NAVINCHANDRA N . MAJITHIA,MUMBAI vs. ITO 9(2)(1), MUMBAI

आदेश / O R D E R

Per Joginder Singh (Judicial Member) The assessee is aggrieved by the impugned order dated 16/01/2013 of the Ld. First Appellate Authority, Mumbai. The first ground raised by the assessee pertains to violation of principle of natural justice on the plea that proper and adequate opportunity of being heard was not provided to the assessee which is against the principle of natural justice.

2.1. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee, an individual, is engaged in the

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business of shares and also having income from other sources. The assessee claimed certain legal expenses, which were disallowed by the Assessing Officer. The assessee also claimed short term capital gain, which was also denied by the Assessing Officer. It is noticed that the matter travelled to the Tribunal, wherein, vide order in ITA No.18/Mum/2004 and ITA No.7424/Mum/2005, order dated 30/04/2010, the Assessing Officer was directed to examine the claim of the assessee and the appeal was allowed for statistical purposes.

2.2. Pursuant to the direction of the Tribunal, the ld. Assessing Officer examined the claim of the assessee and on the reasons contained in the assessment order, affirmed the additions. The assessee challenged the assessment order before the Ld. Commissioner of Income Tax (Appeal), wherein; the stand taken by the ld. Assessing Officer was affirmed. The assessee is in further appeal before this tribunal.

2.3. We have dispassionately examined the record and found that the assessee was provided sufficient/adequate opportunity, which resulted into denial of claimed relief. So far as, merit is concerned, that is different but the question before us is with respect to violation of principle of natural justice. The totality of facts and the material available on record clearly indicates that the assessee was heard by the ld. Assessing Officer as well as by the Ld. Commissioner of Income Tax (Appeal), therefore, there is no violation as such,

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consequently, we find no merit in the claim of the assessee, therefore, this ground is dismissed.

3.1. On the other hand, the ld. DR, strongly defended the impugned order by contending that the assessee is dealing in shares and the claimed legal expenses are not allowable as the same were not incurred for business expenses. Our attention was invited to page-7 of the order of the Ld. Commissioner of Income Tax (Appeal). The ld. DR, further contended that the direction of the Tribunal were

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duly complied with by the Assessing Officer as well as by the Ld. Commissioner of Income Tax (Appeal) for which our attention was invited to page 108 of the paper book.

3.2. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, we find that the assessee and his family members entered into a sale agreement for sale of shares of India Farmers Pvt. Ltd. with one M/s J. B. Holdings Ltd. On account of such agreement an amount of Rs.3,46,52,000/- were obtained by the assessee as advanced due to dispute between the assessee and M/s J. B. Holdings. As per the assessee, M/s J. B. Holdings, failed to make full payment to the assessee in accordance with the terms and conditions of the said agreement. It is further noted that M/s J. B. Holdings lodged a criminal complaint against the assessee for refund of advances made to the assessee. The litigation even reached up to the Hon'ble Apex Court. The stand of the assessee is that legal expenses were incurred by the assessee to safeguard its business interest, whereas, the stand of the Revenue is that the litigation was not for business purposes rather it was with reference to transfer of entire business and assets of M/s India Farmers Pvt. Ltd. proposed to be given to M/s J. B. Holding.

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3.3. We have perused the record and there is a finding in para 4.3 of the impugned order, wherein, it has been observed as under:-

“Obviously, there was intention of the appellant and his family members to transfer lease hold land and business of M/s India Farmers Pvt. Ltd. to M/s J.B. Holdings Ltd. The appellant has got substantial stake in M/s India Farmers Pvt. Ltd. and because of dispute amongst them, litigation was there. Obviously, this litigation was with regard to transfer of shares and resultant ultimate transfer of company and its property by the group member of the assessee to M/s J. B. Holdings Ltd.……….”

