IN INCOME TAX APPELLATE TRIBUNAL H Bench, Mumbai Before Shri B.R. Mittal (JM) & Shri B.R. Bhaskaran (AM) I.T.A. No. 5242/Mum/2005 (Assessment Year : 2001-02) Mr. Nadeem A. Saifi Vs. ACIT Circle 11(1) Meher Villa Mumbai 14, Maratha Madir Marg Mumbai-400 008. PAN/GIR No .AABPS9685E (Appellant) .. (Respondent) Assessee by : Shri Hiro Rai Department by : Shri Pitamber Das Date of Hearing : 18.2.2014 Date of Pronouncement : 26.2.2014 ORDER Per B.R. Mittal (JM) : assessee has filed this appeal for A.Y. 2001-02 against order of learned CIT(A) dated 19.5.2005 on ground as to whether amount of Rs. 15,80,000/- being expenditure on advocates, counsels and investigating agency and Rs. 4,04,849/- being travelling expenses of advocates and counsels have been incurred for business of assessee or same are personal in nature. 2. relevant facts are that on August 12, 1997 one Mr. Gulshan Kumar engaged in business of making and marketing filmy songs audio cassettes and dealing filmy music rights, with whom assessee had business relation making video cassettes for him and looking after publicity of cassettes, was shot dead at Mumbai. Maharashtra Police implicated assessee in said murder of Mr. Gulshan Kumar and started criminal cases against him. assessee at relevant time, was not in India and he was in UK. 2 M r . Na d e e m . S if i Government of India, through Ministry of External Affairs, made requisition to UK Government seeking extradition of assessee and as such extradition proceedings were launched in UK Court. 3. assessee challenged said proceedings and engaged advocates, counsels and other investigating agency to contest said extradition proceedings in UK Court. In said process assessee incurred expenditure aggregating to Rs. 15,80,000/- for fees to advocates, counsels and investigating agency and another sum of Rs. 4,04,849/- incurred towards travelling or visits of advocates, counsels to UK from time to time. 4. During course of assessment proceedings, Assessing Officer asked assessee to show-cause as to how said expenses could be claimed as deduction against business and professional income. assessee submitted that if said extradition proceedings had not been challenged, it could damage his professional reputation and goodwill, which he had managed to build over period of time through hard and dedicated efforts. That it would ultimately had adverse affect on his professional income. That assessee would not have able to carry on his work as music composer from London and would not have earned professional income as music composer in India. 5. Assessing Officer did not accept contention of assessee and stated that assessee was fighting personal criminal cases filed against him and incurring of said expenses had nothing to do with carrying on of his professional/business of music director in film industry in India and/or abroad. That if acts of commission and omission had not been committed by assessee as person, those cases would not have arisen at all. assessee had incurred said expenses to defend himself and not towards defending his business and/or professional work and right/title/interests. Assessing Officer stated that section 37(1) of Act allows deduction for expenses incurred towards business and profession only and not for any 3 M r . Na d e e m . S if i personal purposes. It was stated that Hon'ble High Courts and ITAT all over India in numerous cases of professionals like doctors, accountants, lawyers, engineers, actors, singers etc., have held that personal expenses like medical, legal, dressing, travelling etc. of assessee have nothing to do with carrying on of profession unless it is conclusively proved and having nexus to prove that incurrence of expenses had direct connection with earning of income/receipts. In view of above Assessing Officer disallowed claim of deduction of Rs. 15,80,000/-, expenses towards legal and professional fees and Rs. 4,04,849/- expenses towards tickets and other charges for travelling and stay in London of counsels as they had no connection with carrying on of assessee s business as music director. Being aggrieved, assessee filed appeal before first appellate authority. 6. On behalf of assessee, it was contended that said criminal proceedings and extradition proceedings had arisen against assessee only out of business relationship with Mr. Gulshan Kumar and assessee had only out of business necessity engaged advocates and investigating agency to whom payments were made and expenditure were incurred. assessee also placed reliance on number of cases which have been cited by learned CIT(A) at page No. 6 to 8 of impugned order. 