lah);
j) Central India Spinning, Weaving & Manufacturing Co. Ltd. v. CIT, (1943) 11 ITR 266 (Nag);
k) CIT v. Maharajadhiraja Sir Kameshwar Singh (1942) 10 ITR 214 (PC)
l) Southern V. Borax consolidated Ltd. (1942) 10 ITR (Sup) 1 (KB)
m) Associated Portland Cement Manufacturers Ltd. v. Kerr, (1946) 27 Tax Cas 103, 118 (CA)
n) Ebrahim Aboobaker v CIT (1971) 81 ITR 664 (Bom.) 3.3. In the cases of defending the criminal litigation, we find that Section 37(1) does not make any distinction between expenditure incurred in civil litigation and that incurred in criminal litigation. All that the court has to see is whether the legal expenses were incurred by the assessee in his character as a trader, in other words, whether the transaction in respect of which proceedings are taken arose out of and was incidential to assessee's business. Further, it is to be seen whether the expenditure was bonafidely incurred wholly and exclusively for the purpose of the business [see, CIT v. Birla Cotton Spng. & 19 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
Wvg. Mills Ltd., (1971) 82 ITR 166 (SC); CIT v. Dhanrajgirji Raja Narsingirji, (1973) 91 ITR 544, 549 (SC)]. 3.4. So far as, issue of quantum of the expenditure to be incurred is concerned, we are of the view, it is for the assessee to decide how best to protect his own interest. It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. The ratio laid down in CIT v. Dhanrajgirji Raja Narsingirji, (1973) 91 ITR 544 (SC) supports our view. In that case His Lordship observed:
"It is true that in some of the cases this court has held that an expenditure incurred by an accused assessee to defend himself against a criminal charge did not fall within the scope of section 1O(2)(xv)*. Those decisions were rendered on the facts of those cases. That is not the position in this case."
Criminal litigation may be prosecuted to put pressure on the accused to make good the loss caused to the assessee, and expendi-ture incurred therefore, if having nexus with the profits or business, are allowable deduction Saharanpur Electric Supply Co. Ltd. v. CIT, (1971) 82 ITR 405 (All). Assessee defending himself-Expenses incurred by a person exercising a trade or profession in defending 20 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
himself in a criminal prosecution, which arises out of his business or professional activities, cannot be deducted as business expenditure in the computation of his business income CIT v. H. Hirjee, (1953) 23 ITR 427, 431 (SC); CIT v. Gasper & Co., (1940) 8ITR 100 (Rang)]. In Hirjee's case [23 ITR 427], the assessee incurred expenditure in defending prosecution under the Hoarding and Profiteering Ordinance, 1943 (No. 35 of 1943), for selling goods at black market prices. Such expenditure was held not allowable. Similarly, expenditure incurred by a firm carrying on export and import business in defending one of its partners for having acquired foreign exchange and not fully utilizing it for import were held not allowable although the partner was ultimately acquitted [CIT v. Chaman Lal & Bra .(1970) 77 ITR 383 (Delhi)]. This case was, however, distinguished in CIT v. Ahmedabad Controlled Iron & Steel Assn. Pr. Ltd., (1975) 99 ITR 567 (Guj), where expenses incurred by company in defending its managing director were held allowable. In order to so claim such expenditure the assessee has not only to prove that the expenditure was incidental to the business but also to show that the 21 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
expenditure was laid out or expended wholly and exclusively for the purpose of the business [Indermani Jatia v. CIT, (1951) 19 ITR 342 (All) on appeal, see, (1959) 35 ITR 298 (SC)].
