I have paid Rs15000/- as legal fee to my Income Tax Lawyer in Jan 08 for representing my Scrutiny case of A/Y 2005-06, Can I Claim deduction of this amount from my salary income of A/Y 2008-09.Harish Chander Kochhar, Beas District Amritsar

The simple rule for allowance of an expense under Income Tax Law is that all expense incurred for earning taxable income should be allowed. You are earning salary income , and no part of your salary earning was dependent on the expense you incurred on scrutiny assessment. Moreover there is no provision for any kind of expense allowance against salary. So, Rs 15,000 is not claimable expense.

What would have been the position in case of business income?

There are contradictory decision on the allowance of fees to chartered accountants or lawyers for income tax proceedings in case of earning of business income.

First the favourable decision for assessee

In Commissioner Of Income Tax, (Central), New Delhi. vs Dalmia Dadri Cement Limited. 125 ITR 510 , Delhi High Court

We next advert to question No. 2 relating to the amount of Rs. 8,679 claimed by the assessee as fee paid to lawyers for preparation and pursuing of income tax appeals. The assessee has in this regard placed reliance upon the observations of the Supreme Court in the case of CIT v. Birla Cotton Spinning & Weaving Mills Ltd. [1971] 82 ITR 166 (SC), to the effect that the earning of profit and payment of taxes are not isolated and independent activities of a business. These are continuous and take place from year to year during the whole period for which the business continues. If the assessee takes any step for reducing its liability to tax which results in more funds being left for the purpose of carrying on of business there is always the possibility of higher profit. Similarly, in Sree Meenakshi Mills Ltd. v. CIT [1967] 63 ITR 207, the Supreme Court observed that in order that an expenditure may be admissible as a deduction, it is not necessary that the primary motive in incurring it must be directly to earn income thereby.

The Allahabad High Court too has in the case of Modi Sugar Mills Ltd. v. CIT [1973] 90 ITR 201 allowed expenditure reasonably and honestly incurred in connection with legal proceedings taken by an assessee by way of a writ for escaping tax liability consequent upon the discovery of concealed income. The Delhi High Court too in a Division Bench case, D.S. Bist and Sons v. CIT [1972] 85 ITR 254, has held that the expenses incurred by an assessee in payment of professional fees to chartered accountants in connection with representation to the Central Board of Revenue and other legal proceedings in appeals and in connection with settlement of old assessments with the Directorate of Inspection were allowable as business expenditure under s. 10(2)(xv) of the Indian I.T. Act, 1922. In view of this chain of decisions, we are unable to interfere with the order of the Tribunal holding that the sum of Rs. 8,679 claimed by the assessee as legal and court expenses for preparation and pursuing of income tax appeals was permissible. Question No. 2 is answered in favour of the assessee.

Against the assessee

Rajasthan high court has decided in favour of the assessee in case of Associated Stone Industries v. Commissioner of Income-tax [2003] 261 ITR 766 (Raj) saying

The amount, which has been claimed for deduction under section 80VV only part thereof has been disallowed. The Tribunal was right in its approach in disallowing the payment of fees to chartered accountants for filing the returns and preparing the accounts after the close of the year and for litigation to contest the tax imposed. We do not find that the payment of fees incurred for such type of jobs was for the business of the assessee. It relates to the income and that income has already been earned in the previous year, to contest the tax imposed cannot be said to be for the purpose of business, particularly when a negligible part of the amount of fees has been disallowed.

Take your decision!