Deccan Chronicle Holdings Ltd., Secunderabad V. Dy.CIT, Circle 16(2), Hyderabad

ITA 219/HYD/2014

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7674 (ITAT-HYDERABAD)
• Duration Of Justice: 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-09-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 12-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P SOMASEKHAR REDDY
• Assessee Lawyers: S RAMA RAO
• Keywords: Revenue expenditure; Capital expenditure
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICAL MEMBER ITA.NO.219/HYD/2014 ASSESSMENT YEAR 2010-2011 M/S. DECCAN CHRONICLE HOLDINGS LTD., HYDERABAD. PAN AABCD6737D VS. THE DCIT, CIRCLE 16(2) HYDERABAD (APPELLANT) (RESPONDENT) ITA.NO.517/HYD/2014 ASSESSMENT YEAR 2010-2011 THE DCIT, CIRCLE 16(2) HYDERABAD VS. M/S. DECCAN CHRONICLE HOLDINGS LTD., HYDERABAD. PAN AABCD6737D (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. S. RAMA RAO FOR REVENUE : MR. P. SOMASEKHAR REDDY DATE OF HEARING : 10.09.2014 DATE OF PRONOUNCEMENT : 16.09.2014 ORDER PER B. RAMAKOTAIAH, A.M. THESE ARE CROSS-APPEALS BY ASSESSEE AND REVENUE AGAINST THE ORDER OF LD. CIT(A)-V, HYDERABAD DATED 11.11.2013. 2. WE HAVE HEARD LD. COUNSEL AND LD. D.R. IN THIS REGARD. THE ONE COMMON ISSUE RAISED BY THE ASSESSEE IN GROUND NO.2 AND REVENUE IN ITS APPEAL GROUND NO 2 IS ABOUT ALLOWANCE OF EXPENDITURE UNDER SECTION 35D. 2 ITA.NO.219 & 517/HYD/2014 M/S. DECCAN CHRONICLE HOLDINGS LTD., HYDERABAD 2.1. AT THE OUTSET, IT WAS SUBMITTED THAT THE ISSU E WAS RESTORED TO THE FILE OF LD. CIT(A) IN EARLIER YEARS FOR DETERMINING AFRESH ON THE BASIS OF THE RECORD FOR A.Y. 2006-07 BEING THE FIRST YEAR OF THE CLAIM. SINCE THIS IS A CONSEQUENTIAL CL AIM AND MATTERS ARE PENDING BEFORE THE LD. CIT(A) IN EARLIER YEARS, WE RESTORE THE ISSUE TO THE FILE OF LD. CIT(A) TO CONSIDER IT AFRE SH IN THE LIGHT OF FINDINGS GIVEN FOR A.Y. 2006-07. THE LD. CIT(A) IS DIRECTED TO FOLLOW THE DIRECTIONS GIVEN IN ITA.NO.1844/HYD/2011 FOR A. Y. 2008-09 AND OTHER APPEALS VIDE ORDER DATED 29.04.2013 AND A LSO IN ITA.NO.14/HYD/2013 FOR A.Y. 2009-2010 DATED 30.04.2 013. ACCORDINGLY, THESE GROUNDS ARE CONSIDERED ALLOWED F OR STATISTICAL PURPOSES. 3. ANOTHER GROUND RAISED IN REVENUE APPEAL BEING GROUND NO.3 IS ON THE DIRECTION OF LD. CIT(A) TO AL LOW THE EXPENDITURE ON BUY BACK OF EQUITY SHARES. A.O. CONS IDERED THE AMOUNT OF RS.77,07,600 SPENT BY THE ASSESSEE ON BUY BACK OF EQUITY SHARES, SET OFF IN THE SHARE PREMIUM ACCOUNT , BUT CLAIMED AS DEDUCTION UNDER SECTION 37(1) OF THE ACT. LD. CI T(A) ON THE SUBMISSIONS OF THE ASSESSEE, DELETED THE DISALLOWAN CE STATING AS UNDER : 7.2.1. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE APPELLANT AND THE ASSESSMENT ORDER. I FIND FORCE IN THE CONTENTIONS AND THE CASE-LAWS CITED BY THE APPELLANT THAT THE BUY B ACK OF SHARES WAS EFFECTED BY UTILIZING FREE RESERVES AND THE EXPENDI TURE INCURRED ON BUY BACK OF SHARES WAS NOT CAPITAL EXPENDITURE AS THERE WAS NEITHER PERMANENT CHANGE IN CAPITAL STRUCTURE OF THE COMPAN Y NOR BENEFIT OF ENDURING NATURE WAS RECEIVED BY THE APPELLANT. 7.3 IN THE CASE OF ACIT VS. BRITANNIA INDUSTRIES LIMITED, CIRCLE-7, KOLKATA, ITAT NO.1789/KOL/2008 DATED 31-8 -2010, THE IMPORTANT PORTIONS OF THE ORDER ARE REPRODUCED HERE UNDER : 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MA TERIAL AVAILABLE ON RECORD. WE FIND THAT THE LD. CIT(A) WHILE DELETING THE ADDITION OF RS.28,21,3211 HAD PASSED A VERY WELL REASONED ORDER AND 3 ITA.NO.219 & 517/HYD/2014 M/S. DECCAN CHRONICLE HOLDINGS LTD., HYDERABAD FOR THE SAKE OF BREVITY, WE REPRODUCE THE RELEVANT PORTION OF HIS ORDER AS UNDER: '13. I HAVE CONSIDERED THE SUBMISSIONS OF THE AR, PERUSED THE RELEVANT PROVISIONS OF THE COMPANIES ACT AND THE DE CISION ON WHICH THE RELIANCE WAS PLACED. IN THE IMPUGNED ORDER THE A.O. DISALLOWED SHARE BUYBACK EXPENSES BECAUSE IN HIS OPINION BUYBA CK OF SHARES RESULTED IN PERMANENT REDUCTION IN SHARE CAP ITAL. ACCORDING TO A.O. THE SAME CONSIDERATIONS SHOULD BE APPLIED IN DECIDING THE CHARACTER OF EXPENDITURE IN CASE OF INCREASE AND REDUCTION IN THE SHARE CAPITAL. IN MY OPINION THE A.O.'S PROPOSITION IS NOT SUPPORTED BY THE DECISION OF THE SUPREME COURT IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD (225 ITR 792). IN THIS JUDGMENT THE SUPREME COURT ADMITTED THAT IN CREASE OF SHARE CAPITAL MAY CERTAINLY HELP THE COMPANY IN INC REASING ITS PROFIT EARNING BUT BECAUSE THE BENEFIT DERIVED IS OF LONG TERM AND ENDURING NATURE AND THERE BEING PERMANENT EXPANSION OF THE C APITAL BASE WHICH RESULTS IN CAPITAL IN FLOW; THE EXPENDITURE IS CAPI TAL IN NATURE. IN THE CASE OF BUYBACK OF SHARES HOWEVER THERE IS NO PERMANENT CHANGE IN THE CAPITAL STRUCTURE OF THE COMPANY. THE COMPANY BUYS BACK ITS OUTSTANDING STOCK FROM THE EX ISTING SHARE HOLDERS AND SUCH PURCHASE IS EFFECTED OUT OF COMPANY'S FREE RESERVES WHICH ARE OTHERWISE CAPABLE OF BEING FREELY DISTRIBUTABLE TO THE SHAREHOLDERS BY WAY OF DIVIDEN D OR CAN BE USED FOR DECLARATION OF BONUS SHARES . 