The ACIT, Cochin V. M/s.Trinity Arcade P. Ltd, Cochin

ITA 43/COCH/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 4422 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 1 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-03-2018
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2011-2012
• Appeal Filed On: 13-02-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A DHANARAJ
• Assessee Lawyers: DR C A SANTHA KUMAR K
• Keywords: Business income; Depreciation; Difference of opinion; Capital receipt; Revenue expenditure; Capital expenditure
• Section: 37(1); 69; 37; 28; 10

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI CHANDRA POOJARI , AM & GEORGE GEORGE K., JM I.T.A. NO.43/COCH/2017 ASSESSMENT YEAR : 2011 - 12 THE ASSISTANT COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE- 2(1), KOCHI. M/S. TRINITY ARCADE P. LTD., TRINITY HOUSE, OPPOSITE CHENGAMPUZHA PARK, EDAPALLY P.O., KOCHI-682 018. [PAN: AACCT 2098L] (REVENUE - APPELLANT) (ASSESSEE - RESPONDENT) REVENUE BY SHRI A. DHANARAJ, SR. DR ASSESSEE BY DR. C A SANTHA KUMAR K , FCA DATE OF HEARING 26 /0 2 /2018 DATE OF PRONOUNCEMENT 15 / 0 3 /2018 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF CIT(A)-I, KOCHI DATED 07/12/2016 FOR THE ASSESSMENT YEAR 2011 -12. I.T.A. NO.43/C/2017 2 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS : 1) THE ORDERS OF THE COMMISSIONER OF INCOME TAX(AP PEALS)-I, KOCHI OPPOSED TO THE FACTS AND CIRCUMSTANCES OF THE CASE. 2) THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) ERRED IN HOLDING THE PAYMENT OF COMPENSATION OF RS. 1,74,00,000/- TO EX- DIRECTOR FOR FORFEITURE OF HIS RIGHTS/INTERESTS IN THE COMPANY AS REVENUE EXPE NDITURE WITHOUT APPRECIATING THE CRUX OF THE PURPOSE FOR WHICH THE PAYMENT OF COMPENSATION WAS MADE. 3) THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) IS NOT RIGHT IN HOLDING THAT THE ORIGINAL CHARACTER OF THE PAYMENT MADE TO AN INTERMEDIARY AS ADVANCE TOWARDS PURCHASE OF LAND COULD NOT BE CHANG ED MERELY BECAUSE OF TRANSPLANTATION OF THE RECIPIENT WHO WAS THE EX-DIR ECTOR OF THE COMPANY BASED ON A SETTLEMENT AGREEMENT REACHED OUT OF COUR T TOWARDS GIVING UP OF HIS RIGHTS/INTERESTS IN THE COMPANY. 4) THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) OUGHT TO HAVE APPRECIATED THAT THE BENEFIT DERIVED BY THE COMPANY BY TRANSPLANTING ITS EX- DIRECTOR AS BENEFICIARY OF THE TRANSACTION FOR GIVI NG UP OF HIS RIGHTS/INTERESTS IN THE COMPANY WOULD HAVE THE IMPACT OF ENDURING BENEF IT AND SUCH AMOUNT OF RS. 1,74,00,000/- PAID WAS CAPITAL IN NATURE. 5) THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HAS FAILED TO APPRECIATE THAT RECLASSIFICATION OF THE ADVANCE FOR LAND PURCHASE AS FINAL SETTLEMENT TO EX-DIRECTOR FOR NON-COMPETE FEE WAS P REMATURE AND NOT CRYSTALLIZED PENDING COMPLAINT FILED BEFORE THE COM PANY LAW BOARD DUE TO DISPUTE AMONGST THE DIRECTORS. 6) IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-I, KOCHI IS NOT JUSTIFIED IN DE LETING THE ADDITION OF RS. 1,74,00,000/-. 7) IT IS PRAYED THAT THE DECISION OF THE COMMISSIO NER OF INCOME TAX(APPEALS) DELETING THE ADDITION OF RS.1,74,00,00 0/- BE REVERSED AND THAT OF THE ASSESSING OFFICER RESTORED. I.T.A. NO.43/C/2017 3 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE HA S DEBITED AN AMOUNT OF RS. 1,74,00,000/- IN THE PROFIT AND LOSS ACCOUNT AS SE TTLEMENT ACCOUNT. AS PER POINT NO. 6 OF NOTES ON ACCOUNTS ATTACHED TO THE FI NAL ACCOUNTS, IT IS STATED AS UNDER: THE COMPANY PAID RS.17400000 AS ADVANCE FOR PURCHA SE OF LAND UNDER AN AGREEMENT DATED 21-06-2006 TO ONE MR. JOSE PAUL. T HE COMPANY COULD NOT COMPLETE THE TRANSACTION AS ENVISAGED DUE TO SEVERA L REASONS. AS PART OF THE SETTLEMENT AGREEMENT DATED 12-11-2010 BETWEEN COMPA NY AND ITS EX-DIRECTOR MR K J PAUL, COMPANY FORGONE ITS CLAIM FOR THE ADVA NCE PAID. THE AMOUNT OF RS. 174 LAKHS HAS CHARGED TO THE PROFIT AND LOSS AC COUNT FOR THE YEAR ENDED 31-03-2011. 3.1 IN THIS CONNECTION, THE ASSESSEE WAS ASKED TO FILE DETAILS OF THE SETTLEMENT ACCOUNT BY THE ASSESSING OFFICER VIDE NOTICE U/S. 1 42(1) OF THE ACT DATED 16/01/2014. IN RESPONSE TO THE NOTICE, THE ASSESSE E FILED SETTLEMENT AGREEMENT DATED 12/11/2010 ENTERED INTO BY THE DIRECTORS OF T HE COMPANY AND THE ASSESSEE COMPANY AND TWO OTHER COMPANIES IN WHICH T HE DIRECTORS OF THE ASSESSEE COMPANY ARE DIRECTORS. THE SETTLEMENT AGR EEMENT WAS SIGNED OUT OF COURT WHEN CROSS PETITIONS FILED BY THE DIRECTORS W ERE PENDING BEFORE THE COMPANY LAW BOARD AND THE AMOUNT WAS PAID TO SHRI K .J. PAUL AS A COMPENSATION AS PER THE SETTLEMENT AGREEMENT. ACCO RDING TO THE ASSESSING OFFICER, THE AMOUNT PAID TO SHRI K.J. PAUL WAS IN T HE NATURE OF COMPENSATION FOR FORFEITING ALL HIS CLAIMS ON THE COMPANY AND THE CO MPANYS PAYMENT TO A DIRECTOR CANNOT BE TERMED AS A REVENUE EXPENDITURE IN THE BOOKS OF ACCOUNT OF THE COMPANY. MOREOVER, THE ASSESSING OFFICER NOTIC ED THAT THE PAYMENT WAS I.T.A. NO.43/C/2017 4 MADE CONSEQUENT TO OUT OF COURT SETTLEMENT WHICH IS NOT LEGAL SINCE THE LEGAL PROCEEDINGS WERE PENDING BEFORE THE COMPANY LAW BOA RD. UNDER THESE CIRCUMSTANCES, THE ASSESSING OFFICER DISALLOWED THE CLAIM OF RS.1,74,00,000/- AS REVENUE EXPENDITURE UNDER THE HEAD SETTLEMENT ACCOU NT AND ADDED BACK TO THE INCOME OF THE ASSESSEE. 4. AGAINST THIS, THE ASSESSEE WENT IN APPEAL BEFO RE THE CIT(A). THE CIT(A) OBSERVED THAT SINCE THE ADVANCE WAS ORIGINALLY MADE , FOR TRADING PURPOSES, THE SAME WOULD UNDOUBTEDLY BE REVENUE IN NATURE. THE C IT(A) RELIED ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF EMPIRE JUTE CO. LTD. VS. CIT 124 ITR 1 WHEREIN IT WAS HELD THAT IT IS NOT A UNIVERSA LLY TRUE PROPOSITION THAT WHAT MAY BE A CAPITAL RECEIPT IN THE HANDS OF THE PAYEE MUST NECESSARILY BE CAPITAL EXPENDITURE IN RELATION TO THE PAYER. THE SUPREME COURT HELD THAT THE FACT THAT A CERTAIN PAYMENT CONSTITUTES INCOME OR CAPITAL REC EIPT IN THE HANDS OF THE RECIPIENT IS NOT MATERIAL IN DETERMINING WHETHER TH E PAYMENT IS REVENUE OR CAPITAL DISBURSEMENT QUA THE PAYER. FURTHER, THE C IT(A) OBSERVED THAT SHRI K.J. PAUL HAS THEREFORE BEEN INVESTED WITH THE TRUE AND FULL OWNERSHIP OF THE AMOUNT OF RS.1,74,00,000/- IN LIEU OF THE FORFEITURE OF A LL CLAIMS BY HIM IN THE COMPANY. IT WAS FURTHER OBSERVED BY THE CIT(A) THAT THERE MA Y BE CASES WHERE EXPENDITURE, EVEN IF INCURRED FOR OBTAINING AN ADVA NTAGE OF ENDURING BENEFIT, MAY NONETHELEES, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN AND IT IS NOT EVERY ADVANTAGE OF ENDURIN G NATURE ACQUIRED BY AN I.T.A. NO.43/C/2017 5 ASSESSEE THAT BRINGS THE CASE WITHIN THE PRINCIPLE LAID DOWN IN THIS TEST. ACCORDING TO THE CIT(A) WHAT IS MATERIAL TO CONSIDE R IS THE NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHER E THE ADVANTAGE IS IN CAPITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLOWABLE ON AN APPLICATION OF THIS TEST AND IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING TH E ASSESSEE'S TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSES SEE'S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OF MORE PROFITABLY WHIL E LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVENUE ACCO UNT, EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE FUTURE. ACCO RDING TO HIM, THE TEST OF ENDURING BENEFIT IS THEREFORE, NOT A CERTAIN OR CON CLUSIVE TEST AND IT CANNOT BE APPLIED BLINDLY AND MECHANICALLY WITHOUT REGARD TO THE PARTICULAR FACT AND CIRCUMSTANCES OF A GIVEN CASE. 4.1 THE CIT(A) FURTHER OBSERVED THAT WHAT IS AN OUTGOING OF CAPITAL AND THAT WHAT AN OUTGOING ON ACCOUNT OF REVENUE DEPENDS ON W HAT THE EXPENDITURE IS CALCULATED TO EFFECT FROM A PRACTICAL AND BUSINESS POINT OF VIEW RATHER THAN UPON THE JURISTIC CLASSIFICATION OF THE LEGAL RIGHTS, IF ANY, SECURED, EMPLOYED OR EXHAUSTED IN THE PROCESS AND THE QUESTION MUST BE V IEWED IN THE LARGER CONTEXT OF BUSINESS NECESSITY OR EXPEDIENCY. 