Thursday, August 8, 2013

Sum incurred to defend directors arrested for narcotics offence was not an allowable business exp.

Expenditure incurred on professional fees to defend directors of assessee-company who were arrested for narcotics offence couldn’t be allowed being squarely covered within the meaning of Explanation to section 37(1)

In the instant case the assessee was engaged in the business of import of timber and heavy metal scrap. On a specific information, a container destined to be delivered to the assessee was intercepted in mid sea by the officers of Norcotics Control Bureau (NCB). Thereafter, the directors of the assessee-company were arrested by NCB. The assessee claimed the deduction of legal expenses incurred to defend the directors of the company in that case. During assessment, the AO disallowed the deduction towards such expenditure on the ground that it was incurred for the purpose of an offence prohibited by law. The CIT (A) upheld the order of the AO. Aggrieved assessee filed the instant appeal.

The Tribunal held as under:

1) A bare perusal of the Explanation to section 37(1) (‘the Explanation’) indicates that incurring of any expenditure for a purpose which is an offence or prohibited by law cannot be allowed as deduction. As no final order on conviction or acquittal of directors was passed till relevant time, it showed that the charge was still continuing, which was otherwise an offence under the Narcotics Drugs and Psychotropic Substances Act, 1985;

2) There could be no reason to allow deduction towards such an expenditure which had been incurred for the purpose of an offence prohibited by law and which was squarely covered within the meaning of the Explanation;

3) The next ground of the assessee, about there being no nexus between the legal fees paid and breach of law, was not sustainable. Mandate of the Explanation is crystal clear that any expenditure incurred for any purpose which is an offence or which is prohibited by law cannot be allowed as deduction;

4) It does not make any difference whether expenditure was direct or indirect. So long as nexus of the expenditure with the offence was established, it would continue to be hit by the Explanation to section 37(1). Thus, there was no infirmity in the impugned order passed by CIT(A) - OPM International (P.) Ltd. v. Dy.CIT [2013] 35 480 (Mumbai - Trib.)

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