Legal expenses incurred in the interest of the business are allowable expenses. The following types of legal expenses incurred in the interest of the business or profession are allowed under section 37
(i) Legal expenses incurred in the normal course of the business;
(ii) To avoid a business liability, i.e., compensation paid for breach of a contract in the interest of the business;
(iii) Legal expenses spent to defend the assessee’s title of his business; and
(iv) To terminate a disadvantageous trading relationship.
The expenses which are of personal nature of the partner of the assessee are not treated as business expenses. Expenses incurred in criminal proceeding are also not considered to be incurred for a business purpose and so disallowed.
Expenses incurred on Raising Loans
According to a Supreme Court decision, the expenses incurred in connection with the raising of loans, issuing of debentures etc. (long-term or short-term) are an admissible deduction because these were incurred for the purpose of the business. The expenses included cost of stamps, registration fees, lawyer’s fees etc. [Orissa Cements Ltd. v. C.I. T. (1969) 73 ITR 14 (Delhi)]
On the other hand, expenses incurred on raising capital (e.g., issuing of shares) are treated under preliminary expenses.