VAIPA PHARMACEUTICALS P.LTD, MUMBAI V. ASST CIT 8(3), MUMBAI

ITA 5226/MUM/2012

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3344 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-01-2016
• Appeal Filed By: Assessee
• Bench Allotted: F
• Next Hearing Date: 23-02-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 17-08-2012
• Court: TRIBUNAL
• Assessee Lawyers: RASHESH V PAREKH
• Keywords: Business expenditure; Earning of tax free income; Revenue expenditure
• Section: 143(3); 14A

Judgement Text

, , F, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES F, MUMBAI , , , BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER, AND SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER ITA NO.5226/MUM/2012 ASSESSMENT YEAR: 2009-10 VAIPA PHARMACEUTICALS P. LTD. A-607, 6 TH FLOOR, 215 ATRUIM CHAKALA, ANDHERI KURLA ROAD, ANDHERI (E), MUMBAI-400099 / VS. AC IT - 8 (3) , 2 ND FLOOR, B WING, AAYAKAR BHAVAN MUMBAI -400001 (ASSESSEE ) (REVENUE) P.A. NO. AAACV3767A / ASSESSEE BY SHRI RASHESH V. PAREKH (AR) / REVENUE BY SHRI SANJEEV KASHYAP (DR) ! ' / DATE OF HEARING : 06/01/2016 ! ' / DATE OF ORDER: 20/01/2016 / O R D E R PER ASHWANI TANEJA (ACCOUNTANT MEMBER): THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF LD. COMMISSIONER OF INCOME TAX (APPEALS)-1 8, MUMBAI {(IN SHORT CIT(A)}, DATED 11.06.2012 FOR THE ASSESSMENT YEAR 2009-10, PASSED AGAINST THE ASSESSM ENT VAIPA PHARMACEUTICALS 2 ORDER PASSED BY THE ASSESSING OFFICER (IN SHORT AO ) U/S 143(3) OF THE ACT, ON THE FOLLOWING GROUNDS: 1.COMMISSIONER OF INCOME TAX (A) HAS ERRED IN CONF ORMING THE DISALLOWING OF RS.1,85,10,887/- MADE BY THE ASSESSING OFFICER U/S 14A READ WITH RULE 8 THOUGH T HE COMPANY HAS NOT SPENT THE SAID AMOUNT TO EARN EXEMP T INCOME. 2.COMMISSIONER OF INCOME TAX (A) HAS ERRED IN CONCURRING WITH THE ASSESSING , OFFICER IN TREATING THE LEGAL EXPENSES OF RS.1,85,10,887/- AS OF CAPITAL NATURE/ AND NOT ALLOWING AS BUSINESS EXPENSES U/S.3 7(1) OF THE INCOME TAX ACT 1961. ' 3. WITHOUT PREJUDICE TO GROUNDS OF APPEAL NO.1 AND NO.2 THE LEGAL EXPENSES AS INCURRED BY ASSESSEE COMPANY SHOULD HAVE ALLOWED AS EXPENSES TO EARN CAPITAL GAI N AND COMMISSIONER OF INCOME TAX (A) EARNED IN NOT TREATI NG SAID EXPENSES BE ALLOWABLE AS EXPENSES INCURRED WHOLLY A ND EXCLUSIVELY TO EARN CAPITAL GAIN FROM TRANSFER OF S HARES. 2. DURING THE COURSE OF HEARING, ARGUMENTS WERE MADE B Y SHRI RASHESH V. PAREKH, AUTHORISED REPRESENTATIVE ( AR) ON BEHALF OF THE ASSESSEE AND BY SHRI SANJEEV KASHYAP, DEPARTMENTAL REPRESENTATIVE (DR) ON BEHALF OF THE R EVENUE. 