Allowblity of legal expenses for defanding case ?

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

30 November 2015 Whether Legal Fees Exps paid by Builder for defanding the case of Bad Constuction?
judgement is given in favour of Assessee.

Amol S Joglekar

Amol S Joglekar (Expert)
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30 November 2015 the key point in these judgements is.... the legal fees paid for revenue items is revenue expenditure.

Querist : Anonymous

Querist : Anonymous (Querist)

30 November 2015 so whether it would be allowable or not ?
further as of now the same business is not in operation

Amol S Joglekar

Amol S Joglekar (Expert)
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30 November 2015 please provide some dates viz.
date of expenditure
date of closure of business
date of case filed etc.
period of defect liability, if any in the agreements.

Prima facie, if properly pleaded, the expenditure may be allowed.

Querist : Anonymous

Querist : Anonymous (Querist)

30 November 2015 can i have some references of Judgements in this matter?

the case was filled in year 2001 & the exps is claimed in year 2013 & the business is also closed many years back

Amol S Joglekar

Amol S Joglekar (Expert)
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01 December 2015 Oooooooops

If the business is closed many years back????

How can you claim it in 2013? What is your view?

Querist : Anonymous

Querist : Anonymous (Querist)

03 December 2015 continuity of Business is not required for claiming such exps.

further the case is also running in relevance of Business only

hence according to me it should be allowed.

but i am looking for some of the judgements.

Amol S Joglekar

Amol S Joglekar (Expert)
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03 December 2015 Oh, interesting.... something NEW coming up. Please...

Just to make my understanding more clear and focused : The business for which the legal expenses incurred towards defending the quality of construction case, has been closed many years back. The expenses are claimed in 2013.

Please tell me if in the year 2013, the builder is running his business in some other name? May be proprietor or partner?

The rule is if the business is closed, one can NOT claim the expenditure in subsequent years. (AT the most what one can do is reopen the case at the time of closure of business and claim the same.)

Querist : Anonymous

Querist : Anonymous (Querist)

03 December 2015 if that is the rule then tel me about the treatment of Baddebts recovered?

under which head such income would be count?

is it IFOS?

Amol S Joglekar

Amol S Joglekar (Expert)
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03 December 2015 See try to understand the difference between this BAD debt and Legal expenses.

In the case of Bad debt... the same has been claimed as allowable expenses when the business was in running state. Some portion of bad debts is recovered after the business is closed...(Please note the deduction/exp on bad debts is already allowed).... and hence the recovery is regarded as income. The character of income is same....Business income.

Legal expenses, as you are querying is on different footing. The same were not claimed either through PROVISION or otherwise when the business was running.

Querist : Anonymous

Querist : Anonymous (Querist)

03 December 2015 Good Explanation Sir.

but though the exps is already claimed(Bad debt) , how one would claim it as the business is not in existance

Amol S Joglekar

Amol S Joglekar (Expert)
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04 December 2015 One can reopen the assessment of the year in which the bad debts were claimed as deduction. The revenue, in fact, is acting in assessee's favour by NOT reopening the assessment and treating it as the income in the year of receipt. So? Treating the recovered bad debt as income in the year of receipt is justified.

In fact that is regarded as CONSERVATISM. Therefore, as I said, had you provided the legal expenses in the year of closure or any earlier year either by way of provision or contingent liability, the same might have been allowed. But claiming the expenditure after the business is closed down is against CONSERVATISM.