Whether it amounts to concealment of income warranting penalty when legal expenses incurred to defend himself in a criminal case were claimed as business expenditure but same were disallowed by Tribunal - NO: ITAT

THE issue before the Bench is - Whether it amounts to concealment of income warranting penalty u/s 271(1)(C) when legal expenses incurred by the assessee-actor for defending himself in a criminal case were claimed as business expenditure but the same were disallowed by the Tribunal. And the answer is NO.

Facts of the case

The assessee is a leading film actor who derives income from profession of acting and advertisement assignments. Assessee had claimed legal expenses of Rs. 12,90,000/- and Rs. 33,75,000/- in AYs 2003-04 and 2004-05 respectively which were incurred by the assessee for defending himself in various criminal proceedings pending in the court. According to the A.O., the said expenses incurred by the assessee to defend himself in criminal proceedings were personal expenses and the same therefore could not be allowed as business expenditure. On appeal, the CIT(A) deleted the disallowance made by the A.O. on account of legal expenses for both the years under consideration observing that the said expenses were incurred by the assessee for the preservation and protection of his profession from any legal process or proceedings which might have resulted in reduction of his income. On further appeal, the Tribunal, however, reversed the decision of the CIT(A) on this issue and confirmed the disallowance made by the A.O.

As a result of sustenance by the Tribunal of additions made to the total income of the assessee notices were issued by the A.O. requiring the assessee to show cause as to why penalty u/s 271(1)(c) should not be imposed in respect of the said additions. It was explained by the assessee that the disallowance made on account of legal expenses was deleted by the CIT(A) in both the years under consideration and the decision of the CIT(A) on this issue was reversed by the Tribunal in the quantum proceedings purely on interpretation of law. It was contended that the confirmation by the Tribunal of the addition made on this issue not accepting the legal claim of the assessee thus did not represent concealment of particulars of his income by the assessee or furnishing of in-accurate particulars of such income to attract penalty u/s 271(1)(c) of the Act. The A.O. did not accept this explanation of the assessee and held that by claiming deduction on account of personal expenses in the garb of professional expenditure, there was concealment of particulars of his income by the assessee. On appeal, the CIT(A) confirmed the penalties.

Tribunal held that,

++ a perusal of the orders passed by the A.O. in this regard clearly shows that the relevant aspects of the matter such as the nature of complaint filed against the assessee, the nature of legal proceedings initiated against the assessee, the nature of expenses incurred by the assesse etc. were not gone into by the A.O. and a very cryptic order was passed by him on this issue making the disallowance on account legal expenses treating the same as personal in nature without giving any sound or convincing reasons;

++ although the Tribunal has reversed the decision of the CIT(A) on this issue, the fact that the claim of the assessee was accepted by the CIT(A) on merit clearly shows that the said claim made by the assessee was based on a possible view of the matter ;

++ it is also not in dispute that the legal expenses claimed by the assessee were actually incurred by him and it is not the case of the Revenue at any stage that the expenses so claimed by the assessee were bogus;

++ keeping in view the ratio of the decision of Supreme Court in the case of Reliance Petroproducts Ltd. and having regard to all the facts of the case as discussed above, we are of the view that the present case is not a fit case to impose penalty u/s 271(1)(c) of the Act and the CIT(A) is not justified in confirming the penalties imposed by the A.O. for both the years under consideration. In that view of the matter, we cancel the penalties imposed by the A.O. and confirmed by the CIT(A) for both years under consideration and allow these appeals of the assessee.