Salman Khan V. Assistant Commissioner of Income Tax

CASE BRIEF

Court: Income Tax Appellate Tribunal “E” Bench, Mumbai

Case No: I.T.A. No. 2559/Mum/2013 (Assessment Year: 2003-04); I.T.A. No. 2560/Mum/2013 (Assessment Year: 2004-05)

Case Type: Income Tax Appeal

Date of Hearing: 17/07/2014

Date of Pronouncement: 30/07/2014

Appellant: Salman Khan

Respondent: Assistant Commissioner of Income Tax

Bench: Shri H.L. Karwa, Hon’ble President and Pramod M. Japtap, AM

Statutes Referred: Income Tax, 1961

Charges: S. 271(1) (c) of the Income Tax, 1961

Cases Referred:

• CIT vs. Birla Cotton Spinning & Wvg. Mills, 82 ITR 166;
• CIT vs. Dharajgiri Raja Narasingirji, 91 ITR 544
• CIT vs. Reliance Petroproducts Ltd., 322 ITR 158

Facts:

• The returns of income for the assessment years 2003-04 and 2004-05 were filed by the assessee on 28/11/2003 and 29/10/2004 declaring total income of Rs.3,74,10,421/- and Rs.4,32,18,821/- respectively.
• During the course of course of assessment proceedings, it was noticed by the A.O. that the assessee has claimed legal expenses of Rs.12,90,000/- and Rs.33,75,000/- in assessment years 2003-04 and 2004-05 respectively.
• The assessee also accrued the expenses for protecting himself in numerous criminal proceedings pending in the court, according to the findings of the A.O. The assessee’s charges to protect himself in criminal proceedings, as per the A.O., were confidential in nature and therefore could not be claimed as business expenses. Thus, he disallowed the legal expenses claimed by the assessee in both the years.
• On appeal, the ld. CIT (A) erased the disallowance made by the A.O. on account of the legal expenses for both the years under consideration due to the observation 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 reversed the decision of the ld. C.I.T (A) and confirmed the disallowance made by the A.O. on account of legal expenses for the years under consideration as legal expenses incurred by the assessee to defend himself in criminal proceedings have nothing to do with his professional activities, therefore, it was rightly disallowed by the A.O being expenditure of personal nature.
• As a result of Tribunals decision, notices were issued by the A.O requiring the assessee to show cause as to why penalty under Section 271(1)(c) of the Act should not be imposed in respect of the said additions. The assessee 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 and or furnishing of in-accurate particulars of such income to attract penalty under Section 271(1)(c) of the Income Tax Act.
• The A.O did not accept this explanation and held that by claiming deduction on account of personal expenses in the garb of professional expenditure, there was concealment of particulars of income by the assessee and therefore, imposed penalty of Rs. 3, 68, 550/- and Rs. 10, 24, 650/- under Section 271(1)(c) of the act for 2003-04 and 2004-05 respectively being 100% of the tax sought to be evaded by the assessee.
• On appeal, the ld. CIT(A) confirmed the penalties imposed by the A.O. holding that the claim of the assessee for deduction on account of legal expenses was not permissible as per the law held by Tribunal in the quantum proceedings and that the assessee was not able to substantiate his claim for deduction on account of legal expenses.
• Aggrieved by the orders of the ld. CIT(A), two appeals filed by assessee before the Appellate Tribunal against two separate orders, i.e., ld. CIT(A)- 3, Mumbai dated 04/02/2013 which confirmed the penalties of Rs.3,68,550/- and Rs.10,24,650/- imposed by the A.O. u/s 271(1)(c) of the Income Tax, 1961.

Issues Involved:

• Whether the legal expenses incurred by an assessee to defend oneself in criminal proceedings can be treated as personal expenses in nature? Can such legal expenses be disallowed?

