Dy. CIT, Circle 1(1), Pune V. Bramha Bazaz Hotels & Resorts Ltd., Pune

ITA 774/PUN/2013

• Counselvise Citation: 77424514 RSA 2013
• Duration Of Justice: 1 year(s) 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-12-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 02-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K MODI; P S NAIK
• Keywords: Capital asset; Depreciation; Business expenditure; Competent authority; Scheme of amalgamation; Revenue expenditure; Capital expenditure
• Section: 43B; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 772/PN/2013 (ASSESSMENT YEAR 2007-08) DY.CIT, CIRCLE-1(1), PUNE .. APPELLANT VS. BRAMHA CORP. HOTELS & RESORTS LTD., C/O. HOTELS LE-MERIDIEN, RBM ROAD, PUNE 411001 PAN NO. AAACB7054L .. RESPONDENT ITA NO. 773 & 774/PN/2013 (ASSESSMENT YEARS 2008-09 & 2009-10) DY.CIT, CIRCLE-1(1), PUNE .. APPELLANT VS. BRAMHA BAZAZ HOTELS & RESORTS LTD., C/O. HOTELS LE-MERIDIEN, RBM ROAD, PUNE 411001 PAN NO. AAACB7054L .. RESPONDENT ASSESSEE BY : SHRI KISHOR PHADKE REVENUE BY : SHRI A.K. MODI & SHRI P.S. NAIK DATE OF HEARING : 07-10-2014 DATE OF PRONOUNCEMENT : 02-12-2014 ORDER PER R.K. PANDA, AM : THE ABOVE 3 APPEALS FILED BY THE REVENUE ARE DIRECT ED 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 TOGETH ER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. 2 ITA NO.772/PN/2013 (BRAMHA CORPS HOTELS & RESORTS L TD., (A.Y. 2007-08) : 2. GROUNDS OF APPEAL NO. 1 TO 5 BY THE REVENUE READ S AS UNDER : 1. THE ORDER OF THE ID. COMMISSIONER OF INCOME-TAX ( APPEALS) IS CONTRARY TO LAW AND TO THE FACTS AND CIRCUMSTANCES O F THE CASE. 2. THE ID. COMMISSIONER OF INCOME-TAX (APPEALS) GROSSLY ERRED IN HOLDING THAT IN VIEW OF THE DECISION IN THE CASE O F ECHJAY INDUSTRIES LTD. VS. DCIT, 88 TTJ 108(MUM), THE PREMIA OF RS.2,73,68,189/- AND RS.5,43,00,000/- PAID BY THE ASSESSE E TO MAC CHARLES(L) LTD AND THE GUPTA GROUP RESPECTIVELY ON AC COUNT OF BUY- BACK OF SHARES ARE IN THE NATURE OF REVENUE EXPENDITU RE. 3. THE ID. COMMISSIONER OF INCOME-TAX(APPEALS) GROSSLY E RRED IN DECIDING THE ISSUE IN FAVOUR OF THE ASSESSEE WITHOUT A PPRECIATING THAT THE RATIO OF THE DECISION OF THE HON'BLE SUPREM E COURT IN THE CASE OF BROOK BOND INDIA LTD. VS. CIT, 225 ITR 798, I S CLEARLY APPLICABLE TO THE ISSUE IN APPEAL. 4. THE ID. COMMISSIONER OF INCOME-TAX (APPEALS) GROSSLY ERRED IN HOLDING THE PREMIUM PAID ON BUYING BACK OF SHARES AS REVENUE EXPENSES WHEN SEC. 77A OF THE COMPANIES ACT, 1956 PROV IDES FOR SUCH PURCHASE(BUYBACK) FROM: I) ITS FREE RESERVES; OR II) THE SECURITIES PREMIUM ACCOUNT; OR III) THE PROCEEDS OF ANY SHARES OR OTHER SPECIFIED. 