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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI RAJESH KUMAR & SHRI RAVISH SOOD
Per Rajesh Kumar, Accountant Member:
The present appeals have been preferred by the assessee against the orders even dated 25.03.2019 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment years 2013-14 & 2014-15.
The assessee has taken the following grounds of appeal:
1. The Learned Commissioner of Income Tax(Appeals) has grossly erred in fact and in law by confirming the disallowance made by Ld. Assessing officer relating to legal and professional expenses and other expenses aggregating to Rs.19,85,60,980/- by treating the same as capital expenditure and personal expenditure and expenditure not pertaining to the business of the appellant.
2 & 3711/M/2019 M/s. Majestic Infracon Pvt. Ltd 2. The Learned Commissioner of Income Tax (Appeals) erred in fact and in law by not appreciating the various court rulings relied upon the appellant. 3. The order of the Learned Commissioner of Income Tax(Appeals) is bad in law which deserves to be set aside”
The only issue raised by the assessee in this appeal is against the order of Ld. CIT(A) confirming the disallowance made by the AO relating to legal and professional expenses and other expenses aggregating to Rs.19,85,60,980/- by treating the same as capital and personal expenditure not pertaining to the business of the assessee.
The facts in brief are that the assessee has filed the return of income on 30.09.2013 declaring a loss of Rs.19,14,22,462/-. The case of the assessee was selected under scrutiny and statutory notices were duly issued and served upon the assessee. The assessee is engaged in the business of civil construction. During the course of assessment proceedings the AO observed that assessee has claimed expenses in the P&L account under the head “Legal and professional fee” of Rs.16,38,92,640/- and under various other heads amounting to Rs.3,49,68,340/-. The AO also observed from the notes to accounts no. 24 to 27 that assessee is a holding company of Etisalat DB Telecom Pvt. Ltd. which was granted UAS telecommunication license, however, the said telecom license of the assessee was cancelled by the Hon’ble Supreme Court in February 2012. The Central Bureau of Investigation, Anti Corruption Branch, New Delhi has alleged that the promoters of the company who were also promoter of Swan Telecom Pvt. Ltd. (now known as Etisalat DB Telecom Pvt. Ltd.) are involved inter- alia in criminal conspiracy with others for getting the UAS
3 & 3711/M/2019 M/s. Majestic Infracon Pvt. Ltd license allotted to Swan Telecom Pvt. Ltd. The matter is before special judge, CBI court, New Delhi and promoters have to defend the same on day to day basis. The AO further noted that the assessee company was the majority shareholder of Swan Telecom Pvt. Ltd. (its erstwhile subsidiary) and therefore, to protect its investments and its promoters the assessee’s company decided to bear all expenses of promoters and their close relatives with respect to fees, travelling and accommodation etc. which were required to be incurred for defending these matters/cases before the special court. The AO noted that these expenses could not be allowed for various reasons such as: a. The expenses were not incurred wholly and exclusively for the purpose of business and as such can not be allowed under section 37 of the Act and the expenses incurred to defend the promoters and their close relatives in criminal cases filed against them by CBI in 2G spectrum case is totally unrelated to the business of the assessee as the assessee is engaged in the business of construction and thus the expenses are not even remotely dependent on the outcome of the litigations against the promoters/directors/relatives. Further the AO noted that the expenses are on the capital nature and can not be allowed under section 37 of the Act. b. The AO noted that investments in Etisalat DB Telecom Pvt. Ltd. have been shown under the head non current investments in the balance sheet and the said company has not started its business operation and hence
4 & 3711/M/2019 M/s. Majestic Infracon Pvt. Ltd not earning any income/revenue. Therefore, the expenses are undisputedly capital in nature. c. Expenses are personal in nature of the promoters and the relatives and can not be allowed under section 37 of the Act. Finally, the AO rejected the claim of expenses of Rs.19,88,60,988/- for the aforesaid reasons and added the same to the income of the assessee. The aggrieved assessee preferred an appeal before the ld CIT(A) challenging the assessment order.
In the appellate proceedings, the Ld. CIT(A) dismissed the appeal of the assessee by observing and holding as under: Decision :- “7. I have considered the facts of the case and submissions made by the appellant. Crux of assessee’s submission is that it had made an investment of Rs. 593 crores in Etisalat Db Telecom Private Limited ( EDB ) and EDB was allotted 2G spectrum telecom licenses and this investment was jeopardized by the cancellation of the licenses and also due to various criminal and general allegations made against EDB and its directors who were also the directors of the assessee company. EDB was also facing winding up proceedings in the Court. Assessee wanted to protect its investment of Rs. 593 crores in EDB and the promoters who were also the directors of the company and therefore had incurred legal and professional fees to protect its investments.
