BAFNA BROTHERS BUILDING,CHENNAI vs. ACIT, NCC-11(4), CHENNAI

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ITA 1154/CHNY/2026Status: DisposedITAT Chennai10 September 2026AY 2023-2410 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the expenditure was incurred by the assessee-firm in connection with legal proceedings where the firm itself was implicated. Therefore, the expenditure had a direct nexus with the business activities of the firm and was allowable.

What were the facts?

The assessee, a partnership firm acting as a mediator, claimed Rs. 16,50,000 as professional fees for legal expenses. The Assessing Officer (AO) disallowed this, stating the litigation was personal to a partner. The First Appellate Authority (FAA) upheld the AO's decision.

What were the issues?

Whether professional fees incurred for legal proceedings, where a partner was involved, are deductible as business expenditure for the firm.

Which sections of the Income-tax Act were involved?

Section 37,Section 250,Section 143(1)(a),Section 143(2),Section 143(3),Section 144B,Section 270A

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI

Before: SHRI GEORGE GEORGE K & SHRI S.R. RAGHUNATHA

Hearing: 04.09.2026Pronounced: 10.09.2026

आदेश/ O R D E R PER GEORGE GEORGE K, VICE PRESIDENT: The appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 19.02.2026 passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2023-24.

ITA No.1154/CHNY/2026 - 2 - Bafna Brothers Building 2. The solitary issue that arises for our consideration is whether the First Appellate Authority (FAA) is justified in confirming the disallowance made by the AO to the extent of Rs.16,50,000/- under the head ‘professional fees’.

3.

Brief facts of the case are as follows: The assessee is a partnership firm. For the assessment year 2023-24, return of income was filed on 31.07.2023 declaring loss of Rs.38,09,215/-. The return was processed u/s.143(1)(a) of the Act on 19.10.2023. Subsequently, assessment was taken up for scrutiny and notice u/s.143(2) of the Act was issued on 19.06.2024. During the course of assessment proceedings, it was noticed that assessee had claimed deduction of expenditure under the head ‘professional fees’ a sum of Rs.16,50,000/-. The assessee was directed to explain the allowability of expenditure u/s.37 of the Act. In response to the notice issued by the AO, the assessee filed submissions on 05.03.2025 by stating as under:- “As explained in earlier submissions, the assessee is a mediator (broker) between money lenders and borrowers. The assessee does the due diligence of the borrower and on being convinced of the credentials of the borrower, informs the lenders and the loan requirement of the borrower is spread across the lenders. These lenders issue cheques direct to the borrower and the borrower pays the interest and principal repayment direct to the lenders. The borrower pays commission to the Assesse at 0.50% of the loan amount, once in 3 months till the loan is fully cleared. One such borrower was D Pratish belonging to the famous VGN group

ITA No.1154/CHNY/2026 - 3 - Bafna Brothers Building who are pioneers in real estate in and around Chennai. The said D Pratish borrowed from a total of 196 lenders an aggregate amount of Rs. 41,19,25,000 (list attached) and defaulted in repaying the loan and the brokerage due to the assessee. The Covid19 caused severe hardships to the real estate market and to cover his inability to pay on demand, D Pratish lodged a criminal complaint against the assessee (represented by its partner Mr. Chandrakumar Bafna) and the assessee had to deal with the case. The assessee engaged junior advocates at the Police Station level and engaged senior counsels at High Court. All the lenders have filed civil suits for recovery of their dues and few of them have also been decreed in favour of the lenders. Copy of the affidavit filed by the partner in Madras High Court is attached.”

4.

The assessee also furnished the details of such expenses along with the documentary evidence such as the order passed by the Hon’ble High Court of Madras against Shri Chandra Kumar Bafna (Partner) against the appeals of the Police Department, being Criminal OP No.17893/2022. On perusal of the case details, it was observed by the AO the litigation pertains to Shri Chandra Kumar Bafna in his individual capacity and the case does not have any relevance to the affairs of the firm. Therefore, it was concluded by the AO, the expenditure of Rs.16,50,000/- is not wholly and exclusively incurred for the purpose of assessee’s business and same was added back to the total income vide assessment order dated 17.03.2025 passed u/s.143(3) r.w.s.144B of the Act. Accordingly, the return filed of Rs.38,09,215/- was reduced to Rs.21,59,215/-. The AO also initiated penalty proceedings u/s.270A of the Act for under reporting of income due to misreporting.

