Principal Commissioner Of Income Taxno v. M/S.managed Information Services Pvt. Ltd.,"Pottipati Plaza", 5Th Floor

In the High Court of Judicature at Madras Dated: 08.03.2017 CoramThe Honourable Mr.JUSTICE RAJIV SHAKDHERandThe Honourable Mr.JUSTICE R.SURESH KUMAR Tax Case (Appeal) No.137 of 2017 Principal Commissioner of Income TaxNo.121, Mahatma Gandhi Road,Chennai - 34. .... Appellant Vs. M/s.Managed Information Services Pvt. Ltd.,"Pottipati Plaza", 5th Floor, No.77, Nungambakkam High Road,Chennai - 600 034. .... Respondent APPEAL filed under Section 260A of the Income Tax Act, 1961against the order dated 11.08.2016 made in I.T.A.No.566/Mds/2011on the file of the Income Tax Appellate Tribunal, 'B' Bench,Chennai for the assessment year 2006-2007 and against the orderof the Commissioner of Income Tax (Appeals) V, Chennai dated23/12/2010 made in ITA.No.148/2008-2009 and order of theAssistant Commissioner of Income tax, company circle-IV(1)Chennai-34, dated 12/11/2008 made in GI.No/Pa.No.MA.500/PACCM768011 for the assesment year 2006-2007. For Appellant : Ms.R.Hemalatha Standing Counsel for Income Tax For Respondent: Mr.S.SridharJ U D G M E N T (Judgment of the Court was delivered by RAJIV SHAKDHER,J.) 1. This appeal is directed against the judgment of theIncome Tax Appellate Tribunal (in short 'the Tribunal'), dated11.08.2016, qua the Assessment Year (A.Y) 2006-07. 2. The only issue, which arose for consideration, before https://hcservices.ecourts.gov.in/hcservices/ the Tribunal was, whether the order of the Commissioner ofIncome Tax (Appeals) [in short, 'the CIT(A)'], dated 23.12.2010,was required to be sustained. 3. The CIT(A) vide order dated 23.12.2010, had reversed thefindings of the Assessing Officer, with regard to thedisallowance of the expenditure, claimed by the Assessee qualegal fee and the expenses incurred towards ProfessionalIndemnity Insurance.3.1. To be noted, the Assessee had paid a sum ofRs.1,93,90,452/- towards legal fees, as also, a sum ofRs.1,81,327.50 towards Professional Indemnity Insurance to itslegal adviser, one Hammonds, U.K. 3.2. The aforementioned amounts were arrived by theAssessing Officer, after applying the then prevalent rate ofexchange qua expenses incurred by the Assessee in PoundSterling. 4. According to the Assessing Officer, the Assessee couldnot claim deduction qua the aforementioned payments, underSection 37 of the Income Tax Act, 1961 (in short, 'the Act').The reasons supplied by the Assessing Officer qua the legal feeswas, that it was exorbitant and far in excess to thecompensation received in the matter from the entity, which hadinfringed its rights in the registered software qua which,advice was received from its aforementioned legal adviser, i.e.,Hammonds, U.K. 5. Notably, the compensation received by the AssesseeCompany was a sum of Rs.80,16,570/-, whereas, the legal fees,paid to Hammonds, U.K., after it had been converted to IndianRupees, by the Assessing Officer, was a sum of Rs.1,93,90,452/-,as is indicated herein above. 6. In so far as the claim for deduction towards payment onProfessional Indemnity Insurance was concerned, the AssessingOfficer took the view that insurance, under the U.K. law, had tobe taken out by the legal adviser, and, therefore, the deductionclaimed could not be allowed, as it was incurred for businesspurpose. 7. The record shows that, the appellant, being aggrieved bythe assessment order, carried the matter in appeal to the CIT(A). The CIT(A) reversed the view taken by the Assessing Officerand returned the following findings of fact, and allowed theexpenses incurred, both towards legal fee and ProfessionalIndemnity Insurance, under Section 37(1) of the Act. "....7.1 The first finding of the AssessingOfficer namely, incurring of expenditure of Rs.1.93Crores towards legal fees to recover Rs.80,16,570/- ismisconstrued on the facts of the case. The expenses https://hcservices.ecourts.gov.in/hcservices/ 7. The record shows that, the appellant, being aggrieved bythe assessment order, carried the matter in appeal to the CIT(A). The CIT(A) reversed the view taken by the Assessing Officerand returned the following findings of fact, and allowed theexpenses incurred, both towards legal fee and ProfessionalIndemnity Insurance, under Section 37(1) of the Act. "....7.1 The first finding of the AssessingOfficer namely, incurring of expenditure of Rs.1.93Crores towards legal fees to recover Rs.80,16,570/- ismisconstrued on the facts of the case. The expenses https://hcservices.ecourts.gov.in/hcservices/ according to the Appellant were incurred to protectthe source of income and hence the comparisonattempted by the Assessing Officer is not correct.The expenses incurred to protect and maintain thetitle to the capital assets as well as to protect thesource of income is on the revenue field and based onthe citations given by the Appellant, I hereby holdthat the first facet of the finding of the AssessingOfficer is hereby reversed. 