14. ON COMPARING PROVISIONS OF SEC 77A AND SEC 81 OF THE ACT IT IS FOUND THAT MANY CONDITIONS FOR ISSUE OF BONUS SH ARE ARE PARAMETERIA WITH PROVISIONS RELATING TO BUYBACK OF SHARES. IN BOTH THE CASES I.E. BUYBACK OF SHARES AND ISSUE OF BONUS SHARES, THE CO MPANY CAN USE ITS FREE RESERVES AND SHARE PREMIUM. IN BOTH THE CASES THE COMPANY UTILIZES ITS EXISTING RESERVES FOR ENHANCIN G THE SHARE HOLDER'S INVESTMENT VALUE. THE DECISIONS REGARDING ISSUE OF BONUS SHARE OR BUYBACK OF SHARES ARE TAKEN BY THE D IRECTORS ON BUSINESS CONSIDERATION. NO BENEFIT OF ENDURING NATURE IS DERIVED BY THE COMPANY. IN BUYBACK OF SHARES THERE IS TEMPORARY REDUCTION IN THE CAPITAL BASE BECAUSE PRO HIBITION ON ISSUE OF SHARES OF THAT KIND IS FOR TEMPORARY PERIOD OF 24 MONTHS. THE SUPREME COURT IN THE CASE OF CIT VS. GENERAL INSURANCE CORPORATION (286 ITR 232) HAS HELD THAT EXPENDITURE ON BONUS SHARE IS NOT A CAPITAL EXPENDITURE AS THERE IS NO INCREASE IN THE CAPITAL BASE OF THE COMPANY BECAUSE EXISTING FREE RESERVES OF THE COMPANY ARE UTILIZED FOR ISSUE OF BONUS SHARES. 4 ITA.NO.219 & 517/HYD/2014 M/S. DECCAN CHRONICLE HOLDINGS LTD., HYDERABAD 15. APPLYING THE RATIO LAID DOWN IN THIS DECISION I FIND THAT EXISTING FREE RESERVES AND SHARE PREMIUM ACCOUNT AR E USED FOR BUYBACK OF SHARES WHICH DOES NOT RESULT IN PERMANEN T REDUCTION OF THE SHARE CAPITAL AND NO BENEFIT OF ENDURING NATURE IS DERIVED. IN THE APPELLANT'S CASE THE BUYBACK OF SHARES WAS EFFECTED BY UTILIZING ITS FREE RESERVES. IN MY CONSIDERED OPINION THEREFORE THE EXPENDITURE INCURRED ON BUYBACK OF SHARES WAS NOT A CAPITAL EXPENDITURE AS THERE WAS NEITHER PERMANENT CHANGE IN THE CAPITAL STRUCTURE OF THE COMPANY NOR BENEFIT OF ENDURING NATURE WAS RECEIVED BY THE APPELLANT. THE A.O. IS THEREFORE DIRECTED TO DELETED THE DISALLOWANCE OF RS.28,21,321/- ' 7.3.1 THE SUPREME COURT IN THE CASE OF CIT VS. GEN ERAL INSURANCE CORPORATION (2008-TMI-6547- SUPREME COURT) HAS HELD THAT EXPENDITURE ON BONUS SHARE IS NOT A CAPITAL EXPENDI TURE AS THERE IS NO INCREASE IN THE CAPITAL BASE OF THE COMPANY BECAUSE EXISTING FREE RESERVES OF THE COMPANY ARE UTILIZED FOR ISSUE OF B ONUS SHARES. 7.4. IN THE CASE OF ECHJAY INDUSTRIES LIMITED VS. DEN 88 TT) 1089 DATED 24-4-2002, THE IMPORTANT PORTIONS OF THE ORDER ARE REPRODUCED HEREUNDER : .... WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. THE MAIN QUESTION WHICH ARISES FOR DETERMINATION IS WHETHER THE IMPUG NED EXPENDITURE IS ALLOWABLE ON REVENUE ACCOUNT BEING EXPENDITURE OF BUSINESS IN NATURE OR WHETHER THE SAID ITEM OF E XPENDITURE WAS RIGHTLY DISALLOWED BY THE REVENUE AUTHORITIES ON CAPITAL ACCOUNT. IN THIS CONTEXT, WE ARE OF THE OPINION THAT THE PURPOS E OF THE EXPENDITURE FOR WHICH IT WAS INCURRED IS DET ERMINATIVE OF THE ISSUE. THE SECOND LIMB OF THE ISSUE IS HOW THE SAID EXPENDITURE WAS INCURRED. HOWEVER, THE FIRST LIMB O F THE CONTROVERSY, VIZ. WHETHER THE EXPENDITURE WAS INCUR RED FOR THE PURPOSE OF THE BUSINESS, IS DETERMINATIVE AND SECON DLY IF THE SAID EXPENDITURE WAS INCURRED FOR THE