7. Learned CIT(A) considered submissions of assessee and cases cited before him which are :- (i) CIT Vs. Dhanrajgirji (91 ITR 544)(SC) (ii) Gujarat Agro Oil Enterprises Ltd. Vs. CIT (256 ITR 230)(Guj) (iii) Maruti Udyog Ltd. (92 ITD 119)(Del) (iv) Atlas Cycle Industries Ltd. (181 ITR 18)(P&H) (v) National Rayon Corporation Ltd. (155 ITR 413)(Bom) (vi) C.H. Simpson (197 ITR 237)(Mad) 8. Learned CIT(A) has stated that said cases are not relevant to facts of case of assessee. Learned CIT(A) after considering said cases in impugned order and after discussing case of Ajit Vs. Second 4 M r . Na d e e m . S if i ITO (41 ITD 28) as well as case of ITAT, Mumbai Bench of I.C.B. Ltd. Vs. ITO (93 ITD 418) has held that impugned expenditure involving payment of Rs. 15,80,000/- to advocates, counsels, and investigating agencies and their travelling expenses of Rs. 4,04,849/- incurred for defending assessee from criminal proceedings/prosecution is personal expenditure and is also hit by Explanation to section 37(1) of income Tax Act. Accordingly learned CIT(A) has confirmed action of Assessing Officer. Hence this appeal by assessee. 9. During course of hearing learned Authorised Representative for assessee reiterated facts as stated before authorities below, which we have stated hereinabove. Learned Authorised Representative referred case of Hon'ble Bombay High Court in case of J.B. Advani & Co. Ltd. Vs. CIT (18 ITR 557) and submitted that in that case litigation expenses incurred for prosecution of directors and salesman for offences under Hoarding and Profiteering Ordinance and Defence of India Rules were held to be incurred for purpose of assessee s business and therefore allowable u/s. 10(2)(xv) of Income Tax Act, 1922. That assessee-company was private limited company in which directors had controlling interest. four managing directors of company and its manager were prosecuted in Madras for offences under Hoarding and Profiteering Prevention Ordinance, 1943 for selling stationery boxes and boards. That all accused were discharged. assessee claimed expenditure incurred as deduction on ground that said expenditure was incurred wholly and exclusively for purpose of assessee s business. Learned Authorised Representative also referred decision of Hon'ble Delhi High Court in case of Lakshmiji Sugar Mills Co. (P) Ltd. Vs. CIT (98 ITR 568) and submitted that in that case assessee-company incurred expenditure in connection with criminal cases against director and its employee for offence of bribery. Hon'ble Delhi High Court held that expenditure so incurred to protect good name of business, as prosecution emanated from act which took place in ordinary course of 5 M r . Na d e e m . S if i business and therefore same was allowable as deduction u/s. 10(2)(xv) of Income Tax Act, 1922. Learned Authorised Representative also relied on decision of Hon'ble Apex Court in case of CIT Vs. Dhanrajgirji Raja Narasingirji (91 ITR 544). In said case assessee was managing agent of public company. He was also chairman of its board of directors. Company got into financial difficulties and there was tripartite agreement between assessee-company and one Mr. Ramgopal Ganpatrai, who agreed to bring in necessary finance for company as company got into financial difficulties. Under another agreement said Mr. Ramgopal Ganpatrai was given selling agency and assessee gave up managing agency in his favour. assessee was to be paid office allowance and share in managing agency commission. In 1943, selling agency and managing agency were assigned to two private companies. assessee was removed from his office at instance of Mr. Ramgopal Ganpatrai. assessee instituted civil suit seeking reinstatement as chairman and also to establish his right to selling agency. Pending that suit, assessee lodged criminal complaint against Mr. Ramgopal Ganpatrai alleging misappropriation of company s funds and other fraudulent acts. Pursuant to that complaint, Government instituted criminal case against Mr. Ramgopal Ganpatrai. In said case, assessee after obtaining permission of Court and with consent of Government, employed his own lawyers to prosecute that criminal case. Prosecution, ended in conviction of Mr. Ramgopal Ganpatrai. question arose as to whether amount spent by assessee for criminal litigation was allowable as business expenditure u/s. 10(2)(xv) of Indian Income Tax Act, 1922. Hon'ble Court held that expenditure was incurred by assessee for purpose of business and entire expenditure was deductible. Department filed appeal before Hon'ble Apex Court and held that it was not correct to say that expenditure incurred in connection with criminal case could not be deducted as business expenditure under section 10(2)(xv) of Act. All that court has to see are whether transaction in respect of 6 M r . Na d e e m . S if i which proceedings are taken, arose out of and is incidental to assessee s business and whether expenditure was bonafide incurred wholly and exclusively for purpose of business. Learned Authorised Representative submitted that in view of aforesaid decision of Hon'ble Apex Court, expenditure incurred by assessee to defend extradition proceedings against him was for business purpose and to protect his goodwill and honour