5. THE ID. COMMISSIONER OF INCOME-TAX (APPEALS) GROSSLY ERRED IN HOLDING THAT THE PREMIUM PAID ON BUYING BACK OF SHARES AS REVENUE EXPENSES WHEN SHARE PREMIUM RECEIVED IS NOT A REVENUE RECEIPT, AND THE DIRECTION GIVEN BY THE ID. COMMISSIO NER OF INCOME-TAX (APPEALS) WOULD LEAD TO AN ABSURDITY WHERE RECEIPTS ARE CONSIDERED AS 'REVENUE' IN NATURE AND PAYMENTS AR E CONSIDERED AS 'CAPITAL' IN NATURE UNDER THE SAME HEAD OF ACCOUNTS. 2.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSE SSEE IS A COMPANY AND FILED ITS RETURN OF INCOME ON 31-10-2007 DECLAR ING TOTAL INCOME OF RS.11,88,20,036/-. DURING THE COURSE OF ASSESSM ENT PROCEEDINGS THE AO NOTED FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE THAT IT HAS CLAIMED DEDUCTION OF RS.8,16,68,190 ON ACCOU NT OF PREMIUM PAID ON BUY BACK OF SHARES FROM THE MAC CHARLES GRO UP AND THE GUPTA GROUP. HE OBSERVED FROM THE DETAILS FURNISHED BY THE 3 ASSESSEE THAT THE COMPANY WAS FORMED IN THE YEAR 19 87 BY THE AGARWAL GROUP WHO WERE THEN THE ONLY SHAREHOLDERS. FOLLOWING A TIE UP WITH THE MERIDIEN GROUP WHO DESIRED TO CREAT E A WORLD CLASS HOTEL AND TO ENSURE ADEQUACY OF FUNDS FOR THE FIVE STAR DELUXE HOTEL PROJECT, THE AGARWAL GROUP JOINED HANDS WITH THE MA C CHARLES (INDIA) LTD. GROUP AND THE GUPTA GROUP. BETWEEN THE YEARS 2001 TO 2003, SEVERAL CIVIL AND CRIMINAL CASES WERE FILED B Y MAC CHARLES (INDIA) LTD AGAINST THE AGARWAL FAMILY AND THE COMP ANY DUE TO CERTAIN DISPUTES. FURTHER, THE GUPTA GROUP HAD ALSO FILED CASES AGAINST THE COMPANY ALLEGING MISMANAGEMENT ETC. THE MATTER WAS TAKEN UP BEFORE THE COMPANY LAW BOARD DELHI BY BOTH THE GROUPS BY INVOKING SECTIONS 397 398 OF THE COMPANIES ACT 1 956. THE SUIT FILED BY MAC CHARLES (INDIA) LTD AGAINST THE COMPAN Y WAS NUMBERED COMPANY PETITION NO. 58 OF 2002. SIMILAR S UIT WAS FILED BY THE VIJAY GUPTA GROUP BEARING COMPANY PETITION N O. 106 OF 2006. THE CLB PASSED THE ORDER ON 23.7.2002 RELATIN G TO COMPANY PETITION NO. 58 OF 2002 WHEREIN THE COMPANY WAS PER MITTED TO BUY BACK 1,07,50,000 SHARES FOR AN AMOUNT OF RS.19,21,0 0,000/- WHICH HAD BEEN PAID BY THE MAC CHARLES GROUP OVER A PERIO D OF 36 MONTHS. THE INTEREST AT SPECIFIED RATES WAS DIRECTE D TO BE PAID ON A SUM OF RS. 1,85,95,007/- BEING THE CONSIDERATION FO R THE BALANCE 11,52,107 SHARES WHICH REMAINED TO BE TRANSFERRED T O MAC CHARLES GROUP. DUE TO THE DISPUTES WITH THE RECALCITRANT SH AREHOLDERS THE MODERNIZATION, EXPANSION AND OTHER OBLIGATIONS COUL D NOT BE ADDRESSED. THEREFORE, THE COMPANY DECIDED TO PROTEC T ITS INTEREST BY 4 COMPLYING WITH THE COMPANY LAW BOARD'S DECISION TO BUY BACK THE SHARES OF THE RECALCITRANT GROUP AT A STIPULATED PR ICE WHICH INCLUDED PREMIUM OVER AND ABOVE