Income Tax Appellate Tribunal - Delhi
Satinder Kapur, New Delhi vs Acit, New Delhi on 12 January, 2018
In the Income-Tax Appellate Tribunal,
Delhi Bench 'C', New Delhi
Before : Shri H.S. Sidhu, Judicial Member And
Shri L.P. Sahu, Accountant Member
ITA No. 5105/Del./2015
Assessment Year: 2011-12
Satinder Kapur, C-39, Anand vs. ACIT, Circle 49(1),
Niketan, New Delhi. New Delhi.
PAN - ANVPK 7040C
(Appellant) (Respondent)
Appellant by Sh. Arvind Kumar, Advocate
Respondent by Sh. Arun Kumar Yadav, Sr. DR
Date of Hearing 06.11.2017
Date of Pronouncement 12.01.2018
ORDER
Per L.P. Sahu, A.M.:
This is an appeal filed by the assessee against the order of ld. CIT(A)-20, New Delhi dated 18.05.2015 for the assessment year 2011-12 on the following grounds :
1. That the Ld. CIT (A) has erred in law and in facts in holding that the litigation settlement expenses are not an allowable deduction u/s 37(1) of the income Tax Act ,1961 as it is not incurred wholly and exclusively for the purposes of the profession of the assessee /appellant.
2. That the Ld. CIT(A) has erred in law and in confirming the adhoc disallowance of 10% of expenses on vehicle repair and maintenance, interest on car loan, conveyance and depreciation etc amounting to Rs.
128617 made by the assessing officer on surmises and conjecture, without pointing out any defects in the books of accounts and without providing any opportunity to explain the same."
ITA No. 5105/Del./2015 2
2. The brief facts of the case are that the assessee filed his return of income on 29.09.2011 declaring a total income of Rs. 37,94,050/-. The case was selected for scrutiny and the notice u/s 143 (2) was issued on 16.08.2012 which was duly served upon the assessee within the stipulated time and other statutory notices were also issued to the assessee. During the year under consideration, the assessee derived income from profession and other sources. He is a Lawyer.
3. During the course of scrutiny proceedings the Assessing Officer observed that the assessee has debited litigation settlement expenses of Rs. 39,01,750/- in his income and expenditure account. The Assessing Officer asked to explain whether these expenses were incidental to business and profession. In response to the above quarry, the Authorized Representative of the assessee submitted a detailed written submission. In his written submissions he submitted that the assessee had to incur expenses on account of one time settlement for release of personal guarantees given for loan taken by a company i.e. M/s India Magnetics Limited for which he was guarantor. The loan was taken from a consortium of financial institutions and banks including IFCI, IDBI, Kotak Mahindra Bank etc. In view of default by the borrower company which subsequently went into liquidation and as the ITA No. 5105/Del./2015 3 lenders were unable to recover the complete amount from the borrower, the lenders enforced the personal guarantee of the assessee before the Debt Recovery Tribunal due to which the assessee had to spend considerable time and resources in the litigation process apart from loss of reputation and the possibility of detention as per the provisions of the DRT Act. 1993, section 25 which is quoted in written submissions.
4. The AR of assessee also relied on some case laws which were filed before the Assessing Officer. The assessing officer did not accept the arguments and submissions filed by the assessee before him and he distinguished the case laws relied by the assessee that on the facts and circumstances of the case it is not applicable. He also concluded that the company M/s India Magnetics Limited is not related to the business or profession of the assessee and the assessee has not got any benefit from the above named company. The assessee is a practicing advocate in the Delhi High Court, Supreme Court and Arbitral Tribunals and proprietor of Satinder Kapoor & Associates. When the company M/s India Magnetics Limited defaulted and subsequently went into liquidation and lenders enforced the personal guarantees of the assessee, the assessee incurred expenses which were in no way related to the business or profession of the assessee. ITA No. 5105/Del./2015 4 Therefore, he disallowed the claim of the assessee under section 37 (1) of the Income Tax Act, since it was not expended wholly and exclusively for the purpose of business or profession.
5. The Ld. Assessing Officer also disallowed 10% lump sum adhoc disallowance under section 37 (1) being the personal nature and which are not fully utilized for the purpose of the business for claiming expenditure on conveyance, depreciation , interest on car loan, telephone, vehicle running and maintenance expenses and the total disallowance was made of Rs. 128617/- which is 10% of the total expenditures under the above heads of expenditure.
