AI Drafter 
TaxTMI 
TaxTMI 
2014 (12) TMI 255
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...., 88 TTJ 108(Mum), the premia of Rs. 2,73,68,189/- and Rs. 5,43,00,000/- paid by the assessee to Mac Charles(l) Ltd and the Gupta group respectively on account of buyback of shares are in the nature of Revenue Expenditure. 3. The Id. Commissioner of Income-tax(Appeals) grossly erred in deciding the issue in favour of the assessee without appreciating that the ratio of the decision of the Hon'ble Supreme Court in the case of Brook Bond India Ltd. Vs. CIT, 225 ITR 798, is clearly applicable to the issue in appeal. 4. The Id. Commissioner of Income-tax (Appeals) grossly erred in holding the Premium paid on buying back of shares as Revenue Expenses when Sec. 77A of the Companies Act, 1956 provides for such purchase(buyback) from: i) its free reserves; or ii) the securities premium account; or iii) the proceeds of any shares or other specified. 5. The Id. Commissioner of Income-tax (Appeals) grossly erred in holding that the premium paid on buying back of shares as Revenue Expenses when Share Premium received is not a Revenue Receipt, and the direction given by the Id. Commissioner of Income-tax (Appeals) would lead to an absurdity where Receipts are considered as ....
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....ed into agreement with Vijay Gupta's Group on 26.11.2006 and agreed to settle CP No. 106 of 2006 by transferring the 36,20,000 shares to Vijay Gupta and family for a consideration of Rs. 9,05,00,000/- on pro rata basis. This compromise was subsequently ratified by the Company Law Board in its order dated 28.11.2006. The sale consideration was arrived at the basis of payment of Rs. 25 per share as against the face value of Rs. 10 per share. Therefore, a premium of Rs. 5,43,00,000/- was paid to the Gupta Group and an amount of Rs. 2,73,68,189/- was paid to the Mac Charles Group. The assessee claimed the same as revenue expenditure. 2.2 The Assessing Officer disallowed the revenue expenditure of Rs. 8,16,68,189 as claimed by the assessee for the A.Y. 2007-08 towards premium incurred on buy back of shares on the ground that the expenses incurred were not for the purposes of preservation or protection of assets and interests of the company. It is only one group of shareholders viz. Agarwal family who stands to benefit by the compromise by becoming the majority shareholders. He also analysed the financial functioning and the profitability of the company and held that since 2000-01....
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....after covering 11,50,107 shares already held by them. It was held by the CLB that the consequent reduction of shareholding in the hands of the appellant company would not attract provisions of section 77 of Companies Act 1956. 4.7. In respect of the buy back of the shares of Gupta group who were also agitating before the CLB with respect to the management and control of the company, I have perused the order of the CLB in company petition No. 106/2006. It is seen that the Gupta group has sought a consent order from the CLB in respect of the amicable settlement arrived at for resolution of all disputes between the two parties vide MOD/ agreement dated 27.11.2006. As per this agreement Gupta family which owned 36,20,000 shares would transfer the entire shares @ Rs. 25 per shares for total sale consideration of Rs. 9,05,00,000 only, as against the face value @ Rs. 10 per share. Therefore, a premium of Rs. 5,43,00,000 was to be paid to the Gupta Group. The order of the CLB dated 28ll 1.2006 pursuant to this MOD states as under: "The petitioners have filed a joint application seeking for disposal of the petition in terms of an agreement dated 27.11.2006. The petition is disposed of....
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....sions of sec. 397 and 398 r.w.s. 402 of the Companies Act. The ITAT relied on certain case laws to hold that while accepting a compromise settlement between two groups, the court will keep in mind the prime interest of the company and also public interest even though it may not be in the interest of majority share holders. The case laws relied upon by the Assessing Officer are held to be inapplicable to the facts of the instant case as they pertain to expenses incurred to increase the capital base of the assessee. The detailed justification for holding so can be seen from the appellant's submissions reproduced in para 4.5. So far as the payments of Rs. 2,73,68,190 to Mac Charles (I) Ltd. is concerned, since the same was made in pursuance to compromise order and duly ratified by the Company Law Board, the ratio of the decision in Echjay Industries Ltd. would apply and the amount in question is held to be revenue expenditure. Similarly, the payment of Rs. 5,43,00,000 paid to the Gupta Group made in pursuance to compromise order and duly ratified by the Company Law Board is also held to be revenue expenditure in accordance with the ratio of the jurisdictional High Court and Mumbai....