PURPOSE OF THE BUS INESS, WHETHER SUCH EXPENDITURE BROUGHT INTO EXISTENCE ANY BENEFIT OR ADVANTAGE WHICH COULD BE TREATED AS AN ADVANTAGE ON CAPITAL ACCOUNT. THE FACTS IN THIS CASE ARE NOT IN DISPUTE, VIZ. THERE WERE SERIOUS DISPUTES BETWEEN THE TWO WARRING GROUPS OF THE SHAREHOLDERS WITH THE RESULT THAT THE FUNCTIONING O F THE COMPANY AND ITS GROWTH WAS IMPEDED SO MUCH SO THAT THE MATTER WAS CARRIED TO THE COURT. THEREFORE, NATURALLY THERE WA S DIVERSION OF DIRECTORS FROM THE BUSINESS OF THE COMPANY TO THE L ITIGATION. NATURALLY THE COMPANY'S FUNCTIONING IN SUCH CIRCUMS TANCES COULD NOT BE SMOOTH AND THE MANAGEMENT HAD TO PASS THROUGH A GREAT DEAL OF HARDSHIPS. AFTER A PERIOD OF OVER SIX YEARS, GOOD 5 ITA.NO.219 & 517/HYD/2014 M/S. DECCAN CHRONICLE HOLDINGS LTD., HYDERABAD SENSE PREVAILED BETWEEN THE TWO WARRING GROUPS AND A CONSENT TERM WAS DRAWN BY THE SHAREHOLDERS, WHICH WAS APPRO VED BY THE HON'BLE BOMBAY HIGH COURT BY WAY OF DECREE DATED 2. 5.1991 , INTER ALIA, GIVING THE DIRECTION THAT THE COMPANY W OULD PURCHASE THE SHARES OF THE FAMILY MEMBERS OF SHRI MAGANLAL H . DOSHI, SHRI HASMUKHLAL H. DOSHI AND SHRI MANHARLAL H. DOSH I WHO WERE THE SHAREHOLDERS OF THE COMPANY AND TO PAY A S UM OF RS. 1,000 PER SHARE OF WHICH RS. 100 PER SHARE WAS RETURN OF ITS CAPITAL VALUE AND THE BALANCE OF RS. 900 PER SHARE WAS BY WAY OF PREMIA. THIS RESULTED INTO REDUCTION IN THE SHARE C APITAL OF THE COMPANY WHICH WAS APPROVED BY THE HIGH COURT. THE R EDUCTION IN THE SHARE CAPITAL AS A RESULT OF THE SETTLEMENT, ACCORDING TO THE REVENUE AUTHORITIES, HAS AFFECTED THE CAPITAL STRUCTURE OF THE ASSESSEE-COMPANY AND, THEREFORE, THE IMPUGNED EXPEN DITURE WAS TO BE DISALLOWED ON CAPITAL ACCOUNT. IT WAS ALSO EMPHASISED BY THE DEPARTMENT THAT THE COMPANY GOT ENDURING BENEFI T. SO FAR AS THE QUESTION OF ENDURING BENEFIT IS CONCERNED, THE HON'BLE SUPREME COURT, IN THE CASE OF EMPIRE JUTE CO. LTD. V. CIT (1980) 124 ITR 1 (SC) HAS OBSERVED THAT 'THERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCURRED FOR OBTAINING AN ADVANTAGE OF ENDURING BENEFIT, MAY, NONE-THE-LESS, BE AN REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. IT IS NOT EVERY ADVANTAGE OF ENDURING NATURE ACQUIRED BY AN ASSESSE E THAT BRINGS THE CASE WITHIN THE PRINCIPLES LAID DOWN IN THIS TEST. WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHERE THE ADVANTAGE IS IN THE CAPITAL FILED THAT THE EXPENDITURE WOULD BE DISALLO WABLE ON THE APPLICATION OF THIS TEST. IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING THE ASSESSEE'S TRADING OPERATIONS OR E NABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEE'S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVING T HE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVENUE ACCOUNTS ....... 