6. Aggrieved by the order of the Assessing Officer the assessee appealed before the first appellate authority and he made detailed submissions and relied on some case laws also before him. The Ld. CIT (A), after considering the detailed submissions of the assessee, confirmed the action of the Assessing Officer and he also relied on some case laws. Aggrieved by the order the CIT (A), the assessee is in appeal before the tribunal.
7. The Ld. AR submitted a written synopsis before us which is as under :
"1. That the reasoning of the Ld. AO to disallow the claim of one time settlement expense is that the Guarantee given by the assessee to the Consortium of Banks for the loan taken by M/s India Magnetic Ltd. was personal in nature and therefore the ITA No. 5105/Del./2015 5 said expense made to discharge the said Guarantee is a personal expenditure incurred in his personal capacity and therefore is not allowable as deduction u/s 37(1) of the Act.
1.1 It is humbly submitted before the Hon'ble ITAT that the allowability or otherwise of the expenditure claimed by an assessee in his business/ profession is to be examined with reference to the point in time and the predominant purpose for which the expense is incurred and therefore the fact that loan was taken by the assessee standing in as Personal Guarantee in his personal capacity, is not a relevant factor to determine the allowability of the claim of such expense.
2. That the finding of the Ld. CIT (A) based on the reasoning that the facts of the appellant's case is similar to the case of Shanti Bhushan (Supra) , is again flawed for the reason that the case of Shanti Bhushan was related to allowability of expenses incurred on repair of his impaired heart which would thus add to the longevity and efficiency of a human being per se, as observed by Hon'ble Court in para 22.2 of the said decision. The Hon'ble held in the said decision that the improvement in the efficiency of the human being would be in every activity undertaken by a person and thus there is no direct or immediate nexus between the expenses incurred by the assessee on the coronary surgery and his efficiency in the professional field per se. That therefore such claim of deduction is not allowable u/s 37(1).
3. The Hon'ble Court however by way of an example observed in this every para that in case of an actor undertaking plastic surgery to prevent age being reflected on the screen, it could well be argued as regards the claim of deduction on account of such plastic surgery.
2.1 It is humbly submitted before the Hon'ble Tribunal the case of the appellant, who is in active profession of law including International Arbitration, the onetime litigation settlement expense made in order to avoid needless detraction in DRAT proceedings which affected his professional commitments and took considerable amount of time away from his profession, was a commercially expedient decision taken by him to bolster his professional receipts and also to buy mental peace which is so very essential to his profession . Needless to add that in the facts of the case the appellant had also received a legal notice from DRAT to show cause as to why he should not be arrested, and in case of the eventuality of his arrest it was his reputation as an Advocate / Lawyer which was at stake and once such reputation is tarnished it would have affected his professional income for all times to come, which would have been irretrievable damage to the income generating source itself.
2.2 Reliance is also placed in this regard by the Appellant on the test laid down by the Hon'ble High Court of Bombay on para 16 of the decision in case of Dhimant Hiralal Thakar Vs. CIT (64 taxmann.com 177), which is reproduced as under:-
"The words used in Section 37(1) of the Act is wholly and exclusively for the purposes of business. In this case, the finding of fact is that it is incurred for the personal purposes. Be that as it may, the words used are "wholly and exclusively for the ITA No. 5105/Del./2015 6 purposes of business or profession". In normal understanding the word "wholly" would mean entirely and the word "exclusively" would mean solely. Thus, any element of expenditure not laid out entirely and solely for the purpose of profession would not be covered by Section 37(1) of the Act. One has to examine this from the perspective/prism of the person who does makes the expenditure. In this case, the benefit, if any, of improvement in the eyes may/would also ensure to the applicant not only in the profession but also in all other walks of life. However, the test would really be whether in the absence of being in business or profession, would the applicant have incurred the expenditure to improve his eyes and the answer has to be 'yes1 keeping in view the normal conduct of human affairs. This is because effective eye sight is a necessity for living a life of a complete human. Therefore, in this case the expenditure is personal and incidental benefit if any is to the profession carried out by the applicant. The Supreme Court in the case of(d) "Delhi Safe Deposit Co. Ltd. (133 ITR 756)"
considering as to what would be the true test of the expenditure laid out wholly and exclusively for the purposes of trade or business held that it would be an expenditure incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than of a trader. "
2.3 Reliance is also placed by the Appellant on the test laid down by the Hon'ble Supreme Court of India in the decision in case of CIT Vs. Chandulal Keshavlal & Co, (38 ITR 601), the relevant part of which is reproduced as under:-
"In deciding whether a payment of money is a deductible expenditure one has to take into consideration question of commercial expediency and principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party. Another test is -whether the transaction is properly entered into as a party of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee. In the instant case the finding was that it was laid out for the purpose of the assessee's business and there was evidence to support this finding. In the instant case in order to justify deduction the sum must be given up for reasons of commercial expediency; it may be voluntary, but so long as it is incurred for the assessee's benefit the deduction would be claimable."