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.... D.R. supported the order of the Ld CIT-I, Pune. As per the facts on record, we find that there was fierce litigation between the groups of the shareholders of the assessee company. One group of the shareholders i.e. Mac Charles India Ltd. filed the cases against the other groups of the shareholders as well as the company alleging the serious charges of the mismanagement and oppression. To protect the business interest of the assessee company, proposal was put before the CLB, New Delhi to buy back the shares from Mac Charles India Ltd. by payment of extra premium over and above the face value. The assessee paid Rs. 3,45,95,521/- on the shares and claimed the deduction as a revenue expenditure. 6. In the case of Echjay Industries Ltd.,(Supra) there were similar facts and in the said case also, there were two warring groups of the shareholders. The legal battle between the two warring groups of the shareholders reached before the Bombay High Court and after a period of over six years, good sense prevailed between those two groups and a consent terms were drawn by the shareholders and Hon'ble High Court of Bombay approved the consent terms giving direction to the company to pur....
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....e case of Empire Jut Co. Ltd. (supra), the point which would arise for consideration would be whether the expenditure incurred for getting rid of the minority shareholders, who were creating difficulties, would be an expenditure on revenue account. The authorities relied upon by the learned counsel for the assessee show that payment made to secure peace and harmony and smooth management of the company, the interest of business would serve and that is the whole purpose of such payment. Therefore, the amount paid for this purpose was on revenue account. Applying those principles, the position to our mind is clear that by getting rid of the minority shareholders, the company could not be said to have acquired any enduring benefit. Secondly, even if it is assumed that an enduring benefit has been obtained, even then such enduring benefit is not relatable to fixed capital structure of the company because it has neither increased the assessee's assets nor the company could be said to have acquired any right of income yielding nature. The act of writing off of share capital by way of reduction, may, on the first blush, suggest that the capital structure of the company has been affecte....
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.... be said that to the extent of the present issue, the assessment order is erroneous. We accordingly hold that to the extent of the issue of the allowability of the premium paid in the buy back deal to Mac Charleys India Limited, the assessment order cannot be said to be erroneous and to that extent, the order passed by the CIT -I, Pune is bad in law. We make it clear that on the issue of FBT, the assessee admitted before the Ld CIT that there was a mistake on his part. Hence, on the said issue, the order stands." 5.1 We find similar issue had also come up before the Mumbai Bench of the Tribunal in the case of USV Ltd., Vs. JCIT. We find the Tribunal vide ITA No.376/M/2001 order dated 18-12-2006 for A.Y. 1998-99 decided the issue in favour of the assessee by observing as under : "80. We heard the rival submissions, gone through the orders of the Revenue authorities and the decisions cited by the contending parties. First we will take up the contentions of the Revenue that the litigations were in fact only division of family assets and for controlling of the business of the assessee. Considering the facts and circumstances of the case and the dispute between the contending part....
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....ugh it is not binding as such, cannot be considered and taken note of while corning to a conclusion on facts. In the case of Shailendra Kumar v. Union of India (supra), at p. 508, the Hon'ble Allahabad High Court observed as under: The question for consideration is whether to examine the scheme of Act of 1961, aid can be taken from the Fundamental Rules governing the service conditions of the Central Government employees or from the provisions of a statute which is not cognate or pan materia to the Act of 1961. The IT Act is a self-contained code and the taxability of house rent allowance, city compensatory allowance and dearness allowance or of any other allowance will have to be seen only within the scheme of the Act of 1961. Their Lordships further relied upon the legal proposition as explained by their Lordships of Hon'ble Supreme Court in the case of S. Mohan Lal v. R. Kondiah , which reads as under: It is not a sound principle of construction to interpret expressions used in one Act with reference to their use in another Act, more so if the two Acts in which the same word is used are not cognate Acts. Neither the meaning nor the definition of the term in one ....