4.2 IT WAS FURTHER OBSERVED BY THE CIT(A) THAT TH E PAYMENT OF AMOUNT OF RS. 1,74,00,000/- HAS TO BE EXAMINED FOR ASSESSABILITY AND TAXABILITY AS A REVENUE I.T.A. NO.43/C/2017 6 RECEIPT U/S 28 OF THE ACT IN THE HANDS OF SHRI. K . J. PAUL EITHER IN THE IMPUGNED F.Y . 2010-11 OR IN THE FINANCIAL YEAR OF THE ACTUAL HAND OVER OF THE SAID AMOUNT BY SHRI. JOSE PAUL TO SHRI K. J. PAUL AND I F THE FIRST AMOUNT OF RS. 1,74,00,000/- IS DETERMINED AS NOT HANDED OVER BY SHRI. JOSE PAUL TO SHRI K. J. PAUL, THEN THE SAID AMOUNT HAS TO BE EXAMINED FOR ASSESSABILITY AND TAX ABILITY U/S 28 OF THE ACT AS A REVENUE RECEIPT IN THE HANDS OF SHRI. JOSE PAUL IN THE IMPUGNED F.Y. 2010-11. ACCORDING TO THE CIT(A) IF SHRI. JOSE PAUL IS NOT R EADILY TRACEABLE OR CANNOT BE ASSESSED OR CHARGED TO TAX IN RESPECT OF THE SAID A MOUNT FOR SOME REASON, THEN ON THE STRENGTH OF THE SAID SETTLEMENT AGREEMENT AN D OTHERS AS MAY BE UNEARTHED AND VALIDATED, AND IN THE EVENT OF THE IM PUGNED FIRST AMOUNT OF RS. 1,74,00,000/- BEING RETAINED BY SHRI. JOSE PAUL, SH RI. K. J. PAUL, AS THE ACTUAL BENEFICIARY AND INTENDED RECIPIENT AND THE PRINCIPA L FOR WHOM SHRI. JOSE PAUL WAS ACTING FOR AS AGENT, MAY BE ASSESSED AND CHARGED TO TAX FOR THE SAME IN THE IMPUGNED F.Y. 2010-11. IT WAS OBSERVED BY THE CIT( A) THAT ANY PART OR THE WHOLE OF THE SOURCE, IF UNEXPLAINED OR UNACCOUNTED, OF THE SECOND AMOUNT OF RS. 30,00,000/- HAS TO BE EXAMINED FOR ASSESSABILITY A ND TAXABILITY IN THE HANDS OF SHRI. K. J. PAUL U/S 69 OR 69A OF THE ACT IN THE IM PUGNED F.Y. 2010-11 OR IN THE FINANCIAL YEAR OF THE ACTUAL PAYMENT OF THE SAME. THE CIT(A) OBJECTED THAT THE PROFITS EARNED FROM ANY SALE OR TRANSFER BY SHRI. K . J. PAUL OR SHRI. JOSE PAUL OF THE IMMOVABLE PROPERTIES ASSOCIATED WITH THE TWO AM OUNTS OF RS. 1,74,00,000/- AND RS. 30,00,000/- MAY BE ASSESSED IN THE RESPECTI VE HANDS IN THE FINANCIAL YEAR OF SUCH SALE OR TRANSFER AS ' CAPITAL GAINS' OR 'BUSINESS INCOME ' (INCLUDING I.T.A. NO.43/C/2017 7 INCOME FROM AN 'ADVENTURE IN THE NATURE OF TRA DE') AFTER ANALYZING THE FACTS OF AND THE CIRCUMSTANCES SURROUNDING SUCH SALE OR TRANSFER. THE CIT(A) D IRECTED THE ASSESSING OFFICER TO TAKE ALL NECESSARY STEPS T O ENSURE THAT ALL RELEVANT INFORMATION RELATING TO THE ABOVE MATTERS ARE COMMU NICATED TO THE RESPECTIVE AOS OF SHRI. K. J. PAUL AND SHRI. JOSE PAUL SO THAT THE ASSESSMENTS AS IDENTIFIED ABOVE AND AS REQUIRED ARE CARRIED OUT IN THE CASES OF THESE TWO PERSONS AS PER THE MANDATE OF THE STATUTE. 4.3 ON THE BENEFIT EARNED BY THE ASSESSEE BEIN G THE 'FORFEITURE OF ALL CLAIMS' BY SHRI. K. J. PAUL IN THE COMPANY IN EXCHANGE FOR FO REGOING OF ALL CLAIMS BY THE ASSESSEE, THE CIT(A) OBSERVED THAT THE EXPENSE IS U SUALLY RECORDED AND CLAIMED AT THE TIME THE SEVERANCE COMMITMENT IS MADE UNLESS THE PAYMENT HAS SOME LINKAGE TO FUTURE PERFORMANCE OR OTHER CONTINGENCIE S AND IF THERE IS NO FURTHER PERFORMANCE LINKED TO THE EMPLOYEE, THERE IS NO COM MITMENT WITH NO FUTURE VALUE WHICH SHOULD BE REGARDED AS A DEDUCTIBLE EXPE NSE AT THE TIME OF THE COMMITMENT. IN THE INSTANT CASE, ACCORDING TO THE C IT(A), BOTH THE ASSESSEE AND SHRI. K. J. PAUL WISHED TO AVOID ANY CONTINUING COMMITMENT AND THEREFORE ENTERED INTO A FINAL SETTLEMENT AGREEMENT. THE CIT (A) OBSERVED THAT THE ASSESSEE HAS NOT LOST ANY ASSETS BY WAY OF ANY 'RIG HTS' BUT ONLY AN INSTANTANEOUS PAYMENT THAT REPRESENTS IN THE MOMENT ARY PRESENT THE FUTURE GAINS TO BE HAD IN FORM OF EXPENSE SAVINGS (INCLUDI NG THE DIRECTOR'S REMUNERATION AND OTHER PAYMENTS-PERQUISITES TO BE P ROVIDED TO SHRI. K. J. PAUL). I.T.A. NO.43/C/2017 8 ACCORDING TO THE CIT(A), THE COMPENSATION OF RS. 1. 74 CRORES AS PAID BY THE ASSESSEE IS THUS CORRELATED TO THE SAVINGS IN ITS F UTURE EARNINGS. THE CIT(A) HELD THAT ALL MODERN ACCEPTABLE METHODS THAT DETERMINE T HE VALUE OF THE COMPENSATION TO BE PAID IN THE PRESENT FOR THE SAVI NGS IN THE FUTURE EARNINGS FOLLOWING TERMINATION OF SERVICES OF THE A DIRECTOR ARE BASED ON THE NET PRESENT VALUE (NPV) COMPUTATIONS THAT DETERMINE THE OPPORTU NITY GAINS OF THE CASH FLOWS SAVED ON ACCOUNT OF SUCH TERMINATION/SEVERANCE, I.E ., THE VALUE OF THE COMPENSATION EQUALS THE DISCOUNTED FIGURE OF THE FU TURE ESTIMATED CASH FLOWS OF THE REMUNERATIONS-PERQUISITES LIABLE TO BE PAID TO THE DIRECTOR (SHRI. K. J. PAUL) HAD HE CONTINUED IN HIS POSITION FOR A REASONABLE T IMEFRAME. FROM ANOTHER ANGLE, THE CIT(A) OBSERVED THAT OPPORTUNITY GAIN OF ANY PA YMENT MADE AS SEVERANCE COMPENSATION IS THE INCREMENTAL RETURN ON THE SAID PAYMENT THAT A BUSINESS GAINS WHEN IT ELECTS TO DO SO RATHER THAN CONTINUE WITH THE SERVICES OF THE SAID DIRECTOR. IN THE INSTANT CASE, ACCORDING TO THE CIT (A), PAYMENT OF RS.1.74 CRORES TO THE DIRECTOR AS COMPENSATION (AS WELL AS HAND OV ER ANOTHER IDENTIFIED PROPERTY TO SHRI. K. J. PAUL FOR A CONSIDERATION OF RS. 30 L AKHS) IT WAS MADE TO CUT ITS LOSSESAS AGAINST INVEST IN THE CONTINUANCE OF THE C OMPANYS SERVICES. THEREFORE, ACCORDING TO THE CIT(A), IT HAS BARGAINED AND BUDGE TED IN FAVOUR OF THE INCREMENTAL BUSINESS RETURN ON THE SAID PAYMENT WHI CH IS REVENUE IN NATURE. 4.4 THE CIT(A) OBSERVED THAT THE SURROGATUM PRINCIPLE PROVIDES THAT THE CHARACTER OF AN EXPENSE OF DAMAGES OR OF AN AMOUNT PAID IN SETTLEMENT OF A I.T.A. NO.43/C/2017 9 CLAIM AS A CAPITAL OR REVENUE EXPENDITURE DEPENDS O N WHAT THE AMOUNT WAS INTENDED TO REPLACE. ACCORDING TO THE CIT(A), THIS MAY INVOLVE A PERSON (THE ASSESSEE) WHO EXPECTS TO SUFFER POTENTIAL HARM CAUS ED BY ANOTHER (THE DIRECTOR, SHRI. K. J. PAUL) AND MAY ELECT TO PAY COMPENSATION FOR POTENTIAL (A) LOSSES OF INCOME, (B) EXPENSES INCURRED, (C) PROPERTIES DESTR OYED/COMPROMISED, AND/OR (D) PERSONAL INJURY, AS WELL AS PUNITIVE DAMAGES. T HE CIT(A) FURTHER OBSERVED THAT UNDER THE SURROGATUM PRINCIPLE, THE TAX CONSEQUENCES OF A DAMAGE OR SETTLEMENT PAYMENT DEPEND ON THE TAX TREATMENT OF T HE ITEM FOR WHICH THE PAYMENT IS INTENDED TO SUBSTITUTE AND IF THE REPLAC ED AMOUNT IS TAXABLE, THE AWARD OR SETTLEMENT OR COMPENSATION AMOUNT WILL ALS O BE TAXABLE. 4.5 THE CIT(A) RELIED ON THE FOLLOWING JUDICIAL P RONOUNCEMENTS: 1) DCIT VS. JOSHI FORMULABS (P) LTD. (104 TAXMAN 2 15) (ITAT, RAJKOT). 2) CIT VS. MANDOVI HOTEL (P) LTD. (284 ITR 129) (B OMBAY). 3) CIT VS. DELHI BIDI SALES AGENCIES (225 ITR 54) (MP). 4) CIT VS. NAINITAL BANK LTD. (62 ITR 638) (SC). 5) CIT VS. NAINITAL BANK LTD. (55 ITR 707) (SC). 6) AZTEC SOFTWARE AND TECHNOLOGY SERVICES LTD. VS. ACIT (294 ITR (AT) 32 (ITAT,BANGALORE). 7) HASIMARA INDUSTRIES LTD. VS. CIT (230 ITR 927) ( SC). 8) M/S. SOCIAL MEDIA INDIA LTD. VS. ACIT (ITAT, HYD ERABAD). 9) CIT VS. TARUN COMMERCIAL CO. LTD. (107 ITR 172 ( GUJARAT). 10) CIT VS. SURYA PRABHA MILLS (P) LTD. (123 ITR 65 4) (MADRAS) 11) THACKERS H.P. & CO. VS. CIT 35 ITR 46 (BOMBAY). 