Itxa/1169/2017 Of National Refinery P. Ltd v. The Deputy Commissioner Of Income-Tax Circle-5(2)

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 1166 OF 2017WITHINCOME TAX APPEAL NO. 1172 OF 2017WITHINCOME TAX APPEAL NO. 1169 OF 2017WITHINCOME TAX APPEAL NO. 1170 OF 2017 National Refinery Pvt. Ltd. .. Appellant v/s. Asst. Commissioner of Income-Tax, Circle 5(2)Respondent Mr. Vipul B. Joshi a/w Ms. Namrata Kasale for the appellant None for the respondent CORAM : M.S. SANKLECHA & NITIN JAMDAR, J.J. DATED : 6[th] NOVEMBER, 2019 P.C. 1.These four appeals under Section 260A of the Income Tax Act, 1961 (Act) challenge the impugned order dated 28[th] September,2016 passed by the Income Tax Appellate Tribunal (Tribunal). Theimpugned order dated 28[th] September, 2016 is a common orderrelating to Assessment Years 2005-06, 2007-08, 2008-09 and2009-10. Thus, the four appeals. 2.The appellant assessee has urged the following identical questions of law in all the four appeals :- “(i)Whether on the facts and in the circumstances of thecase and in law, the Tribunal erred in disallowing the claim oflegal expenses? (ii)Whether on the facts and in the circumstances of thecase and in law, the order of the Tribunal disallowing legalexpenses is justified when the Tribunal has proceeded onerroneous factual basis that it was not shown that the Directors/ shareholders were subjected to legal proceedings inconnection with the activities carried out by them during thenormal course of carrying on business of the AppellateCompany? (iii)Whether on the facts and in the circumstances of thecase and in law, the order of the Tribunal is perverse in asmuch as it is based on extraneous, impermissible andirrelevant considerations, while ignoring the relevant materialand considerations? (iv)Without prejudice to the above and in any event,whether on the facts and in the circumstances of the case andin law, the Tribunal ought to have allowed appropriateproportion out of the legal expenses claimed, instead ofdisallowing the entire expenses ? Although multiple questions have been raised, the basic issue is dis-allowance of legal expenses claimed to be incurred by theappellant company in all the four assessment years under Section 37(1) of the Act. As the facts (save the amount of legal expensesclaimed in each of the assessment years) and the law applicable areidentical in all the four appeals, at the request of the parties the factsin Income Tax Appeal No.1166 of 2017 relating to Assessment Year2005-06 are being referred to as representative of facts in all the fourappeals. It is agreed between the parties that the view taken on theabove fact will equally apply in the other three appeals. 3.The appellant assessee is engaged in the business of melting,assaying, refining and fabrication of precious metals. For theAssessment Year 2005-06 the appellant filed on 30[th] October, 2005 itsreturn of income declaring an income of Rs.12.36 lakhs. Duringscrutiny, the Assessing Officer noticed that legal expenses to theextent of Rs. 11.72 lakhs out of Rs. 16.50 lakhs had been claimed inconnection with complaints filed by one group of shareholdersagainst the other group of shareholders / directors. The AssessingOfficer found on facts that above expenses were incurred not by thecompany for the purpose of carrying out its business but for thepurpose of defending its Directors / Shareholders in respect ofcomplaints filed against them by another group of Shareholders. Thus, holding in its order dated 31[st] December, 2017 passed underSection 143(3) of the Act that the legal expenses of Rs.11.72 lakhscannot be allowed under Section 37 of the Act and added the sameto determine the taxable income. Thus, holding in its order dated 31[st] December, 2017 passed underSection 143(3) of the Act that the legal expenses of Rs.11.72 lakhscannot be allowed under Section 37 of the Act and added the sameto determine the taxable income. 4.Being aggrieved with the order dated 31[st] December, 2017, therespondent filed an appeal to the Commissioner of Income Tax(Appeals)[CIT(A)] amongst other issues, one was the issue ofdisallowance of legal expenses of Rs. 11.72 lakhs. By an order dated10[th] December, 2009, the CIT(A) dismissed the respondent’s appealon the issue of legal expenses. This on a finding of fact that therewas a dispute inter se between its shareholders over the managementand control of the appellant company. Thus, the litigation expensesincurred by the appellant to the extent of Rs. 11.72 lakhs was not forcarrying out its business but expenses incurred for one group i.e.Directors / Shareholders in their individual capacity and theseexpenses had nothing to do with the running of the appellantcompany. Further, it also upheld the observation of the AssessingOfficer that the appellant had not furnished details of the legalexpenses and nature of services rendered by the professionals. In the above circumstances, the order dated 31[st] December, 2017 of theAssessing Officer to the extent of disallowing of Rs. 11.72 lakhs aslegal expenses under Section 37 of the Act was upheld. 