3.4. From the foregoing discussion and the observation made in the assessment order as well as in the impugned order, there is no dispute to the fact that some litigation was going on amongst the parties and the assessee incurred legal expenses to safeguard its business interest. The payment was made through banking channel to various persons/advocates as is evidenced from pages 46 to 51 of the paper book. It is noticed that the payments were made to advocates like Shri S. G. Surana, Shri Bharat Mehta, Shri R.T. Tiwari, Shri Mayank Chandan, S. K. Vyas, S.G. Paghe, Shri Milind Sakhardande, Shri Dhiraj Mirajkar, Narendra Thakore, P.R. Vakil, Ramakant Khalak, Shri Arun Jaitely, etc. The amounts paid to the respective advocates, date of payment, cheque number and the purpose has been duly mentioned at pages 46 to 41 of the paper book. The majority

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of the fee, which was paid is with respect to litigation with M/s J.B. Holding Ltd. for appearance/argument before Session Court, Hon'ble High Court/Apex Court. Thus, it is clear that the legal fee was paid to defend the suit/cases and to safeguard its business interest. It is not the case that bogus claim was made by the assessee rather we find that, as mentioned earlier, the payments were made through banking channel. The Copy of the suit/criminal complaint (GDE No.86 dated 16/06/1997 and registered vide CID (HQr) PS Case No.1(6)97 u/s 420 IPC), filed by M/s J. B. Holdings Ltd. with the Special Superintendent of Police, Special Branch (CID), Shillong, Meghalay is available at pages 52 to 55 of the paper book. The decision dated 04/09/2000, from Hon'ble Apex Court in Criminal Appeal No.744 of 2000 (arising out of SLP (Crl No.1097 of 1999) is available from pages 56 to 81 of the paper book. Another decision from Hon'ble Apex Court itself dated 04/08/2000 is available at pages 82 to 97 of the paper book. It is also noted that one decision from Hon'ble Apex Court is available at pages 93 to 104 of the paper book. The decision from the Tribunal (ITA No.18/Mum/2004) and (ITA No.7424/Mum/2005) is available at pages 105 to 109 of the paper book. The totality of facts clearly indicates that the assessee made the payment of legal fees to defends its case.

3.5. Now, question arises, whether the payment of legal fee is an allowable deduction. The obvious reply is yes. Section 57 of the Act speaks about income chargeable under the head “Income from Other Sources”, which shall be

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computed after making the deductions mentioned therein. The section is reproduced hereunder for ready reference:-

“57. The income chargeable under the head "Income from other sources" shall be computed after making the following deductions, namely :— (i) in the case of dividends, other than dividends referred to in section 115-O, or interest on securities, any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividend or interest on behalf of the assessee ; (ia) in the case of income of the nature referred to in sub-clause (x) of clause (24) of section 2 which is chargeable to income-tax under the head "Income from other sources", deductions, so far as may be, in accordance with the provisions of clause (va) of sub-section (1) of section 36 ; (ii) in the case of income of the nature referred to in clauses (ii) and (iii) of sub-section (2) of section 56, deductions, so far as may be, in accordance with the provisions of sub-clause (ii) of clause (a) and clause (c) of section 30, section 31 and sub-sections (1) and (2) of section 32 and subject to the provisions of section 38 ; (iia) in the case of income in the nature of family pension, a deduction of a sum equal to thirty-three and one-third per cent of such income or fifteen thousand rupees, whichever is less. Explanation.—For the purposes of this clause, "family pension" means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death ; (iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purposeof making or earning such income; (iv) in the case of income of the nature referred to in clause (viii) of sub-section (2) of section 56, a deduction of a sum equal to fifty per cent of such income and no deduction shall be allowed under any other clause of this section”.

3.6. If the provision of the Act, which is corresponding to the section 12(2) of 1922 Act, used in this context, the expression “incurred solely for the purposes of making or

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earning such income”, the use of expression “laid out or expanded wholly and exclusively” in section 57(iii) of the 1961 Act is to secure uniformity with the language of section 37(1) of the 1961 Act. At the same time, the expression, “for the purposes of business or profession” has a wider implication then the expression “for the purposes of making or earning income” used in section 57(iii) of the Act. The purpose contemplated by section 57(iii) is more specific in character. So far as, reasonableness of the expenditure envisaged by section 57(iii) depends upon the facts of particular case. The Hon'ble Court in CIT vs New Savan Sugar and Good Refining Co. Ltd. (1990) 185 ITR 564, 571 (Cal.) held that it is for the Tribunal to decide whether the expenditure is wholly incurred for the purpose of keeping the assessee company in operation and earning income in as much as the concept “wholly” pertains to quantum of the money expended. The Hon'ble Court further observed even if a particular expenditure is un-remunerative, such expenditure is nonetheless a proper deduction, if such expenditure is made wholly and exclusively for the purposes of earning such income.