4.6 FINALLY THE CIT(A) OBSERVED THAT THE AMOUNT O F RS.1,74,00,000/- BEING COMPENSATION PAID TOWARDS FORFEITURE OF ALL CLAIMS BY SHRI K.J. PAUL, DIRECTOR IN THE ASSESSEE-COMPANY IS REVENUE IN CHARACTER AND AL LOWABLE AS DEDUCTIBLE I.T.A. NO.43/C/2017 10 EXPENSES U/S. 37 OF THE ACT AS BEING EXPENSES WHOLL Y AND EXCLUSIVELY INCURRED TOWARDS THE PURPOSE OF THE ASSESSEES BUSINESS. 5. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REV ENUE IS IN APPEAL BEFORE US. 6. THE LD. DR SUBMITTED THAT THE ASSESSEE IS A CONTRACTOR/REAL ESTATE DEVELOPER AND IN THE A.Y. 2011-12, THE ASSESSEE COM PANY, M/S. TRINITY ARCADE PRIVATE LTD, HAD DEBITED RS. 1.74 CRORES AS SETTLEMENT/COMPENSATION PAID TO EX-DIRECTOR- SRI K.J. PAUL, FOR FORFEITING AL L HIS CLAIMS IN THE COMPANY. ACCORDING TO THE LD. DR, THE A.O. HAD DISALLOWED R S. 1.74 CRORES MAINLY FOR THE REASON THAT SUCH PAYMENT BY THE COMPANY CANNOT BE T REATED AS REVENUE EXPENDITURE. IT WAS SUBMITTED THAT THE CIT (A) ALL OWED THE APPEAL OF THE ASSESSEE COMPANY HOLDING THE PAYMENT OF RS. 1.74 CR ORES AS REVENUE EXPENDITURE, WITHOUT APPRECIATING THE FACT THAT GIV ING UP OF RIGHTS/ INTEREST BY A DIRECTOR IN THE COMPANY WOULD HAVE ENDURING BENEFIT S AND PAYMENT OF RS. 1.74 CRORES IS CAPITAL IN NATURE. 6.1 THE LD. DR PLACED RELIANCE ON THE FOLLOWING D ECISIONS:- I) CHELPARK CO. LTD VS CIT (191 ITR 249 (MAD) AND SUBMITTED THAT THE PAYMENT MADE TO EX- MANAGING DIRECTOR WAS NOT TO CA RRY ON ANY COMPETITIVE BUSINESS FOR 5 YEARS SINCE CAPITAL EXPENDITURE DERI VED BENEFIT OF ENDURING NATURE. IN THE CASE OF CHELPARK CO. LTD. VS. CIT (191 ITR 249), THE DECISION OF HON. SUPREME COURT IN THE CASE OF M/S. EMPIRE JUTE CO. LTD, I.T.A. NO.43/C/2017 11 WAS DISTINGUISHED. IT WAS SUBMITTED THAT IN FA CT THE CIT(A) WHILE ALLOWING THE APPEAL OF THE ASSESSEE HAD RELIED ON EMPIRE JUTE CO. LTD. (124 ITR 1(SC). THE LD. AR SUBMITTED THAT THE FACTS OF THE EMPIRE JUTE CO. LTD (SUPRA) WERE ALSO DIFFERENT FROM THAT OF THE ASSESS EE. IN EMPIRE JUTE CO. (SUPRA), THE FACT INVOLVED WAS PRICE PAID FOR PURCH ASE OF LOOM HOURS FROM ANOTHER MEMBER COMPANY AND WAS HELD AS REVENUE EXPE NSES. ON THE OTHER HAND, IT WAS SUBMITTED THAT IN THE CASE OF ASSESSEE , IT IS COMPENSATION PAID TO EX- DIRECTOR SHRI K.J. PAUL, FOR FORFEITURE OF H IS CLAIMS. 6.2 THE LD. DR ALSO PLACED RELIANCE ON THE DECIS ION OF THE MADRAS HIGH COURT IN THE CASE OF T.I. DIAMONDS CHAINS LTD VS CIT (27 4 ITR 59) WHEREIN THE DECISION IN THE CASE OF EMPIRE JUTE COMPANY (SUPRA) RELIED ON BY THE CIT (A) WHILE ALLOWING THE APPEAL OF THE ASSESSEE, HAS BEE N DISTINGUISHED. 6.3 FURTHER RELIANCE WAS PLACED ON THE FOLLOWING D ECISIONS, FOR THE PROPOSITION THAT EXPENDITURE WAS NOT LAID OUT WHOLLY AND EXCLUS IVELY FOR THE PURPOSE OF BUSINESS. A) B.K. KHANNA & CO.P LTD. VS CIT : 247 IT R 705 (DEL) B) CIT VS T.S. HAJI MOOSA & CO. : 143 I TR 422 (MAD) . C) MYSORE KIRLOSKAR LTD VS CIT : 166 ITR 836 (KAR) D) SIDDHO MAL & SONS. VS ITO : 122 I TR 839 (DEL) I.T.A. NO.43/C/2017 12 6.4 THE LD. DR FURTHER SUBMITTED THAT THE OT HER DECISIONS RELIED ON BY THE CIT (A) ARE ALSO NOT APPLICABLE AS THE FACTS AR E DIFFERENT FROM THE FACTS OF THE CASE OF THE ASSESSEE: A) IN THE CASE OF DCIT VS JOSHI FORMULABS P LTD. ( 104 TAXMAN 215), THE LD. DR SUBMITTED THAT THE AMOUNT WAS PAID TO AVOID COMPETITION THAT HAS ACCESS TO INK FORMULA WHICH WAS A TRADE SECRET. IN THE CASE OF ASSESSEE IT WAS ONLY A REAL ESTATE DEVELOPMENT/ CONTRACT WHICH HAS GOT NOTHING TO DO WITH TRADE SECRET. B) IN THE CASE OF CIT VS MANDOVI HOTELS P.LTD. (28 4 ITR 129) (BOMBAY), IT WAS SUBMITTED THAT THE FACTS ARE DIFFERENT SINCE THE PAYMENTS WERE MADE TO RETIRING PARTNERS ANNUALLY. C) IN THE CASE OF CIT VS DELHI BEEDI SALES AGENCIE S (225 ITR 54) (MP) IT WAS SUBMITTED THAT DIFFERENT PAYMENTS WERE MADE TO DISCHARGE THE STATUTORY LIABILITY OF RETIRING PARTNER. D) IN THE CASE OF CIT VS NAINITAL BANK LTD. 62 IT R 638 (SC), IT WAS SUBMITTED THAT THE FACTS ARE DIFFERENT AND COMPENSA TION PAID FOR STOLEN JEWELLERY WAS HELD AS REVENUE EXPENDITURE. I.T.A. NO.43/C/2017 13 6.5 IN VIEW OF THE ABOVE IT WAS SUBMITTED THAT T HE ORDER OF THE ASSESSING OFFICER BE UPHELD. 6.6 RELYING ON SECTION 40 ( A) (2) (B) OF I.T. A CT, THE LD. DR SUBMITTED THAT SECTION 40(A)(2) DOES NOT PROVIDE FOR ANY UN-REASON ABLE PAYMENTS TO INTERESTED PERSONS' INCLUDING ANY DIRECTOR, WHICH MAY INCLUDE EX-DIREC TOR. THE LD. DR SUBMITTED THAT THERE IS NO STATUTORY SAN CTION PROVIDED IN THE IT ACT TO ALLOW PAYMENT OF RS. 1.74 CRORES AS COMPENSA TION FOR FORFEITURE OF HIS CLAIMS IN THE COMPANY, ESPECIALLY IN A COMPANY WHER E THE BUSINESS DONE IS JUST AN ORDINARY CONTRACT/ REAL ESTATE DEVELOPMENT. 6.7 FURTHER, IT WAS SUBMITTED THAT THE PROVISIONS OF COMPANY LAW ALSO DO NOT PROVIDE FOR ANY ALLOWANCE FOR PAYMENT OF RS. 1.74 C RORES TO EX DIRECTOR. ACCORDING TO THE LD. DR, SECTION 191 (1) OF THE COM PANY ACT MANDATES THAT NO DIRECTOR OF A COMPANY SHALL IN CONNECTION WITH T RANSFER OF THE WHOLE OR ANY PART OF ANY UNDERTAKING OR PROPERTY OF THE COMPANY SHALL RECEIVE ANY PAYMENT BY WAY OF COMPENSATION FOR LOSS OF OFFICE OR FROM THE TRANSFEREES OF SUCH UNDERTAKING OR PROPERTY. FUR THER, IT WAS SUBMITTED THAT SECTION 202( 3) QUANTIFIES THE COMPENSATION PAYABLE FOR THE LOSS OF OFFICE OF MANAGING DIRECTOR, WHOLE TIME DI RECTOR OR MANAGER. THEREFORE, ACCORDING TO THE LD. DR, PAYMENT OF RS . 1.74 CRORES TO EX- DIRECTOR- SRI K.J. PAUL IS VIOLATIVE OF SECTION 2 02 (3 ) OF THE COMPANIES ACT. I.T.A. NO.43/C/2017 14 THE LD. DR ALSO SUBMITTED THAT THE PROVISIONS ( ON NON COMPETE FEE ) 28 (VA) (A) OF I.T. ACT ( IN RESPECT OF ANY SUM, RECEIVED/R ECEIVABLE, IN CASH OR KIND UNDER AN AGREEMENT FOR NOT CARRYING OUT ANY AC TIVITY IN RELATION TO ANY PROFESSION/ [DIRECTORSHIP IN A COMPANY] WAS APPLICA BLE ONLY W.E.F. 1-04-2017. 6.8 IN VIEW OF THE ABOVE AND FURTHER IN VIEW OF THE PROVISIONS OF SECTION 37(1) & 40 A (2 ) (B) OF THE I.T. ACT, THE LD. DR CONCLUD ED THAT THE ORDER OF THE A.O. BE UPHELD AND ORDER OF THE CIT (A) BE REVERSED. 7. ON THE OTHER HAND, THE LD. AR SUBMITTED THAT T HE ASSESSEE IS A PRIVATE LIMITED COMPANY INCORPORATED IN 2005 WITH THE OBJEC TIVE OF DEVELOPMENT AND SALE OF REAL-ESTATE PROPERTIES INCLUDING CONSTRUCTI ON AND SALE OF RESIDENTIAL FLATS. THE LD. AR SUBMITTED THAT MR. KJ PAUL WAS ONE OF TH E PROMOTERS OF THE COMPANY WITH 20% SHARES OF THE PAID UP CAPITAL OF THE COMPA NY AND HIS BROTHER LATE SHRI K.J. KURIAKOSE WAS ANOTHER DIRECTOR WITH 20% SHARES . ACCORDING TO THE LD. AR, ON THE DEATH OF SHRIK.J.KURIAKOSE ON 07 TH APRIL 2010, HIS WIFE SMT. LISSY KURIAKOSE BECAME THE SHAREHOLDER OF THE COMPANY. T HE LD. AR SUBMITTED THAT IN THE MEANTIME, SERIOUS DIFFERENCE OF OPINION BETW EEN MR KJ PAUL AND OTHER PROMOTERS, SHRI K.J. PAUL AND SMT. LISSY KURIAKOSE FILED PETITION BEFORE THE COMPANY LAW BOARD CHENNAI BENCH, UNDER SEC 397,398, 402,237,111 & 167 OF THE COMPANIES ACT OF 1956. THE LD. AR SUBMITTED THA T THE PETITIONERS WERE I.T.A. NO.43/C/2017 15 HOLDING 40% OF THE SHARES OF THE COMPANY AND RELIEF SOUGHT BEFORE THE COMPANY LAW BOARD INCLUDED SPLITTING THE ASSESSEE-C OMPANY AMONG THEMSELVES AND THE OTHER SHAREHOLDERS. HE DREW OUR ATTENTION TO PARA 8(J) OF RELIEF SOUGHT IN THE PETITION CP NO. 91/2010 BEFORE CLB WHICH IS REPRODUCED BELOW. 