Contentions by parties:

1. Arguments advanced by the Appellants

• The assessee had gone to Jodhpur for shooting a Hindi movie named “Hum Sath Sath Hain” and during his stay; the assessee was falsely implicated in a criminal proceedings by leveling an allegation that he shot a black buck, which is an endangered species and religious in nature.
• The assessee was arrested by the local police and in order to get himself released, he had to engage some lawyers. The criminal proceedings of this case have continued thereafter and the assessee has been regularly incurring legal expenses to defend himself and obtain exemptions from the personal hearings of this case.
• If the assessee had not defended himself in the criminal proceedings and asked for personal exemptions, it would have resulted in his non- appearance from all the movies/projects undertaken by him causing damage of revenue not only to him but also to the producers of his films. Thus, it was necessary for him to incur such legal expenses during the years under consideration to preserve and protect his profession and the said expenses were thus claimed as deduction by the assessee.
• The ld. CIT (A) in the quantum proceedings accepted the stand of the assessee and although the Tribunal has reversed the decision of the ld. CIT(A), it is sufficient to prove

1. That the claim of the assessee for deduction on account of legal expenses was a legal claim.
2. That the claim made by the assessee for deduction on account of legal expenses was a bonafide claim.

• Since all the particulars relevant to the said claim were duly furnished by the assessee, there was no case for imposition of penalty under Section 271(1)(c) of the Act.
• The claim of the assessee was not found to be bogus or false and the same was disallowed by the Tribunal treating the legal expenses as in the nature of personal expenses as against that the same were professional in nature which was accepted by the ld. CIT(A) in the quantum proceedings.
• Since there is no allegation made by the A.O in the penalty order alleging any concealment of particulars of his income furnished by the assessee in respect of such legal claim, penalties imposed by the A.O and confirmed by the ld. CIT(A) are liable to be cancelled.

1. Arguments advanced by the Respondents

• Strongly relied on the impugned orders of the ld. CIT(A) in support of the Revenue’s case that penalties under Section 271(1)(c) of the Act for both the years are rightly imposed by the A.O.
• The disallowance made by the A.O account of legal expenses has been finally confirmed by the Tribunal in the quantum proceedings holding that the said claim representing personal expenditure of the assessee were not allowable according to law.
• The claim made by the assessee was a wrong claim and by making such claim, the assessee was guilty of furnishing in-accurate particulars of his income, clearly attracting penalty under Section 271(1)(c) of the Act.

Observations/Obiter Dicta:

• A scrutinity of the orders passed by the A.O. clearly depicts that the relevant aspects of the matter such as nature of the complaint filed against the assessee, the nature of legal proceedings initiated against the assessee, the nature of the expenses incurred by the assesse etc., were not take into consideration by the A.O and a very cryptic order was passed by him on this issue making the disallowance on account of legal expenses treating the same as personal in nature without giving any sound or convincing reasons.
• The fact that the claim of the assessee was accepted by the ld. CIT (A) on merit clearly shows

1. That the said claim made by the assessee was based on a possible view of the matter.
2. That the claim made by the assessee for deduction on account of legal expenses was a bonafide claim and as submitted by the ld. Counsel for the assessee at the time of our hearing has capitalised comparable legal costs accrued in subsequent years since learning of the determination about the disallowance made in the years under consideration which goes to shows assessee as bonafide.

• It’s not in dispute that the legal expenses claimed by the assessee were actually incurred by him and it’s not the case of the Revenue at any stage that the expenses so claimed by the assessee were bogus.

Judgment:

• The present case is not a fit case to impose penalty under S. 271(1) (c) of the Act and the ld. CIT (A) is not justified in confirming the penalties imposed by the A.O for both the years under consideration.
• Penalties imposed by the A.O and confirmed by the ld. CIT (A) for both years under consideration cancelled.
• Both the appeals of the assessee allowed.

Conclusion:

The Appellate Tribunal found that the A.O did not take into consideration various aspects such as nature of the complaint filed against the assessee or the nature of proceedings initiated against him and passed a very cryptic order without giving any sound or convincing rationale behind the same. Therefore, the Appellate Tribunal believed the claim made by the assessee to be bonafide.