F. As regards the ad-hoc disallowance of vehicle related expenses etc. @ of 10% made by the AO and confirmed by the Ld. CIT it is submitted that the same has been made purely on ad-hoc basis and since the books and account of the appellant have not been rejected, there no basis to disallow the claim in case of professional who has to necessarily incur such expenses in the course of his profession and which expenses are wholly and exclusively for the purpose of business / profession. G. It is therefore humbly submitted before the Hon'ble Tribunal to allow both the grounds of appeal, for which the appellant shall ever pray." ITA No. 5105/Del./2015 7
8. On the other hand, the Ld. Departmental Representative relied on the orders of the lower authorities. He submitted that expenditure incurred by the assessee is one-time settlement for personal guarantee given for obtaining loan by M/s India Magnetics Ltd. The assessee has not got any direct and indirect benefit from this company which is taxable in the hands of the assessee. There is also no direct and indirect nexus between the business or professions of the assessee and the impugned expenses. The case laws relied by the assessee are not applicable and distinguishable on facts of the assessee's case because there is no direct or indirect nexus with assessee business from the company in which he was a guarantor. In view of these, the lower authorities has done good reasoned order and it does not require any interference and the case laws relied by the lower authorities are squarely applicable.
9. After hearing both the sides and perusing the materials available on record and order of the authorities below. The authorized representative of the assessee reiterated the submissions made before the lower authorities. We have to decide here whether the amount in question can be treated as expenditure laid out or expended wholly and exclusively for the purpose of the business or profession of the assessee, which is admissible as a deduction ITA No. 5105/Del./2015 8 under section 37. The facts found in the present case are that the assessee was carrying on profession of advocate. The assessee had given the guarantee for obtaining loan by the Company M/s India Magnetics Ltd. There is no direct/indirect nexus between the assessee's profession and the company for which he gave his guarantee. The assessee is also unable to prove that the assessee has received any direct indirect benefit for becoming a guarantor for the above company. The ld. CIT(A) has, therefore, done good reasoned order on this account, which needs no interference. For the sake of convenience, the relevant findings of the ld. CIT(A) are reproduced as under :
5.1. I have carefully considered the assessment order and submissions thereof. The facts of the case as per assessment order are that the assessee had incurred an expense of Rs. 39,01,750/- as litigation settlement expenses. The details regarding the same were called for and filed by the assessee. In brief, the assessee submitted that the expense were incurred on account of one time settlement for release of a personal guarantee given for loan taken by a company i.e. M/s India Magnetics Limited from a consortium of financial institutions and banks. In view of the default by the borrower company which subsequently went into liquidation and as the lenders were unable to recover the complete amount from the borrower, the lenders enforced the personal guarantee of the appellant before the Debt Recovery Tribunal due to which the appellant faced the possibility of detention as per sec 25 of the DRT Act 1993. The assessee offered for one time settlement in lieu of release of his personal guarantee and ultimately settled the dispute. It was claimed by the assessee that the expense had been incurred wholly and exclusively for business purposes and was allowable u/s 37(1) of the Act in view of the fact that it was commercially expedient from the appellant's professional perspective as his professional reputation and standing were at stake. The assessee would have been liable to arrest and detention had the matter not been settled. The assessee claimed that the expense was not for infringement of any law and was a purely commercial transaction and was of revenue nature as it did not create any benefit of enduring nature or result in a new asset. The appellant submitted the relevant documents as a proof of the guarantee and the settlement arrived at with the consortium of bankers, before the Ld. Assessing Officer. The aforesaid contention of the assessee were not accepted by the Assessing Officer and the expense was disallowed u/s 37(1) of the income tax act 1961 on the basis that the expense were in no way related to the business as the company which defaulted is not related to the business or ITA No. 5105/Del./2015 9 profession of the appellant and hence the amount is not expended wholly and exclusively for the purposes of business or profession.
In appeal the appellant reiterated his submissions made before the Assessing Officer and claimed that the expense had been incurred for the purpose of business. The necessary conditions for allowance under section 37 are • Such expenditure should not be covered under the specific section i.e. sections 30 to 36.
• Expenditure should not be of capital nature • The expenditure should be incurred during the previous year. • The expenditure should not be of personal nature.