5.Being aggrieved by the order dated 10[th] December, 2009, theappellant filed an further appeal to the Tribunal. By the impugnedorder dated 28[th] September, 2016, the Tribunal on facts found thatthere was a dispute between two groups of shareholders, primarilyfor the management and control of the appellant company. It foundthat the appellant has not shown that the concerned Directors /Shareholders for whom the legal expenses were incurred weresubjected to legal proceedings only in view of their conduct incarrying out the appellant’s business. Further, it holds that there isnothing on record to indicate that the Directors / Shareholders onwhom legal expenses were incurred by the appellant were subjectedto legal proceedings in connection with their activity of carrying outthe business of the appellant company. Thus, upholds the view ofthe lower authority that these expenses were not be allowed as anexpenditure under section 37 of the Act for carrying out the businessof the appellant company. 6.Being aggrieved by the impugned order dated 28[th] September,2016 which is a common order for all the four subject assessmentyears, the appellant has filed three appeals. 7.Mr. Joshi, learned Counsel appearing in support of the appealssubmits that these legal expenses have been incurred by theappellant company in protecting the Shareholders / Directors as wellas the company in criminal proceedings as well as proceedings beforethe Company Law Board. It is submitted that these expenses wereincurred to ensure good name of the company and for the purpose ofcarrying out its business. This it is submitted is evident from thefact that proceedings were also commenced against its Auditors andCompany Secretary. Thus, the appeal require admission. 8.We find that all the authorities under the Act have come to afinding of fact that the legal expenses incurred by the appellantcompany was not for the purpose of carrying out its business and,therefore, was not allowable as expenditure under Section 37 of theAct. It held that these legal expenses were incurred so as to protectthe Directors / Shareholders of the company in respect of the 8.We find that all the authorities under the Act have come to afinding of fact that the legal expenses incurred by the appellantcompany was not for the purpose of carrying out its business and,therefore, was not allowable as expenditure under Section 37 of theAct. It held that these legal expenses were incurred so as to protectthe Directors / Shareholders of the company in respect of the complaints filed against them in their individual capacity and not inrespect of their conduct in the course of carrying on the business ofthe appellant company. In fact, the complaint filed before the ChiefMetropolitan Magistrate Court has been made against the Directors /Shareholders in individual capacities. The entire dispute betweenthe various group of shareholders was only to acquire themanagement and control of the appellant company and, therefore,these expenses are not expenses incurred for and on behalf of thecompany but expenses incurred for the Directors / Shareholders fortheir individual benefit so as to retain control and management ofthe appellant company. The Tribunal has observed the fact that legalproceedings were also commenced against its Auditors / CompanySecretary were only on off-shoot of the inter se dispute betweendifferent shareholders of the appellant company. In fact, this Courtwhile admitting a criminal Writ Petition bearing No. 2052 of 2004 on27[th] April, 2005, did inter alia observe that the complaints have beenfiled so as to settle personal scores between the parties. It thusnoticed that the appellant company was no way involved in the legalproceedings taken against the Directors / Shareholders in theirindividual capacities. Moreover, it is pertinent to note that the Assessing Officer as well as the CIT(A) recorded the fact that thedetails of the nature of the legal expenses was not forthcoming fromthe appellant. In the aforesaid facts, the view taken by theAuthorities under the Act including the Tribunal, is a possible viewon facts and cannot be said to be perverse. In these circumstances,the questions as proposed in all the four appeals do not give rise toany substantial question of law. Thus, not entertained. 9.Therefore, the four appeals are dismissed. No order as tocosts. (NITIN JAMDAR, J.) (M.S. SANKLECHA, J.)