7.2 First of all assessee has not furnished details and documents relating to legal and professional expenses of Rs.20,11,60,163/- and has also not submitted proof whether tax at source was deducted in respect of such payments or not under chapter XII of the IT Act 1961. It was a fact that assessee had made investments in EDB of Rs.593 crores by resorting to borrowing of funds on which crores of rupees were being paid as interest to banks and others however the moot point in the matter was whether the expenditure of Rs.20.11 crores was incidental to the carrying on of the business of construction of project especially when the investment of Rs.593 crores was being held by the assessee as ‘current investments’ and classified as a capital asset. It is also observed from the records that assessee had itself mentioned its business as that of a civil contractor in various records and following note 1 of the annual accounts is indicative of the same:
“1 Company Background ‘
5 & 3711/M/2019 M/s. Majestic Infracon Pvt. Ltd The company is engaged in business of and to undertake contracts / subcontracts for constructing, reconstructing, extending, altering or demolishing buildings or tenements and to promote develop, manage, monitor and carry out infrastructure projects & facilities.
The Company, being a hundred percent subsidiary company of Pony Infrastructure & Contractors Limited, has become a Deemed Public Company w.e.f. 29th June 2010."
7.3 It has also been mentioned in note 2.6 to the accounts that ‘investments held by the company are of long term in nature. In this connection, notes numbering 24.2 to 27 of annual accounts (page book 48) reflect the true nature of the situation and reasons for incurring the legal and professional expenses of Rs.20.11 crores:
"24.2 The Etisalat Group had filed Suit (L) No.444 of 2012 before the Hon'ble High Court against the company and its two ultimate shareholders praying for payments of enormous amounts of money, including the value of their investment in the Company, and interim relief of security from the Defendants therein., The company is defending the said suit and is confident of a positive outcome of the same. Since the ultimate outcome and the amount involved are unascertainable, no provision for the same is made in the books of accounts of the company.
The company had enquired in term loan from Punjab National Bank (PNB) which was secured by various assets including the shares held by the company of Etisalat Db Telecom Pvt. Lid. (EDB). However PNB had adjusted its entire outstanding dues of Rs.254,16,52,551 as on 19th May, 2012 against the, fixed deposit of EDB, Etisalat Db Telecom Pvt. Ltd. has filed a suit in the High Court of Bombay being Suit No.631 of 2013 against Punjab National Bank (PNB) and others in July / August 2013, Majestic Infracon Private Limited, Mr. Shahid Batwa, Mr. Vinod Goenka, DB Reaity Limited and BD & P Hotels, (India) Private Limited are arrayed as Defendant No.2, Defendant No.3, Defendant No.4, Defendant No.5 and Defendant No.6, respectfully. EDB has also taken notice of motion in the Suit for interim relief.
26.Investmenits:
The Supreme Court of India vide its order dated February 02, 2012 with regards to 2G spectrum, has cancelled all the 122 UAS Licenses issued by the Telecom Minister in 2008 by stating that the said licenses had been allotted as ‘an unconstitutional and arbitrary manner.’ This includes teh 15 UAS licenses Issued to Etisalat OB Telecom Private Limited (“EDB4, Emirates Mauritius Limited filed Company Petition No.114 of 2012 before the Bombay High Court on March 12, 2012 as well as Company Application NO.134 of 2012 therein on March 14, 2012, seeking winding up of the EDB on the grounds that it is just and equitable to do so as the substratum of the Company was purportedly lost and the basis on which the joint venture was launched had been destroyed. Majestic Infracon Private Limited, being Respondent No.2 therein is opposing the said Company Petition on the 6 & 3711/M/2019 M/s. Majestic Infracon Pvt. Ltd grounds that the business of the Company is still viable and that the substratum of the Company is not lost as it still has valid licenses, viz. ILD, NLD & ISP, which are not covered by the Supreme Court Order dated February 02, 2012 which only cancels the UAS Licences held by the Company, vide its Affidavit to Reply dated April 11, 2012 read with its Additional Affidavit in Reply. Further Affidavit, Affidavit in Sur Rejoinder, Affidavit in Sur Sur Sur Rejoinder and Further Additional Affidavit dated April 20, 2012, April 24, 2012, June12, 2012 and August 22, 2012 respectively, has stated it is willing to take over the management of the Company and buy out the shareholding of the Etisalat Group in the Company, as is evidenced by their filings before the Hon'ble Bombay High Court in said Company Petition. Further, Majestic Infracon Private Limited has alongwith its Affidavit in Sur Sur Sur Rejoinder dated August 22, 2012 also submitted a business viability plan for the three valid licenses viz. ILD, NLD and ISP, owned by EDB on which it is possible to run a profitable business. Considering all facts as stated hereinabove, the management is of opinion that Its investments EDB be carried at cost and there is no impairment.