and therefore it is allowable u/s. 37(1) of Act. Learned Authorised Representative also referred decision of Hon'ble MP High Court in case of CIT Vs. Khemchand Motilal Jain Tobacco Products P. Ltd. (340 ITR 99) and submitted that in said case director of company was kidnapped while on business tour and amount paid as ransom was held to be business expenditure and allowable u/s. 37(1) of Act. 10. On other hand learned Departmental Representative supported orders of authorities below. He submitted that expenditure was not incurred by assessee for his business purpose but to defend himself against criminal case filed against him in his personal capacity. Said expenditure was incurred by assessee to defend himself where he was implicated of committing offence of murder of late Gulshan Kumar. Learned DR submitted that said expenditure incurred by assessee towards counsels fees and/or their travelling expenses is nothing to do with business of assessee. Learned Departmental Representative relying on decision of ITAT, Mumbai Bench in case of DCIT Vs. Salman Khan (130 ITD 81) submitted that when personal complaint was lodged against assessee and legal expenses incurred by him seeking exemption from personal appearance in court, assessee claimed deduction in respect of said expenses. Tribunal held that expenditure incurred in defending against those allegations of assessee were of personal nature and such expenditure could not be allowed against income from business and profession. Said criminal proceedings did not arise out of any incident during shooting of film. Learned Departmental Representative also referred decision 7 M r . Na d e e m . S if i of Hon'ble Allahabad High Court in case of Swadeshi Cotton Mills Co. Ltd. Vs. CIT (100 ITR 59) and submitted that expenditure incurred by assessee- company in defending its directors, officers and employees, who were prosecuted under Essential Supplies (Temporary Powers) Act, for having stamped on cloth produced by company, price higher than those fixed under Textile Control Order, 1948 and expenditure to defend them was held not deductible as business expenditure u/s. 10(2)(xv) of Income Tax Act, 1922. In said case assessee-company contended that expenditure was incurred to save its own reputation and goodwill but Hon'ble Allahabad High Court rejected contention of assessee on ground that assessee-company had not brought any material to show that its motive and intention was not to save accused from punishment but to save its own reputation and goodwill. Learned Departmental Representative submitted that said decision of Hon'ble Allahabad High Court squarely apply to case of assessee. Learned Departmental Representative further submitted that cases referred to by learned Authorised Representative of assessee (supra) are not applicable to facts of case. Learned Departmental Representative submitted that in case of Khemchand Motial Jain Tobacco Products P. Ltd.(supra), one of director of company was on business tour from where he was kidnapped and ransom was paid. Therefore said ransom was paid to kidnappers as act had occurred during business tour of said director. Accordingly expenses had nexus/attributable to business of assessee-company. Learned Departmental Representative further submitted that in case of Dhanrajgirji Raja Narsingirji (supra), Hon'ble Apex Court itself has mentioned that court has to see whether transaction in respect of which proceedings are taken arose and are incidental to assessee s business and whether expenditure was bonafide incurred wholly and exclusively for purpose of business. Learned Departmental Representative submitted that assessee s implication in murder of late Gulshan Kumar had no connection with business of assessee and 8 M r . Na d e e m . S if i assessee was implicated in his personal capacity under provisions of Criminal Law; therefore said expenditure incurred by assessee to defend himself in criminal case is his personal expenditure and not expenditure incurred for business purposes. Learned Departmental Representative submitted that in case of Ajit (supra) that when medical expenditures are incurred by actor and plea was taken that expenditure was incurred to keep him physically fit which was essential factor in his profession to act as villain which is source of income, Tribunal has held that expenditure is not for carrying on of business of assessee but expenditure is personal in nature and cannot be linked with profession carrying on by assessee. 