By TIOL News Service

BANGALORE, SEP 01, 2017: THE ISSUE BEFORE THE COURT IS - Whether expenditure incurred towards legal fee and other litigation charges, to protect business interests in relation to mining lease and not for acquiring any mining lease, is allowable revenue expenditure u/s 37. YES is the verdict.

Facts of the case:

The Assessee during the subject year, had debited certain legal expenditure incurred while defending certain writ petitions filed by M/s.JSW Steels Ltd., and M/s.Sathavahana Ispat Ltd., in which, the aforesaid parties had sought for quashing of Government notifications granting mining lease to the assessee. The case of Assessee was that the expenditure incurred was to protect the lease that was granted by the Government to the assessee, who was defending a claim made by third parties and not for the purpose of perfecting a mining lease. That the lease was granted by the Department of Mines and Geology in the year 2006 to the assessee, which was assailed in writ petitions filed by the aforesaid parties. The AO not being satisfied with the contention of assessee, held that the expenditure had to be construed to be capital expenditure, as it was an expenditure having nexus to earning of profits in business.

On appeal, the CIT reversed the order of AO. On further appeal, the ITAT held that the CIT(A) had not looked into the aspect as to whether the expenditure incurred long back could be allowed on piecemeal basis in subsequent years and that the approach of CIT(A) in deciding the matter was not proper. Therefore, the appeals were remanded for reconsideration.

High Court held that,

++ it is noted that one of the business activities of the assessee is mining of iron ore by taking lands on lease from the State Government. That certain lands were leased out to assessee for the purpose of mining iron ore by the Department of Mines and Geology in the year 2006. The assessee was working on the said lease as a lessee of the State Government. The grant of lease to the assessee was challenged in writ petitions filed before this court by M/s.J.S.W. Steels Ltd., and M/s.Sathawahana Ispat Ltd, wherein the assessee was made a respondent. It is in order to defend and sustain the said lease that the assessee had to incur expenditure towards legal fee and other allied expenditure. The assessee was dragged into litigation before this court by writ petitions filed by third parties. The assessee had to resist the writ petitions in order to protect his mining rights in respect of the contentious lease. Therefore, the expenditure incurred towards legal fee and other litigation charges was to protect its business interests in relation to the mining lease. The expenditure was not incurred to acquire the mining lease or to get rid of a defect in the title. While resisting the writ petitions, the assessee did not bring into existence any asset or create any capital asset. Therefore, such expenditure is allowable within the meaning of Section 37, as revenue expenditure.

(See 2017-TIOL-1712-HC-KAR-IT)