'TO DIRECT THE RESPONDENT NO. 2, 3 AND 4 TO SELL TH EIR SHARES TO PETITIONER NO. 1 AND 2. ALTERNATIVELY, TO DIRECT AN EVALUATION OF STATUS OF ALL PROJECTS AND ISSUE AN ORDER SPLITTING THE PROJECTS OF THE CO MPANY IN THE MOST EQUITABLE MANNER BETWEEN THE PETITIONERS AND RESPON DENTS IN PROPORTION TO THEIR ACTUAL SHARE CONTRIBUTION . ACCORDING TO THE LD. AR, RELIEF SOUGHT IN PARA 8(J) HAS TO BE READ ALONG WITH RELIEF SOUGHT IN PARA 8(F) AND 20% SHARES ALLOTTED TO RES PONDENT NO.4 WAS TO BE SET ASIDE WHICH WOULD LEAD TO THE SITUATION WHERE BY PE TITIONERS 1 AND 2 TOGETHER WILL HOLD 40% OF THE SHARES OF THE COMPANY AND RES PONDENT NOS. 2 AND 3 HOLDING THE REMAINING 40% OF THE SHARES LEADING TO A TIE IN THE MANAGEMENT OF THE COMPANY AND CONSEQUENT WINDING UP OF THE COMPAN Y. ACCORDING TO THE LD. AR, IT WAS ONLY TO AVOID SUCH A CONTINGENCY AND NEC ESSITY THE ASSESSEE- COMPANY HAD TO AGREE FOR THE PAYMENT OF RS 174 LAKH S. THE LD. AR SUBMITTED THAT SUCH AN ACTION WOULD RESULT IN WINDING UP OF T HE COMPANY OR SERIOUSLY AFFECT ITS BUSINESS INTEREST AND THROUGH THE INTERVENTION OF FRIENDS AND WELL WISHERS AN AMICABLE SETTLEMENT AGREEMENT WAS REACHED WITH MR K J PAUL. IT WAS SUBMITTED THAT PARA 7 OF THE SAID AGREEMENT GAVE ALL RIGHTS T O MR KJ PAUL IN RS 174 LAKHS PAID BY THE ASSESSEE-COMPANY TO ONE MR JOSE PAUL TO WARDS PURCHASE OF LAND WHICH IS SHOWN AS ADVANCE FOR LAND IN THE BALANCE S HEET OF THE ASSESSEE COMPANY. I.T.A. NO.43/C/2017 16 7.1 THE LD. AR FURTHER SUBMITTED THAT IN THE LIGH T OF THE SETTLEMENT AGREEMENT, A JOINT AFFIDAVIT OF COMPROMISE WAS FILED BEFORE TH E CLB TOGETHER WITH THE COPY OF THE SAID AGREEMENT AND THE CLB AFTER TAKING THE PETITION ON RECORD PASSED ITS ORDER APPROVING THE SETTLEMENT. THE LD. AR SUBMITT ED THAT THE SAID AMOUNT OF RS.174 LAKHS WAS CHARGED TO THE P&L ACCOUNT DURING THE AY 11-12 AS REVENUE EXPENDITURE INCURRED OUT OF COMMERCIAL NECESSITY FO R THE PURPOSE OF PRESERVING THE EXISTING BUSINESS OF THE ASSESSEE-COMPANY. 7.2 THE LD. AR SUBMITTED THAT THE AO DISALLOWED T HE EXPENDITURE HOLDING THAT THE COMPENSATION PAID TO THE OUTGOING DIRECTOR CANN OT BE TREATED AS A REVENUE EXPENDITURE AND SINCE THE SETTLEMENT WAS OUT OF COU RT AND LEGAL PROCEEDINGS WERE PENDING BEFORE THE CLB, SUCH EXPENSES CANNOT B E LEGAL AND HENCE TO BE DISALLOWED. 7. 3 ACCORDING TO THE LD. AR, THE DEPARTMENT HAS RAI SED THE CONTENTIONS IN THE APPEAL BEFORE THIS TRIBUNAL AS FOLLOWS: A) THE ORIGINAL CHARACTER OF THE PAYMENT MADE TO AN IN TERMEDIARY AS ADVANCE TOWARDS PURCHASE OF LAND COULD NOT BE CHANG ED MERELY BECAUSE OF TRANSPLANTATION OF THE RECIPIENT WHO WAS THE EX DIRECTOR OF THE I.T.A. NO.43/C/2017 17 COMPANY BASED ON A SETTLEMENT AGREEMENT REACHED OUT OF COURT TOWARDS GIVING UP OF HIS RIGHTS/ INTERESTS IN THE COMPANY. B) THE BENEFIT DERIVED BY THE COMPANY BY TRANSPLAN TING ITS EX DIRECTOR AS THE BENEFICIARY OF THE TRANSACTION FOR GIVING UP OF HIS RIGHTS/ INTERESTS IN THE COMPANY WOULD HAVE THE IMPACT OF ENDURING BENEF IT AND SUCH AMOUNT OF RS 174 LAKHS PAID WAS CAPITAL IN NATURE. C) THE CLASSIFICATION OF ADVANCE FOR LAND PURCHASE AS FINAL SETTLEMENT TO EX DIRECTOR FOR NON COMPETE FEE WAS PREMATURE AND N OT CRYSTALLIZED PENDING COMPLAINT FILED BEFORE THE COMPANY LAW BOAR D DUE TO THE DISPUTE AMONG THE DIRECTORS. 7.4 IN RESPONSE, THE LD. AR SUBMITTED THAT ISSUE S RAISED BY THE DEPARTMENT ARE ALREADY COVERED BY THE ORDER OF THE CIT(A) AND THE ISSUES ABOVE ARE ADDRESSED AD SERIATIM : A) PARA 6(D) OF CIT(A)S ORDER THE FUNDAMENTAL QUESTION THAT IS TO BE ANSWERED IS , IRRESPECTIVE OF THE NOMENCLATURE OF THE PAYMENT MADE OR RECEIVED (N AMED IN THE INSTANT CASE THROUGH THE INSTRUMENT OF SETTLEMENT A GREEMENT AS 'COMPENSATION') CAN A PAYMENT: I. MADE IN ADVANCE TO ANOTHER PERSON (SRI JOSE PA UL); II. BY A REAL ESTATE TRADING COMPANY (THE APPELLAN T); III. OSTENSIBLY TOWARDS PURCHASE OF STOCK-IN-TRADE (LANDS); I.T.A. NO.43/C/2017 18 IV. AND THEREAFTER TRANSFERRED THROUGH DOCUMEN TATION (THE SETTLEMENT AGREEMENT); V. WHICH DOCUMENTATION DID NOT INVOLVE OR HAVE A SIGNATORY THE SAID OTHER PERSON (SRI JOSE PAUL); VI. TO AN EX DIRECTOR (SRI KJ PAUL) OF THE APPELL ANT; VII TOWARDS THE FORFEITURE OF ALL CLAIMS BY THE S AID EX DIRECTOR (SRI KJ PAUL); BE INVARIABLY AND WITHOUT EXCEPTION BE REVENUE IN N ATURE? PARA 6(E) OFF CITS ORDER IN THE ABOVE, SINCE ADVANCE WAS ORIGINALLY MADE IN THE ABSENCE OF ANY CONTRADICTING FACTS OR EVIDENCES FOR A TRADING PURPOSE, THE SAME WOULD UNDOUBTEDLY BE REVENUE IN N ATURE. THEREAFTER, THERE EMERGES A DISCONNECT IN THAT THE INTENDED PAYEE (SRI JOSE PAUL) WHO WAS THE AUTHORISED INTERM EDIARY OR THE RESPONSIBLE AGENT DROPS OUT OF THE PICTURE SINC E THE ENVISAGED TRANSACTIONS BY THE SAID INTERMEDIARY - A GENT DID NOT FRUCTIFY IN THE INTENDED MANNERS. THEREFORE, THE AM OUNT OF RS 174 LAKHS PAID REMAINS A TRADING ADVANCE IN THE ACC OUNT OF THE APPELLANT. THIS HELPS IT RETAIN ITS REVENUE CHARACT ER. TO RESOLVE THE STATE OF STULTIFYING AND STAGNATING LIMBO, THE MONIES BEING REVENUE-NATURE ADVANCES THAT WERE TRANSFERRED ARE PROCESSED AND TREATED THROUGH THE INSTRUMENT OF DOCUMENTATION (THE SETTLEMENT AGREEMENT) TO DECIDE THEIR FURTHER FINAN CIAL CAREER. THIS AGREEMENT UNILATERALLY SCRAPS THE NAME OF SRI JOSE PAUL OUT OF THE PICTURE AND SUBSTITUTES THAT OF MR KJ PAUL I NSTEAD, WITH SRI JOSE PAUL NOW ACTING AS AN AGENT OF SRI KJ PAUL IN THE MATTER OF THE HANDLING OF THE MONEY AND ITS CONSEQUENT OWN ERSHIP AS WELL AS THE TRANSACTION INVOLVING THE LANDS (WHICH HAVE NEVER ENTERED THE FINANCIAL DOMAIN OF THE APPELLANT AND T HEREFORE NEED NOT CONCERN US). SRI KJ PAUL HAS THEREFORE BEE N INVESTED WITH THE TRUE AND FULL OWNERSHIP OF THE AMOUNT OF R S 174 LAKHS IN LIEU OF THE FORFEITURE OF THE CLAIMS BY HIM IN T HE COMPANY. PARA 6(J) OF CIT(A)S ORDER IN THIS, IT NEEDS TO BE FIRST APPRECIATED THAT THE APPELLANT HAS NOT LOST ANY ASSETS BY WAY OF ANY 'RIGHTS' BUT ONLY AN INSTANTANEOUS PAYMENT THAT REPRESENTS IN THE MOMENT ARY PRESENT THE FUTURE GAINS TO BE HAD IN THE FORM OF E XPENSE SAVING (INCLUDING THE DIRECTORS REMUNERATION AND OT HER PERQUISITES TO BE PROVIDED TO SRI KJ PAUL). I.T.A. NO.43/C/2017 19 PARA 6(1) OF CIT(A)S ORDER THE SURROGATUM PRINCIPLE PROVIDES THAT THE CHARACT ER OF AN EXPENSE OF DAMAGES OR OF AN AMOUNT PAID IN SETTLEME NT OF A CLAIM AS A CAPITAL OR REVENUE EXPENDITURE DEPENDS O N WHAT THE AMOUNT WAS INTENDED TO REPLACE. THIS MAY INVOLVE A PERSON (THE APPELLANT) WHO EXPECTS TO SUFFER POTENTIAL HARM CAU SED BY ANOTHER (THE DIRECTOR, SRI KJ PAUL) AND MAY ELECT T O PAY COMPENSATION FOR POTENTIAL (A) LOSS OF INCOME (B) E XPENSE INCURRED (C) PROPERTIES DESTROYED/COMPROMISED AND/O R (D) PERSONAL INJURY, AS WELL AS PUNITIVE DAMAGES. UNDER THE SURROGATUM PRINCIPLE, TAX CONSEQUENCES OF A DAMAGE OR SETTLEMENT PAYMENT DEPEND ON THE TAX TREATMENT OF T HE ITEM FOR WHICH THE PAYMENT IS INTENDED TO SUBSTITUTE. IF THE REPLACED AMOUNT WOULD HAVE BEEN TAXABLE, THE AWARD OR SETTLE MENT OR COMPENSATION AMOUNT WILL ALSO BE TAXABLE. THEREFORE, AS THE REPLACED IN THE INSTANT CASE ARE THE POTENTIAL FUTURE EXPENSES (CASH FLOWS) BEING REMUNERATION-PER QUISITES LIABLE TO BE PAID THAT HAVE BEEN GAINED WHICH ARE R EVENUE IN NATURE, THE COMPENSATION THAT SEEKS TO REPLACE THE SAME WOULD ALSO BE REVENUE. PARA 6(G) OF CIT(A)S ORDER THE ANSWER TO QUESTION NO. 6 (H)(V) IS IN THE NEGA TIVE. AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF EMPIRE J UTE COMPANY LTD. VS. CIT (1980) 124 ITR 1 (SC), THE REL EVANT PORTIONS OF WHICH DECISION ARE REPRODUCED AS UNDER: (I) IT IS NOT A UNIVERSALLY TRUE PROPOSITION THAT WHAT MAY BE A CAPITAL RECEIPT IN THE HANDS OF THE PAYEE MUST NE CESSARILY BE CAPITAL EXPENDITURE IN RELATION TO THE PAYER. THE F ACT THAT A CERTAIN PAYMENT CONSTITUTES INCOME OR CAPITAL REC EIPT IN THE HANDS OF THE RECIPIENT IS NOT MATERIAL IN DETER MINING WHETHER THE PAYMENT IS REVENUE OR CAPITAL DISBURSEMENT QUA THE PAYER (II) THERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCURRED FOR OBTAINING AN ADVANTAGE OF ENDURING BENEFIT, MAY NONETHELESS, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. IT IS NOT EVERY ADVANTAGE O F I.T.A. NO.43/C/2017 20 ENDURING NATURE ACQUIRED BY AN ASSESSEE THAT BRINGS THE CASE WITHIN THE PRINCIPLE LAID DOWN IN THIS TEST. W HAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHERE THE ADVANTAGE IS IN CAPITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLO WABLE ON AN APPLICATION OF THIS TEST. IF THE ADVANTAGE CONSI STS MERELY IN FACILITATING THE ASSESSED TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND THE CONDUCT OF THE ASSESSEES BUSINE SS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY B Y LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVENUE ACCOUNT, EVEN THOUGH THE ADVANTAGE MAY ENDU RE FOR AN INDEFINITE FUTURE. THE REST OF ENDURING BENE FIT IS THEREFORE, NOT CERTAIN OR A CONCLUSIVE TEST AND IT CANNOT BE APPLIED BLINDLY AND MECHANICALLY WITHOUT REGARD TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF A GIVEN CASE. (III) WHAT IS AN OUTGOING OF CAPITAL AND THAT WHAT AN OUTGOING ON ACCOUNT OF REVENUE DEPENDS ON WHAT THE EXPENDITURE IS CALCULATED TO EFFECT FROM A PRACTICA L AND BUSINESS POINT OF VIEW RATHER THAN UPON THE JURISTI C CLASSIFICATION OF THE LEGAL RIGHTS, IF ANY SECURED, EMPLOYED OR EXHAUSTED IN THE PROCESS. THE QUESTION MUST BE VIEW ED IN THE LARGER CONTEXT OF THE BUSINESS NECESSITY OR EXPEDIENCY. C) PARA 6(C) OF CIT(A)S ORDER THE AO ALSO STATED, WITHOUT EXPLAINING THE BASIS O F HIS OPINION AND FINDING, THAT THE PAYMENT WAS MADE CONS EQUENT TO AN OUT-OF-COURT SETTLEMENT WHICH WAS NOT 'LEGAL' SINCE THE 'LEGAL PROCEEDINGS WERE PENDING BEFORE THE COMPANY LAW BOARD'' THIS IS SQUARELY AND ROUNDLY REJECTED. IT D OES NOT NEED THE INTERVENTION OR THE ACTIVE PRESENCE OF AN HON'BLE COURT OR TRIBUNAL TO LEND LEGALITY TO AN ACTION. ASIDE FROM THE JUDGE-MADE AND INTERPRETED LAWS THAT RESULT OUT OF THE JUDICIAL PROCESS THROUGH PROCEEDINGS IN THE HON'BLE COURTS AND TRIBUNALS OF THE LANDS THERE WERE LEGISLATIVE L AWS, COMMERCIAL LAWS, ADMINISTRATIVE LAWS, COMMON LAWS A ND CUSTOMARY LAWS. IN LAW, AN OUT-OF-COURT SETTLEMENT IS A CONTRACT AND A RESOLUTION BETWEEN DISPUTING PARTIES ABOUT A LEGAL CASE, REACHED EITHER BEFORE OR AFTER COURT AC TION BEGINS. SUCH A SETTLEMENT IS ONE POSSIBLE (AND COMM ON) RESULT WHEN THE PARTIES SUE (OR CONTEMPLATE SO DOIN G) EACH OTHER IN CIVIL PROCEEDINGS. THE PLAINTIFF (S) AND D EFENDANT(S) I.T.A. NO.43/C/2017 21 IDENTIFIED IN THE LAWSUIT CAN END THE DISPUTE BETWE EN THEMSELVES WITHOUT A TRIAL. THE CONTRACT IS BASED U PON THE BARGAIN THAT A PARTY FORGOES ITS ABILITY TO SUE (IF IT HAS NOT SUED ALREADY) OR TO CONTINUE WITH THE CLAIM (IF THE PLAINTIFF HAS SUED), IN RETURN FOR THE CERTAINTY WRITTEN INTO THE SETTLEMENT. THE COURTS CAN AND WILL ENFORCE THE SET TLEMENT, IF IT IS BREACHED, THE PARTY IN DEFAULT COULD BE SUED FOR THE BREACH OF THAT CONTRACT. IN SOME JURISDICTIONS, THE PARTY IN DEFAULT COULD ALSO FACE THE ORIGINAL ACTION BEING R ESTORED. THIS IS THE REASON WHY THE TERMS OF SETTLEMENT AGRE EMENT IN THE INSTANT CASE WAS FILED BY THE APPELLANT AND HIS FELLOW CONTESTANTS IN THE FORM OF A JOINT AFFIDAVIT OF COM PROMISE FILED BEFORE THE CLB. THEREFORE, THERE IS NO MERIT IN THE AOS IMPUTATION OF THE LACK OF LEGALITY IN THE OUT-OF-CO URT SETTLEMENT ENTERED INTO IN THE INSTANT CASE. THE AO APPEARS TO HAVE MADE THIS STATEMENT ONLY BECAUSE, BESIDES T HE PURPORTEDLY CAPITALIZING NATURE OF THE FORFEITURE O F AIL CLAIMS' BY SRI KJ PAU!, HE (THE AO) HAD NOTHING ELSE TO STA TE BY WAY OF REASONING AND EXPLANATION BEHIND HIS DECISION TO MAKE THE IMPUGNED DISALLOWANCE. 7.5 THE LD. AR FURTHER SUBMITTED THAT A PAYMENT M ADE TO REMOVE THE POSSIBILITY FOR RECURRING DISADVANTAGE CANNOT BE MA DE AS PAYMENT MADE TO SECURE AN ENDURING ADVANTAGE. HE RELIED ON THE FOLL OWING JUDGMENTS: [CIT VS ASHOK LEYLAND (1969) 72 ITR 137,143 (MAD); AFFIRMED (1972) 86 ITR 549 (SC)] UNLESS THE VERY ASSET WHICH HAS BEEN BROUGHT INTO EXISTENCE DOES BELONG TO THE ASSESSEE, IT CANNOT BE SAID THAT T HE ASSESSEE HAS ACQUIRED AN ENDURING ADVANTAGE FOR ITS BUSINESS [CIT VS P REMIER COTTON SPINNING MILLS LTD. 223 ITR 440,449 (KER)] [CIT VS ASSOCIATED CEMENT COS LTD. (1988) 172 ITR 2 57, 262 (SC)] WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF ADVA NTAGE IN A COMMERCIAL SENSE AND ONLY WHEN THE ADVANTAGE IS IN A CAPITAL F IELD, THAT THE EXPENDITURE WOULD BE DISALLOWED ON AN APPLICATION O F THE ABOVE TEST. IF THE I.T.A. NO.43/C/2017 22 ADVANTAGE CONSISTS IN FACILITATING THE ASSESSEE'S T RADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEE 'S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR PROFITABLY, WHILE LE AVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVENUE ACCO UNT, EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE FUTURE . 7.6 THE LD. AR FURTHER SUBMITTED THAT THE DECISIO NS RELIED UPON BY THE LEARNED DR IS NOT APPLICABLE TO THE FACTS OF THE CASE AND D ISTINGUISHED THE CASE AS FOLLOWS: 1. CHELPARK & CO. VS CIT [ 191 ITR 249 (MAD) THE FACTS OF THIS CASE ARE TOTALLY DIFFERENT. IN TH IS CASE THE MANAGING DIRECTOR OF THE INK MANUFACTURING COMPANY WHO WAS IN THE KNO W OF THE FORMULA FOR MAKING THE INK, POST RETIREMENT, STARTED A PARTNERSHIP FIRM TO MANUFACTURE INK. IN ORDER TO AVOID COMPETITION FROM THE EX-MANA GING DIRECTOR THE COMPANY ENTERED INTO AN AGREEMENT WITH HIM, WHEREBY THE SAID MD WAS TO WIND UP HIS PARTNERSHIP BUSINESS, CALL OFF THE ADVE RTISEMENT ISSUED FOR RECRUITMENT OF TECHNICIANS, HANDOVER ALL PROMOTION MATERIALS MADE AND TO LEAVE THE SHORES OF THE COUNTRY FOR A CONSIDERATION OF RS. ONE LAC. IN THAT CASE, SINCE THE POTENTIAL COMPETITION WAS PERMANENT LY REMOVED, THE COURT HELD THAT IT WAS A CAPITAL EXPENDITURE. THE FACTS OF THE IMPUGNED CASE ARE TOTALLY DIFFERENT. 2. BK KHANNA & CO (P) LTD VS CIT [ 247 ITR 705 (DEL ) THIS CASE IS ALSO DISTINGUISHABLE. IN THIS CASE, AS SESSEE A PRIVATE LIMITED COMPANY. ITS FOUR DIRECTORS WERE CLOSE RELATIVES. IT PAID RS. 30,000 TO TWO OF I.T.A. NO.43/C/2017 23 THE DIRECTORS FOR THEIR AGREEING NOT TO CARRY ON AN Y FURTHER BUSINESS OF PROMOTION OF COMPANIES FOR A PERIOD OF FIVE YEARS A ND TO CARRY IT ON ONLY IN NAME OF COMPANY FOR THAT PERIOD AND FOR ITS BENEFIT . ASSESSING OFFICER DENIED DEDUCTION OF AMOUNT SO PAID. TRIBUNAL UPHELD ASSESS ING OFFICER'S VIEW. JUSTIFIED. TRIBUNAL NOTICED THAT PAYMENT WAS NOT FO R AGREEING TO NOT TO CARRY ON ANY SIMILAR BUSINESS BUT FOR CARRYING IT ON FOR ASSESSEE-COMPANY. THIS POSITION ACCEPTED BY ASSESSEE'S COUNSEL BEFORE TRIBUNAL. THEREFORE, QUA THE COMPANY IT WAS A CAPITAL EXPENDITURE, HENCE , AMOUNT WAS NOT DEDUCTIBLE UNDER SECTION 37(1) 3. MYSORE KIRLOSKAR LTD VS GIT [ 166 1TR 836 (KAR ) THE QUESTIONS RAISED IN THESE CASES ARE TOTALLY UNR ELATED TO THE ISSUES IN THE IMPUGNED ORDER UNDER CHALLENGE BY THE REVENUE. '1. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AND ON A PROPER INTERPRETATION OF SECTIONS 35 AND 43 (1), CA PITAL ASSETS WHICH ARE PURCHASED FOR AN CONTAINED TO BE UTILISED IN SCIENTIFIC RESEARCH WOULD QUALITY FOR DEPRECIATION ALLOWANCE UNDER SECTION 32 IN THE YEAR OTHER THAN THE YEAR OF INSTALLATION WHERE THE ENTIRE AMOUNT HA S BEEN ALLOWED UNDER SECTION 35 (2) ? 2. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE SURTAX PAYABLE UNDER THE COMPANIES (PROFITS) SURTAX ACT, 1964, WAS INADMISSIBLE AS A DEDUCTION IN COMPU TING THE TOTAL INCOME OF THE ASSESSEE ? 3. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE TRIBUNAL WAS RIGHT IN REJECTING THE ASSESSEES CLAIM FOR DEDU CTION OF 61.1 PER CENT OF RS. 62,000 DONATED BY IT TO MYSORE KIRLOSKAR EDUCATI ON TRUST ?' I.T.A. NO.43/C/2017 24 4. SIDDHO MAL & SONS VS ITO [ 122 1TR 839 (DEL) THE FACTS IN THIS CASE ARE NO WAY RELEVANT TO THE C ASE NOW BEING ADJUDICATED. IN THIS CASE, THE DEPOSITS WERE HELD BY THE FIRM IN THE NAME OF MINOR SONS OF THE PARTNERS. SUCH DEPOSITS CARRIED INTERESTS @ 7.5 %. OVER AND THIS INTEREST, COMMISSION WAS PAID ON SUCH DEPOSITS. THE INTEREST AND COMMISSION TOGETHER CONSTITUTED 40% RETURN. THE COURT DISALLOWED SUCH C OMMISSION, HOLDING THAT IT WAS NOT EXCLUSIVELY FOR THE PURPOSES OF THE ASSE SSEE. 7.7 IN VIEW OF THE FOREGOING, THE LD. AR SUBMITTE D THAT THERE IS NO INFIRMITY IN THE ORDER OF THE CIT(A) AND HENCE, THERE BEING NO M ERIT IN THE APPEAL FILED BY THE DEPARTMENT, THE SAME MAY BE DISMISSED. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. WE HAVE CAREFULLY GONE THROUGH THE SETTLEMENT AGREE MENT DATED 12/11/2016 WHICH WAS FILED BY THE ASSESSEE BEFORE COMPANY LAW BOARD AND THE COMPANY LAW BOARD ACCEPTED THE AGREEMENT REACHED BY THE PAR TIES VIDE THEIR LETTER DATED 18/11/2010 IN PETITION NO, CP 91/2010 BEFORE THE CO MPANY LAW BOARD, CHENNAI BENCH. THE SETTLEMENT AGREEMENT WHICH WAS ENTERED R EADS AS FOLLOWS: THIS SETTLEMENT AGREEMENT EXECUTED AT ERNAKULAM ON 12 TH DAY;OF NOVEMBER, 2010 BETWEEN (1) MR. K.J. PAUL, RESIDIN G AT XXVIII, S305A, KUREKKAL HOUSE, THRIKKAKARA,-ERNAKULAM, KERALA (HE REINAFTER CALLED AS PARTY NO. 1) WHICH EXPRESSION SHALL UNLESS REPUGNAN T TO THE CONTEXT OR MEANING THEREOF BE DEEMED TO INCLUDE HIS SUCCESSOR S AND PERMITTED I.T.A. NO.43/C/2017 25 ASSIGNS), (2) LATE K.J. KURIAKOSE, REPRESENTED BY HIS WJFE MRS. LISSY KURIAKOSE, RESIDING AT 38/750, KURIKKAL HOUSE, EDAPP ALLY P.O, KOCHI, ERNAKULAM, (HEREINAFTER CALLED PARTY NO. 2 WHICH EXP RESSION SHALL UNLESS REPUGNANT TO THE CONTEXT OR MEANING THEREOF BE DEEM ED TO INCLUDE HER SUCCESSORS AND PERMITTED ASSIGNS), (3) M/S. TRINITY ARCADE PRIVATE LIMITED, HAVING ITS REGISTERED OFFICE AT 35/268A, TRINIT Y HOUSE, OPP. YATHRI NIVAS, MAMANGALAM, KOCHI REPRESENTED BY ITS MANAGIN G DIRECTOR MR. ROY JOSEPH, (HEREINAFTER REFERRED TO AS PARTY NO.3 WHIC H EXPRESSION SHALL UNLESS REPUGNANT TO THE CONTEXT OR MEANING THEREOF BE DEEM ED TO INCLUDE HIS SUCCESSORS AND PERMITTED ASSIGNS) (4) MR. ROY JOSE PH, RESIDING AT 1/150, MULLAPPARAMBIL HOUSE, MARADU P.O., ERNAKULAM (HERE INAFTER CALLED AS PARTY NO.4 WHICH EXPRESSION SHALL UNLESS REPUGNANT TO THE CONTEXT OR MEANING THEREOF DEEMED TO INCLUDE HIS SUCCESSORS AND PERMITTED ASSI GNS), (5) MR. M.J. LUIS RESIDING AT LINK HORIZON, MARINE DRIVE, ERNAKULAM, (HEREINAFTER CALLED AS PARTY NO. 5 WHICH EXPRESSION SHALL UNLESS REPUGNANT TO THE CONTEXT OR MEANING THEREOF BE DEEMED TO INCL UDE HIS SUCCESSORS AND PERMITTED ASSIGNS), (6) MR. C.J. MATHEW, RESIDING A T 3/96, MASTER LINE, TRICHUR, KERALA (HEREINAFTER CALLED AS PARTY NO.6, WHICH EXPRESSION SHALL UNLESS REPUGNANT TO THE CONTEXT OR MEANING THEREOF BE DEEMED TO INCLUDE HIS SUCCESSORS AND PERMITTED ASSIGNS) AND (7) M/S. GREENL EAF BUILDERS AND DEVELOPERS (INDIA) PRIVATE LIMITED, HAVING ITS REGISTER ED OFFICE AT 35/268A, TRINITY HOUSE, OPP. YATHRI NIVAS, MAMANGAL AM, KOCHI REPRESENTED BY ITS MANAGING DIRECTOR, MR. ROY JOSEPH, (HEREINAF TER CALLED AS PARTY NO.7 WHICH EXPRESSION SHALL UNLESS REPUGNANT TO THE CONT EXT OR MEANING THEREOF BE DEEMED TO INCLUDE ITS SUCCESSORS) (8) M/S, 'CAVALI ER DEVELOPERS (INDIA) PRIVATE LIMITED', HAVING ITS REGISTERED OFFICE AT 35/ 268A, TRINITY HOUSE, OPP. YATHRI NIVAS, MAMANGALAM, KOCHI REPRESENTED BY ITS MANAGING DIRECTOR MR. ROY JOSEPH (HEREINAFTER CALLED AS PARTY NO.8 W HICH EXPRESSION SHALL UNLESS REPUGNANT TO THE CONTEXT OR MEANING THEREOF BE DEEMED TO INCLUDE ITS SUCCESSORS). WHEREAS THE PARTY NO.2 IS THE PETITIONER NO. 2 IN TH E COMPANY PETITION NO. 91/2010 FILED WITH THE COMPANY LAW BOARD, CHENNAI B ENCH, AND WHEREAS PARTY NO. 3 IS THE COMPANY IN THE MATTER OF WHICH THE COMPANY PETITION NO. 91/2010 CAME TO BE FILED BEFORE THE HO N'BLE COMPANY LAW BOARD AND COMPANY IS THE RESPONDENT NO. 1 IN THE SAID PET ITION. WHEREAS THE PARTY NOS. 4, 5 AND 6 ARE THE RESPONDENT NOS. 2, 3 AND 4 RESPECTIVELY IN THE ABOVE REFERRED COMPANY PETITION NO.91/2010, AND ENFORCEABLE IN A LAWFUL MANNER AND IT SHOULD BE BIN DING ON THE PARTIES IN ALL RESPECTS. .'.' I.T.A. NO.43/C/2017 26 PARTY NOS.3, 7 AND 8 ARE COMPANIES IN WHICH PARTY N OS. 1, 2, 4, 5 AND 6 HAVE SHAREHOLDINGS AND DIRECTORSHIPS. THE INTENTION OF THE PARTIES IS TO ENSURE THAT THE TERMS OF SETTLEMENT BINDS THE RESPE CTIVE COMPANIES, THEIR DIRECTORS, SHAREHOLDERS, THEIR MEN AND AGENTS IN AL L RESPECTS AND THE SETTLEMENT AGREEMENT IS BACKED UP RESOLUTION OF RES PECTIVE BOARDS OF DIRECTORS OF RESPECTIVE COMPANIES. IN PARTY NO. 3 THE FOLLOWING ARE THE SHAREHOLDERS AND THEY HOLD SHARES OF RS.10/- EACH IN THE FOLLOWING MANNER: PARTY NO, 1 2,00,000 NOS PARTY NO .2 2,00,000 NOS PARTY NO. 4 2,00,000 NOS PARTY NO. 5 2,00,000 NOS PARTY NO. 6 2,00,000 NOS IN PARTY NO. 7 THE FOLLOWING ARE THE SHAREHOLDERS A ND THEY HOLD SHARES OF RS.100/- IN THE FOLLOWING MANNER: PARTY NO, 1 10,000 NOS PARTY NO .2 10,000 NOS PARTY NO. 4 10,000 NOS PARTY NO. 5 10,000 NOS PARTY NO. 6 10,000 NOS IN PARTY NO. 8 THE FOLLOWING ARE THE SHAREHOLDERS A ND THEY HOLD SHARES OF RS.100/- IN THE FOLLOWING MANNER: PARTY NO, 1 10,000 NOS PARTY NO .2 10,000 NOS PARTY NO. 4 10,000 NOS PARTY NO. 5 10,000 NOS PARTY NO. 6 10,000 NOS 6. IN CONSIDERATION OF THE COVENANTS CONTAINED HE REUNDER PARTIES ABSOLUTELY AGREE TO TRANSFER THEIR SHAREHOLDINGS IN THE MANNE R SET OUT BELOW AND RESIGN THEIR RESPECTIVE DIRECTORSHIPS AS SET OUT HEREUNDER :. A. THE PARTY NO.1 IS HOLDING 2,00,000 FULLY PAID UP EQUITY SHARES OF RS. 10/- EACH IN THE SHARE CAPITAL OF PARTY NO.3. PARTY NO.1 HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES TO TRANSFER AND HEREBY TRANSFERS 2,00,000 (TWO LAKHS) EQUALLY IN FAVOUR OF EACH OF T HE PARTY NOS. 2, 4, 5 AND 6 SUCH THAT EACH OF PARTY NOS. 2, 4, 5 AND 6 PU RCHASE 50,000 [FIFTY I.T.A. NO.43/C/2017 27 THOUSAND] FULLY PAID UP SHARES IN PARTY NO. 3 FOR A TOTAL AGREED CONSIDERATION OF RS,40,00,000/- [RUPEES FORTY LAKHS ONLY] AT THE RATE OF RS.10,00,000/- [RUPEES TEN LAKHS ONLY] FOR EVERY 50 ,000 FULLY PAID UP EQUITY SHARES IN THE CAPITAL OF PARTY NO. 3 HEREBY TRANSFERRED TO EACH OF THE PARTY NOS. 2, 4, 5 AND 6 AND EACH OF THE PARTY NOS. 2, 4, 5 AND 6 HEREBY AGREE, UNDERTAKE AND HEREBY PAY TO PARTY NO. 1, A SUM OF RS.10,00,000/- [RUPEES TEN LAKHS ONLY] B. THE PARTY NO. 1 IS HOLDING 10,000 FULLY PAID U P EQUITY SHARES OF RS.100/- EACH IN THE SHARE CAPITAL OF PARTY NO.7. P ARTY NOS.1, 2, 4, 5, 6 [FIVE INDIVIDUALS] HOLD 10,000 [TEN THOUSAND] FULLY PAID UP EQUITY SHARES OF RS.100/- EACH IN PARTY NO.7. PARTY NO.1 HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES TO TRANSFER AND HEREBY TRANS FERS 10,000 (TEN THOUSAND) EQUALLY IN FAVOUR OF EACH OF THE PARTY