3. THE ONLY EFFECTIVE ISSUE RAISED IN THIS APPEAL IS WITH REGARD TO DISALLOWANCE FOR A SUM OF RS.1,85,10,887/- BEING THE AMOUNT OF LEGAL COSTS ON ACCOUNT OF FEES PAID TO M/ S. AZB & PARTNERS. VAIPA PHARMACEUTICALS 3 3.1. THE BRIEF FACTS NOTED FROM THE RECORDS BROUGHT BEF ORE US ARE THAT DURING THE YEAR UNDER CONSIDERATION THE AS SESSEE COMPANY WAS ENGAGED IN THE MANUFACTURE AND PROCESSI NG OF AYURVEDIC MEDICINES. THE ASSESSEE COMPANY HAD A SUB STANTIAL STAKE IN M/S ZANDU PHARMACEUTICAL WORKS LTD. (IN SH ORT ZANDU). DURING THE YEAR UNDER CONSIDERATION, ONE EM AMI GROUP ACQUIRED SUBSTANTIAL HOLDING OF ZANDU, AND AS REQUIRED UNDER SEBI LAW, IT WAS REQUIRED TO ACQUIRE FURTHER 20% STAKE FROM OPEN MARKET BY WAY OF OPEN OFFER. IT MADE OPEN OFFER OF RS.7,315/- PER SHARE IN JUNE 2008. THE ASSESSEE COM PANY, WITH A VIEW TO SAFEGUARD ITS INVESTMENT AND ITS BUS INESS RELATIONSHIP WITH ZANDU, APPROACHED VARIOUS TOP LAW YERS AS WELL AS FINANCIAL ADVISORS TO EVALUATE THE MAXIMUM VALUE THAT IT COULD GET AND ALSO TO INITIATE LEGAL METHODOLOGY TO PREVENT EMAMI TO BUY SHARES AT SUCH LOW PRICE OF RS.7,315 /- PER SHARES. IN THIS MANNER, ACTUAL TAKE OVER PRICE WAS INCREASED TO RS.16,500/- PER SHARE, THEREBY LEADING TO A SIGNIFI CANT INCREASE IN CAPITAL GAINS INCOME OF THE ASSESSEE CO MPANY FOR RS.17.05 CRORES, APPROXIMATELY. FOR FIGHTING THIS L EGAL BATTLE, THE ASSESSEE COMPANY AVAILED THE BENEFIT OF PROFESS IONAL SERVICES OF M/S AZB & PARTNERS AND PAID FEE FOR THE LEAGAL SERVICES AVAILED BY IT. THE FEE SO PAID WAS CLAIMED AS LEGAL EXPENSES. BUT AO DISALLOWED THESE EXPENSES BY INVOK ING THE PROVISIONS OF SECTION 14A ON THE GROUND THAT EXPENS ES WERE INCURRED TO SAFEGUARD THE INVESTMENT-INTEREST OF TH E ASSESSEE AND THAT INVESTMENT WOULD YIELD AN EXEMPT INCOME IN THE FORM OF DIVIDEND INCOME. VAIPA PHARMACEUTICALS 4 3.2. BEING AGGRIEVED, THE ASSESSEE FILED AN APPEAL BEFO RE LD. CIT(A), WHERE NO RELIEF WAS GIVEN AND DISALLOWANCE MADE BY THE AO WAS CONFIRMED. 3.3. STILL BEING AGGRIEVED, THE ASSESSEE FILED AN APPEA L BEFORE THE TRIBUNAL. 3.4. DURING THE COURSE OF HEARING, IT HAS BEEN SUBMITTE D ON BEHALF OF THE ASSESSEE THAT AOS ALLEGATION IS TOTA LLY IRRATIONAL, AS NO PERSON WOULD INCUR SUCH HUGE EXPENSES TO MERE LY SAFEGUARD THEIR DIVIDEND INCOME. THE LEGAL FEES WER E PAID TO SAFEGUARD THE INVESTMENT MADE BY THE ASSESSEE. IT W AS FURTHER SUBMITTED THAT THE ASSESSEE WANTED TO PROTECT ITS B USINESS WITH ZANDU. THUS, THE IMPUGNED EXPENSES HAVE BEEN I NCURRED TO MAINTAIN THE BUSINESS AND TO PROTECT THE INVESTM ENT. IT SHOULD BE ALLOWED AS REVENUE EXPENDITURE. ALTERNATI VELY, IT CAN BE ALLOWED TO BE ADDED TO THE COST OF SHARES TOWARD S COST OF IMPROVEMENT. ON THE OTHER HAND, LD. DR SUPPORTED TH E ORDERS OF THE LOWER AUTHORITIES. 3.5. WE HAVE GONE THROUGH THE ORDERS OF THE LOWER AUTHO RITIES AND SUBMISSIONS MADE BEFORE US BY BOTH THE SIDES. A T THE VERY OUTSET, IT IS NOTED BY US THAT LD. CIT(A) HAS GIVEN A FINDING IN LAST PARA OF HIS ORDER THAT THE IMPUGNED EXPENSES R ELATES TO THE ASSESSEE COMPANY. THE SAID PARA IS REPRODUCED B ELOW FOR THE SAKE OF READY REFERENCE: THE CHALLENGE OF THE APPELLANT TO THE FACT THAT AO HAS ERRED IN ASSUMING EXPENDITURE INCURRED BY THE APPEL LANT IN VAIPA PHARMACEUTICALS 5 RELATION TO THEIR INTEREST IN ZANDU PHARMACEUTICALS WORKS LTD. (ZPWL)- IS LIABILITY OF ZPWL-BORNE BY THE APPE LLANT-IS CORRECT BECAUSE THE EXPENDITURE OF RS.1,85,10,887/- HAS BEEN SHOWN BY THE APPELLANT TO HAVE BEEN INCURRED B Y HIM-SINCE, M/S. ABZ & PARTNERS HAVE IN LETTER DATED 31.03.2009 REQUIRED THE APPELLANT TO MAKE PAYMENT O F THIS BILL- WHICH CLEARLY SHOW THAT THIS EXPENDITURE RELATES TO THE APPELLANT. HENCE, TO THIS EXTENT ONLY- THE P LEA OF THE APPELLANT IS ACCEPTED. 3.6. FROM THE PERUSAL OF THE ABOVE, IT IS CLEAR THAT GE NUINENESS OF THE EXPENSES IS NO MORE IN DOUBT. IT IS ALSO NOT IN DOUBT THAT IMPUGNED EXPENSES RELATE TO THE ASSESSEE. THE AFORESAID FINDINGS HAVE NOT BEEN CHALLENGED BY THE REVENUE BY WAY OF APPEAL OR CROSS OBJECTIONS. THUS, ADMITTED POSITION IS THAT THE EXPENSES PERTAIN TO THE ASSESSEE AND THESE ARE GENU INE. UNDER THESE FACTS AND CIRCUMSTANCES, LIMITED QUESTION THA T REMAINS TO BE DECIDED BY US IS THAT WHETHER THE ASSESSEE CA N CLAIM BENEFIT OF THESE EXPENSES IN ANY MANNER. THE UNDISP UTED FACTS BROUGHT BEFORE US ARE THAT LEGAL FEES HAS BEEN PAID TO M/S AZB & PARTNERS (ADVOCATES AND SOLICITORS) FOR PROTECTIN G THE INVESTMENT OF THE ASSESSEE WITH ZANDU. FURTHER, AN ADMITTED FACT IS THAT AS A RESULT OF THE AFORESAID LEGAL EXE RCISE, THE ASSESSEE EARNED LARGER AMOUNT OF CAPITAL GAINS AS I NITIAL OPEN OFFER OF RS.7,315/- PER SHARE WAS EVENTUALLY ENHANC ED TO RS.16,500/- PER SHARE. THE TOTALITY OF FACTS AND CI RCUMSTANCES OF THE CASE AND DOCUMENTARY EVIDENCES BROUGHT BEFOR E US CLEARLY SUGGEST THAT UNDOUBTEDLY, THERE WAS IMPROVE MENT IN VAIPA PHARMACEUTICALS 6 THE VALUE OF THE ASSET BEING SHARES OF ZANDU HELD B Y THE ASSESSEE COMPANY. DURING THE COURSE OF HEARING, BOT H THE PARTIES FAIRLY AGREED THAT EVEN IF IMPUGNED EXPENSE S MAY NOT BE ALLOWABLE AS REVENUE EXPENSES BUT THESE WERE, FO R SURE, AIMED FOR PROVIDING ENHANCEMENT TO THE VALUE OF THE SHARES. UNDER THESE CIRCUMSTANCES, WE DO NOT FIND ANY HESIT ATION IN HOLDING THAT THESE EXPENSES SHOULD BE ADDED TO THE COST OF SHARES AS COST OF IMPROVEMENT. THE AO IS DIRECTED T O RECOMPUTE THE AMOUNT OF CAPITAL GAIN EARNED BY THE ASSESSEE. ACCORDINGLY, GROUND NUMBER 3 IS ALLOWED AND GROUND NO.1 AND 2 ARE DISMISSED. 4. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH JANUARY, 2016. SD/- (SANJAY GARG ) SD/- (ASHWANI TANEJA) '# / JUDICIAL MEMBER $# / ACCOUNTANT MEMBER MUMBAI; $ DATED :20 /01/2016 CTX? P.S/. .. %'&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. & '( / THE APPELLANT 2. )*'( / THE RESPONDENT. 3. + + , ( & ) / THE CIT, MUMBAI. 4. + + , / CIT(A)- , MUMBAI 5. /0 ) 1 , + &' 12 , / DR, ITAT, MUMBAI VAIPA PHARMACEUTICALS 7 6. 3 4 / GUARD FILE. / BY ORDER, * /& ) //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI