Litigation Expenditure Incurred To Protect Business Is Covered Under Revenue Expenditure: ITAT

The two-member bench of Sandeep Gosain (Judicial Member) and Rathod Kamlesh Jayantbahi (Accountant Member) has observed that since the assessee has no interest in the ownership of the asset but he is in possession of the asset for conducting its business, the litigation expenditure incurred is only to protect his business and, therefore, it is revenue expenditure. The litigation expenditure incurred by the assessee is revenue expenditure and not capital expenditure.

The appellant/assessee is a Partnership Firm, engaged in the business of manufacturing and export of wooden handicrafts, durries, rugs, textile items, etc. The assessee filed its return of income declaring total income for the year under consideration. The return of income was processed by the CPC under section 143(1) of the Income Tax Act, 1961. The case of the assessee was selected for Scrutiny and notice under section 143(2) was issued for compliance on 07.10.2019. In response the assessee furnished its reply. Subsequently, in compliance to notice under section 142(1) along with questionnaire, the assessee furnished the details and replied vide its letters and it was examined and verified by the AO. In the course of assessment proceedings, the AO on examining the details of professional expenses claimed at Rs. 3,20,45,910 observed that it includes legal expenditure of Rs. 2.37 crores paid to advocates for defending the case in Supreme Court in relation to the assessee's property where its export house is situated.

The AO considered it to be a capital expenditure being incurred for acquiring, improving, extending, possession, or removing defects in the title of fixed assets. The assessee has been in possession of the property and has been utilising it from the beginning. The litigation expenses incurred for continued possession of the immovable property where the assee's office and factory are located is expenditure in relation to immovable property and hence, a capital expenditure which would provide benefit for several years.

The AO disallowed the litigation expenses of Rs. 2,37,00,000 as a capital expenditure and added them back to the assessee's returned total income. The assessee preferred an appeal before the CIT (A). The CIT (A) observed that the expenditure has substantially increased as compared to the last year. The details of expenses have not been furnished during the appellate proceedings. The outcome of the litigation and its present status is not known. Hence, the nature of expenditure cannot be considered as recurring and revenue-generating in nature. The CIT (A) upheld the order of the AO, treating the expenditure as capital expenditure.

The assessee contended that the assessee is not the owner of the asset but possesses the asset from where it is conducting its business. Thus, the litigation expenditure incurred is to protect its business, and therefore, the expenditure so incurred should be allowed as revenue expenditure.

The ITAT directed the AO to allow interest to the assessee upto the actual date of refund, i.e., upto 11.06.2020.

Case Title: M/s. Mangalam Arts Govind Nagar (East) Versus Deputy Commissioner of Income-tax

Citation: ITA No. 207/JP/2022

Date: 10/08/2022

Counsel For Appellant: CA P. C. Parwal

Counsel For Respondent: Addl. CIT A.S. Nehra

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