• The expenditure should have been incurred wholly or exclusively for the purpose of the business or profession.
• The business should be commenced.
The Hon'ble' Delhi High Court in the case of Mr. Shanti Bhushan Vs. Commissioner of Income Tax, wherein the assessee claimed Medical Expense as business expenses on the basis that the same were essential for his Profession and would have a direct impact on his earning capacity, held as under:-
It is trite law that the claim for deduction under section 37 of the IT Act should satisfy three conditions: firstly, it should be an expense which is incurred wholly and exclusively for the purpose of the assessee's business or profession; secondly, it should not be an expense incurred to bring into existence a capital asset; and lastly, it should not be an expense of a personal nature.
22.1 In our view, the assessee's claim under section 37 of the IT Act does not fulfill the first condition which is that the expense in issue have been Incurred wholly and exclusively for the purposes of the assessee's profession.
22.2 As observed hereinabove, an impaired heart would handicap functionality of a human being irrespective of his position, status or vocation in life. Expenses incurred to repair an impaired heart would thus add perhaps to the longevity and efficiency of a human being per se. The improvement in the efficiency of the human being would be in every activity undertaken by a person. There is thus no direct or immediate nexus between the expenses incurred by the assessee on the coronary surgery and his efficiency in the professional field per se. Therefore, to claim a deduction on account of expenses incurred by the assessee on his coronary surgery under section 37(1) of the IT Act would have to be rejected. There is, as a matter of fact, no evidence brought on record, which would suggest that the assessee could have continued in the same state without the medical procedure undertaken by him. On this aspect, the best example which comes to mind, which perhaps, in a given case would be considered as an expense amenable under section 37 of the IT Act would be that of an actor undertaking plastic surgery to prevent age being reflected on screen. It could be argued in the case of an actor that he could have existed in the state he was without ITA No. 5105/Del./2015 10 having gone under the knife of a plastic surgeon. Such are not the facts in the instant case.
22.3 In this regard, even the judgment of the Bombay High Court in Mehboob Productions (supra), which was cited before us, is distinguishable. As indicated above, only the assessee had come up before it with regard to the Tribunal's decision disallowing 1/3rd of the expenses reimbursed by the assessee company to its Director who had suddenly suffered a serious heart attack while running an errand for the assessee company in USA. Based on the findings returned by the Tribunal, that the Director was the "driving force" of the company and that he had gone to USA in connection with nomination of the film produced by the assessee company for an award - the Division Bench of the Bombay High Court, concluded that there was no good reason to disallow the remaining expenses as the revenue had not challenged the findings on the ground of perversity.
23. In view of the foregoing reasons, we are of the opinion that the concurring judgments and orders of the authorities below ought not to be disturbed. It is ordered accordingly. The question of law is thus answered in the negative and against the assessee.
The Hon'ble Court has thus held that the claim of the assessee did not fulfill the first condition of claim of expenses under section 37(1) that the expense should have been incurred wholly and exclusively for the purpose of business. The facts of the appellant's case are similar, there is no direct nexus between the litigation expenses and the business of the appellant. The expenses cannot be therefore allowed as a business/ professional expense. The addition made by the Assessing Officer is therefore sustained."
10. The assessee could not controvert the test laid down for claiming deduction u/s. 37(1), as discussed by the ld. CIT(A). The assessee also failed to prove that they had got any benefit for becoming a guarantor of the said company. Therefore, one-time settlement charges paid to banks is not an allowable expenditure under section 37 of the Income Tax Act. We, accordingly, do not find any justification to interfere with the reasoned order made by the ld. CIT(A) on this count.
ITA No. 5105/Del./2015 11
11. As regards the other issue regarding partial disallowance out of expenditures claimed by the assessee, we find that the ld. Authorities below have made the disallowance on adhoc basis, that too without rejecting the books of account of the assessee. Moreover, the ld. Authorities below have failed to pin point any particular expenditure which was of disallowable nature. Therefore, adhoc disallowance made by the authorities below deserves to be deleted in view of various judicial pronouncements made by higher courts. We accordingly, allow this ground of appeal raised by the assessee.
12. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 12.01.2018.
Sd/- Sd/-
(H.S. Sidhu) (L.P. Sahu)
Judicial member Accountant Member
Dated: 12.01.2018
*aks*
Copy of order forwarded to:
(1) The appellant (2) The respondent
(3) Commissioner (4) CIT(A)
(5) Departmental Representative (6) Guard File
By order
Assistant Registrar
Income Tax Appellate Tribunal
Delhi Benches, New Delhi