THE issue before the Bench is - Whether when the assessee facing Customs duty evasion charge deposits certain sums as per High Court's bail order, the same cannot be construed as penal in nature till the time adjudication is pending. And YES is the answer of the Tribunal.
Facts of the case
A) The assessee incurred expenditure for hiring lawyers and other support services to get the bail for him, as the assessee was in judicial custody due to his arrest by DRI in the Custom Duty Evasion case. AO made disallowance of the same. The CIT(A) held that the expenditure was incurred for defending the assessee in criminal proceedings initiated by the Department of Revenue Intelligence (DRI) and was an expenditure which was of personal in nature and not allowable under the provisions of the Act.B) The assessee made payment as per direction of High Court of Delhi given in the bail order which enlarged the assessee on bail in the criminal case of Custom Duty Evasion. The Assessing Officer disallowed the amount by treating the same as penal in nature, by invoking the provisions under Explanation to section 37(1).
In appeal, the CIT (A) granted relief to the assessee. The CIT(A) held that after the search operation was carried out by the DRI, no adjudication in the case of the assessee had taken place by the DRI authorities. It was held that till the time the adjudication took place, the ascertainment of duty and penalty, if any, could not be determined. It was held that the amount paid by the assessee was nothing but an advance towards payment of additional customs duty which was not a penal payment. On the alternate argument of the assessee, the CIT(A) held that there was no requirement on the part of the assessee to prove the incurring of the liability prior to payment to be entitled to deduction in the year of payment. It was held that even if the advance payment towards duty was made, it would be allowed u/s 43B.
Assessee submitted that the fee paid to the lawyers was on account of assessee's arrest by the DRI on the allegation on evasion of Custom Duty, hence, authorities below denied the claim of the assessee without any legal and justified reason.
Revenue submitted that the impugned claimed expenses were incurred by the assessee to defend himself in a criminal case in which the assessee was arrested for the charge of evasion of Custom Duty which is certainly out of ambit of his business or profession activities and expenditure so incurred could not be deducted as business expenditure in the computation of business income of the assessee.
Having heard the parties, the tribunal held that,
A) ++ In the cases where assessee is able to demonstrate positively that the claimed expenditure on legal fees and proceedings is in extricably or proximately related to caring on the business of the assessee more effectively then the same shall be allowable. However, in the cases where the given or claimed expenditure on legal fees and proceedings is remotely connected or unconnected to caring on of business of the assessee, then the same may not be allowable u/s 37 of the Act. Applying this to the facts in extant case, it can be safely inferred that expenditure to defend in custom duty evasion criminal case, having no connection with caring on of business, is held to rightly disallowed by the AO and same disallowance was upheld by the CIT(A) on cogent and reasonable basis. Ergo the assessee's contentions are jettisoned;
++ the assessee was arrested in Custom Duty Evasion criminal case by the DRI and the payment of legal expenses and fees to the lawyers was made to defend and to secure bail for the assessee in that case. In this situation respectfully following the decision of Supreme Court in the case of CIT Vs. H. Hirjee, we reach to the logical conclusion that the authorities below were right in holding that the payment of legal fees and expenses towards defending in a criminal prosecution not allowable as business expenditure because the same was not expended wholly and exclusively for the purpose of business. Accordingly, ground nos. 2 & 3 of the assessee are dismissed;
B) ++ The assessee made payment of Rs.70 lacs as per direction of High Court of Delhi given in the bail order dated 01.02.2007 which enlarged the assessee on bail in a criminal case of Custom Duty Evasion. At the time of payment the custom duty assessment was pending and yet to be completed in future. Obviously, when it is found that the assessee has evaded custom duty then the penalty is obvious and leviable as per the relevant provisions of the Act but until and unless assessment is not completed the amount of custom duty/additional custom duty, interest thereon and penalty cannot be ascertained and in this situation impugned payment made by the assessee cannot be held as penalty or penal in nature at any stretch of imagination;
++ CIT(A) rightly held that till the time the adjudication takes place ascertained of duty and penalty, if any, cannot be determined. The CIT(A) further went to hold that as such situation takes place the amount deposited by the assessee shall first be appropriated towards the custom duty and balance shall go towards interest, if any, and the balance amount so paid, if any, shall be thereafter appropriated towards penalty, if levied, in the case of assessee. We are also in agreement with the findings of the CIT(A) wherein he accepted the alternate argument of the assessee that the additional custom duty of Rs.70 lacs paid by the assessee is an allowable expenditure u/s 43B of the Act. Respectfully following the decision of Special Bench of the ITAT, Chandigarh in the case of DCIT Vs. Glaxo Smithkline Consumer Healthcare Ltd. we hold that section 43B allow deduction of impugned payment as additional custom duty irrespective of the previous year in which the liability to pay such sum was raised against the assessee. Accordingly, we are unable to see any perversity, ambiguity or any other valid reason to interfere with the impugned order and we uphold the same.