ITA No.1154/CHNY/2026 - 4 - Bafna Brothers Building 5. Aggrieved, assessee filed appeal before the First Appellate Authority. The FAA confirmed the view taken by the AO. It was held by the FAA, assessee has not established with cogent documentary evidence that the litigation was in respect of business obligation of the assessee firm whereas on the documents only the name of the partner has mentioned and therefore, the expenditure incurred to defend the partner in his individual capacity cannot be allowed as deduction.

6.

Aggrieved by the above order of the FAA, the assessee has preferred the present appeal before the Tribunal. The assessee has also filed a paper-book containing, inter alia, the show-cause notices issued during the course of assessment proceedings, the replies filed thereto, and the submissions made before the FAA.

7.

During the course of hearing, on a specific query from the Bench, the Ld. AR submitted that there was no formal agreement entered into by the assessee with either the lender or the borrower for rendering services as a mediator. However, drawing our attention to the financial statements of the relevant assessment year, the Ld. AR submitted that the commission income earned by the assessee for acting as an intermediary between the lender and the borrower had

ITA No.1154/CHNY/2026 - 5 - Bafna Brothers Building duly been accounted for and offered to tax. The Ld. AR further submitted that penalty proceedings u/s.270A of the Act had been initiated alleging under-reporting of income in consequence of misreporting. It was, therefore, contended that the assessee is contesting the disallowance of the expenditure, notwithstanding the fact that the total income determined in the assessment completed u/s.143(3) r.w.s.144B of the Act resulted in a loss of Rs.21,59,215/-. In support of the claim that the expenditure was incurred wholly in connection with the business and for protecting the business interests of the assessee-firm, the Ld. AR placed reliance on the First Information Report (FIR), the legal notice issued in the matter and the order of the Hon’ble Madras High Court in Criminal O.P. No.17893 of 2022. It was categorically submitted that the expenditure in question was incurred towards defending the criminal proceedings initiated against the assessee-firm as well as Shri Chandra Kumar Bafna, who was proceeded against in his capacity as a partner of the assessee-firm.

8.

The Ld.DR on the other hand strongly supported the orders of the AO and the FAA.

ITA No.1154/CHNY/2026 - 6 - Bafna Brothers Building 9. We have heard the rival submissions and perused the material available on record. The solitary issue for our consideration is whether the FAA was justified in confirming the action of the AO in disallowing the expenditure of Rs.16,50,000/- incurred under the head ‘professional fees’. The assessee-firm is engaged in the business of acting as a mediator/intermediary in arranging finance for individuals and business concerns. In the course of such activity, the assessee identifies persons/business entities requiring funds, undertakes the necessary due diligence and facilitates the transaction between the borrower and the prospective lender. The funds are directly advanced by the lender to the borrower and the borrower, in turn, services the principal and interest liability directly to the lender. For rendering such intermediary services, the assessee earns brokerage/commission from the borrower. During the year under consideration, the assessee incurred professional fees of Rs.16,50,000/- towards legal assistance. The AO disallowed the entire expenditure primarily on the ground that the legal proceedings were connected with Shri Chandra Kumar Bafna, partner of the assessee-firm, and, therefore, the expenditure could not be regarded as having been incurred for the business purposes of the firm. We are unable to subscribe to the aforesaid reasoning of the AO. The material placed before us indicates that, in the course of its regular