NO S.2, 4, 5 AND 6 SUCH THAT EACH OF PARTY NOS.2, 4, 5 AND 6 PURCHASE 2,50 0 [TWO THOUSAND FIVE HUNDRED] FULLY PAID UP SHARES IN PARTY NO.7 TOR A T OTAL CONSIDERATION OF RS.30,00,000/- [RUPEES THIRTY LAKHS ONLY] AT THE RA TE OF RS.7,50,000/- [RUPEES SEVEN LAKHS FIFTY THOUSAND ONLY] FOR EVERY 2,500 EQUITY SHARES IN THE CAPITAL OF PARTY NO.7 HEREBY TRANSFERRED TO EAC H OF THE PARTY NOS.2, 4, 5 AND 6 AND EACH OF THE PARTY NOS. 2, 4,5 AND 6 HEREBY AGREE, UNDERTAKE AND HEREBY PAY TO PARTY NO. 1 RS.7,50,000 /- [RUPEES SEVEN LAKHS FIFTY THOUSAND ONLY]. AS A RESULT PARTY NO. 7 AND PARTY NO. 1 DOES NOT HAVE ANY SHARES AT ALL IN THE CAPITAL OF P ARTY NO. 7. C. THE PARTY NO. 2, 4, 5 AND 6 ARE HOLDING 10,00 0 FULLY PAID UP EQUITY SHARES OF RS.100/- EACH IN THE SHARE CAPITAL OF PA RTY NO. 8. EACH OF THE PARTY NOS. 2, 4, 5 AND 6 HEREBY IRREVOCABLY AND UNC ONDITIONALLY AGREE TO TRANSFER ; AND HEREBY TRANSFER ALL THEIR SHAREHOLDING IN THE CAPITAL OF PARTY NO. 8 ENTIRELY IN FAVOUR OF PARTY NO. 1 SUCH THAT EACH OF PARTY NOS. 2, 4, 5 AND 6 TRANSFER, SELL 10,000 [TEN THOUSAND] FUL LY PAID UP SHARES EACH ONE HOLDS IN THE CAPITAL OF PARTY NO. 8 FOR A TOTA L CONSIDERATION OF RS.40,00.000/- [RUPEES FORTY LAKHS ONLY] AT THE R ATE OF RS. 10,00,000/- [RUPEES TEN LAKHS ONLY] FOR EVERY 10,000 EQUITY S HARES IN THE CAPITAL OF PARTY NO. 8 HEREBY TRANSFERRED BY EACH OF THE PART Y NOS. 2, 4, 5 AND 6 TO AND IN FAVOUR OF PARTY NO.1 AND EACH OF THE PAR TY NOS. 2, 4, 5 AND 6 HEREBY ACKNOWLEDGE THE RECEIPT OF THE ENTIRE CONSID ERATION FROM PARTY NO. 1. AS A RESULT PARTY NO. 1 BECOMES THE OWNER OF 100% OF THE CAPITAL OF PARTY NO. 8. 7. PARTY NO.3 THE COMPANY IN RELATION TO WHICH THE COMPANY PETITION NO.91/2010 CAME TO BE FILED HAS, UNDER AN AGREEMENT DATED 21-06-2006 FOR SALE OF PROPERTY, PAID BY WAY OF AN ADVANCE A S UM OF RS.1,74,00,000/- I.T.A. NO.43/C/2017 28 TO ONE MR. JOSE PAUL TOWARDS ADVANCE PAYMENT FOR PU RCHASE OF 237 CENTS OF LAND COVERED UNDER SURVEY NO 320/1 IN CHANGARNAN AD VILLAGE, ALUVA TALUK IN ERNAKULAM DISTRICT. PARTY NO.3 COULD NOT C OMPLETE THE TRANSACTION AS ENVISAGED DUE TO SEVERAL REASONS. AS PART OF THE SETTLEMENT, PARTIES 2 TO 6 IRREVOCABLY AGREE THAT, THE COMPANY WILL WRITE TO THE SAID MR. JOSE PAUL, WHO HAS SIGNED THIS SETTLEMENT AGREEMENT BY WAY OF A CONFIRMING PARTY, EXPRESSING ITS NO OBJECTION TO MR. JOSE PAUL SO THAT MR. JOSE PAUL, THE VENDOR IN THE SAID AGREEMENT MAY SELL THE SAID PROP ERTY COVERED IN THE SAID AGREEMENT TO PARTY NO. 1 OR TO ANY OF HIS .NOM INEE OR :ANY OTHER PROSPECTIVE BUYERS AS IDENTIFIED AND APPROVED IN WR ITING BY PARTY NO.1 AND THE COMPANY WILL NEVER CLAIM RETURNING OF THE SAID ADVANCE FROM THAT MR. JOSE PAUL AND UNTIL THE SALE OF THE SAID PROPERTY, THE SAID ADVANCE AMOUNT SHALL REMAIN WITH MR. JOSE PAUL, TO THE CREDIT AND BENEFIT OF PARTY NO. 1 WHO SHALL BE VESTED WITH ALL THE RIGHTS ACCRUING TO PARTY NO. 3 UNDER THE SAID AGREEMENT FOR ALL INTENTS AND PURPOSES. 8.. PARTY NO. 3, THE COMPANY IN THE COMPANY PETIT ION NO. 91/2010 ALONG WITH PARTY NOS. 2, 4, 5 AND 6 HEREBY IRREVOCABLY AN D UNCONDITIONALLY AGREES, ENDORSE, APPROVE THAT PARTY NO. 3, THE COMP ANY OWNS 17.197 CENTS OF LAND COVERED IN SURVEY NO. 61/3D2.61/3A4.6 1/3D2 IN EDAPPALLY VILLAGE; KANAYANNUR TALUK IN, ERNAKULARN DISTRICT AN D THEY HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREE THAT THE COM PANY WILL SELL AND TRANSFER BY ABSOLUTE CONVEYANCE THE AFORESAID LAND TO PARTY NO. 1 AT AN AGREED TRANSFER, BY ABSOLUTE CONVEYANCE THE AFORESA ID LAND TO PARTY NO. 1 AT AN AGREED CONSIDERATION OF RS.30,00,000/-. THE COMPANY WILL ISSUE NECESSARY RECEIPT/ACKNOWLEDGMENT FOR RECEIPT OF THE CONSIDERATION. 9. PARTY NO.3, THE COMPANY AND PARTIES 2, 4, 5 AND 6 HEREBY RELEASE ABSOLUTELY DISCHARGE AND RELINQUISH THE PARTY NO. 1 IN THE ABOVE TERMS AND IN THE FULL AND FINAL SETTLEMENT OF THE SHAREHOLDI NGS OF PARTY NO. 1 IN THE COMPANY. HE WILL RELINQUISH HIS DIRECTORSHIP IN PA RTY NO. 3 AND PARTY NO. 7 WITH IMMEDIATE EFFECT AND SIGNING OF THIS SETTLEMEN T AGREEMENT BY ALL PARTIES SHALL CONSTITUTE HIS RESIGNATION LETTER AND A CESSATION OF HIS DIRECTORSHIP. PARTY NO. 1 AGREES TO FORMALLY ISSUE A RESIGNATION LETTER TOO. 10. PARTIES 2, 4 , 5 AND 6 HEREBY RELINQUISH THEIR DIRECTORSHIPS IN PART Y NO.8 AND WITH IMMEDIATE EFFECT AND SIGNING OF THIS SETTLEMENT AGREEMENT BY ALL PARTIES SHALL CONSTITUTE THEIR RESPECTIVE RESIGN ATION FROM PARTY NO.8. PARTIES 2, 4, 5 AND 6 AGREE TO ISSUE A FORMAL RESIGN ATION LETTER AND THE SETTLEMENT AGREEMENT SHALL CONSTITUTE A CESSATION O F THEIR DIRECTORSHIPS IN PARTY NO. 8. I.T.A. NO.43/C/2017 29 11. IN THE ACCOUNTS GREENLEAF DEVELOPERS AND BUILD ERS (INDIA) PVT. LTD., THIS IS AN AGREEMENT AMOUNT OF RS.4311015/-(RUPEE S FORTY THREE LAKHS ELEVEN THOUSAND & FIFTEEN-ONLY) SHOWN AS DUE TO M/S CAVALIER DEVELOPERS (INDIA) PVT LTD AS ON DATE. THIS IS SOUGHT TO BE SETTLED BY PASSING NECESSARY ADJUSTMENT ENTRIES IN THE BOOKS OF ACCOUNTS AND IS SUING NECESSARY RECEIPTS BY PARTY NO 8 TO THIS AGREEMENT AND IN RETURN PARTY NO. 7 SHALL ISSUE THE LEDGER COPY OF PARTY NO. 8 AFTER CLOSING THE BALANC E IN THE BOOKS OF PARTY NO. 7. 12. PARTIES AGREE TO EXECUTE TRANSFER INSTRUMENTS IN ACCORDANCE WITH THE COMPANIES ACT, 1956. IN DEFAULT WHEREOF, THIS SE TTLEMENT AGREEMENT SHALL OPERATE AS THE INSTRUMENT, AND ANY DEFAULT IN EXECU TING DEEDS AND DOCUMENTS SHALL NOT CREATE DIFFICULTY IN IMPLEMENTI NG THE TERMS OF THIS SETTLEMENT TO ALL ITS INTENTS AND EFFECTS IN FAVOUR OF ALL THE PARTIES AS STATED SPECIFICALLY IN THIS SETTLEMENT AGREEMENT. 13. IT IS AGREED BY THE COMPANY, PARTIES 2, 4, 5 AND 6 THAT THE PARTY NO. 1 STANDS RELIEVED, DISCHARGED AND RELINQUISHED FROM ANY AND ALL PAST, PRESENT AND FUTURE CLAIMS OR DEMANDS, OBLIGATIONS O R COURSE OF ACTION FOR COMPENSATORY OR PUNITIVE DEMANDS, COSTS, LOSSES, EX PENSES AND COMPENSATION BASED ON STATUTORY, CONTRACT THAT OR F ROM ANY OTHER LIABILITY OF WHATSOEVER NATURE, WHETHER CRYSTALLIZED !OR NOT. 14. PARTY NO. 3, THE COMPANY AND PARTIES 2, 4, 5 A ND 6 HEREBY RATIFYING ALL THE TRANSACTIONS DONE BY PARTY NO 1 IN. THE CAPACIT Y AS DIRECTOR OF PARTY NO 3 WITH RESPECT TO BANKS/LAND/ALL STATUTORY DEPARTME NTS /VENDORS/CLIENTS; DURING HIS TENURE AS DIRECTOR. PARTY NO: 1 AND PART Y NO: 2 HEREBY UNCONDITIONALLY WITHDRAW ALL ALLEGATIONS CONTAINED IN THEIR LETTER DATED 29 TH SEPTEMBER, 2010 AND PETITIONS FILED BEFORE ROC AND COMPANY LAW BOA RD. : ' 15. ALL THE TRANSFERS, CONVEYANCES AND OTHER DUTIE S AND RESPONSIBILITIES CAST UNDER THIS AGREEMENT SHALL BE COMPLETED BY THE PARTIES WITHIN A MAXIMUM PERIOD OF 10 DAYS FROM THE DATE OF THIS AGR EEMENT. THE PARTIES HEREBY ALSO AGREES, TO FILE A JOINT AFFIDAVIT OF CO MPROMISE BEFORE THE COMPANY LAW BOARD, CHENNAI BENCH AND REQUEST THE HON BLE BENCH TO ISSUE A ORDER RECORDING THE TERMS OF CONSENT WHILE DISPOSING OF THE COMPANY PETITION NO.91/2010 WITH LIBERTY TO APPLY IN CASE OF ANY DIF FICULTY IN IMPLEMENTING THE TERMS OF CONSENT ORDER IN ANY M ANNER WHATSOEVER TO THE EXTENT IT PERTAINS TO THE AFFAIRS OF PARTY NO. 3 THE COMPANY IN THE COMPANY PETITION. 16. SAVE AS AFORESAID, PARTIES .AGREE THAT IN RELA TION TO ANY DISPUTE ARISING UNDER THE SETTLEMENT AGREEMENT, PARTIES ARE ENTITLE D TO ENFORCE THE TERMS I.T.A. NO.43/C/2017 30 OF THIS AGREEMENT SPECIFICALLY AND ALL DISPUTES REL ATING TO THIS AGREEMENT [SAVE AS AFORESAID IN RELATION TO CONSENT ORDER OF COMPANY LAW BOARD ] SHALL BE SETTLED .THROUGH THE APPOINTMENT OF A SOLE ARBITRATOR OF THEIR MUTUAL CHOICE AND THE ARBITRATOR SHALL BE A PERSON NOT LES S THAN RANK OF RETIRED JUDGE OF HIGH COURT OR A RETIRED MEMBER OF THE COMP ANY LAW BOARD AND IN CASE OF ANY DISPUTE ON AS TO: CHOICE OF THE ARBITRA TOR, ANY PARTY IS ENTITLED TO INVOKE THE PROVISIONS OF THE ARBITRATION AND CON CILIATION ACT,1996 FOR THE PURPOSE OF CONSTITUTING THE ARBITRAL TRIBUNAL. THE PLACE OF ARBITRATION SHALL BE KOCHI. THE LANGUAGE OF ARBITRATION PROCEEDINGS SHALL BE ENGLISH.OR MALAYAIAM OR BOTH. FOR ALL PURPOSES, COURTS IN KOC HI SHALL HAVE EXCLUSIVE JURISDICTION TO THE EXCLUSION OF COURTS IN OTHER PLACES. 9.1 ON ENTERING INTO THE ABOVE SETTLEMENT AGREEME NT, SHRI K.J. PAUL WAS HOLDING 2 LAKHS FULLY PAID UP EQUITY SHARES OF RS. 10 EACH IN THE SHARE CAPITAL OF THE ASSESSEE COMPANY, AND UNCONDITIONALLY AGREED TO TRANSFER THE SAID SHARES EQUALLY IN FAVOUR OF MRS. LISSY KURIAKOSE, REPRESEN TATIVE OF LATE MR. K.J. KURIAKOSE AND MR. ROY JOSEPH, MR. M.J. LUIS, MR. C. J. MATHEW FOR A CONSIDERATION OF RS. 10 LAKHS FOR EVERY 50000 FULLY PAID EQUITY S HARES WHICH IS TO BE PAID TO MR. K.J. PAUL BY EACH PARTY MENTIONED ABOVE. 9.2 AS SEEN FROM THE ABOVE, THE SETTLEMENT AMOUNT WHICH WAS SAID TO BE PAID TO MR. K.J. PAUL IS RELATING TO TRANSACTIONS BETWEE N VARIOUS PARTIES MENTIONED HEREINABOVE. HOWEVER, THE ASSESSEE CLAIMED ENTIRE SAID AMOUNT OF RS.1.74 CRORES AS INCURRED TO PROMOTE THE BUSINESS OF THE A SSESSEE COMPANY. SINCE MR. K.J. PAUL, BEING A DIRECTOR OF THE ASSESSEE-COMPANY HAS BEEN CREATING DISTURBANCE IN BOARD MEETINGS AND ALSO NUISANCE WHI CH EFFECTED THE DAY-TO-DAY MANAGEMENT OF THE ASSESSEE-COMPANY SO AS TO GET RID OF HIM, THE COMPANY PAID I.T.A. NO.43/C/2017 31 THE SAID COMPENSATION OF RS.1.74 CRORES TO MR. K.J. PAUL. ACCORDING TO THE LD. AR, THIS WAS INCURRED WHOLLY AND EXCLUSIVELY FOR TH E PURPOSE OF THE BUSINESS OF THE ASSESSEE-COMPANY. IF IT IS SO, IT WAS THE DUTY OF THE ASSESSEE-COMPANY TO FURNISH THE NECESSARY DETAILS BEFORE THE AUTHORITIE S TO SUPPORT ITS CONTENTION. FROM THE EVIDENCE ON RECORD, IT CANNOT BE SAID THAT THE ASSESSEE MADE ANY SUCH ATTEMPT. EVEN THE SETTLEMENT AGREEMENT DOES NOT IN ANY MANNER SUPPORT THE PRESENT ARGUMENT OF THE ASSESSEES COUNSEL. IN THE SETTLEMENT AGREEMENT, MR. K.J. PAUL SOLD HIS SHARES TO THE PARTIES FOR WHICH HE RECEIVED THE CONSIDERATION. OVER AND ABOVE, THE NECESSITY OF PAYMENT OF RS.1.74 CRORES TO MR. K.J. PAUL IS NOT AT ALL EXPLAINED IN THE SETTLEMENT AGREEMENT. FURTHER, BEFORE THE CIT(A), IT WAS STATED BY THE ASSESSEE THAT THE SAID AMOUNT HAS BEEN PAID FOR FORFEITING ALL HIS CLAIM IN THE ASSESSEE-COMPANY. IT IS NOT MENTIO NED IN THE SETTLEMENT AGREEMENT WHAT A CLAIM MR. K.J. PAUL IS HAVING IN T HE ASSESSEE-COMPANY OVER AND ABOVE 2 LAKHS OF SHARES WHICH HE HELD IN THE AS SESSEE-COMPANY. IT WAS ALSO THE ARGUMENT OF THE LD. AR THAT COMPENSATION PAID T O MR. K.J. PAUL WHO IS A DIRECTOR IN THE ASSESSEE-COMPANY, IS FOR THE LOSS O F OFFICE AND IT IS A REVENUE EXPENDITURE. IN A COMPANY, OTHER THAN PERMANENT DI RECTOR AUTHORIZED BY ARTICLE OF ASSOCIATION OF THE COMPANY, WOULD BE APPOINTED O N THE BASIS OF VOTING IN AGM WHICH IS DEPENDING UPON THEIR SHARE HOLDINGS. HENCE, THERE IS NO QUESTION OF LOSS OF OFFICE BY THE DIRECTOR AND PAYMENT OF CO MPENSATION IN THIS REGARD. IN OUR OPINION, WHEN K.J. PAUL SOLD HIS SHARE HOLDINGS IN THE ASSESSEE COMPANY, IT IS NOT CLEAR WHAT BEARING SUCH PAYMENT WOULD HAVE RESU LTED IN THE CONDUCT OF THE I.T.A. NO.43/C/2017 32 BUSINESS OF THE ASSESSEE COMPANY. IF THE SHARES O F MR. K.J. PAUL WERE PURCHASED BY OTHER DIRECTORS OF THE ASSESSEE- COMPA NY, SUCH TRANSACTIONS, WITHOUT ANY EVIDENCE TO INDICATE ITS OBJECT, CANNOT BE SAID TO HAVE HAD ANY BEARING ON THE BUSINESS INTERESTS OF THE ASSESSEE-C OMPANY. IF THE TRANSACTIONS EFFECTED WERE WITH THE SOLE INTENTION OF PROMOTING THE BUSINESS INTERESTS OF THE ASSESSEE-COMPANY, IT IS THE DUTY OF THE ASSESSEE TO PLACE NECESSARY EVIDENCE IN THIS REGARD. 9.3 ONE MORE REASON GIVEN BY THE CIT(A) TO DELETE THE ADDITION WAS THAT PAYMENT OF RS.1.74 CRORES WAS ADJUSTED OUT OF ADVA NCES GIVEN FOR THE PURCHASE OF LAND WHICH IS THE STOCK-IN-TRADE OF THE ASSESSEE -COMPANY AND THE APPROPRIATION OR ADJUSTMENT OF THE SAME IS TO BE CO NSIDERED AS REVENUE EXPENDITURE IN THE HANDS OF THE ASSESSEE-COMPANY WH ICH IS TOTALLY MISCONSTRUED CONCEPT FOR WHICH THERE IS NO LEGAL SANCTION TO PRO VE THE APPROPRIATION OF ADVANCE GIVEN FOR PURCHASE OF STOCK-IN-TRADE WHICH WOULD RESULT IN REVENUE EXPENDITURE. IT IS ALWAYS DEPEND UPON NATURE OF TRA NSACTIONS AND NOT AT ALL DEPEND UPON PREVIOUS TRANSACTIONS ENTERED BY THE AS SESSEE. ACCORDINGLY, THIS PLEA OF THE LD. AR IS REJECTED. 9.4 FINALLY, THERE IS NO EVIDENCE BROUGHT ON REC ORD BY THE ASSESSEE TO SUGGEST THAT BUT FOR PAYMENT OF COMPENSATION OF RS.1.74 COR ES TO MR. K.J. PAUL, HE WOULD NOT HAVE RESIGNED. I.T.A. NO.43/C/2017 33 9.5 FURTHER IN THE CASE OF TRAVANCORE TEA ESTATES CO. LTD. VS. CIT (1985) 154 ITR 745, THE HIGH COURT OF KERALA HELD AS UNDER: THE DECISION OF THE BOARD TO PAY COMPENSATION WAS SUBSEQUENT TO THE AGREEMENT OF THE THREE DIRECTORS TO RESIGN FROM THE BOARD. THE AMOUNTS WERE PAID AS COMPENSATION FOR LOSS OF OFFICE. THER E WAS NOTHING TO SHOW THAT THE COMPENSATION WAS PAID FOLLOWING A PRIOR UN DERSTANDING WITH THE THREE DIRECTORS AS AN INDUCEMENT TO RESIGN. THERE WAS NO SUGGESTING THAT, BUT FOR THE COMPENSATION PAID, THE THREE DIRE CTORS WOULD NOT HAVE RESIGNED. THERE WAS NO EVIDENCE TO SHOW THAT THE EXPENDITURE WAS INCURRED IN THE PROCESS OF STRENGTHENING OR PRUNING OR PRESERVING OR PROMOTING THE BUSINESS OF THE ASSESSEE. IN FACT TH E GROUNDS OF APPEAL BEFORE THE TRIBUNAL INDICATED THAT EVEN, ACCORDING TO THE ASSESSEE, IT WAS A RETRENCHMENT COMPENSATION CONSEQUENT ON CERTAIN CHANGES IN THE MANAGEMENT OF THE COMPANY. IT WAS AN EX GRATIA PA YMENT FOR, IT WAS NOT MADE IN TERMS OF OR PURSUANT TO A CONTRACT OR U NDER COMPULSION OF ANY STATUTE OR OTHER CIRCUMSTANCES. THERE WAS NOTH ING TO SUGGEST THAT THE THREE DIRECTORS RESIGNED INVOLUNTARILY. THE AS SESSEE HAD AT NO STAGE INDUCED OR ENCOURAGED OR COMPELLED THEM TO RESIGN. THERE WAS NOTHING TO SHOW THAT THE AMOUNTS PAID WERE CONSEQUENT UPON AN EARLIER DECISION. THE RESIGNATION OF THE THREE DIRECTORS HAD NOT RESU LTED IN ANY SAVING OF EXPENDITURE, FOR IN THEIR PLACES THREE NEW DIRECTOR S HAD BEEN APPOINTED. THE PAYMENTS MADE SUBSEQUENT TO THE DECISION OF THE THREE DIRECTORS TO RESIGN DID NOT THEREFORE QUALIFY FOR DEDUCTION UNDE R S. 37(1). 9.6 IN OUR OPINION, THE PAYMENT OF COMPENSATION T O MR. K.J. PAUL CANNOT BE CONSIDERED IN THE HANDS OF THE ASSESSEE AS REVENUE EXPENDITURE. ACCORDINGLY, THIS GROUND OF APPEAL RAISED BY THE REVENUE IS ALLO WED. I.T.A. NO.43/C/2017 34 10. IN THE RESULT, THE APPEAL OF THE REVENUE IS A LLOWED. PRONOUNCED IN THE OPEN COURT ON 15 TH MARCH, 2018. SD/- SD/- ( GEORGE GEORGE K.) (CHAN DRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 15 TH MARCH, 2018 GJ COPY TO: 1. M/S. TRINITY ARCADE P. LTD., TRINITY HOUSE, OPPO SITE CHENGAMPUZHA PARK, EDAPALLY P.O., KOCHI-682 018. 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CORPOR ATE CIRCLE-2(1), KOCHI. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS)-I, KOCHI 4. THE PR. COMMISSIONER OF INCOME-TAX, KOCHI 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRA R) I.T.A.T. , COCHIN