Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - State Government appointed a Commission to enquire into irregularities and illegalities committed by assessee-company's officers and a director - Assessee engaged an advocate to render necessary assistance to Commission so that it could come to a right conclusion which was necessary for goodwill of assessee's business and claimed that fees paid to advocate was business expenditure - Whether Commission was required to be properly assisted by putting several relevant facts before Commission in their proper perspective so that upon appreciation of all relevant facts and circumstances of case, Commission could come to a right conclusion and, therefore, assessee-company was justified in engaging advocate and fees paid to him was an expenditure allowable under provisions of section 37(1) - Held, yes FACTS It was alleged that officers and one of the directors of the assessee-company had indulged in irregularities and illegalities. The Gujarat State appointed a Commission for inquiry. The assessee-company engaged an advocate for assisting the Commission, paid an amount as fees and claimed it as business expenditure under the provisions of section 37(1). The Assessing Officer rejected that claim holding that the expenditure had to be treated as capital expenditure. The Commissioner (Appeals) deleted the disallowance holding that it was necessary to incur expenditure so as to protect the reputation of the company, to enhance the credibility and to develop its business. On the revenue's appeal, the Tribunal disallowed the claim. On reference : HELD In each case, where one has to see whether the expenditure incurred by the assessee is allowable as business expenditure, one has to see whether the expenditure is in reality a business expenditure which was incurred for earning profits or was incurred as a measure of business expediency or for protecting or safeguarding assets of the business including goodwill of the business. Moreover, if the expenditure is such that it is incurred in connection with some activity or transaction which is directly and substantially connected with the running…

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