3.5. Assessee defending an employee, etc.-When an employee is prosecuted in respect of transaction in the course of his employment, expenditure incurred in or about his defense is incurred for the protection of the good name of the business and is an allowable business expenditure [ J.B. Advani & Co. Ltd. v. CIT & EPT, (1950) 18 ITR 557 (Bom) considered in CIT v. H. Hirjee, (1953) 23 ITR 427 (SC), where the correctness of its ultimate decision was not doubted; J.N. Singh & Co. Pr. Ltd. v. CIT. (1966) 60 ITR 732 (Punj)]. Legal expenses incurred by assessee-company, a sugar mill, in defending a criminal prosecution launched against its director-manager and some employees on charge of conspiracy between the assessee and the railway employees to give and accept bribes in regard to transport of sugarcane from various stations to mill were held to be allowable deductions [Lakshmiji Sugar Mills Co. Ltd. v. CIT, (1967) ITR (Sh N) 21 (Delhi)]. Similarly, expenditure 22 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
incurred in defending a criminal case against the directors and principal officers of the assessee-company on the allegation that the vegetable oil produced by the company did not contain 5% till oil as required by the Government rule was held to be an expenditure incurred with a view to proving the quality and standard of the manufactured goods produced by the assessee and, therefore, deductible [Rohtas Industries Ltd. v. CIT, (1968) 67 ITR 361 (Pat)]. 3.6. In Ananda Marga Pracharaka Sang ha v. CIT [(1996) 218 ITR 254, 258, 2 (Cal)] , the legal expenses incurred by the assessee for defending Marga Guru, the president of the association and other members of the association against criminal charges have been held allowable as a permissible expenditure while computing the income of the assessee. However, on the question of allowability of legal expenses incurred by the assessee for defending criminal charges arising out of the person civil rights and unconnected with the aims and objects of the assessee-organization such, has been remanded to the Tribunal (p. 273) to determine that whether such expenses 23 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
were related to the society's activity and then to decide such question about their allowability. 3.7. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel and the judicial pronouncements discussed hereinabove, if kept in juxtaposition and analyzed, we find that even the Ld. Assessing Officer has not disputed of making the payment or incurring the expenditure to various share holders of Seth Industries Pvt. Ltd.. One of the objection raised by the Ld. Assessing Officer is that the confirmations were not filed on stamp papers. We are of the view that it is not the requirement of law that every transaction has to be confirmed on stamp papers only. The payments were made through account payee cheques and the recipient parties duly acknowledged the receipt of such payments and even Shri Naresh Seth filed a affidavit on behalf of the petition shareholders (page-109) of the paper book) before Hon'ble Delhi High Court and the application was withdrawn by him (page-110 of the paper book). The deed of pledge on 24 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
behalf of the recipients is available at page-111 of the paper book, wherein, the impugned amount was received by them. At page-117 of the paper book, all the recipient has duly put the signatures and the list of shares is available at page-118 of the paper book. So far as, the receipt of the amounts is concerned, the name of the pledgor, amount and the pay order along with date is available at page-119 and all the recipient have put their signature on the revenue stamp as is evidenced at page-120 of the paper book. The declaration cum indemnity of all the recipients/concerned parties is available at pages 121 to 130 of the paper book. We have also perused the orders from Hon'ble High Court of Delhi and Bombay, which clearly indicates that the assessee duly paid the impugned amounts in lieu of the shares of the litigating parties and the expenses were incurred to safeguard the business interest of the assessee, which is permissible under the Act. No evidence in any manner has been adduced by the Revenue contradicting the factual finding recorded by the Ld. Commissioner of Income Tax (Appeal). 25 ITA No.428/Mum/2016
M/s Cowtown Land Development Pvt. Ltd.
It is further noted that the assessee entered into a development agreement on 29/10/2004 with Seth Industries Pvt. Ltd. at a consideration of Rs.14.50 croers followed by supplemental agreement dated 22/02/2006 and deed of conveyance made on 08/11/2006 at agreed price of Rs.23,04,80,219/- and the amount of Rs.6.50 crores was made to the shareholders in respect of which supporting documents have been duly filed. Even through the affidavit filed by Shri Naresh Seth on behalf of the Seth Industries and other petitioner dated 13/02/2007 before the Hon'ble High Court of Delhi requesting to withdraw their applications in respect of CWP No.3326 of 1992 (as mentioned earlier) and the assessee also filed copy of deed of pledge dated 14/02/2007. These parties agreed to pledge 2750 number of share of Seth Industries with the pledgee followed by a declaration cum indemnity dated 14/03/2007. It is evidently clear that the payment of Rs.6.50 crores was made to these shareholders of Seth Industries Pvt. Ltd. for withdrawal of litigations and suits filed before Hon'ble High Court of Delhi and Bombay, so that the development of the said property could be 26 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
smoothly undertaken without any hindrance, consequently, the expenditure was incurred to protect the business interest of the assessee and further to safeguard the assessee itself for further losses, resultantly, we find no infirmity in the order of the First Appellate Authority. The same is affirmed. The appeal of the Revenue is, therefore, dismissed.
Finally, the appeal of the Revenue is dismissed. This Order was pronounced in the open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 30/11/2017.
Sd/- Sd/-
(G. Manjunatha) (Joginder Singh)
लेखा सद#य / ACCOUNTANT MEMBER या$यक सद#य / JUDICIAL MEMBER
मब
ंु ई Mumbai; +दनांक Dated : 27/12/2017
f{x~{tÜ? P.S/. न.स.,
आदे श क %$त'ल(प अ)े(षत/Copy of the Order forwarded to :
1. अपीलाथ/ / The Appellant
2. 01यथ/ / The Respondent.
3. आयकर आय3 ु त,(अपील) / The CIT, Mumbai.
4. आयकर आय3 ु त / CIT(A)- , Mumbai
5. 5वभागीय 0 त न ध, आयकर अपील&य अ धकरण, मब ुं ई / DR, ITAT, Mumbai 27 ITA No.428/Mum/2016 M/s Cowtown Land Development Pvt. Ltd.
6. गाड फाईल / Guard file.
आदे शानस ु ार/ BY ORDER, स1या5पत 0 त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मब ुं ई / ITAT, Mumbai