THE FACE VALUE OF THE SHARES . FURTHER, THE COMPANY ENTERED INTO AGREEMENT WITH VIJAY GUPTA'S G ROUP 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 RS.9,05,00,000/- ON PRO RATA BASIS. THIS COMPROM ISE WAS SUBSEQUENTLY RATIFIED BY THE COMPANY LAW BOARD IN I TS ORDER DATED 28.11.2006. THE SALE CONSIDERATION WAS ARRIVED AT T HE BASIS OF PAYMENT OF RS.25 PER SHARE AS AGAINST THE FACE VALU E OF RS.10 PER SHARE. THEREFORE, A PREMIUM OF RS.5,43,00,000/- WAS PAID TO THE GUPTA GROUP AND AN AMOUNT OF RS.2,73,68,189/- WAS P AID TO THE MAC CHARLES GROUP. THE ASSESSEE CLAIMED THE SAME AS REVENUE EXPENDITURE. 2.2 THE ASSESSING OFFICER DISALLOWED THE REVENUE E XPENDITURE OF RS.8,16,68,189 AS CLAIMED BY THE ASSESSEE FOR THE A .Y. 2007-08 TOWARDS PREMIUM INCURRED ON BUY BACK OF SHARES ON T HE GROUND THAT THE EXPENSES INCURRED WERE NOT FOR THE PURPOSES OF PRESERVATION OR PROTECTION OF ASSETS AND INTERESTS OF THE COMPANY. IT IS ONLY ONE GROUP OF SHAREHOLDERS VIZ. AGARWAL FAMILY WHO STAND S TO BENEFIT BY THE COMPROMISE BY BECOMING THE MAJORITY SHAREHOLDER S. HE ALSO ANALYSED THE FINANCIAL FUNCTIONING AND THE PROFITAB ILITY OF THE COMPANY AND HELD THAT SINCE 2000-01 THE COMPANY WAS SHOWING A GRADUAL IMPROVEMENT IN PROFITABILITY. THE LOSSES AR ISING IN THE INITIAL YEARS WERE DUE TO THE CREATION OF INFRASTRU CTURE, DEPRECIATION 5 AND OVERHEADS, WHICH WAS CAUSED BY HEAVY EXPENDITUR E AND GRADUALLY SETTLED DOWN OVER TIME. HE ALSO HELD THAT THE ASSESSEES CONTENTION THAT THE FUNCTIONING OF BUSINESS HAD BEE N SMOOTHENED BY THE EXTINGUISHMENT OF SHARE HOLDING OF MAC CHARLES AND GUPTA GROUP ONLY GOES TO SHOW THAT THE COMPANY HAS BEEN G RANTED AN ENDURING AND LONG LASTING ENDURING BENEFIT EVEN THO UGH NO NEW ASSETS ARE CREATED. HE RELIED ON CERTAIN JUDICIAL DECISIONS TO SHOW THAT EXPENDITURE RELATED TO INCREASE OF SHARE CAPIT AL BASE WHICH CHANGES THE CAPITAL STRUCTURE OF THE COMPANY HAS TO BE DISALLOWED ON CAPITAL ACCOUNT. 3. IN APPEAL, THE LD.CIT(A) ALLOWED THE CLAIM OF EX PENDITURE ON ACCOUNT OF PREMIUM PAID ON BUY BACK OF SHARES AS RE VENUE EXPENDITURE BY HOLDING AS UNDER: 4.6. I HAVE CONSIDERED THE SUBMISSIONS MADE BY THE APPE LLANT. THE HOTEL ACTIVITY OF THE COMPANY WAS APPARENTLY STARTED IN 1998-99. BECAUSE THE COMPANY WAS INCURRING HUGE LOSSES AND WAS IN NEED OF CONTINUOUS CAPITAL INFUSION FOR WORKING CAPITAL AND C APITAL EXPENDITURE, THE PROMOTERS OF THE COMPANY NAMELY AGA RWAL GROUP ENTERED INTO SHAREHOLDER AGREEMENT WITH ONE MAC CHAR LES GROUP WHO OWNED AND OPERATED THE FIVE STAR HOTEL IN BANGAL ORE STYLED LE MERIDIEN, BANGALORE. HOWEVER, AFTER SOME TIME, THE D ISPUTES REGARDING CONTROL AND MANAGEMENT AROSE BETWEEN