3.7. If the issue is analyzed in the light of section 37(1) of the Act, broadly speaking, where litigation expenses are incurred for purposes of creating, curing or completing the assessee’s title to the capital, then the such expenses are in the nature of capital expenditure. On the other hand, if the litigation expenses are incurred to protect the business of the

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assessee, it must be considered as revenue expenditure. This proposition is supported by Hon'ble Apex Court in Dalmia Jain & Co. Ltd. vs CIT (1971) 81 ITR 754 (SC) and Meenakshi Mills Ltd. vs CIT (1967) 63 ITR 207 (SC). To be more precise, the type of litigation, object or purpose of the litigation has to be ascertained from the facts of each case. If the object or purpose is to defend or maintain existing title to the capital asset of the business of the assessee, the expenditure would be of revenue in nature. The ratio laid down in following cases supports our view:-

a) CIT v. Bengal Assam Investors Ltd., (1969) 72 ITR 319, 325 (Cal); b) CIT v. Life Insurance Corporation of India, (1966) 62 ITR 827 (Cal); c) Premier Construction Co. Ltd. v. CIT, (1966) 62 ITR 176 (Bom); d) Liberty Cinema v. CIT, (1964) 52 ITR 153, 167 (Cal); Transport Co. Pr. Ltd. v. CIT, (1962) 46 ITR e) 1009, 1016 (Mad); Transport Co. Ltd. v. CIT, (1957) 31 ITR 259, 266-7 (Mad); f) G. Veerappa Pillai v. CIT, (1955) 28 ITR 636 (Mad); g) CIT v. Raman & Raman Ltd.,(1951) 19 ITR 558, 569-70 (Mad). Also see, Lachminarayan Modi v. CIT, (1955) 28 ITR 322 (Orissa); h) J. B. Advani & Co. Ltd. v. CIT, (1950) 18 ITR 557 (Bom); i) Mahabir Prasad & Sons v. CIT, (1945) 13 ITR 340 (Lah); j) Central India Spinning, Weaving & Manufacturing Co. Ltd. v. CIT, (1943) 11 ITR 266 (Nag); k) CIT v. Maharajadhiraja Sir Kameshwar Singh (1942) 10 ITR 214 (PC)

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l) Southern V. Borax consolidated Ltd. (1942) 10 ITR (Sup) 1 (KB) m) Associated Portland Cement Manufacturers Ltd. v. Kerr, (1946) 27 Tax Cas 103, 118 (CA) n) Ebrahim Aboobaker v CIT (1971) 81 ITR 664 (Bom.) 3.8. In the cases of defending the criminal litigation, we find that Section 37(1) does not make any distinction between expenditure incurred in civil litigation and that incurred in criminal litigation. All that the court has to see is whether the legal expenses were incurred by the assessee in his character as a trader, in other words, whether the transaction in respect of which proceedings are taken arose out of and was incidential to assessee's business. Further, it is to be seen whether the expenditure was bonafidely incurred wholly and exclusively for the purpose of the business [see, CIT v. Birla Cotton Spng. & Wvg. Mills Ltd., (1971) 82 ITR 166 (SC); CIT v. Dhanrajgirji Raja Narsingirji, (1973) 91 ITR 544, 549 (SC)].

3.9. So far as, issue of quantum of the expenditure to be incurred is concerned, we are of the view, it is for the assessee to decide how best to protect his own interest. It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. The ratio laid down in CIT v. Dhanrajgirji Raja Narsingirji, (1973) 91 ITR 544 (SC) supports our view. In that case His Lordship observed:

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“It is true that in some of the cases this court has held that an expenditure incurred by an accused assessee to defend himself against a criminal charge did not fall within the scope of section 1O(2)(xv)*. Those decisions were rendered on the facts of those cases. That is not the position in this case."

Criminal litigation may be prosecuted to put pressure on the accused to make good the loss caused to the assessee, and expendi-ture incurred therefore, if having nexus with the profits or business, are allowable deduction Saharanpur Electric Supply Co. Ltd. v. CIT, (1971) 82 ITR 405 (All). Assessee defending himself-Expenses incurred by a person exercising a trade or profession in defending himself in a criminal prosecution, which arises out of his business or professional activities, cannot be deducted as business expenditure in the computation of his business income CIT v. H. Hirjee, (1953) 23 ITR 427, 431 (SC); CIT v. Gasper & Co., (1940) 8ITR 100 (Rang)]. In Hirjee's case [23 ITR 427], the assessee incurred expenditure in defending prosecution under the Hoarding and Profiteering Ordinance, 1943 (No. 35 of 1943), for selling goods at black market prices. Such expenditure was held not allowable. Similarly, expenditure incurred by a firm carrying on export and import business in defending one of its partners for having acquired foreign exchange and not fully utilising it for import were held not allowable although the partner was utlimately acquitted [CIT v. Chaman Lal & Bra .(1970) 77 ITR 383 (Delhi)]. This case was, however, distinguished in CIT v. Ahmedabad Controlled Iron & Steel Assn. Pr. Ltd., (1975) 99 ITR 567 (Guj), where