ITA No.1154/CHNY/2026 - 7 - Bafna Brothers Building business, the assessee-firm had introduced Shri Pratish Vedhapuddi to the financial lender for facilitating the procurement of finance. The assessee-firm had admittedly earned brokerage/commission from the said transaction, which income has duly been accounted for and offered to tax during the relevant assessment year. Subsequently, on account of default committed by Shri Pratish Vedhapuddi in discharging his financial obligations to the lender, disputes arose and the assessee-firm was also drawn into the resultant litigation. In these circumstances, once the assessee-firm itself was subjected to legal proceedings arising out of a transaction undertaken in the ordinary course of its business, the expenditure incurred towards obtaining professional/legal assistance for defending the firm cannot, merely because the proceedings also involved its partner, be characterised as expenditure incurred for the personal benefit or purposes of the partner. The relevant consideration is the purpose and nexus of the expenditure with the business of the assessee-firm. In the present case, such nexus is clearly established from the sequence of events and the surrounding material placed on record. We also find that the expenditure was duly recorded in the books of account of the assessee-firm and was incurred towards professional assistance in connection with the legal proceedings to which the firm itself was a party. More importantly, the very transaction out of

ITA No.1154/CHNY/2026 - 8 - Bafna Brothers Building which the dispute arose was a business transaction of the assessee- firm, from which the assessee had earned brokerage/commission income and had duly offered the same to tax.

10.

The AO has placed reliance on the cause title and the judgment passed by the Hon’ble Madras High Court in Criminal O.P. No.17893 of 2022 dated 02.08.2022 to conclude that the legal expenditure was incurred in connection with the personal case of Shri Chandra Kumar Bafna, partner of the assessee-firm. In our considered view, such conclusion is misplaced and does not accord with the material available on record. On a plain reading of the affidavit filed before the Hon’ble Madras High Court, it is evident that the assessee-firm itself was implicated in the legal dispute and that Shri Chandra Kumar Bafna was representing the firm in his capacity as its partner. The relevant extract of the affidavit, placed at page 52 of the paper- book, clearly demonstrates that the dispute was not a personal dispute concerning the individual partner, but one arising in connection with the assessee-firm. This position is further corroborated by the FIR filed before the K3 Police Station, a copy of which is placed at page 45 of the paper-book.

ITA No.1154/CHNY/2026 - 9 - Bafna Brothers Building 11. It is also significant that neither the AO nor the FAA has disputed the actual incurring or payment of the professional fees. Equally, there is no finding by either of the lower authorities that the assessee-firm had not earned the corresponding commission income from the transaction in which it acted as an intermediary between Shri Pratish Vedhapuddi and the lender. The said commission income had admittedly been accounted for in the books of the assessee-firm and offered to tax in the relevant assessment year. Thus, the entire basis for the impugned disallowance is that the expenditure was incurred for Shri Chandra Kumar Bafna in his individual capacity and, therefore, according to the AO, it was not expenditure incurred for the business purposes of the assessee-firm. Such reasoning, in our considered view, cannot be sustained.

12.

On an overall consideration of the facts and the material placed before us, we find that the expenditure was incurred by the assessee-firm, in connection with legal proceedings in which the firm itself was implicated. The expenditure, therefore, has a direct nexus with the business activities of the assessee-firm. Accordingly, we hold that the professional fees of Rs.16,50,000/- are allowable as expenditure incurred for the purposes of the business of the assessee-firm. In view of the above, the disallowance of

ITA No.1154/CHNY/2026 - 10 - Bafna Brothers Building Rs.16,50,000/- made by the AO and confirmed by the FAA is deleted. The grounds raised by the assessee are allowed. It is ordered accordingly.

13.

In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 10th September,2026 at Chennai.

Sd/- Sd/- (एस.आर. रघुनाथा) (जॉज� जॉज� के) (GEORGE GEORGE K) (S.R. RAGHUNATHA) लेखा सद�य/ACCOUNTANT MEMBER उपा�य� /VICE PRESIDENT चे�नई/Chennai, �दनांक/Dated, the 10th September, 2026 RSR, Sr.PS आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त /CIT, Chennai 4. �वभागीय ��त�न�ध/DR 5. गाड� फाईल/GF. By Order REKHA Digitally signed by REKHA SENTHIL RAJ SENTHIL Date: 2026.09.11 RAJ 17:48:04 +05'30'

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