Case Law Details
National Refinery Pvt. Ltd. Vs ACIT (Bombay High Court)
Legal expenses incurred to protect the Directors of the company in respect of the complaints filed against them in their individual capacity will not allowed under section 37 as business expenses.
The issue under consideration is that whether on the facts and in the circumstances of the case and in law, the Tribunal erred in disallowing the claim of legal expenses?
The appellant assessee is engaged in the business of melting, assaying, refining and fabrication of precious metals. For the Assessment Year 2005-06 the appellant filed on 30th October, 2005 its return of income declaring an income of Rs.12.36 lakhs. During scrutiny, the Assessing Officer noticed that legal expenses to the extent of Rs. 11.72 lakhs out of Rs. 16.50 lakhs had been claimed in connection with complaints filed by one group of shareholders against the other group of shareholders / directors. The Assessing Officer found on facts that above expenses were incurred not by the company for the purpose of carrying out its business but for the purpose of defending its Directors / Shareholders in respect of complaints filed against them by another group of Shareholders.
HC find that all the authorities under the Act have come to a finding of fact that the legal expenses incurred by the appellant company was not for the purpose of carrying out its business and, therefore, was not allowable as expenditure under Section 37 of the Act. It held that these legal expenses were incurred so as to protect the Directors / Shareholders of the company in respect of the complaints filed against them in their individual capacity and not in respect of their conduct in the course of carrying on the business of the appellant company. In fact, the complaint filed before the Chief Metropolitan Magistrate Court has been made against the Directors / Shareholders in individual capacities. The entire dispute between the various group of shareholders was only to acquire the management and control of the appellant company and, therefore, these expenses are not expenses incurred for and on behalf of the company but expenses incurred for the Directors / Shareholders for their individual benefit so as to retain control and management of the appellant company. The Tribunal has observed the fact that legal proceedings were also commenced against its Auditors / Company Secretary were only on off-shoot of the inter se dispute between different shareholders of the appellant company. In fact, this Court while admitting a criminal Writ Petition bearing No. 2052 of 2004 on 27th April, 2005, did inter alia observe that the complaints have been filed so as to settle personal scores between the parties. It thus noticed that the appellant company was no way involved in the legal proceedings taken against the Directors / Shareholders in their individual capacities. Moreover, it is pertinent to note that the Assessing Officer as well as the CIT(A) recorded the fact that the details of the nature of the legal expenses was not forthcoming from the appellant. In the aforesaid facts, the view taken by the Authorities under the Act including the Tribunal, is a possible view on facts and cannot be said to be perverse. In these circumstances, the questions as proposed in all the four appeals do not give rise to any substantial question of law. Thus, not entertained. Therefore, the appeal is dismissed.
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