Assessee submitted that the fee paid to the lawyers was on account of assessee's arrest by the DRI on the allegation on evasion of Custom Duty, hence, authorities below denied the claim of the assessee without any legal and justified reason.
Revenue submitted that the impugned claimed expenses were incurred by the assessee to defend himself in a criminal case in which the assessee was arrested for the charge of evasion of Custom Duty which is certainly out of ambit of his business or profession activities and expenditure so incurred could not be deducted as business expenditure in the computation of business income of the assessee.
Having heard the parties, the tribunal held that,
A) ++ In the cases where assessee is able to demonstrate positively that the claimed expenditure on legal fees and proceedings is in extricably or proximately related to caring on the business of the assessee more effectively then the same shall be allowable. However, in the cases where the given or claimed expenditure on legal fees and proceedings is remotely connected or unconnected to caring on of business of the assessee, then the same may not be allowable u/s 37 of the Act. Applying this to the facts in extant case, it can be safely inferred that expenditure to defend in custom duty evasion criminal case, having no connection with caring on of business, is held to rightly disallowed by the AO and same disallowance was upheld by the CIT(A) on cogent and reasonable basis. Ergo the assessee's contentions are jettisoned;
++ the assessee was arrested in Custom Duty Evasion criminal case by the DRI and the payment of legal expenses and fees to the lawyers was made to defend and to secure bail for the assessee in that case. In this situation respectfully following the decision of Supreme Court in the case of CIT Vs. H. Hirjee, we reach to the logical conclusion that the authorities below were right in holding that the payment of legal fees and expenses towards defending in a criminal prosecution not allowable as business expenditure because the same was not expended wholly and exclusively for the purpose of business. Accordingly, ground nos. 2 & 3 of the assessee are dismissed;
B) ++ The assessee made payment of Rs.70 lacs as per direction of High Court of Delhi given in the bail order dated 01.02.2007 which enlarged the assessee on bail in a criminal case of Custom Duty Evasion. At the time of payment the custom duty assessment was pending and yet to be completed in future. Obviously, when it is found that the assessee has evaded custom duty then the penalty is obvious and leviable as per the relevant provisions of the Act but until and unless assessment is not completed the amount of custom duty/additional custom duty, interest thereon and penalty cannot be ascertained and in this situation impugned payment made by the assessee cannot be held as penalty or penal in nature at any stretch of imagination;
++ CIT(A) rightly held that till the time the adjudication takes place ascertained of duty and penalty, if any, cannot be determined. The CIT(A) further went to hold that as such situation takes place the amount deposited by the assessee shall first be appropriated towards the custom duty and balance shall go towards interest, if any, and the balance amount so paid, if any, shall be thereafter appropriated towards penalty, if levied, in the case of assessee. We are also in agreement with the findings of the CIT(A) wherein he accepted the alternate argument of the assessee that the additional custom duty of Rs.70 lacs paid by the assessee is an allowable expenditure u/s 43B of the Act. Respectfully following the decision of Special Bench of the ITAT, Chandigarh in the case of DCIT Vs. Glaxo Smithkline Consumer Healthcare Ltd. we hold that section 43B allow deduction of impugned payment as additional custom duty irrespective of the previous year in which the liability to pay such sum was raised against the assessee. Accordingly, we are unable to see any perversity, ambiguity or any other valid reason to interfere with the impugned order and we uphold the same.
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