28. IF WE GO THROUGH THE FACTS OF THE PRESENT CASE, IT WILL BE CLEAR THAT THE ASSESSEE-COMPANY INCURRED THE IMPUGN ED EXPENDITURE IN THE LARGER INTEREST OF THE BUSINESS NECESSITY OR EXPEDIENCY ........ 29. ........THE SUPREME COURT HAD OCCASION TO CONSI DER SIMILAR CONTROVERSY IN THE CASE OF CIT V. ASHOK LEYLAND LTD . (1972) 86 ITR 549 (SC) IN WHICH THE APEX COURT HAS HELD THAT THE PRINCIPLES WHICH FLOW FROM THE ABOVE CITED DECISION S CLEARLY SUGGEST FIRSTLY THAT THE ENDURING BENEFIT IN ITSELF IS NOT A CONCLUSIVE TEST. SECONDLY, IT IS NECESSARY TO CONSI DER WHETHER THE ENDURING ADVANTAGE CONSISTED M ERELY IN FACILITATING THE ASSESSEE'S OPERATION OR ENABLING THE MANAGEMENT AND CONDUCT 6 ITA.NO.219 & 517/HYD/2014 M/S. DECCAN CHRONICLE HOLDINGS LTD., HYDERABAD OF THE ASSESSEE'S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNT OUCHED, THEN SUCH EXPENDITURE WOULD BE ON REVENUE ACCOUNT. THIRDLY, THE QUESTION MUST BE VIEWED IN A LARGER CONTEXT OR BUSINESS NECESSITY OR EXPEDIENCY .... 31. ......THEREFORE, WE AGREE THAT THE ASSESSEE COMPANY HAD INCURRED THE IMPUGNED EXPENDITURE OUT OF BUSINESS E XPEDIENCY AND FOR ITS SMOOTH FUNCTIONING, WHICH WAS WHOLLY AND EXCLUSIVELY INCURRED IN THE COURSE OF CARRYING ON OF ITS BUSINESS. HENCE, IT IS AN ALLOWABLE REVENUE EXPENDITURE .... 7.5 RESPECTFULLY FOLLOWING THE ABOVE DECISIONS WH ICH ARE SQUARELY APPLICABLE TO THE FACTS OF THE CASE OF THE APPELLANT, I HOLD THAT IN THE APPELLANT'S CASE, THE EXPENDITURE INCURRED O N BUY BACK OF SHARES WAS NOT CAPITAL EXPENDITURE AS IT WAS ONLY INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF CARRYING ON ITS BUSI NESS AS ENUNCIATED U/S 37 (1) OF THE ACT AND HAS TO BE TREATED AS BUSI NESS EXPENDITURE. HENCE, I DELETE THE ADDITION OF RS. 77,07,600. . 4. WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A) WHICH IS BASED ON THE COORDINATE BENCH D ECISIONS ON SIMILAR ISSUE. THEREFORE, THERE IS NO MERIT IN REVE NUE GROUND. ACCORDINGLY, THIS GROUND IS DISMISSED. 5. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSES AND APPEAL OF REVENUE IS PARTL Y ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 16.09.2014. SD/- SD/- (SAKTIJIT DEY) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 16 TH SEPTEMBER, 2014 VBP/- 7 ITA.NO.219 & 517/HYD/2014 M/S. DECCAN CHRONICLE HOLDINGS LTD., HYDERABAD COPY TO 1. M/S. DECCAN CHRONICLE HOLDINGS LTD., 36-SAROJINI DEVI ROAD, SECUNDERABAD 500 003. 2. THE DCIT, CIRCLE 16 (2), ROOM NO.611, 6 TH FLOOR, AAYAKAR BHAVAN, HYDERABAD. 3. CIT(A)-V, HYDERABAD + 1 COPY 4. CIT-IV, HYDERABAD 5. D.R. A BENCH, ITAT, HYDERABAD.