INCOME TAX ACT, 1961

Section 37(1)

Capital or revenuee expenditure - Legal expenses incurred in relation to immovable properties - Immovable properties being treated as stock-in-trade -

Assessee-NBFC claimed deduction of legal expenses including service-tax component. Such expenses were in relation to various legal proceedings concerning acquisition of interest in the estate of erstwhile Nizam of Hyderabad. AO found that though, by virtue of an order of High Court, a part of Nizam's immovable properties was given to the assessee, however, the subject properties were under legal dispute as some of them were acquired by Government and the assessee was not in possession of the properties. He further found that part of the legal expenses were relating to dispute between assessee and a person 'D', who was appointed as power of attorney holder to look after Nizam's properties acquired by the assessee. Assessee claimed that the properties in question had been treated as stock-in-trade and the compensation received had been offered as business receipts. However, the AO held that since the assessee had no possessory right over the properties and the legal expenses incurred were for acquiring/improving title over the properties, the same could not be treated as revenue expenditure. Accordingly, he disallowed the legal expenses. On appeal, CIT (A) granted partial relief to the assessee.Held: CIT(A) clearly held that immovable properties located at Hyderabad were stock-in-trade of assessee. Thus, once the immovable properties located at Hyderabad had been held as stock-in-trade, they could not be treated as capital asset in terms of section 2(14)(i) and therefore, any expenditure related to stock-in-trade had to be considered as revenue expenditure. Further, as regards the property at Pune, undisputedly, the said property had been acquired by defence authorities and compensation had been paid to the assessee and he was in dispute over enhancement of the compensation. Therefore, the nature and character of the said property was also at par with the properties located at Hyderabad. It was also a fact that the compensation received by the assessee due to acquisition of some of the properties had been offered as business income and Revenue accepted it. Hence, the legal expenses claimed by the assessee, being in the nature of revenue expenditure was allowable. Accordingly, the partial disallowance sustained by the CIT (A) was deleted.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2015-16

INCOME TAX ACT, 1961

Section 14A Rule 8D

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