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expenses incurred by company in defending its managing director were held allowable. In order to so claim such expenditure the assessee has not only to prove that the expenditure was incidental to the business but also to show that the expenditure was laid out or expended wholly and exclusively for the purpose of the business [Indermani Jatia v. CIT, (1951) 19 ITR 342 (All) on appeal, see, (1959) 35 ITR 298 (SC)].

3.10. Assessee defending an employee, etc.-When an employee is prosecuted in respect of transaction in the course of his employment, expenditure incurred in or about his defence is incurred for the protection of the good name of the business and is an allowable business expenditure [ J.B. Advani & Co. Ltd. v. CIT & EPT, (1950) 18 ITR 557 (Bom) considered in CIT v. H. Hirjee, (1953) 23 ITR 427 (SC), where the correctness of its ultimate decision was not doubted; J.N. Singb & Co. Pr. Ltd. v. CIT. (1966) 60 ITR 732 (Punj)]. Legal expenses incurred by assessee-company, a sugar mill, in defending a criminal prosecution launched against its director-manager and some employees on charge of conspiracy between the assessee and the railway employees to give and accept bribes in regard to transport of sugarcane from various stations to mill were held to be allowable deductions [Lakshmiji Sugar Mills Co. Ltd. v. CIT, (1967) ITR (Sh N) 21 (Delhi)]. Similarly, expenditure incurred in defending a criminal case against the directors and principal officers of the assessee-company on the allegation that the

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vegetable oil produced by the company did not contain 5% til oil as required by the Government rule was held to be an expenditure incurred with a view to proving the quality and standard of the manufactured goods produced by the assessee and, therefore, deductible [Rohtas Industries Ltd. v. CIT, (1968) 67 ITR 361 (Pat)].

3.11. In Ananda Marga Pracharaka Sang ha v. CIT [(1996) 218 ITR 254, 258, 2 (Cal)] , the legal expenses incurred by the assessee for defending Marga Guru, the president of the association and other members of the association against criminal charges have been held allowable as a permissible expenditure while computing the income of the assessee. However, on the question of allowability of legal expenses incurred by the assessee for defending criminal charges arising out of the person civil rights and unconnected with the aims and objects of the assessee-organisation such, has been remanded to the Tribunal (p. 273) to determine that whether such expenses were related to the society's activity and then to decide such question about their allowability.

3.12. There are some other cases, where the expenditure incurred in criminal litigation was held allowable, are:-

(1) Hingir Rampur Coal Co. Ltd. v. CIT, (1971) 81 ITR 633 (Bom) [rioting by assessee's workmen resulting in

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injury and death of manager-sums spent by assessee in assisting State prosecution of accused].

(2) CIT v. Dhanrajgirji Raja Narasingirji, (1973) 91 ITR 544 (SC) [expense incurred by the assessee for prosecution of the transferee of the managing agency, which was instrumental in settlement between the assessee and the transferee].

(3) Iron Traders P. Ltd. v. CIT, (1974 97 ITR 606 (Delhi) Criminal complaint against former managing director for failure to account for amount belonging to the company-expenses for prosectuoin.

4) Lakshmiji Sugar Mills Co. Pr. Ltd. v. CIT, (1975) 98 ITR 568 (Delhi) [criminal case against director and employees for bribery-amount spent by company for defence of accused).

5) Parshva Properties Ltd. v. CIT, (1976) 104 ITR 631 (Cal) [expenses incurred in defending employees of the assessee-company in a criminal prosecution for violating Mines Regulations].

6) CIT v. National Rayon Corporation Ltd., (1985) 155 ITR 413 (Bom) [expenditure incurred in defending a senior employee of the assessee was held deductible].