7.2. On the second facet, the Assessing Officerhad held that there was no material on record aboutthe details of the work carried out by the UK legalfirm and in this regard, it was established by theAppellant that the payment was made to the legal firmtheir professional work as confirmed by them.Therefore, the said finding of the Assessing Officeris misplaced in the facts and circumstances of thecase. 7.3. In so far as the quantum of legal fees paidand claimed in computation of taxable total income,the Assessing Officer committed a mistake inconverting the foreign currency into Indian Rupees.According to me, the Officer ought to have consideredthe claim with reference to the UK Standards and interms of the UK Standards, the incurring ofexpenditure under consideration was reasonable. 7.4. The other facet raised by the AssessingOfficer while making the disallowance of legalexpenses is with regard to the payment of such feesthrough Mr.Brijnath Personal Account and not from theAppellant's bank account. In this regard, I agreewith the Appellant that the modus operandi is notrelevant to consider the claim of deduction underconsideration and the only consideration is on thegenuineness of the transaction which according to meis proved beyond doubt by the Appellant. ...." 8. A perusal of the aforesaid extract from the order of theCIT(A) would show that before him, an additional ground appearsto have been taken by the Revenue, which was, that the paymentof legal fee, in the first instance, had been made to HammondsU.K., by the Director of the Assessee company, one,Shri.Brijnath via his personal account. 9. This aspect of the matter was also gone into by the CIT(A), who affirmed the genuineness of the transaction and allowedthe deduction qua legal fee by holding that the "modus operandi"of payment was not relevant. https://hcservices.ecourts.gov.in/hcservices/ 10. The Revenue, being aggrieved, carried the matter inappeal to the Tribunal. The Tribunal, in turn, sustained theview of the CIT(A). 11. Before us, Ms.Hemalatha, learned counsel for the Revenueraises the very same ground to assail the order of the Tribunal.It is the submission of the learned counsel for the Revenuethat, since, the legal fee paid was far in excess to thecompensation received, the same cannot be allowed as a deductionunder Section 37(1) of the Act. 9. This aspect of the matter was also gone into by the CIT(A), who affirmed the genuineness of the transaction and allowedthe deduction qua legal fee by holding that the "modus operandi"of payment was not relevant. https://hcservices.ecourts.gov.in/hcservices/ 10. The Revenue, being aggrieved, carried the matter inappeal to the Tribunal. The Tribunal, in turn, sustained theview of the CIT(A). 11. Before us, Ms.Hemalatha, learned counsel for the Revenueraises the very same ground to assail the order of the Tribunal.It is the submission of the learned counsel for the Revenuethat, since, the legal fee paid was far in excess to thecompensation received, the same cannot be allowed as a deductionunder Section 37(1) of the Act. 12. According to us, what has been lost sight of by theRevenue by advancing this argument is, that the Assessee companywas protecting its rights in a registered software. Theregistered software was a property of the Assessee Company,which, one would assume, could earn the Assessee, revenue fromtime to time, as and when, it licenced its use by third parties.Therefore, to compare the value of compensation paid by theinfringer of the right, (which was an entity by the name"Hanover Outsourcing", based in Pakistan), with the expensesincurred on legal fees, would be fallacious, to say the least. 12.1. Furthermore, as rightly held by the CIT(A), theRevenue, if, at all, ought to have compared the fees paid toHammonds, with the fees demanded by a professional working outof U.K., qua a similar kind of work. 12.2. It is important to note that the CIT(A) hascategorically held that the transaction between the Assessee andits legal adviser, i.e., Hammonds U.K., which, included theamount paid towards fee was genuine. If, that be the case,surely, this argument cannot be sustained. 