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.... not an expenditure connected with carrying on of business of the assessee but to determine the mutual rights and obligations of the partners on the terms and conditions on which they had agreed to enter into partnership from time to time. Hence, their Lordships held, this is not expenditure in the nature of revenue but capital expenditure. At p. 61, the Hon'ble High Court held : "In the present case, however, the expenditure incurred is not for the purpose of protecting the assets but for the purpose of ascertaining what they are on settlement of the disputes between the partners in relation to them. In our opinion, therefore, having regard to the essential nature of the litigation and the purpose for which it was contested, we do not think that the expenses of litigation claimed by the assessee could be allowed to it as expenditure incurred wholly and exclusively for the purpose of carrying on its business." Coming to the instant case of the assessee, the facts are distinguishable. Had the dispute not settled, the continuance of business of the assessee itself would have jeopardized. 84. The decision of the jurisdictional High Court, relied upon by the learned CIT(A), in t....
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....of the litigations/dispute between the warring groups of the family, withdrawn from the negotiations. This clearly shows that the business of the assessee or the growth potential of the assessee had definitely been affected. In short, we are of the opinion that the view canvassed by the learned Counsel is to be accepted. 86. Coming to the decision relied upon by the learned Counsel, in the case of Dalmia Jain & Co. Ltd. v. CIT (supra), the Hon'ble Supreme Court held : "where litigation expenses are incurred by the assessee for the purpose of creating, curing or completing the assessee's title to the capital, then the expenses incurred must be considered as capital expenditure. But if the litigation expenses are incurred to protect the business of the assessee they must be considered as a revenue expenditure." In the instant case of the assessee the facts clearly show that the business of the assessee due to infighting between the two groups of the family members, was in a difficult situation and the assessee lost many business opportunities for its growth. Even if the payments were to settle this dispute but the determinate character is to protect the business as well an....
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....the rival arguments made by both the sides. We find the AO disallowed an amount of Rs. 10,27,230/- on the ground that the assessee has paid the PF and ESI dues beyond the due dates mentioned in the respective Act. The details of such disallowance are as under : PF Liabilities (Rs.) Due date Paid date 2,33,975/- 15.01.200 24.01.200 2,35,773/- 15.02.200 02.03.200 2,40,457/- 15.03.200 22.03.200 7,10,205/- Total ESIC Liabilities (Rs.) Due date Paid date 21,098/- 21.05.200 24.05.200 21,701/- 21.06.200 24.06.200 21,634/- 21.07.200 25.07.200 21,517/- 21.08.200 23.08.200 22,152/- 21.09.200 6 22.09.200 25,506/- 21.10.200 26 6.10.200 29,184/- 21.11.200 24.11.200 29,172/- 21.12.200 27.12.200 30,331/- 21.01.200 02.03.200 30,725/- 21.02.200 7 02.03.200 31,220/- 21.03.200 27 8.03.200 32,785/- 21.04.200 7 26.04.200 3,17,025/- Total 9. Before the CIT(A) it was argued that the assessee has paid the amounts on or before the due dates by way of cheques, however, the auditors has considered the date on which the SBI has deposited the cheques with the PF/ESI authorities a....
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....Hon'ble Jurisdictional High Court in the case of Prabhat Theatre (P)Ltd, Vs CIT (1979)118 ITR 953(Bom.) wherein it was held that compensation by way of interest was not allowable as business expenditure. 6. The learned Commissioner of Income-tax(Appeals) grossly erred in directed the Assessing Officer to allow depreciation on the capital expenditure without appreciating that the asset was put to use from the A.Y. 2000-01 and had also already depreciated; and, moreover, there is no provision in the Act to allow adjustment to WDV as would enable computing depreciation. 7. For these and such other grounds as may be urged at the time of the hearing, the order of the Ld. Commissioner of Incometax( Appeals) may be vacated and that of the Assessing officer be restored. 8. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal during the course of the appellate proceedings before the Hon'ble Tribunal." 11.1 Facts of the case, in brief, are that the Assessing Officer during the course of assessment proceedings observed that M/s. Jay Arts was assigned the work of interior design of 106 rooms of the hotel in the year 1997. The said wor....