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7) CIT v. Indian Copper Corporation Ltd., (1986) 162 ITR 905 (Pat) [expenditure incurred in defending watchmen and other employees who guarded the premises of company].

8) Atlas Cycle Industries Ltd. v. CIT, (1990) 181 ITR 18 (Punj) [expenditure incurred in connection with criminal litigation pertaining to criminal conspiracy commission of offence under the Essential Commodities Act, 1955, was held deductible].

3.13. However, the amount spent in defending directors who were prosecuted under the Mines Act was held not deductible because there was no evidence to show that the amount was spent for preserving the reputation of the assessee [CIT v. Indian Copper Corporation Ltd., (1986) 162 ITR 905 (Pat)]. Similarly, expenses incurred by a Newspaper company in defending the editor and printer in proceedings for contempt of court were held, on facts, not to be expenditure incurred for the purpose of earning profits or gains and consequently not allowable [Amrita Bazar Patrika, In re, (1937) 5 ITR 648 (Cal)]. Also see, Swadeshi Cotton Mills Co. Ltd. v. CIT, (1975) 100ITR (All), for facts and decision.

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(1) by a shareholder-assessee in suits filed against directors respecting matters of internal management of the company [Transport Co. P. Ltd. v. CIT, (1962) 46 ITR 1009 (Mad)];

(2) in an appeal with regard to the correctness of a ruling given by the president in the general meeting, with reference to the relative rights of the shareholders and the board of directors under the Companies Act, which had nothing to do with the company's business [Premier Construction Co. Ltd. v. CIT, (1966) 62 ITR 176 (Born), where the expenses of the original suit were held allowable as the plaintiff had claimed for reliefs which, if granted, would have affected the carrying on of the business of the company];

(3) in defending an application to the court by the shareholders under section 153C of the Indian Companies Act, 1913, questioning the appointment of some of the directors of the company [CIT v. Shiwalik Talkies Ltd., (1967) 63 ITR 83 (Punj)];

(4) in a suit for amending the articles of association of the company and thereby acquiring the voting rights in respect of each and every share [CIT v. Bengal Assam Investors Ltd., (1969) 72 ITR 319 (Cal)];

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(5) in proceedings for compelling a company to register its shares in the name of the assessee, which were purchased earlier in an auction sale [CIT v. Bengal Assam Investors Ltd., (1969) 72 ITR 319 (Cal)];

(6) in connection with the dispute between the partners of the old managing agency Firm and for obtaining sanction of the Central Government for appointment of thereconstituted firm as its managing agents [Rampooria Cotton Mills Ltd. v. CIT, (1974) Tax LR 395 (Cal)];

(7) in paying to Chartered Accountants giving advice regarding the scheme of amalgamation [New Commercial Co. Ltd. v. Addl. CIT, IT Ref. o. 40 of 1972 decided by the Gujarat High Court on 30-11-1973];

(8) in defending disciplinary proceedings against the auditor [CIT v. Deccan Sugar & Abkhari Co. Ltd., (1976) 104 ITR 458 (Mad)];

(9) by the assessee-lessor-company in conducting winding up proceedings started against the lessee- company [Associated Bombay Cinema P. Ltd. v. CIT, (1978) III ITR 942 (Bom)];

(10) in resisting transfer of shares without assigning or disclosing reasons [Harinagar Sugar Mills Ltd. v. CIT, (1979) 117 ITR 945 Born)];

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(11) in attempting to prevent investigation into the affairs of the company [Harinagar Sugar Mills Ltd. v. CIT, (1979) 117 ITR 945 (Born)];

(12) by the assessee-amalgamated-company in reimbursing the amount of legal expenses incurred by the shareholders who attempted stayal of declaration of dividends [Raza Buland Sugar Co. Ltd. v. CIT, (1980) 122 ITR 817 (All)];

(l3) for the purposes of the amalgamation of two companies [Raza Buland Sugar Co. Ltd. v. CIT, (1980) 122 ITR 817 (All); Raza Buland Sugar Co. Ltd. v. CIT, (1980) 123 ITR 24 (All)];

(14) in defending a suit instituted by certain shareholders seeking an injunction restraining the company from proceeding to distribute dividends in specie [Buland Sugar Co. Ltd. v. CIT, (1981) l30 ITR 434 (Del)];

(15) by the company in defending a suit instituted by a director against another director [Albert David Ltd. v. CIT, (1981) l31 ITR 192 (Cal)];