11. Learned Authorised Representative of assessee in his rejoinder submitted that decision of ITAT in case of Ajit (supra) is distinguishable as in that case expenditure was incurred towards his medical treatment and in that context Tribunal held that it was expenditure for his personal purpose and not for purpose of earning profit from carrying on his profession. He submitted that if assessee had not defended extradition proceedings instituted against him, he could not have carried on business of music composer and it had not been possible to earn income which he earned and declared to extent of Rs. 1,18,90,400/- in A.Y. 2001-02 and paid taxes thereon of Rs. 35,41,121/-. He submitted that assessee in subsequent assessment years also earned income and paid taxes thereon and referred page 6 of order of learned CIT(A) which contain details of income returned and taxes paid from A.Y. 2001-02 to 2004-05. 12. We have carefully considered orders of authorities below and submissions of representatives of parties. We have also carefully considered cases relied upon by authorities below as well as cited before us by representatives of both parties. 9 M r . Na d e e m . S if i 13. We observe that assessee was implicated in murder of late Gulshan Kumar and criminal proceedings were initiated against him. Government of India made requisition to UK Government seeking extradition of assessee as he was at relevant time was away at UK. assessee defended extradition proceedings initiated against him and incurred aforesaid expenditure towards counsels fees aggregating to Rs. 15,80,000/- and their travelling expenses aggregating to Rs. 4,04,849/-. question arises as to whether said expenditure incurred by assessee in defending himself from criminal case could be said to be expenditure incurred in connection with business carrying on by assessee and as such is allowable as deduction u/s. 37(1) of Act. 14. We observe that assessee contended that if he had not defended himself from said criminal proceedings assessee could have been arrested and his personal goodwill had suffered which he had built over period of time and consequently this would have affected his profession of music director and music composer. However, we are of considered view that said contention of learned Authorised Representative of assessee has no merits. said criminal proceedings were initiated against assessee for committing act of omission and commission of violating provisions of law in his personal capacity and it has nothing to do in respect of business being carrying on by him as music director and music composer. Hon'ble Bombay High Court has also held in case of J.B. Advani & Co. Ltd. (supra) that where assset of business is protected or safeguarded by assessee carrying on business in civil litigation, costs of such litigation are always permissible deduction. If trader is charged with offence which is breach of law and he is convicted, he cannot claim legal expenses incurred for defending himself against prosecution as money expended wholly and exclusively for business, because it can never be said that breach of law is incidental to business, It is relevant to state that Hon'ble Jurisdictional High 10 M r . Na d e e m . S if i Court in above case has held that it is to be considered as to whether assessee was charged with regard to transaction which took place in ordinary course of business and whether he was charged in his capacity as trader. If these tests are satisfied, and Court comes to conclusion that primary object of incurring expenditure was to protect good name of business, then it could be said that expenditure was wholly and exclusively incurred for purpose of business. In case before us it can never be possible that implicating assessee in respect of murder of late Gulshan Kumar could be act took place in ordinary course of business of assessee as music composer. On other hand he was charged for offence of committing murder in his personal capacity which had nothing to do with business of assessee and therefore expenditure incurred by assessee to defend himself in criminal proceedings was not for purpose of his business. That cases relied upon by learned Authorised Representative of assessee (supra) do not support case of assessee. On other hand it supports case of Revenue. Similarly case of Hon'ble Delhi High Court of Lakshmiji Sugar Mills Co. (P) Ltd. (supra) is case where director and its employees were prosecuted in connection with business of assessee and it was found that prosecution had emanated from act which took place in ordinary course of business. On these facts it was held that expenses incurred in connection with criminal case against directors and employees of assessee was deductible u/s. 10(2)(xv) of Indian Income Tax Act, 1922. Therefore said case relied upon by learned Authorised Representative of assessee does not support case of assessee. We also observe that case of Dhanrajgirji Raja Narsingirji (supra) was case where assessee had incurred expenditure for purpose of his business and to protect his own interest to reinstate himself as chairman and also to establish his right to selling agency; and criminal complaint was lodged against Shri Ramgopal Ganpatrai by assessee as said Ramgopal Ganpatrai had misappropriated funds of company and 11 M r . Na d e e m . S if i committed other fraudulent acts. Ramgoapl