2017 (8) TMI 647 - HC - Income Tax

Benefit of deduction u/s.57(iii) - whether payment was made for enlarging the control and management over - capital expenditure or revenue expenditure - Held that - In the present case the Respondent/Assessee has been denied the deduction under Section 57(iii) by the CIT (A) only because of absence of income by way of dividend/interest in the subject Assessment Year. This connection/nexus between allowing of deduction u/s.57(iii) of the Act only upon earning of income in the subject Assessment Year has been negatived by the Apex Court in Rajendra Prasad Moody (1978 (10) TMI 133 - SUPREME Court ). In fact the only requirement is that the expenditure is with the object of earning income and not dependent upon actual earning of income in fact. In this case the impugned Order of the Tribunal has recorded a finding that the amount of 3.25 Crores were paid to Mr.G.R.Handa by the Respondent/Assessee only with a view to safeguard its investment in M/s.A.P.Rayons Ltd. so as to earn dividend/interest income. The decision of Gujarat High Court in Sarabhai Sons (P) Ltd. (1993 (1) TMI 53 - GUJARAT High Court ) relied upon by the Revenue would have no application to the present facts. Thus on the present facts no interference with the impugned Order is called for as it merely follows the Apex Court decision in Rajendra Prasad Moody (supra). The question as framed on behalf of the Revenue seeks to deny the respondent/assessee the benefit of Section 57(iii) of the Act on the ground that it is in the nature of capital expenditure as it was expended for enlarging control and management of M/s.A.P. Rayons Ltd. This finding of capital expenditure by the Assessing Officer was negatived by the CIT (A) who held it was allowable as a deduction under Section 57(iii) of the Act only subject to earning of income. Section 57 (iii) of the Act itself excludes expenditure of capital nature. However the Revenue accepted the above finding of the CIT (A) as no appeal on this aspect was filed to the Tribunal. Therefore the question as formulated does not arise from the impugned Order of the Tribunal.

Summary

Issues:
Challenge to Order of Income Tax Appellate Tribunal regarding payment to individual under Section 57(iii) of Income Tax Act for enlarging control and management over a company.

Comprehensive Analysis:
1. The appeal challenged the Order of the Income Tax Appellate Tribunal regarding a payment made to an individual under Section 57(iii) of the Income Tax Act for enlarging control and management over a company for Assessment Year 1993-94.
2. The Memorandum of Understanding distributed shareholding in the company amongst promoters, with a provision for an individual to acquire a portion of shares from one of the promoters over a period of 15 years.
3. A lawsuit was filed for specific performance of the Memorandum of Understanding, leading to a compromise where the company paid a significant amount to retain its shares in the company.
4. The company claimed the payment as revenue expenditure for carrying on its business, but the Assessing Officer disallowed it as an expense to acquire control over the company, not for business purposes.
5. The Commissioner of Income Tax (Appeals) allowed the deduction under Section 57 of the Act if income was earned on the expenditure, which was not the case during the relevant Assessment Year.
6. The Tribunal allowed the appeal, stating that the expenditure was to safeguard the investment and earn dividend income, not contingent on income earned in the same year.
7. The Revenue contended that the payment was capital expenditure to acquire control over the company, citing a different court decision, but the company argued it was to safeguard its investment for income purposes.
8. The Tribunal's decision was upheld, emphasizing that the payment was for earning income, not for acquiring control, in line with the Apex Court's ruling.
9. The Gujarat High Court decision cited by the Revenue did not apply as it involved acquiring shares for control, not income, unlike the present case.
10. The Tribunal's decision was found justified, as it followed the law and did not involve capital expenditure for control or management.
11. The Revenue's argument to deny the benefit of Section 57(iii) of the Act was not valid, as the payment was not for enlarging control but for safeguarding investment and earning income.
12. The Tribunal's decision was upheld, concluding that no interference was warranted, and the appeal was dismissed.

This detailed analysis covers the issues, arguments, court decisions, and the final judgment, providing a comprehensive understanding of the legal judgment.