(16) in legal proceedings in connection with a scheme of amalgamation which did not materialise [Bengal & Assam Investors Ltd. v. CIT, (1983) 142ITR 156 (Cal)];

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(17) by the assessee, a major shareholder, in connection with application under section 186 of the Companies Act for calling meeting of its subsidiary company for removal of existing directors and appointment of new directors, etc. [United Breweries Ltd. v. CIT, (1986) 162 ITR 527 (Karn)];

(18) by the assessee towards fees for conducting an appeal before the Company Law Board in connection with the refusal of registration of certain shares in a company [Jaya Hind Industries (P.) Ltd. v. CIT, (1986) 161 ITR 842 (Bom)];

(19) in connection with seeking legal advice in the matter of certain irregularities and fictitious transactions as revealed in the auditors' reports [CIT v. Mcleod & Co. Ltd., (1987) 164 ITR 681 (Cal)].

(20) in defending the appeal filed by B Co. in the Supreme Court challenging the order of the Company Law Board ordering the transfer of shares of B Co. to the assessee [CIT v. Jaya Hind Industries (P.) Ltd., (1993) 201 ITR 934,938 (Bom)].

(21) in connection with amalgamation of company M with the assessee-company which resulted in a radical alteration in the framework of the business of the as-sessee-company [Godfrey Phillips India Ltd. v. CIT,

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(1994) 206 ITR 23,35 (Bom)]. Also see, Lalitmani Pvt. Ltd. v. CIT, (1997) Tax LR 543,544 (Born).

(22) for obtaining advice of solicitors in regard to dilution of shareholding in pursuance of the provisions of the Foreign Exchange Regulation Act, 1973, as the expenditure resulted in augmentation of the capital base of the assessee-company [CIT v. Hayward Waldia Refinery Ltd., (1994) 209 ITR 159, 161 (Cal)].

(23) in paying fees to the lawyers in connection with increase in authorised capital of the assessee-company [Cynamid India Ltd v. CIT, (1994) Tax LR 895, 897-98 (Bom)].

(24) in connection with amalgamation of one of the subsidiary companies of the assessee-company with the latter has been held of capital in nature because the purpose and object of incurring the expenditure was to alter the framework or the structure under which the assessee was carrying on its business and affected the profit-making apparatus [Jayashree Tea & Industries Ltd. v. CIT, (1995) 80 Taxman 169,175-76 (Cal)].

(25) on account of legal and professional charges in connection with the merger of the company was held not deductible as revenue expenditure because there were no findings that the two companies were carrying

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on complementary business and the amalgamation was necessary for the smooth and efficient conduct of business [Triveni Engineering Works Ltd. v. CIT, (1998) 232 ITR 639, 645 (Del)].

(26) in connection with issuance of share certificates and bonds as a part of the amalgamation scheme [CIT v. Official Liquidator, Ahmedabad Manufacturing & Calico Printing Co. Ltd., (2000) 244 ITR 156, 160, 162-63 (Guj)].

(i) in order to decide whether an expenditure is a permissible deduction under section 57(iii), the nature of the expenditure must be examined; (ii) the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee; (iii) the expenditure must have been laid out or expended wholly and exclusively for the purpose of making or earning "Income from other sources"; (iv) the purpose of making or earning such income must be the sole purpose for which the expenditure must have been incurred, that is to say, the expenditure should not have been incurred for such

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purpose as also for another purpose or for a mixed purpose; v) the distinction between purpose and motive must always be borne in mind in this connection, for, what is relevant is the manifest and immediate purpose and not the motive or personal considerations weighing in the mind of the assessee in incurring the expenditure; (vi) if the assessee has no option except to incur the expenditure in order to make the earning of the income possible, such as when he has to incur legal expense for preserving and maintaining the source of income, then, undoubtedly, such expenditure would be an allowable deduction; however, where the assessee has an option and the option which he exercises has no connection with the making or earning of the income and the option depends upon personal considerations or motives of the assessee, the expenditure incurred in consequence of the exercise of such option cannot be treated as an allowable deduction; (vii) it is not necessary, however, that the expenditure incurred must have been obligatory; it is enough to show that the money was expended not of necessity and with a view to an immediate benefit to the assessee but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the making or earning of the income; (viii) if, therefore, it is found on application of the principles of ordinary commercial trading that there is some connection, direct or indirect, but not remote, between the expenditure incurred and the income earned, the expenditure must be treated as an allowable deduction;