Ganpatrai was convicted on account of criminal complaint filed by assessee to protect company s asset. That in that context it was held that expenditure was incurred for purpose of business and same was allowed as deduction. Hon'ble Apex Court held that it makes no difference whether proceedings are civil or criminal. Court has to see as to whether transaction in respect of which proceedings are taken arose out and was incidental to assessee s business and expenditure was bonafide incurred wholly and exclusively for purpose of business. In case before us, we agree with learned Departmental Representative that above case of Hon'ble Apex Court (supra) does not support case of assessee as assessee has not incurred expenditure for protection of his business but to protect himself. We also agree with learned Departmental Representative that case of Khemchand Motilal Jain Tobacco Products P. Ltd. (supra) is case which is not relevant to facts of case of assessee. In said case ransom was paid to kidnappers to get free and to save life of person who was kidnapped while he was on business tour. Hence Hon'ble MP High Court held that expenditure was incurred having linked/attributable to business of assessee. Further we observe that case of ITAT, Mumbai Bench of Salman Khan (supra) squarely apply to facts of case before us where it was held that legal expenditure incurred by assessee for payment to criminal lawyers to defend himself in criminal proceedings which was not connected of incident having taken place during shooting of film was purely of personal nature. Thus expenditure was not allowable as deduction. We also observe that learned CIT(A) after considering case of Ajit (supra) has stated that medical expenditure incurred by Shri Ajit for his treatment in USA was to be personal expenditure, although it was contended that it was necessary for assessee to be 100% physically fit in order to carry on his act of villain or to take part in film and if he is not fit, his source of income would dry up. Tribunal held that expenditure incurred by assessee was his desire to 12 M r . Na d e e m . S if i live longer and such desire is personal in nature and cannot be linked with profession carried on by assessee. Tribunal has also held in case of I.C.B. Ltd. (supra) that where expenditure is incurred for defending employee from criminal proceedings/prosecution for activities which are violative of or in contravention of provisions of law, such expenditure tantamount to incurring of expenditure for purpose which is offence or prohibited by law and said expenditure cannot be deemed to have been incurred for purpose of business or profession and therefore no deduction in respect of such expenditure would be allowable. We are of considered view that assessee has incurred expenditure to defend himself from criminal proceedings initiated against him in his personal capacity and said expenditure has been incurred by assessee to protect himself and expenditure is not incurred in respect of business carrying on by him. Contention of learned Authorised Representative of assessee that if assessee had been extradited, assessee could not carry on business and to earn income has no merits because if assessee has committed some acts of omission and commission in his personal capacity and assessee is punished for those acts of omission and commission as same are contrary to law of land and due to which assessee s business is affected, it cannot be said that said expenditure is to be allowed as business expenditure. It is just like case that if person spend money for his medical treatment and/or for purpose of taking meals to live to save his life, it cannot be said that said expenditure is for business purposes otherwise assessee could not remain alive and due to which assessee could not earn income. If we accept contention of assessee, then all personal expenditures incurred have to be allowed as expenditure incurred for purpose of carrying on business by assessee. 15. In view of above, we hold that expenditure under consideration incurred by assessee for defending himself in criminal proceedings on account legal fees etc. and travelling, staying of counsels engaged is not 13 M r . Na d e e m . S if i expenditure incurred for business carrying on by assessee. Thus, we confirm action of learned CIT(A) that said expenditure cannot be allowed as deduction as business expenditure, and it is personal in nature. Therefore grounds of appeal taken by assessee are rejected by upholding order of learned CIT(A). 16. In result, appeal of assessee is dismissed. Order pronounced on 26th Day of February, 2014 . Sd/- Sd/- (B.R. BHASKARAN) (B.R. MITTAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated : 26/2/2014 Copy of Order forwarded to : 1. Appellant 2. Respondent. 3. CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// Dy./Asstt. Registrar) ITAT, Mumbai PS Sri. NADEEM SAIFI v. ACIT CIR. 11(1)