Legal and Professional Expenses incurred to Defend Criminal Charges against Directors of Company allowable as Business Expenses: ITAT [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held that these expenses incurred on legal, professional, travelling and boarding are allowable as business expenditure of the assessee.

The assessee, Majestic Infracon Pvt. Ltd made huge investments of Rs.593/- Crores in Etisalat DB Telecom Pvt. Ltd. CBI has filed criminal cases against the directors and their relatives in connection with allotment of UAS telecom license to Swan Telecom Pvt. Ltd. and the cases were before the special court (CBI), New Delhi. The assessee has incurred these expenses by way of legal and professional fee, travelling expenses and staying and boarding expenses in connection defending the matters before the special court. It was observed that the assessee has huge business interest in other entity in which huge investments to the extent of Rs.593/- crores were made by the assessee. The assessee incurred expenditure for defending the case and claimed deduction on the same. However, the department denied the claim.

The Tribunal bench comprising Shri Rajesh Kumar, Accountant Member and Shri Ravish Sood, Judicial Member observed that if these directors/their relatives are not defended, the business interest of the assessee will be jeopardized, and it may be put the assessee to huge financial and commercial losses.

“Though the business of the related concern is not similar to that of the assessee’s business of construction, however, undoubtedly the interest of the assessee is certainly there in the success of these criminal cases in defending its directors/their relatives. In our opinion, the expenses incurred even for defending the directors and their relatives in criminal litigations are admissible expenses provided that are incurred in order to protect the business interest of the assessee,” the Tribunal observed.

Noting that the case of the assessee is squarely covered by the decision of Apex Court decision in the case of Dhanrajgiriji Raju Narasingiriji, the Tribunal observed that “section 37(1) of the Act is corresponding to this section and therefore it is not open to the department to dictate what expenditure the assessee should incur and under what circumstances.”

Ms. Ritu Kamal Kishore appeared for the assessee.

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