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....he said party asked for settlement of Rs. 1.8 Cr. 11 Dispute as to whether Mock-up rooms making was an integral part of the said party's work 15 Claim of the company that there were delays in completion work by the said party 19 Company claimed that the workmanship of the said party was bad 19 Company (BBHL) lodged a counter claim of recovery of Rs. 2,56,72,442/- on the said party 29-35 Findings given by the court 27 Order that the company has to pay Rs. 2.07 Cr. with simple interest @12% from 1-4-99 20 Yearly interest 24,87,880 No. of years 9 years Total interest 2,23,90,919 (i.e. 52% of total liability) Original amount 2,07,32,332 (i.e. 48% of the Total liability) Total liability as on 1-2-2008 (say) 4,31,23,251 (i.e. 100%) - On 22/2/2008, the entire liability was settled for Rs. 3,50,00,000/-. Now, if the said overall liability is segregated in the ratio of 52% : 48%, the interest expenditure that ought to have been claimed for A. Y. 2008-09 works out to Rs. 1,82,00,000/- and the balance amount of Rs. 1,68,00,000/- could be considered as liquidated damages arising out of a court case settlement....
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....erefore, the change in asset schedule cannot be done. He accordingly held that depreciation cannot be allowed on this payment made by the assessee. He accordingly disallowed the claim of the assessee. 13. Before the CIT(A) the assessee made elaborate submissions based on which the Ld.CIT(A) gave part relief to the assessee by holding that since the liability to pay the interest has accrued during the relevant assessments years and the same has been incurred as bonafide expenditure, the corresponding interest element paid during those years, i.e. Rs. 32 lakhs for A.Y. 2008-09 and balance Rs. 1, 50,00,000/- for A.Y. 2009-10 are to be allowed as Revenue expenditure. The relevant observation of the Ld.CIT(A) reads as under : "6.3. I have considered the submissions made. At the outset, it needs to be examined as to whether the amounts in question are contractual 'amounts, in respect of which liquidated damages are payable. In this regard the order of the 6th Additional Judge, Small Causes Court, and Joint Civil Judge, Sr. Division, Pune has been examined in great detail. The findings of the learned judge are recorded at pages 22 to 37 of the order. It is clearly recorded at pa....
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....e is no written agreement or contract between the appellant and M/s Jay Arts. There is therefore, no contractual obligation to pay liquidated damages. 6.5. However, there is a court order directing the appellant to pay the compensation and interest thereon. The court has directed that the compensation paid to M/s Jay Arts related to amounts which was payable by the appellant in respect of the works executed by the said party, although disputed by the appellant. The amount of Rs. 2,07,32,232 at the least relates to the outstanding amounts payable to M/s Jay Arts and have been directed to be paid during the year by the Civil Court. It is well settled that where a suit for damages is entertained by a court of law, the right to receive damages and the corresponding liability to pay damages accrue or arise only when the matter is finally decided by the courts. Therefore, in a case where the claim for damages is not initially accepted and the matter is disputed before the court, the acceptance by both of parties of the judgment and decision of the court will signal the accrual of the right to receive and the concomitant liability to pay the compensation as decreed by the court. In the....
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....rposes of business must be determined on consideration of all facts and circumstances and by the application of principles of commercial trading. In view of the discussion at para 6.5 above since the liability to pay the interest has accrued during the relevant assessment years, and the same has been incurred as bonafide expenditure, the corresponding interest element paid during those years viz. Rs. 32,00,000 for A.Y. 2008-09 and balance Rs. 1,50,00,000 for A.Y. 2009-10 are to be allowed as revenue expenditure. Therefore, Grounds No. 2 to 4 for A.Y. 2008-09 and Ground Nos. 1 to 3 for A.Y. 2009-10 are treated as partly allowed." 13.1 Aggrieved with such order of the CIT(A) the Revenue is in appeal before us. 14. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find in the instant case the assessee had assigned the work of interior design of 106 rooms of the Hotel in the year 1997 to one M/s. Jay Arts. Due to certain disputes that arose between the said party and the assessee, a case was f....
