The factual matrix of the present case is that there was a criminal case against the assessee with an allegation of custom duty evasion and he incurred impugned expenditure of legal fees for hiring lawyers to represent his criminal case before the Hon’ble High Court and Lower Courts to get the bail order. As the assessee was arrested and sent in judicial custody by the DRI in the Custom Duty Evasion case which cannot be said to be incurred bona fidely wholly and exclusively for the purpose of business of the assessee.
It is also pertinent to mention that it is not the case of the assessee, that the assessee initiated any proceedings or prosecution to defend his business and the claimed expenditure was incurred wholly and exclusively for the purpose of business of the assessee.
The ratio of the above decisions can be summarized as follows. In the cases where assessee is able to demonstrate positively that the claimed expenditure on legal fees and proceedings is in extricably or proximately related to caring on the business of the assessee more effectively then the same shall be allowable. However, in the cases where the given or claimed expenditure on legal fees and proceedings is remotely connected or unconnected to caring on of business of the assessee, then the same may not be allowable u/s 37 of the Act. Applying this to the facts in extant case, it can be safely inferred that expenditure to defend in custom duty evasion criminal case, having no connection with caring on of business, is held to rightly disallowed by the AO and same disallowance was upheld by the CIT(A) on cogent and reasonable basis. Ergo the assessee’s contentions are jettisoned.
Per contra, we clearly observed that the assessee was arrested in Custom Duty Evasion criminal case by the DRI and the payment of legal expenses and fees to the lawyers was made to defend and to secure bail for the assessee in that case. In this situation respectfully following the decision of Hon’ble Supreme Court in the case of CIT Vs. H. Hirjee (Supra), we reach to the logical conclusion that the authorities below were right in holding that the payment of legal fees and expenses towards defending in a criminal prosecution not allowable as business expenditure because the same was not expended wholly and exclusively for the purpose of business.