13. We may also note that, though, this is not a submission,which was pressed before us, the amount paid towardsProfessional Indemnity Insurance, by the Assessee to HammondsU.K., was also in order, as even though, Hammonds, was requiredto take out an insurance under the U.K. law, the legal adviserwas entitled to recover the same from his client, i.e., theAssessee. 13.1. Therefore, on both counts, according to us, there isno flaw in the judgment of the Tribunal, as also that of the CIT(A). 14. Before we conclude, we may only indicate that the testto be employed for examining as to whether or not a particularexpenditure incurred by an Assessee, be allowed, is that, whichis, provided in Section 37 itself. Therefore, what is requiredto be ascertained is, whether or not, the expenditure in issueis laid out or incurred wholly and exclusively for the purposeof business, and that, it is not an expenditure, which isdescribed under Sections 30 to 36 of the Act, or an expenditure https://hcservices.ecourts.gov.in/hcservices/ in the nature of capital expenditure or, if, an Assessee is anindividual, it involves defrayment of personal expenses. 14.1. In ascertaining as to whether the expenditure has beenlaid out or expended wholly and exclusively for the purpose ofbusiness, what is to be borne in mind, is that, it is incurredon account of commercial expediency of the Assessee. The factthat the expenditure incurred by an Assesseee is not propelledon account of any legal obligation, or that, it benefits a thirdparty, would not come in the way of it being allowed, as long asit is incurred due to commercial expediency. 14.2. As to what is commercial expediency is to be looked atby Income Tax Authorities by placing themselves in the shoes ofa prudent business person. https://hcservices.ecourts.gov.in/hcservices/ in the nature of capital expenditure or, if, an Assessee is anindividual, it involves defrayment of personal expenses. 14.1. In ascertaining as to whether the expenditure has beenlaid out or expended wholly and exclusively for the purpose ofbusiness, what is to be borne in mind, is that, it is incurredon account of commercial expediency of the Assessee. The factthat the expenditure incurred by an Assesseee is not propelledon account of any legal obligation, or that, it benefits a thirdparty, would not come in the way of it being allowed, as long asit is incurred due to commercial expediency. 14.2. As to what is commercial expediency is to be looked atby Income Tax Authorities by placing themselves in the shoes ofa prudent business person. 14.3. Further, the fact that a particular expense doesresult in a profit for the Assessee in the immediate proximitycannot form the basis of its disallowance. In incurring anexpense, a business person could have a short and a long termperspective. The fact that in the short term the expenseincurred does lead to a profit, cannot rule out the possibilityof accretions of profits to the Assessee in the long run. Theseare business decisions best left to the wisdom of those who runand manage the business. Therefore, as long an expense isincurred, wholly and exclusively for the purpose of the businesscarried on by the Assessee, it ought to be, ordinarily, allowedunder Section 37 of the Act. (See Sassoon J. David & Co. (P)Ltd., V. CIT, (1979) 118 ITR 261). 14.3. Thus, if, the aforesaid principles are applied, it isclear that notwithstanding the fact that the legal fee paid wasmore than the compensation received by the Assessee, the same,was amenable for deduction under Section 37 of the Act.Likewise, in so far as the expense incurred towards ProvisionalIndemnity Insurance was concerned, it could not have beendisallowed, merely, by reason of the fact that Hammonds, U.K.,was required to take out the insurance. 15. The appeal is, accordingly, dismissed, as according tous, there is no merit in the same. 16. There is no question of law, which arises for ourconsideration much less a substantial question of law. However,there shall be no order as to costs.-s/d- Assistant Registrar(CS II) True Copy Sub-Assistant Registrar To 1.The Income Tax Appellate Tribunal, 'A' Bench, Chennai. 'A' Bench, Chennai. 2.The commissioner of Income Tax (Appeals)-V 121, Mahatma Gandhi Road, Chennai-34. 121, Mahatma Gandhi Road, Chennai-34. 3.The Assistant Commissioner of Income Tax, Company Circle IV (1) Chennai-34 Company Circle IV (1) Chennai-34 4.The Principal Commissioner of Income Taxes, 121, Mahatma Gandhi Road, Chennai-34. 121, Mahatma Gandhi Road, Chennai-34. +1cc to M/s.T.R.Senthil Kumar, Advocate SR.No.15444+1cc to M/s.S.Sridhar, Advocate SR.No.14764Tax Case (Appeal) No.137 of 2017GMI(CO)GN(03/04/2017)