2015 (9) TMI 236 - HC - Income Tax

Court upholds deduction claim on buyback premium, citing necessity for business continuity.

The Bombay High Court dismissed the appeal challenging the order of the Income Tax Appellate Tribunal for the Assessment Year 2006-07. The Court held that ... Revision u/s 263 - Assessing Officer had allowed the assessee's claim of deduction on account of premium paid on buyback of shares by merely assuming the facts, without applying his mind as per CIT(A) - Held that:- Assessing Officer as well as the Tribunal were satisfied that the amount paid by the Respondent-Assessee to buy-back shares of one group of share holders was only for the purpose of ensuring that it can run its business smoothly and more profitably. This is essentially a finding of fact. It would be pertinent to point out that the impugned order of the Tribunal also relies upon its order in Chemosyn Ltd. (2012 (9) TMI 804 - ITAT MUMBAI) arising on an identical facts. The Revenue carried the above order. This Court by order [2015 (2) TMI 863 - BOMBAY HIGH COURT] dismissed the Revenue's appeal holding that expenditure so incurred by the Respondent-Assessee for purchase of shares and subsequent cancellation thereof was only for the purpose of enabling smooth running of its business. It was further held that the aforesaid finding is essentially a finding of fact and the Revenue was not able to show that the finding is in any manner perverse and/or arbitrary. The above observation applies with equal force to the present facts. Decision of the Apex Court in the case of Brooke Bond [1997 (2) TMI 11 - SUPREME Court] is inapplicable to the present facts. In view of the above, it cannot be said that the order of the Assessing Officer is erroneous for the purpose of exercising of power under Section 263 of the Act. In any event, at the very highest, the issue would be a debatable issue and in these circumstances, the exercise of power by the Commissioner of Income Tax under Section 263 of the Act is not valid. - Decided in favour of assessee. Issues:Challenge to order under Section 260A of the Income Tax Act, 1961 for Assessment Year 2006-07.Analysis:The appeal before the Bombay High Court challenged the order passed by the Income Tax Appellate Tribunal for the Assessment Year 2006-07. The main question raised was whether the Tribunal erred in holding the Commissioner's order under Section 263 as bad in law regarding the deduction claim on premium paid for buyback of shares. The Respondent-Assessee had debited a sum towards buyback of shares, which the Assessing Officer initially accepted as deductible expenditure. However, the Commissioner in a revision order set aside the Assessment Order and directed the addition of the amount to taxable income, considering it as capital expenditure not eligible for deduction.The Tribunal, in its order, noted a dispute among share holders affecting the business of the Respondent-Assessee, leading to a buyback arrangement to ensure business prosperity. The Tribunal relied on its own decisions in similar cases to support the view that the amount paid for buyback was revenue expenditure. The Revenue argued that a Supreme Court decision supported disallowing such expenditure related to share capital. However, the Court found the facts in the present case distinct from the Supreme Court case, as the buyback was necessary for business continuity, not for capital increase.The Court emphasized that the Assessing Officer and the Tribunal had valid reasons to consider the buyback expenditure as necessary for the smooth operation and profitability of the business. The Court also highlighted a previous case where a similar issue was decided in favor of the taxpayer. Ultimately, the Court concluded that the Commissioner's exercise of power under Section 263 was not valid, as the issue was at most debatable and did not constitute an error warranting revision. Therefore, the appeal was dismissed, and no costs were awarded.