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TMI Blog2016 (4) TMI 1183X X X X Extracts X X X X X X X X Extracts X X X X ..... GMENT 1. The subject matter of challenge is a judgment and order dated January 25, 2007 passed by the learned Income-tax Appellate Tribunal, A Bench Kolkata in I. T. A. No. 664/Kol/2006 pertaining to the assessment year 2002-03, by which the learned Tribunal dismissed an appeal preferred by the assessee and upheld the order of the Commissioner of Income-tax (Appeals). Aggrieved by the order the assessee has come up in appeal. 2. The question formulated at the time of admission of the appeal is as follows : Whether on the facts and in the circumstances of the case and on a proper construction of agreement dated March 9, 1999 between the appellant company and M/s. UTI Bank Limited, the Tribunal erred in law in holding that the payment of liquidated damages of ₹ 50,71,328 by the appellant company to UTI Bank Ltd. was payment of dividend and not allowable/deductible expenditure in the hands of the appellant-company under the Income-tax Act, 1961 ? 3. The facts and circumstances of the case, briefly stated, are as follows : 4. The assessee issued 30,00,000 (thirty lakhs) cumulative redeemable preference shares of ₹ 10 each at par aggregating to a sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment was made in connection with the preference shares which were redeemed earlier. The relationship between the bank and the assessee cannot be termed as one of loan-creditor and loan-debtor and the assessee has not borrowed any fund from the bank, hence, there is no question of treating the damages paid by the assessee as interest payment. The damages have been paid to the preference shareholder in lieu of the dividend payment. It is clear from the agreement that the preference share holder, i.e., UTI Bank Ltd., has sought sure return of 12 per cent. on the preference shares and the nomenclature of dividend has been changed to liquidated damages by the parties. As the dividend payment to the preference shareholder is not an allowable expenditure, any amount paid in lieu of dividend, whether termed as damages or otherwise, cannot be allowed as a business expense. Moreover, even though the preference shareholders have preference in the matter of receipt of dividend under the Companies Act, 1956, they are treated as the owners of the company and any payment made to the owners has to be shown in the appropriation column and cannot be treated as an expense for earning the revenue. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch reads as under : Sub : 12 per cent. redeemable cumulative preference shares aggregating ₹ 3.00 crores Debit Note Particulars Amount in Rs. Liquidated damages in terms of clause 14.1 of the Subscription agreement dated March 9, 1999 50,71,328.00 Total 50,71,328.00 (Rupees fifty lakhs seventy-one thousand three hundred twenty-eight only) We confirm that the above payment will extinguish the liability of GGL Hotel and Resort Company Ltd. relating to our investment in the 12 per cent. redeemable cumulative preference shares of the company. 7. From the above it is evident that the liquidated damages was claimed by the UTI Bank on 12 per cent. redeemable cumulative preference shares as per subscription agreement dated March 9, 1999. Thus the liquidated damages were compensation in lieu of dividend which the assessee failed to declare on the preference shares. In the debit note itself the UTI Bank has mentioned that the above payment of liquidated damages will extinguish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e total issue or any other issue of preference shares which may be made within a period of six months after the date of this agreement, then the company agrees to revise the rate of dividend on the preference shares subscribed by the investor to such higher rate from the date of allotment of preference shares to the investor. In case, the company issues preference shares with any terms different from the terms of the present issue, anytime within six months after the date of this agreement, the company agrees to give an option to the investor to revise the present terms of these new terms and in the event the bank opts for the new terms, the company agrees to change the terms from the first date of allotment of preference shares under such later issue. 6.1 The company agrees that interim dividend shall be declared and paid pro rata on or before 31st March of each financial year. However, the last dividend shall be paid immediately on the date of redemption/early redemption. The company agrees to organise the payment of dividend such that the credit of the dividend proceeds is received by the investor on the dividend payment date as mentioned above or earlier to such date. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te, redeem the preference shares held by the investor at such premium that the post-tax (and surcharge) return to the investor remains at 12.00 per cent. (compounded annually) or such higher rate as determined in clause 5.1. For this purpose, the company shall make all possible efforts, including issue of further equity or preference shares at premium. 10. The fact that the payment took the character of liquidated damages, does not obliterate the fact that the liability to pay was on account of dividend. Failure on the part of the assessee to pay dividend was a breach of the contract which entitled the UTI Bank to recover damages. The measure of damages was lucidly answered in the case of Robinson v. Harman [1843-1860] All ER 383 as follows : The next question is : What damages is the plaintiff entitled to recover ? The rule of the common law is that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed. 11. Therefore when the assessee paid the damages the assessee was really discharging its liability to pay dividend under th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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