Litigation Expenses incurred by Assesee Company for Recovery of Money from Debtors cannot be Disallowed: ITAT [Read Order]

The Mumbai bench of Income Tax Appellate Tribunal (ITAT) held that litigation expenses incurred by Assessee Company for recovery of money from the debtors could not be disallowed. 

Assessee Minestrone Mumbai is a partnership firm which was carrying on the business of “Manufacture and Export of Diamonds’ ‘. The Assessing Officer from the perusal of the audited financial statements noted that the assessee has debited several expenditures and depreciations. The Assessing Officer further noted that assessee has not made any sales of purchase during the year and there was no such business activity carried out by the assessee. After verifying the records, the assessing officer disallowed Legal and professional fees claimed by the assessee along with other claim.

Aggrieved assessee filed appeal before CIT(A). The CIT(A) confirmed the order of the Assessing Officer. Thereafter assesee filed second appeal before the ITAT.

Jeet Kamadar, counsel for the assessee contended that During the year there was no activity of purchase and sale of manufacturing which is evident from the financial statements.

But the assessee made some payments for filling of several civil suits before the Bombay High Court for recovery of amount from the creditors. Assessee had submitted the bill raised by Advocate and solicitors, Bhrube Liladhar and Company. It was submitted that such payment shall not be disallowed.

Chetan M Kacha, Counsel for the revenue submitted that no TDS have been deducted on such payment of professional fees and therefore the same should be disallowed under Section 40(a)(ia) Income Tax Act, 1961.

The bench observed that “Payments have been made by the assessee for the filling of various suits for recovery of money from the debtors like Fancy Impacts, Marble Gems, Asugems Sugey Gems which are still pending, and the suits were filed in 2012. Thus, these legal expenses could not be disallowed as they have been incurred during carrying on the business.”

Thereafter, the tribunal of Amit Shukla, Judicial Member and Gagan Goyal, Accountant member restored the matter back to the file of the Assessing Officer to see whether any TDS has been deducted on the payment of professional legal fee to the legal firm and whether provisions of Section 40(a)(ia) of the Income Tax Act are applicable. Thus, the bench partly allowed the claim of the assessee.

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