9911796707
TMI Blog1982 (12) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... between the compensation of Rs. 10.20 crores and the paid-up capital, viz., Rs. 8.20 crores, was credited to general reserve of the limited company. 3. After the nationalisation of the Punjab National Bank Ltd., the company carried on business in terms of the following resolution adopted at the extraordinary general meeting of the company held on 20-1-1971 : "Resolved that the company do continue the business of banking as defined in section 5(b) of the Banking Regulation Act, 1949, subject to the receipt of permission from the Reserve Bank of India and that the company do continue to engage in other forms of business under section 6(i) of the said Act and in accordance with the provisions of the objects clause of the company's Memorandum of Association." The board of directors had assured the shareholders that they would come forward with suitable proposals to satisfy both the sections of the shareholders-one desiring the company to continue its business of financing trade and industry and also to undertake trading activities and the other not wanting to continue as members of the company on its ceasing to do banking business. Pursuant to this assurance, the board of direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company intended to purchase 11,98,711.50 of its own shares valued at Rs. 10 each at the rate of Rs. 40 per share exclusive of dividend which may be declared till the date of the purchase price. The proposed reduction in the share capital was confirmed by the High Court in C. P. No. 86 of 1973, dated 15-11-1973. 6. By a circular letter dated 12-12-1973, the Punjab National Bank Ltd. informed its shareholders that the Delhi High Court had confirmed the reduction of capital of the company from Rs. 20,00,000 to Rs. 80,12,885 in terms of the special resolution passed by the shareholders in the annual general meeting held on 25-9-1973. Certified copy of the judgment when received was to be filed with the Registrar of Companies, Delhi and Haryana, New Delhi, for registration. All the shareholders who exercised their option to sell the shares to the company shall cease to be the members of the company from the date of such registration. These formalities were expected to be completed by 15-1-1974. On Registrar of Companies registering the Delhi High Court's order and after the book closing, the company was to issue a circular to each of the registered shareholder of the shares in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price over the paid-up value of Rs. 10, which might be deemed dividend under the Income-tax Act and make payment of the balance amount to the sellers of the shares. Several shareholders including Life Insurance Corporation of India and Unit Trust of India wrote to the company that since it would be making payment of the purchase price of the shares, no deduction of tax at source was called for and, if necessary, the company may file a declaratory suit to get the matter decided by a court of law. On legal consultations, the board of directors has been advised that no declaratory suit in the matter can be filed by the company itself. On the same being brought to the notice of LIC they have suggested the company to make on account payment of Rs. 33.10 per share and the balance of Rs. 6.90 per share should be retained by the company for the present on the specific condition and understanding that the company will be entitled to treat it as tax deduction at source in case a final decision to that effect is made. Thereupon the company will deposit the amount with the Income-tax Department and issue income-tax deduction certificate and you would be entitled to treat the amount as tax dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing extract from the resolution No. 12 passed by the board of directors on 13-2-1974 : "Extract from resolution No. 12 passed by the board of directors of the Punjab National Bank Ltd. in their meeting held on 13-2-1974 : The Chairman further stated that the matter of interim dividend raised by Life Insurance Corporation of India and Unit Trust of India was discussed with Life Insurance Corporation of India and they were informed that the question of payment of dividend does not arise. Life Insurance Corporation of India, however, desired that on account of delay in completion of various formalities, reasonable interest per share be paid to the erstwhile shareholders. The matter was discussed and it was decided that while making 'on account' payment, interest @ 80 paise per share, subject to deduction of tax under section 194A of the Income-tax Act, wherever applicable, be also paid to the erstwhile shareholders." The company had treated the payment of 80 paise per share as interest and tax deducted at source under section 194A of the Income-tax Act, 1961 ('the Act'). The sum of Rs. 9,58,969 was claimed by the assessee as revenue expenditure. It was claimed that out of the af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipt of circular letter dated 18-2-1974, the LIC to whom a sum of Rs. 49,64,400 became payable in respect of the shares held by it at Rs. 40 per share, wrote a letter dated 12-3-1974, stating inter alia that in case the sum of Rs. 6.90 per share retained by the company was refunded after a final decision was arrived at on that question, it would be just and fair that the shareholders should be entitled to get interest that may be earned by the company in the meantime and the LIC suggested a reasonable rate of interest at 9 per cent per annum for the period for which the said amount was retained. It was admitted that no interest will accrue if the amount was not refundable to the shareholders. On 1,24,110 shares surrendered by the LIC, the retained amount at the rate of Rs. 6.90 per share came to Rs. 8,56,359. There was correspondence on this issue between the assessee-company and the LIC. On 27-1-1975 along with a letter the LIC sent an agreement to the assessee-company stating the case for opinion of the Hon'ble High Court at Delhi under order 36, rule 1 of the Code of Civil Procedure on behalf of the LIC. Para 22 of the agreement which is given below contains the controversial iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r : "Considered the matter with regard to the retained amount of Rs. 6.90 per share as also letter dated 27th January, 1975, from Life Insurance Corporation of India and it was decided to make provision for interest in the company's accounts for the year ended 31st December, 1974, on the following basis : From 1st April, 1974 to 30th June, 1974 7% p. a. From 1st July, 1974 to 31st October, 1974 9% p. a. From 1st November, 1974 onwards 11% p. a. The board further approved draft of the circular letter to be sent to the erstwhile shareholders who had sold their shares to the company." It was on the basis of this resolution that the interest payable on the retained amount of Rs. 6.90 per share was calculated. The assessee claimed the sum of Rs. 4,52,344 as a revenue deduction. The submission made on behalf of the assessee-company was that no part of the purchase price of Rs. 40 per share payable to the erstwhile shareholders was divided and, therefore, no question of deducting any tax at source arose. The claim of the department for deduction of tax at source was being resisted and the entire sum of Rs. 68,71,053 was being held in trust for the erstwhile shareholders. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he major shareholders of the company, had pressed for payment of reasonable interest to the shareholders for the period during which the amount of the shareholders was in the control of the company. The company had treated the payment of 80 paise per share as interest and deducted tax at source under section 194A. The amount so paid could not be treated as an additional price for the purchase of its own shares. The purchase consideration was settled much earlier and the shareholders opting out were required to send irrevocable letters of option to the company so as to reach the company on or before 5-7-1973. The price of Rs. 40 per share had been agreed upon subject to the approval of the scheme by the High Court. The scheme was approved by the High Court on 15-11-1973 and registered with the Registrar of Companies on 30-1-1974. The decision to pay interest at 80 paise per share in respect of shares purchased was taken much later as per the board of directors' resolution No. 12, dated 13-2-1974. Till the payment of the amount was made to the erstwhile shareholders it was retained and utilised by the assessee-company in its financing business and, accordingly, the payment made could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spective of the fact whether or not the amount has actually been paid, the deduction for such liability is admissible. I accordingly held that the Income-tax Officer was not justified in disallowing Rs. 4,52,344. The addition is deleted." 14. For the following reasons stated in his order the Commissioner (Appeals) allowed the deduction of Rs. 9,58,969 : "2.7 I am further of the opinion that the appellant's objection against the disallowance of Rs. 9,58,969 is also well founded. The said payment has been made as authorised by resolution No. 12 of the board of directors passed in their meeting held on 13-2-1974. The said resolution has been passed in pursuance of demand for interest by LIC and Unit Trust of India, the two major shareholders of the appellant company. Irrevocable options were lodged with the appellant company by the shareholders choosing to opt out by 5-7-1973. The agreed purchase consideration was Rs. 40 per share. Further stipulation was that the shareholders would be entitled to dividend that may be declared till the date of payment of the purchase price. The scheme which involved reduction of capital was approved by the High Court on 15-11-1973 and registered w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d (iii) deleting the disallowance of Rs. 9,58,969 rightly made by the ITO." 16. The learned departmental representative submitted that if the provisions of section 194 applied, then the entire money retained by the assessee-company belonged to the Government and no interest would thus be payable to any one and, therefore, the claim for interest of Rs. 4,52,344 could not be allowed. Assuming that this contention was not accepted, the learned departmental representative referred to the following para 23 of the agreement between the Punjab National Bank Ltd. and the LIC and contended that the liability to pay any interest was not settled : "23. The parties agree that the opinion of the High Court of Delhi shall be binding upon the parties and that the first party shall pay Rs. 6.90 per share being the balance payable in respect of the said shares to the second party if according to the opinion of the High Court of Delhi the excess price payable in respect of the said shares to the second party over and above the paid-up value of shares is not considered as deemed dividend under section 2(22) of the Income-tax Act, 1961 and the provisions of section 194 read with section 2(22) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that in the mercantile system of accounting even estimated liability had to be allowed as necessary business expenditure. He relied on the judgment in Bombay Steam Navigation Co.'s case, wherein interest on the unpaid balance of the consideration for the assets acquired, was allowed as expenditure under section 10(2)(xv) of the 1922 Act, corresponding to section 37(1) of the 1961 Act. He also relied on the judgment in Rohtas Industries Ltd.'s case wherein, interest paid for acquisition of land through the Government under the Land Acquisition Act was allowed as a deduction under section 10(2)(xv). He then submitted that the liability to pay interest of Rs. 4,52,344 was not a contingent liability. For this purpose he relied on Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) and CIT v. Nirmal Kumar Bose Bros. [1979] 119 ITR 537 (Pat.). He then submitted that if there was any cessation in respect of the liability to pay the aforesaid interest, it could be brought to tax under section 41(1) of the Act. He thus submitted that the order of the Commissioner (Appeals) in respect of the allowance of interest of Rs. 4,52,344 should not be disturbed. He also submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yed by the Hon'ble Delhi High Court. The department thereupon filed a C. M. Petition No. 1059 of 1975 and the High Court ordered on 30-5-1975 that the department would be entitled to proceed with the adjudication of the issue and to determine the legal liability of the assessee. The Court also directed the assessee in the meantime to furnish a security of Rs. 68,55,866 to the satisfaction of the Commissioner. Thereafter the ITO again started proceedings vide a letter dated 23-6-1975 calling upon the company to show cause why the entire amount paid to the shareholders who opted to surrender their shares should not be deemed as dividends in terms of section 2(22)(d) and why the company should not be treated in default for failing to deposit tax deducted at source from the amount paid to the shareholders and why the company should not be treated in default for not deducting the tax at source on the full amount of Rs. 40 per share. After taking into consideration the various submissions made by the assessee against the charge proposed to be levied by the ITO, the ITO came to the conclusion that there was a default in terms of section 201 for the total amount of Rs. 96,17,339. On appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase price of own shares. The general reserve had been created by crediting Rs. 8.20 crores out of the compensation money of Rs. 10.20 crores. Thus, it was observed by the Tribunal, that if Rs. 8.20 crores was excluded from the general reserve, there would be no accumulated profit. The Tribunal also noted that there was no material on record to show as to what was the amount of capital gains taxable for the assessment year 1970-71, because that amount had not been specifically excluded in Explanation 11 to section 2(22). The Tribunal thus observed : "We are thus unable to give any finding as to whether sum of Rs. 8.20 crores includes any element of capital gains. We, therefore, proceed on the basis that the sum of Rs. 8.20 crores does not include any capital gains and thus we have to hold that the said company did not have any accumulated profits as on 30-1-1974." Assuming for the sake of argument that Punjab National Bank Ltd. had made any capital gains which formed a part of Rs. 8.20 crores, then also the Tribunal held that there would be no deemed dividend as the distribution was not to all the shareholders. According to the Tribunal, "the payment made by the Punjab Nationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... National Bank Ltd., desired payment of an interim dividend, because in terms of the order of the High Court, the shareholders exercising their option would cease to be shareholders on 30-1-1974 and thus they would not be entitled to any dividend for the year ended 31-12-1973 and for the period thereafter till the date of payment of the purchase price. The mention of the payment of 80 paise per share arises for first time in resolution No. 12 passed by the board of directors on 13-2-1974. The reason given is that this payment was made for the delay in completion of various formalities. Though the words 'on account' payment of 80 paise per share has been called the payment of interest, subject to deduction of tax under section 194A, we are of the opinion that this payment cannot be called payment of interest. In Law of Income-tax in India by V. S. Sundaram (11th edition) at page 1210 the learned author has observed : "25. What is interest--- it is the price of the use of money and should be distinguished from payments of the nature of compensation." The sum of 80 paise per share, in our opinion, is some kind of compensation to the erstwhile shareholders, because they were not pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