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(ix) it would not, however, suffice to establish merely that the expenditure was incurred in order indirectly to facilitate the carrying on of the activity which is the source of the income; the nexus must necessarily be between the expenditure incurred and the income earned; (x) it is not necessary to show that the expenditure was a profitable one or that in fact income was earned; (xi) the test is not whether the assessee benefited thereby or whether it was a prudent expenditure which resulted in ultimate gain to the assessee but whether it was incurred legitimately and bona fide for making or earning the income; (xii) the question whether the expenditure was laid out or expended for making or earning the income must be decided on the facts of each case, the final conclusion being one of law'. In the aforesaid propositions (vi) it has been clearly held/observed that incurring of legal expenses for preserving and maintaining of source of income would be allowable deduction.

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(i) litigation expenses to secure an order from the court for enabling an assessee to carry on its business without interference is an allowable deduction;

(ii) expenditure incurred to resist, in a civil proceeding, the enforcement of a measure, legislative or executive, which imposes restrictions on the carriage of a business or to obtain a declaration that the measure was invalid, would, if other conditions are satisfied, be admissible as deduction; and

(iii) the deductibility of expenditure incurred in prosecuting a civil proceeding depends upon the nature and purpose of the civil proceeding in relation to assessee's business and cannot be affected by the final outcome of that business.

6.1. In the case of CIT vs Gannon Dunkarlay and Co. Pvt. Ltd. (2000) 243 ITR 646 (Mad.), CIT vs Administrator General Of Madras (1998) 234 ITR 351 (Mad.), CIT vs Patiala Flour Mills Co. Ltd. (1989) 180 ITR 75 (P & H), Hindustan Milk Food Manufacturing Ltd. 179 ITR 302 (P & H), Palani Sir Murgun Textiles Ltd. vs ACIT (2002) 254 ITR 333 (Mad.) decided the issue in favour of the assessee. In the case of Gannon Dunkarlay and Co. Pvt. Ltd., the Hon'ble Madras High Court, where the expenditure was incurred by the official liquidator to maintain the infrastructure of the company held that the expenditure was deductible u/s

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57(iii), as it would not have been possible to earn the interest income without incurring such expenditure. In the light of the foregoing discussion, ratio laid down by various Hon'ble High Courts/Hon'ble Apex Court and the facts available on record, we are of the considered opinion that in defending the litigation, the fee/legal expenses paid by the assessee is an allowable deduction, more specifically when the same was paid through banking channel and the Assessing Officer has neither contradicted the genuineness of payment and has also not brought any contrary material on record, evidencing that no such payment was made by the assessee, therefore, this ground of the assessee is allowed.

7.1. The crux of argument advanced on behalf of the assessee is that payment was made through banking channel/ cheque, shares are delivery based and the assessee is a investor and not a trader. It was also explained that assessee filed additional evidence/various information before the Ld. Commissioner of Income Tax (Appeal) for which our attention was invited to page-8 para .5.2 of the impugned order. Our attention was further invited to page 42 of the paper book by explaining that the

27 Shri Navinchandra N. Majithia ITA No.2830/Mum/2013

shares are listed one. The ld. Counsel also claimed that the average holding period is 43.61 days and is following consistent method. Reliance was placed upon the decision in ITA No.6497/Mum/2009 order dated 15/06/2011 and ITA No.605/Jp/2013 dated 18/03/2016.

7.2. On the other hand, the ld. DR invited our attention to page-11 of the impugned order and also the order of the Tribunal (page-108 of the paper book), by defending the addition made by the Assessing Officer and sustained by the Ld. Commissioner of Income Tax (Appeal).

7.3. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that it is worth mentioning that this issue even travelled to the Tribunal and vide order dated 30/04/2010 (ITA No.18/Mum/2004) direction was granted to the Assessing Officer to examine the factual matrix and also whether the shares were actually delivered at the time of sale. The claim of the assessee with respect to addition of Rs.6,12,711/- arose from share transaction made by the assessee. Even during set-aside proceedings, the ld. Assessing Officer maintained the addition, which was affirmed by the Ld. Commissioner of Income Tax (Appeal). The assessee duly participated before the Assessing Officer during set-aside proceedings and filed various information. The amount was arose from 51 sales transactions of share, which was not regarded as short term capital gain. The ld. Assessing