Expenses for defending 2G spectrum case against the promoters:
Central Bureau of Investigation Anti Corruption Branch, New Dethi (CBI) in the Charge Sheet RC.DAI.2009.A.0045 for the year 2009 (2G Spectrum Case) has alleged that the promoters of the company who were a/so promoters of Swan Telecom Private Limited (now known as Etisalat DB Telecom Pvt, Ltd.) are involved inter alia in @ criminal conspiracy with others for getting UAS licences allotted to Swan Telecom Pvt. Lid. The matter Is currently before the special judge (CBI) court, New Delhi and the promoters have to defend the same on a@ day to day basis. Further, the company was the majority shareholder of Swan Telecom Private Limited (its erstwhile subsidiary), Therefore to protect its investments and defend its promoters, it has been decided by the Board that the company will bear 4 2 the expenses of the promoters and their close relatives with respect to legal fees, travelling, accommodation, etc. which are required to be inquired for defending the matter before the special court.”
7.4 It is thus crystal clear that incurrence of the legal and professional fees had to everything to do with safeguarding of the Investment of Rs.593 crores made in the EDS and criminal and general allegations made against the directors of the assessee company who were also the promoters of EDB. Now it is not the business of the assessee to safeguard the directors and promoters of the company against criminal cases filed against them as ‘promoters and directors of EDB in which the assessee held investment of Rs.593 crores and it was the responsibility, if any of the EDB and the directors and promoters of EDB and not that of the assessee even though the directors of the assessee company happened to be the directors/promoters of the company. In nutshell, it was the personal responsibility of the directors/promoters of EDB and/or that of the EDB and definitely that of the assessee. Prima facie it would appear that the nature of cases pending against ED8 and its directors and promoters are criminal in nature and hence any expenditure incurred by the assessee company on defending a criminal act by the company and/or its 7 & 3711/M/2019 M/s. Majestic Infracon Pvt. Ltd directors/promoters, is not an allowable deduction under section 37(1) of the IT Act 1961 even if the expenses were incidental to the running of the business of the assessee, and which is not the case here. Prima facie It would appear that these expenses were not incidental to the running of the business of the assessee of construction of projects and these expenses appear to have been debited to the accounts of the assessee and claimed as revenue deduction because ' ED8 was facing winding up proceedings in the court’. It is also observed from the records that‘ assessee had borrowed Rs.619.94 crores till 31 March 2013 from banks and holding company and related parties on which interest of Rs.53,20,51,342/- was paid and out of which Rs.53,20,79,833/- was offered for disallowance and add back under section 36(1)(iii) of the IT Act 1961 by the assesses in the computation of total Income filed with the return of income with the remarks ‘interest till the asset is put to use’. Thus this disallowance of interest of Rs.63.20 crores offered as add, back in the computation of total income by the assesses Itself, clearly shows that the borrowings of Rs.619.94 crores which were directly relatable to the Investment of Rs. 593 crores in EDB shares and when the expenditure of Interest of Re.53.20 crores relatable to the investments of Rs.531.43 crores in shares of EDB was offered for taxation by the assessee itself, there was no reason to claim deduction for legal and professional expenses of Rs. 19.85 crores which was directly relatable to the safeguarding of the investment under section 37(1) of the IT Act 1964. In nutshell, assessee’s case is not tenable under section 37(1) of the IT Act 1961 or any other provision of the IT Act "1961 and hence the addition of Rs. 19.85 crores made by the AO is hereby confirmed in facts of the case and In law and in light of judicial decisions.”
The Ld. A.R. vehemently submitted before us that the authorities below have failed to appreciate the fact that these expenses were primarily incurred for the purpose of protecting the directors/their relatives as the assessee has made huge investments in Etisalat DB Telecom Pvt. Ltd. to the tune of Rs.593/- Crores and the promoters of the assessee were also directors of the said company. The Ld. A.R. submitted that though the expenses were not directly related to the business of the assessee, however, the investments/business interest of the assessee will be only protected if these directors and their relatives are protected from the litigations pending in the CBI, Special Court and therefore submitted that these expenses are wholly and exclusively for the purpose of protecting the interest of the assessee and its business interest and therefore the conclusion by both the authorities below that these are not 8 & 3711/M/2019 M/s. Majestic Infracon Pvt. Ltd connected with the business of the assessee or capital in nature or personal in nature are wrong and devoid of merit. In defense of her arguments the Ld. A.R. relied on the following decisions: i) ITO vs. Dhanrajgiriji Raju Narasingiriji (1973) 91 ITR 544(SC) ii) CIT vs. Ahmedabad Controlled Iron and Steel Reg. Stockholders Association Pvt. Ltd. (1975) 99 ITR 567(Guj) iii) Gujarat Agro Oil Enterprise Ltd. vs. CIT (2002) 125 taxman 912.
The Ld. A.R. therefore, prayed that in view of the ratio laid down in the various decisions as stated above,the order of Ld. CIT(A) may kindly be reversed and AO may kindly be directed to delete the addition.
The Ld. D.R., on the other hand, relied heavily on the orders of authorities below by submitting that these expenses are not at all related to the business of the assessee as the assessee is engaged in the business of civil construction. The Ld. D.R. submitted that as have been noted by the authorities below that these expenses were incurred to protect the directors and their relatives against the criminal cases filed against them by the CBI for getting UAS telecom license allotted to Swan Telecom Pvt. Ltd. (now known as Etisalat DB Telecom Pvt. Ltd.) and therefore these expenses are not wholly and exclusively for the purpose of business since Etisalat DB Telecom Pvt. Ltd. has not commenced its business operation at all and therefore these expenses are capital in nature and were rightly disallowed. The ld. DR also submitted that these expenses are more of personal nature as these are incurred to protect the criminal cases against the directors and their relatives. The Ld. D.R.
We have heard the rival submissions and perused the material on record. The undisputed facts are that the directors of the assessee company and the other concern involved namely Etisalat DB Telecom Pvt. Ltd. are common. We note that assessee has made huge investments of Rs.593/- Crores in Etisalat DB Telecom Pvt. Ltd. We find that CBI has filed criminal cases against the directors and their relatives in connection with allotment of UAS telecom license to Swan Telecom Pvt. Ltd. (now known as Etisalat DB 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. This is also undisputed 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. Under these circumstances, we are certainly of the belief 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. Therefore, we are not in agreement with the conclusion drawn by the Ld. CIT(A)/AO that these expenses are not wholly and exclusively incurred for the purpose of business of the assessee
10 & 3711/M/2019 M/s. Majestic Infracon Pvt. Ltd and are of capital in nature as the business of Etisalat DB Telecom Pvt. Ltd. has not commenced or personal nature of the directors and 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 case of the assessee is squarely covered by the decision of Apex Court decision in the case of Dhanrajgiriji Raju Narasingiriji (supra) in which it has been held that business expenditure incurred by the assessee in connection with criminal litigation for the purpose of his business was deductable under section 10(2)(xv) of 1922 Act as the section 10(2)(xv) did not make any distinction between civil and criminal litigation. The 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. Similarly, in the case of CIT vs. Ahmedabad Controlled Iron and Steel Reg. Stockholders Association Pvt. Ltd. (supra), the Honble Gujarat High Court has held that the money spent in defending the managing director of the assessee company in a criminal prosecution under Essential Commodities Act is an expenditure wholly and exclusively for the purpose of business of the assessee and as such allowable. Considering the facts of the assessee’s case and the ratio laid down in the various decisions as discussed above, we are inclined to hold that these expenses incurred on legal , professional, travelling and boarding are admissible and allowable the hands of the assessee. Accordingly, we set aside
Accordingly, the appeal of the assessee is allowed.
ITA No.3711/M/2019 10. The issue involved in this appeal is similar to one as decided by us in A.Y. 2013-14, therefore, our decision in ITA No.3710/M/2019 A.Y. 2013-14 would, mutatis mutandis, apply to this appeal as well. Accordingly, the order of Ld. CIT(A) is set aside and AO is directed to delete the addition. Accordingly, the appeal of the assessee is allowed.
In the result, both the appeals of the assessee are allowed.
Order pronounced under rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1962, by placing the details on the notice board