Kalpesh Classes

For the purpose of section 37(1), it makes no difference whether the proceedings are civil or criminal.​​ All that has to be seen​​ is whether the legal expenses were incurred by the assessee in his character as a trade, i.e. whether the transaction in respect of which the proceedings are taken arose out of and was incidental to the assessee’s business - CIT V/s. Dhanrajgiriji Raja Narasingirji [1973] 91 ITR 544 (SC).

The question whether litigation expenses are of capital or revenue nature depends on whether the expenses were incurred by the assessee for the purpose of creating, rectifying or completing the assessee’s title to the capital, or whether it was for the purpose of protecting its business. It is the former, then the expenses incurred must be considered as capital expenditure - Dalmia Jain & Co. Ltd. V/s. CIT [1971] 81 ITR 754 (SC).

In every criminal case where the matter is defended to protect the good name of a businessman or a professional, the fear of possible fine or imprisonment must always be there. It cannot therefore be said that in every such case the expenses incurred by a person exercising a trade or profession in defending a criminal prosecution which arises out of his business or professional activities should be allowed as a deduction.​​ Where the framers of an Ordinance have regarded the offence as one calling for deterrent punishment in view of its anti-social character, it would be idle to suggest that it was for the income-tax authorities to prove in such cases that the conviction might result in sentence of imprisonment and that, in the absence of such​​ proof, there was at the most only a chance of conviction and fine. Expenses incurred in respect of such offences are not deductible - CIT V/s. H. Hirjee [1853] 23 ITR 427 (SC).