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Officer has also cited various judicial decisions and reached to the conclusion that the assessee is a trader in shares, there is frequent transactions, the intention is to earn profit. We have perused the paper book and found that the shares are delivery based (pages 1 to 31 of the paper book), sale and purchase was made through banking channel (page -32 to 45 of the paper book) and has been shown as investments in the books of accounts maintained by the assessee. The assessee is consistently following the same method of account and no fault was ever found. The shares transacted by the assessee are listed one (page-42 of the paper book) and the average holding period is 43.61 days. The shares were actually delivered and the intention of the assessee is investment only. So far as, the contention of the ld. DR as well as the observation made in the assessment order that the intention of the assessee is to earn profit, is concerned, we are of the view that while doing the business or even investment, the intention is always to earn the profit and not a loss, therefore, this contention of the ld. Assessing Officer cannot be said to be justified. We find that the case of the assessee is covered in his favour by the ratio laid down in CIT vs Trishul Investment Ltd. (2008) 305 ITR 434 (Mad.), CIT vs Ramamirtham (2008) 306 ITR 239 (Mad.), CIT vs N.S. S. Investment Pvt. Ltd. 277 ITR 149 (Mad.), CIT vs Jubilant Security Pvt. Ltd. (2011) 333 ITR 445 (Del.), Janak S. Rangwala vs ACIT 11 SOT 627 (Mum.), Bombay Gymkhana Ltd. vs Income Tax Officer (2008) 5 DTR (Mum)

29 Shri Navinchandra N. Majithia ITA No.2830/Mum/2013

401, CIT vs Gopal Purohit (2011) 336 ITR 287 (Bom.)(SLP dismissed by Supreme Court in 334 ITR 308)(St.)(SC). So far as, the frequency of transaction is concerned, it depends upon volume, magnitude, use of borrowed funds, period of holding, infrastructure of the assessee, etc and facts of each case. The ratio laid down in Karishma Sha vs ACIT (ITA No.2735/Mum/2009) order dated 23/07/2010, where there were transactions of 138 purchases and 107 sales and the average period of holding was less than one month, supports the case of the assessee. Further, the ratio laid down in Nehal V. Shah vs ACIT (ITA No.2733/Mum/2009) order dated 15/12/2010, Vinod K. Nevatia vs ACIT (ITA No.6556/Mum2009) order dated 03/12/2010, ACIT vs Naishadh v. Vachharajani (ITA No.6429/Mum/2009) order dated 25/02/2011, Nagindas P. Shah (HUF) vs ACIT (ITA No.961 & 1836/Mum/2010) order dated 05/04/2011, Ramesh Babu Rao vs ACIT (ITA No.3719, 4084, 5318 & 5319/Mum/2009) order dated 13/04/2011, Hitesh Satishchandra Doshi Etemai vs JCIT (ITA No.6497/Mum/2009) order dated 15/06/2011, CBDT Instruction No.1827 dated 31/08/1999 along with supplementary instruction supports the case of the assessee. The ratio laid down in the aforementioned cases is that when the assessee treated the transactions as investments in the books of accounts, which includes both long term and short term, the intention of the assessee for acquiring the shares, source of acquisition are out of own

30 Shri Navinchandra N. Majithia ITA No.2830/Mum/2013

funds/family funds, the assessee valued the shares under investment portfolio at cost and never valued them at market price or realization value, it has to be treated as short term capital gain. During hearing, the ld. counsel for the assessee claimed that in earlier years, such transaction of the assessee were assessed as short term capital gain/long term capital gain. This factual matrix was not controverted by the Revenue, consequently we are of the that unless and until contrary material is brought on record no U-turn is expected from the Department. Considering the totality of facts, we are of the view, the assessee transacted the shares as investor, therefore, it cannot be treated as business income. This ground of the assessee is, therefore, allowed.

Finally, the appeal of the assessee is partly allowed.

This Order was pronounced in the open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 16/11/2016.

Sd/- Sd/- (N.K. Pradhan) (Joginder Singh) लेखा सद�य / ACCOUNTANT MEMBER �या�यक सद�य / JUDICIAL MEMBER मुंबई Mumbai; �दनांक Dated : 18/11/2016 f{x~{tÜ? P.S /�नजी स�चव आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT, Mumbai.

31 Shri Navinchandra N. Majithia ITA No.2830/Mum/2013

आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy//

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai,