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TMI Blog2014 (12) TMI 255X X X X Extracts X X X X X X X X Extracts X X X X ..... rity shareholders, the company could not be said to have acquired any enduring benefit – thus, there was no infirmity in the order of the CIT(A) allowing the premium paid on buy back of shares as a revenue expenditure – Decided against revenue. Disallowance on payment of PF and ESI made u/s 43B – Payments made after prescribed due dates – Held that:- It has been held in various decisions that PF & ESI dues, if paid before filing of the return prescribed u/s.139(1) is an allowable deduction - the assessee has paid/deposited the PF & ESI dues much prior to the due date of filing of the return, therefore, there was no infirmity in the order of the CIT(A) – Decided against revenue. Amount of compensation debited by assesse - 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 filed before the Civil Court who in its judgment dated 10-08-2007 had granted compensation to Jay Arts against the work done with respect to interior designing of the hotel in the year 1997 and some additional work - The assessee had debited compensation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the common order dated 30-02-2013 of the CIT(A)-I, Pune relating to Assessment Years 2007-08 to 2009-10 respectively. For the sake of convenience, all these appeals were heard together and are being disposed of by this common order. ITA No.772/PN/2013 (Bramha Corps Hotels Resorts Ltd., (A.Y. 2007-08) : 2. Grounds of appeal No. 1 to 5 by the Revenue reads as under : 1. The order of the Id. Commissioner of Income-tax (Appeals) is contrary to law and to the facts and circumstances of the case. 2. The Id. Commissioner of Income-tax (Appeals) grossly erred in holding that in view of the decision in the case of Echjay Industries Ltd. Vs. DCIT, 88 TTJ 108(Mum), the premia of ₹ 2,73,68,189/- and ₹ 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21,00,000/- which had been paid by the Mac Charles Group over a period of 36 months. The interest at specified rates was directed to be paid on a sum of ₹ 1,85,95,007/- being the consideration for the balance 11,52,107 shares which remained to be transferred to Mac Charles Group. Due to the disputes with the recalcitrant shareholders the modernization, expansion and other obligations could not be addressed. Therefore, the company decided to protect its interest by complying with the Company Law Board's decision to buy back the shares of the recalcitrant Group at a stipulated price which included premium over and above the face value of the shares. Further, the company entered 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 ₹ 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 ₹ 25 per share as against the face value of ₹ 10 per share. Therefore, a premium of ₹ 5,43,00,000/- wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it against the directors in the Bombay High Court vide Criminal Application No. 2108 of 2001, 2109 of 2001 and 2110 of 2001 following a complaint made by the promoter of the company Shri Surendrakumar Agarwal before the Judicial Magistrate, Pune. The Mac Charles group filed CP No. 58 of 2002 before the Company Law Board, Delhi and after hearing both the parties and taking into account the settlement arrived between the parties, the CLB passed final orders dated 23.7.2004 and 14.1.2005 directing refund of ₹ 19,31,00,000 to the Mac Charles group in 36 monthly equal installments along with simple interest @ 4 % thereon. Further, the appellant company was permitted to buy back equity shares on pro rata basis 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 G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um in accordance with the agreement before High Court was an expenditure to ensure smooth running of the business of the company and therefore, on revenue account. I have perused the two decisions of the Mumbai ITAT and the Hon'ble Bombay High Court cited by the learned AR. In the Echjay Industries case, a dispute between two warring group of shareholders was terminated consequent to a consent term drawn up by the shareholders and approved by the Bombay High Court with the directions that the company would purchase the shares of some of the shareholders at a premium. It was held that the payment made to the shareholders was to secure smooth running of the company and avoid possible winding up of the company under the provisions 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the interest of revenue. He submits that the decision of the Tribunal in the case of Echjay Industries Limited (Supra) has been approved by the Hon'ble High Court of Bombay by dismissing the appeal filed by the Revenue against the said decision i.e. Income Tax Appeal No. 337 of 2004, order dated 30th July 2008. The sum and substance of the argument of the Ld Counsel is that the issue which is a subject matter of revision u/s. 263 cannot be treated as a capital expenditure as the same is a revenue expenditure as held in the case of Echjay Industries Limited M/s. Brahma Bazaz Hotels Ltd. A.Y. 2006-07 (Supra). He pleaded that merely the revenue loss cannot be the criteria for exercising jurisdiction u/s. 263. 5. Per contra, the Ld. 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, prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r similar controversy in the case of CIT vs. Ahok Leyland Ltd. 1973 CTR (SC) 9: (1972) 86 ITR 549 (SC) in which the apex Court has held that the principles which flow from the above cited decisions clearly suggest firstly that the enduring benefit in itself is not a conclusive test. Secondly, it is necessary to consider whether the enduring advantage consisted merely facilitating the assessee's operation or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, then such expenditure would be on revenue account. Thirdly, the question must be viewed in a larger context or business necessity or expediency. Having regard to the above test in the 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 ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly keeping in view the purpose of ss. 397 and 398 of the Companies Act, 1956. 7. The above decision has been followed by the ITAT C Bench, Mumbai in the case of Chemosyn Limited (Supra). The decision in the case of Brooke Bond India Ltd. Vs. CIT, 225 ITR 798 (SC) has been explained in the decision of Echjay Industries Limited (Supra). Hence, in our opinion, the order of the A.O on the issue of the premium paid on the buy back of shares treating the same as a revenue expenditure cannot be said to be erroneous for exercising the jurisdiction u/s. 263. Both the conditions that (1) order must be erroneous and (2) same should be prejudicial to the interest of revenue must be satisfied for exercising jurisdiction u/sec. 263. In our opinion, it cannot 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied upon by the contending parties. The decisions relied upon by the learned CIT(A), on which reliance has also been placed by learned Departmental Representative, i.e. Madurai District Central Co-operative Bank Ltd. v. ITO (supra) and Shailendra Kumar v. Union of India (supra), does not further Revenue's case. In the case of Madurai District Central Co-operative Bank Ltd. (supra), Hon'ble Supreme Court held, IT Act is a permanent enactment and in the case of Shailendra Kumar v. Union of India (supra), Hon'ble Allahabad High Court held that IT Act is a self-contained code and the taxability or otherwise of receipts to be determined with reference to the provisions of the Act. It does not mean that a finding of fact by an authority, though 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d : the expenditure incurred by the assessee in his capacity as agent of another is not a deductible item. In other words, the decision went against the assessee because it was a payment made as an agent. Assessee paid the estate duty on behalf of another person, which is not wholly and exclusively for the purpose of business, Hon'ble Supreme Court held. 83. Coming to the decision relied upon by the Revenue authorities in the case of Adarsha Dugdhalaya v. CIT (supra), this was a case wherein as directed by the award, payments were made by the assessee towards arbitrators' fees, solicitors' fees and costs on both sides in two suits and this amount was claimed as deduction in the assessment. Hon'ble Bombay High Court held, this was 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 incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusively for the purpose of business. In the instant case of the assessee we have seen that had the settlement not been taken, the business itself would have jeopardized. 85. AO has given a chart of turnover, profit, etc. vide pp. 29 and 30 of his order, para 14(a), to show that assessee's business turnover and profit because of this litigation has never come down. In other words, it has not adversely affected. On the other hand, learned Counsel for the assessee has contended that mere increase in the turnover and profit alone is not criteria to decide whether the business adversely affected or not. We have mentioned in para 70 of this order, the ranking given and also the parties who entered into negotiations with the assessee and because 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO made addition of ₹ 10,27,230/- u/s.43B on the ground that the assessee has paid PF liability of ₹ 7,10,205/- and ESI liability of ₹ 3,17,025/- after the prescribed due date mentioned in the respective Act. 7. Before the CIT(A) it was submitted that the amounts were actually paid on or before the due dates by the assessee by way of cheque to the State Bank of India, Bund Garden Branch, Pune. However, the auditor has considered the date on which State Bank of India has deposited the cheques with the PF/ESI authorities. The Ld.CIT(A) therefore directed the AO to verify these facts and allow consequential relief u/s.43B of the I.T. Act. 7.1 Aggrieved with such order of the CIT(A) the Revenue is in appeal before us. 8. We have considered the rival arguments made by both the sides. We find the AO disallowed an amount of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under ; 1. The order of the learned Commissioner of Income-tax (Appeals) is contrary to law and to the facts and circumstances of the case. 2. The learned Commissioner of Income-tax (Appeals) grossly erred in allowing an amount of ₹ 32,00,000/- from out of the payment of ₹ 2,00,00,000/- made by the assessee to M/s. Jay Arts by holding the same as revenue expenditure instead of confirming the assessment on this issue wherein the entire payment had been treated as capital expenditure. 3. The learned Commissioner of Income-tax (Appeals) grossly erred in failing to appreciate that the payments related to the original work pertaining to furniture and fixtures, when the hotel was started, and also the assessee had capitalised the concerned assets; and, in the circumstances, no part of the payment could be treated as revenue expenditure. 4. The learned Commissioner of Income-tax(Appeals) grossly erred in allowing the interest paid on arrears outstanding as a revenue expenditure by relying on the decision in the case of Bombay Steel Navigation Co P Ltd Vs CIT(56 ITR 52), without giving any finding that the interest paid was an integral part of the profit-earning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee asking it to explain as to why the payments made to Jay Arts should not be disallowed as being capital in nature. The assessee made a detailed submission which has been reproduced by the Assessing Officer in the body of the assessment order and which reads as under: 13.2 The assessee's submission dated 16.12.2010 is reproduced below: - Dispute with Jay Arts - The said party was assigned the work of interior designing of the 106 rooms of the hotel in the year 1997. The said work was completed by the said party. Some extra works were also assigned to the said party. As regards the overall consideration, dispute arose between the said party and the assessee. The said party made a large demand of damages on the assessee company. A case was filed before the Civil court, Pune. Copy of the judgment dated 10/8/2008 is enclosed. Key observations from the judgment of the said case are as follows. The liability with interest @ 12% comes to the following amount. Page No. Contents 1 The case is decided on 10/8/2007. The said party (Jay Arts) has filed a suit for recovery of ₹ 3,49,26,892 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws : A.Y. Rate of dep. Addition/ Opening WDV Depreciation Closing WDV 2001-02 20% 16,800,000 3,360,000 13,440,000 2002-03 20% 13,440,000 2,688,000 10,752,000 2003-04 10% 10,752,000 1,075,200 9,676,800 2004-05 10% 9,676,800 967,680 8,709,120 2005-06 10% 8,709,120 870,912 7,838,208 2006-07 10% 7,838,208 783,821 7,054,387 2007-08 10% 7,054,387 705,439 6,348,948 2008-09 10% 6,348,948 634,895 5,714,054 Accumulated Depreciation 11,085,946 As such on an alternative basis, the deduction which needs to be granted to the company works out to ₹ 2,92,85,946 (i.e. ₹ 1,82,00,000 interest + ₹ 1,10,85,946 Accumulated depreciation). It is submitted, the appropriate view needs to be adopted so that the genuine bonafide expenditure (though emanating from serious contractual dispute) of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s viz. Jay Arts and the appellant company. The main dispute between the two parties is regarding the rate approved per room and the payments in accordance with such rates. The dispute is regarding the approval of estimates furnished by Jay Arts. It is found that on all issues i.e. the number of rooms given for interior decoration work to Jay Arts, the rate for which the work is approved, the method of certification and verification of work done by Jay Arts through Architect, the order of the Court is against the appellant. Accordingly, excluding the interest component the amount of ₹ 2,07,32,232 which has been directed to be paid by the court to Jay Arts is in respect of outstanding bills of the contractor. The appellant company failed to make payment of the rightful claims of the contractor when such amounts were due and instead of payment, made counter claims and allegations against the-'contractor. The withdrawal of the appellant's suit before the Bombay HC is an acceptance of the incorrect claims regarding the payments due to the contractor. It has been submitted that the appellant had decided to contest the Civil Court's decision before the Hon'ble Mumbai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute entered into a memorandum of compromise following the decision of the court. This has been so held by the Madras Bench of ITAT in Kaveri Engineering Industries Ltd. vs DCIT reported in 43 ITD 527 and International Services vs ITO reported in 43 ITD 25. 6.6. The payments in question spread over two assessment years namely A.Ys. 2008-09 and 2009-10 pertained to capital expenditure for the interior of the hotel rooms. The same relates mostly to furniture and fixture, false ceiling, and other carpentry work. Some of the amounts relate to interior work in the hotel lobby, courtyard, staircase, terrace etc. but majority of the expenditure relates to wood work which requires constant upgradation, repairs and replacement. The court had directed that the amount of compensation to be paid to M/s Jay Arts was ₹ 2,07,32,232 (on account of outstanding amounts due) which works out to 48% of the total liability. As per court order, the interest to be paid w.e.f. 1.4.1999 till payment is ₹ 2,23,90,919 which translates to 52% of the total liability. The appellant has settled the claim at ₹ 3,50,00,000. On the pro rata basis, the capital expenditure and interest component is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 10-08-2007 had granted compensation to Jay Arts against the work done with respect to interior designing of the hotel in the year 1997 and some additional work. The assessee had debited compensation of ₹ 2 crores paid to Jay Arts in its profit and loss account for the A.Y. 2008-09. It was the submission of the assessee before the Assessing Officer that the entire liability was settled for ₹ 3,50,00,000/- as per MOU dated 22-02-2008 after the Pune Sessions Court order dated 10-08-2007. If the same is segregated in the ratio of 52% and 48% then the interest expenditure comes to ₹ 1,82,00,000/- being 52% of the total liability and the balance amount of ₹ 1,68,00,000/- could be considered as liquidated damages arising out of a court case settlement. We find the Assessing Officer rejected the same on the ground that the payments out of compensation should also be in the nature of capital expenditure since all the payments made to Jay Arts during the period 1997 to 2001 have been capitalised and taken into fixed assets under the head Furniture and Fixtures. We find the Ld.CIT(A) allowed an amount of ₹ 32 lakhs out of the said ₹ 1,82,00,000/- being re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner (Appeals) upheld the ITO's order. On second appeal: HELD There is a difference between a statutory liability and a liability arising on account of a breach of contract or breach of faith. Statutory liability arises on the happening of the taxable event. Such liability arises by reason of the statute itself and merely because the assessee disputes the liability, its accrual does not get postponed. That, however, is not a case where a claim is made for damages on account of breach of contract or breach of faith. In such cases, the liability does not arise merely because a claim for damages is made. The liability arises the moment the assessee accepts the claim. If, on the contrary, the assessee disputes the claim, the liability arises in the year in which adjudication took place. Thus, a claim for contractual breach cannot be equated with statutory liability. Where the claim is disputed, the liability does not accrue till the claim is adjudicated upon or it is accepted by the assessee. In the instant case, the High Court awarded damages on 30-4-1982. At the first blush, it appeared the liability to pay the damages got fastened on to the assessee on that day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deciding the issue of interest on borrowed capital as business expenditure has observed as under (Short Notes) : Pursuant to a scheme of amalgamation between two shipping companies, the assessee-company was incorporated on August 10, 1953, to take over certain passenger and ferry services carried on by one of the former. On August 12, 1953, the assessee-company took over assets, which were finally valued at ₹ 81,55,000, and agreed that the price was to be satisfied partly by allotment of 29,990 fully paid up shares of ₹ 100 each and the balance was to be treated as a loan and secured by a promissory note and hypothecation of all movable properties of the assessee-company. The balance remaining unpaid from time to time was to carry simple interest at 6 per cent. By a supplemental agreement the original agreement was modified to the effect that the balance shall be paid by the assessee-company and until it was paid in full the assessee-company shall pay simple interest at 6 per cent, per annum on so much of the balance as remained due. The balance was also to be secured by hypothecation of all the movable properties of the assessee-company. During the relevant account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the business, the expenditure may be regarded as revenue expenditure. Tax is payable under section 10(1) by an assessee on his profits or gains turned in the business, profession or vocation carried on by him in the year of account. If no business at all is carried on in that year, liability to tax does not arise under section 10(1). 14.3 In view of the above 2 decisions cited (Supra), we find no infirmity in the order of Ld.CIT(A) in allowing an amount of ₹ 32,00,000/- out of the payment of ₹ 2,00,00,000/- to M/s. Jay Arts treating the same as revenue expenditure. 14.4 So far as the decision of the Hon ble Bombay High Court in the case of Prabhat Theatres (P) Ltd., (Supra) relied on by the Revenue is concerned, we find the same is not applicable to the facts of the present case and is distinguishable. In that case, the assessee company was carrying on business of exhibiting motion pictures in a theatre which had been taken on lease by two partnership firms. Since the lessees of the theatre did not pay lease rent, the lessor filed a suit in 1945 for recovery of rent and for eviction against the partnership firms and also respective partners. The owner of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the claim in the suit for arrears of interest was ₹ 70,500 while in the consent decree that amount was reduced to ₹ 44,600. In the plaint an amount of ₹ 9,500 was claimed by way of interest while in the consent decree a sum of ₹ 40,882 was agreed to be paid by way of interest and court expenses. How those figures were arrived at is not made clear by the contents of the compromise decree nor was it made clear by other material brought on record on behalf of the assessee before the taxing authorities and the Tribunal. In that view of the matter, the Tribunal came to the conclusion that this sum of ₹ 34,080 was agreed to be paid under the compromise decree in order to legalise the assessee's right for occupation and not for preserving its tenancy rights. Actually it found that even the deduction of ₹ 5,400 that was allowed by the AAC was unjustified but as there was no appeal by the revenue that finding could not be disturbed. So far as the claim for the remaining part of the interest was concerned, it was disallowed in view of this conclusion of the Tribunal because as a result thereof what was described as payment of interest was in fact ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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