Business Expenditure in Income Tax Act under Section 37(1)
Business expenditure -income tax act u/s 37(1) states that if a director of company hires lawyers to represent his favor in court then his/her expenditure will not be personal but business expenditures.
Taxation in India, are generally levied by State and Central Government, for the development of the country.
Of all the taxes, Income Tax is the major part, which is the Direct tax collected by every employee, entrepreneur, and even self-employed.
Under Section 37(1), the expenditure which is spent for the personal cause of the assessee, then it is not considered under the deduction of taxes. Under this act, taxes were allowed for deductions in certain cases as expenses occurred in advertising for the business, daily expenses to develop the business, and the taxes collected within the country such as Domestic Tax, Wealth Tax etc., were also considered with certain rules.
Case of Nimesh N. Kampani against ACIT (ITAT Mumbai)
In a recent case of Nagarjuna Finance Ltd, has convicted under Section 37(1) Act, where the assessee has claimed amount from public and failed to repay them. The assessee has claimed Rs. 55, 65,938 under legal fees and related expenses. Later, the company was charged for the accusation of not returning fixed deposits and were asked to return the investments by the Supreme Court.
Assessee has approached various advocates for supporting his case in District Courts, Supreme Court, and High Courts. He appealed Assessee officer for claiming the amount which he spent on advocates and other court allowances by showing the finances as he spent on Business purposes. Assessee Officer has not allowed the appeal under section 37(1), as the domestic tax is applied on all the purchases of goods and its sales but it doesn’t consider the cost which the company uses for the development of the business. As the expenditure is spent for the personal cause, assessee doesn’t have any claim.
Assessee then approached the Tribunal, held approving the appeal on the request of assessee. According to the report, assessee is an employee in Nagarjuna Finance Limited (NFL). He was one of the directors in Nagarjuna Finance Limited, Mr. Nimesh Kampani. When Supreme Court ordered the board of directors to return investments, he is also one of them.
Hence, Mr. Nimesh Kampani, had appealed in Court by offering money to the advocated to defend him. The assessee has spent money for his professional case, which doesn’t consider as a personal expenditure. Hence, they had allowed the claim amount under section 37(1), and the final verdict was forwarded to Assessing Officer for allowing legal expenses up to Rs. 40,72,750/-.