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....amely CD's wife, daughter and son. Thereupon, GW Ltd. filed a suit alleging, inter alia, that CD had in a clandestine manner got hold of the business of the foreign principals, and claimed, inter alia, liquidated damages. By their order dated 30-04-1982, the High court awarded to the plaintiff a sum of Rs. 42 lakhs as and by way of liquidated damages. CD, firstly by interlocutory petition, got the operation of the Judgment stayed and, secondly, on 28-10-1991, a memorandum of compromise was entered into by the parties to the dispute, under which the assessee-defendant paid a sum of Rs. 17 lakhs to GW Ltd. in full and final compromise/settlement of the claims and counter claims involved in the dispute. Thereupon, by their order dated 31-10- 1991, the High Court confirmed the said memorandum of compromise. For the assessment year 1983-84, the assessee-firm set up a claim for revenue deduction in a sum of Rs. 14 lakhs on the ground that the liquidated damages of Rs. 42 lakhs awarded by the High Court on 30-4-1982 were to be shared equally by the assessee-firm and its two foreign principals. The Assessing Officer, however, negatived the assessee's claim. On appeal, the Commissioner ....
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....her, in view of the Supreme Court decision in CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 261 ITR 524 /27 Taxman 450A the liability of the assessee-firm to pay its share of the liquidated damages arose on 31-10-1991 when the memorandum of compromise was made the decree of the Court. It should, therefore .follow that the assessee's claim must fail. Therefore, the liability to pay the assessee's share of the damages as finally quantified on compromise would have to be dealt with in the assessment year relevant to the previous year in which the date 31- 10-1991 fell." 14.2 So far as treating the expenditure of Rs. 1,82,00,000/- as interest is concerned, we find the Ld.CIT(A) following the decision of Hon'ble Supreme Court in the case of Bombay Steel Navigation Company (P) Ltd., Vs. CIT reported in 56 ITR 52, has decided the issue in favour of the assessee and accordingly allowed interest expenditure of Rs. 32 lakhs for the impugned assessment year and the remaining Rs. 1,50,00,000/- revenue expenditure in the subsequent year. We find the Hon'ble Supreme Court in the case of Bombay Steam Navigation Company (1953) Pvt. Ltd., while deciding the issue of in....
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....964] 53 I.T.R. 186 (S.C.) followed. The expenditure made under a transaction which is so closely related to the business that it could be viewed as an integral part of the conduct of the business, may be regarded as revenue expenditure laid out wholly and exclusively for the purposes of the business. Expenditure for satisfying liability unrelated to the business, even if incurred for avoiding danger, apprehended or real, to the conduct of the business, cannot be said to be revenue expenditure. In considering whether expenditure is revenue expenditure, the court has to consider the nature and the ordinary course of business and the objects for which the expenditure is incurred. The question whether a particular expenditure is revenue expenditure incurred for the purpose of the business must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition to the carrying on of the business, the expendi....
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....d from time to time was filed, that only the consent decree in a suit was filed and held that the assessee failed to establish that it was in occupation of the theatre as a tenant from the very beginning. The Tribunal further held that the amount of interest was paid by the assessee in order to legalise the assessee's right to occupation and not for preserving its tenancy right and hence the payment of interest was capital expenditure. Under these circumstances, the Hon'ble High Court upheld the order of the Tribunal. The relevant observation of the Hon'ble High Court at page 957 reads as under : "So far as question No. 3 is concerned, the Tribunal has been careful enough to point out that there was no material on record to indicate the time from which the assessee company started occupying the Kibe Theatre. Without knowing the time when the assessee company was in occupation of the theatre it will be difficult for the Tribunal to come to a definite finding as regards the liability for an amount of Rs. 34,080 which was described as the amount of interest in the consent decree. It will not be out of place to refer to the fact that the claim in the suit for arrears of interest was....