THE T WO PARTIES. THE MAC CHARLES GROUP SPREAD MALICIOUS INFORMATION ABO UT THE PROMOTERS OF THE COMPANY TO THE BANKERS, REGISTRAR OF COMPANIES AND THE LE MERIDIEN GROUP. THE MAC CHARLES GROUP ALSO FILED CRIMINAL SUIT 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 MAGI STRATE, 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, T HE CLB PASSED FINAL ORDERS DATED 23.7.2004 AND 14.1.2005 DIRECTIN G REFUND OF RS.19,31,00,000 TO THE MAC CHARLES GROUP IN 36 MONTHL Y EQUAL INSTALLMENTS ALONG WITH SIMPLE INTEREST @ 4 % THEREON. FURTHER, THE APPELLANT COMPANY WAS PERMITTED TO BUY BACK EQUITY SH ARES 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 ATTR ACT PROVISIONS OF SECTION 77 OF COMPANIES ACT 1956. 6 4.7. IN RESPECT OF THE BUY BACK OF THE SHARES OF GUPTA GROUP WHO WERE ALSO AGITATING BEFORE THE CLB WITH RESPECT TO TH E 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 GU PTA GROUP HAS SOUGHT A CONSENT ORDER FROM THE CLB IN RESPECT OF THE AMICABLE SETTLEMENT ARRIVED AT FOR RESOLUTION OF ALL DISPUTES BE TWEEN THE TWO PARTIES VIDE MOD/ AGREEMENT DATED 27.11.2006. AS PER THIS AGREEMENT GUPTA FAMILY WHICH OWNED 36,20,000 SHARES W OULD TRANSFER THE ENTIRE SHARES @ RS.25 PER SHARES FOR TOTAL SALE CONSIDERATION OF RS.9,05,00,000 ONLY, AS AGAINST THE FA CE VALUE @ RS.10 PER SHARE. THEREFORE, A PREMIUM OF RS.5,43,00,00 0 WAS TO BE PAID TO THE GUPTA GROUP. THE ORDER OF THE CLB DATED 28LL 1.2006 PURSUANT TO THIS MOD STATES AS UNDER: 'THE PETITIONERS HAVE FILED A JOINT APPLICATION SEE KING FOR DISPOSAL OF THE PETITION IN TERMS OF AN AGREEMENT DATED 27.11.2 006. THE PETITION IS DISPOSED OF IN TERMS OF SAID AGREEMENT WHICH WIL L FORM PART OF THIS ORDER. THE COMPANY IS PERMITTED TO PURCHASE THE SHA RES OF THE PETITIONER AND REDUCE ITS SHARE CAPITAL ACCORDINGLY .' THE DOCUMENTS EVIDENCING THE ABOVE HAVE BEEN FILED B EFORE ME AND ARE PART OF THE RECORD. THE LEARNED AR HAS STATED THA T ALL THE DOCUMENTS RELATING TO COMPANY PETITIONS 58 OF 2002, 1 06 OF 2006, MOD BETWEEN THE COMPANY AND SHRI VIJAYKUMAR GUPTA D ATED 26.11.2006 AND THE CLB ORDERS DATED 23.7.2004, 14.1. 2005 AND 28.11.2006 WERE FILED BEFORE THE ASSESSING OFFICER WHO HAS HOWEVER OBJECTED THE COPIES OF THE ORIGINAL CRIMINAL CASES/ CIVIL CASES WERE NOT FILED IN HIS OFFICE. HOWEVER, HE SEEMS TO HAVE ACCEPTED THE FACTS RELATING TO THE LITIGATION SINCE H E NOTES AT PARA 11.3 OF THE ORDER '.......IT TRANSPIRES THAT THE COMP ANY WAS DRAGGED INTO LITIGATION BETWEEN THE SHAREHOLDERS, WITHOUT ANY REASON. HOWEVER, THE ISSUE REMAINS, CAN SUCH EXPENDITURE BE ALL OWED AS DEDUCTION.' 4.8. THE LEARNED AR HAS PLACED RELIANCE ON THE DECISI ON OF THE MUMBAI BENCH OF ITAT IN ECHJAY INDUSTRIES LTD. VS DCIT REPORTED IN 88 TTJ 1089 WHICH SUBSEQUENTLY WAS AFFIRMED BY THE HON 'BLE BOMBAY HIGH COURT BY DISMISSING THE APPEAL FILED BY RE VENUE BY ITS ORDER DATED 30.7.2008 IN ITA NO. 237 OF 2004. HE HA S ALSO RELIED UPON THE ITAT MUMBAI BENCH C DECISION IN CHEMOSYN LTD. VS ACIT REPORTED IN 25 TAXMANN.COM 325 WHEREIN IT WAS HELD T HAT PURCHASE OF SHARES OF RECALCITRANT GROUP OF SHARE HOLDE RS WAS AN EXPENDITURE OUT OF BUSINESS EXPEDIENCY WHERE THE ASSESSEE DID NOT OBTAIN ANY RIGHT OR ADVANTAGE WHICH WOULD AFFECT IT S CAPITAL STRUCTURE. THE PURCHASE OF SHARES OF THE RECALCITRANT SHAREHOLDERS AT A PREMIUM IN ACCORDANCE WITH THE AGREEMENT BEFOR E HIGH COURT WAS AN EXPENDITURE TO ENSURE SMOOTH RUNNING OF THE BUSI NESS OF THE COMPANY AND THEREFORE, ON REVENUE ACCOUNT. I HAVE P ERUSED THE TWO DECISIONS OF THE MUMBAI ITAT AND THE HON'BLE BOMBAY H IGH COURT CITED BY THE LEARNED AR. IN THE ECHJAY INDUSTRIES CASE , A DISPUTE BETWEEN TWO WARRING GROUP OF SHAREHOLDERS WAS TERMINAT ED CONSEQUENT TO A CONSENT TERM DRAWN UP BY THE SHAREHOLD ERS AND APPROVED BY THE BOMBAY HIGH COURT WITH THE DIRECTIO NS THAT THE COMPANY WOULD PURCHASE THE SHARES OF SOME OF THE SHAREHO LDERS 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 7 398 R.W.S. 402 OF THE COMPANIES ACT. THE ITAT RELIED ON CERTAIN CASE LAWS TO HOLD THAT WHILE ACCEPTING A COMPROMISE SETTLEM ENT 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 LA WS RELIED UPON BY THE ASSESSING OFFICER ARE HELD TO BE INAPPLICABLE TO THE FACTS OF THE INSTANT CASE AS THEY PERTAIN TO EXPENSES INCURRED T O INCREASE THE CAPITAL BASE OF THE ASSESSEE. THE DETAILED JUSTIFICATION FOR HOLDING SO CAN BE SEEN FROM THE APPELLANT'S SUBMISSIONS REPRODUCED I N PARA 4.5. SO FAR AS THE PAYMENTS OF RS.2,73,68,190 TO MAC C HARLES (I) LTD. IS CONCERNED, SINCE THE SAME WAS MADE IN PURSUANCE TO COMPROMISE ORDER AND DULY RATIFIED BY THE COMPANY LA W BOARD, THE RATIO OF THE DECISION IN ECHJAY INDUSTRIES LTD. WO ULD APPLY AND THE AMOUNT IN QUESTION IS HELD TO BE REVENUE EXPENDIT URE. SIMILARLY, THE PAYMENT OF RS.5,43,00,000 PAID TO THE GUPTA GROUP MADE IN PURSUANCE TO COMPROMISE ORDER AND DULY RATIFI ED BY THE COMPANY LAW BOARD IS ALSO HELD TO BE REVENUE EXPENDIT URE IN ACCORDANCE WITH THE RATIO OF THE JURISDICTIONAL HIGH COURT AND MUMBAI ITAT DECISION QUOTED SUPRA. CONSEQUENTLY, GRO UND NO.6 FOR A.Y. 2007-08 IS ALLOWED, AND ADDITIONAL GROUND SO UGHT TO BE RAISED FOR A.Y. 2007-08 (AS PER PARA 3 IS TREATED AS DI SMISSED). 4. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVE NUE IS IN APPEAL BEFORE US. 5. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND IN THE INSTANT CASE SIMILAR CLAIM WAS MADE BY THE ASSESSEE DURING A.Y. 2006-07 WHICH WAS ALLOWED BY THE ASSESSING OFFICER AS A REVENUE EXPENDITURE. THE LD. CIT INVOKED JURISDICTION U/S. 263 AND SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO MAKE ADDITION OF RS.3,45,95,921/- BY TREATING THE S AME AS A CAPITAL EXPENDITURE. WE FIND WHEN THE ASSESSEE CHALLENGED THE ORDER OF THE CIT BEFORE THE TRIBUNAL, THE TRIBUNAL ALLOWED THE A PPEAL FILED BY THE ASSESSEE AND CANCELLED THE 263 ORDER PASSED BY THE LD. CIT BY OBSERVING AS UNDER : 8 4. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PARTIES AND PERUSED THE RECORD. THE LD COUNSEL RELIED ON THE DECI SION IN THE CASE OF ECHJAY INDUSTRIES LIMITED VS. DCIT, 88 TTJ 1089 (MUM) AS WELL AS CHEMOSYN LIMITED VS. ACIT, MUMBAI, ITA NOS. 6382/MUM/2011, ORDER DATED 7.9.2012. THE LD COUNSEL ALSO RELIED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF MALABAR INDUSTRIAL COMPANY LIMITED, 243 ITR 83 TO SUPPORT HI S ARGUMENT THAT BOTH THE CONDITIONS OF SEC. 263 OF THE ACT MUST BE SATISFIED I.E. (1) THE ORDER MUST BE ERRONEOUS AND (2) IT SHOULD BE P REJUDICIAL TO THE INTEREST OF REVENUE. HE SUBMITS THAT THE DECISION O F THE TRIBUNAL IN THE CASE OF ECHJAY INDUSTRIES LIMITED (SUPRA) HAS BE EN APPROVED BY THE HON'BLE HIGH COURT OF BOMBAY BY DISMISSING THE APPEAL FILED BY THE REVENUE AGAINST THE SAID DECISION I.E. INCOME T AX 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 CAP ITAL EXPENDITURE AS THE SAME IS A REVENUE EXPENDITURE AS HE LD IN THE CASE OF ECHJAY INDUSTRIES LIMITED M/S. BRAHMA BAZAZ HOT ELS LTD. A.Y. 2006-07 (SUPRA). HE PLEADED THAT MERELY THE RE VENUE 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 T HE ASSESSEE COMPANY. ONE GROUP OF THE SHAREHOLDERS I.E. MAC CHARL ES INDIA LTD. FILED THE CASES AGAINST THE OTHER GROUPS OF THE SHAREHOL DERS AS WELL AS THE COMPANY ALLEGING THE SERIOUS CHARGES OF THE MIS- MANAGEMENT AND OPPRESSION. TO PROTECT THE BUSINESS INTER EST OF THE ASSESSEE COMPANY, PROPOSAL WAS PUT BEFORE THE CLB, NE W DELHI TO BUY BACK THE SHARES FROM MAC CHARLES INDIA LTD. BY PAYMENT OF EXTRA PREMIUM OVER AND ABOVE THE FACE VALUE. THE ASSE SSEE PAID RS.3,45,95,521/- ON THE SHARES AND CLAIMED THE DEDUCTI ON AS A REVENUE EXPENDITURE. 6. IN THE CASE OF ECHJAY INDUSTRIES LTD.,(SUPRA) THER E WERE SIMILAR FACTS AND IN THE SAID CASE ALSO, THERE WERE TWO WARRING GROUPS OF THE SHAREHOLDERS. THE LEGAL BATTLE BETWEEN T HE TWO WARRING GROUPS OF THE SHAREHOLDERS REACHED BEFORE THE BOMBAY HIGH COURT AND AFTER A PERIOD OF OVER SIX YEARS, GOOD SENSE PREVAILED BETWEEN THOSE TWO GROUPS AND A CONSENT TERMS WERE DRAWN BY THE SHAREHOLDERS AND HON'BLE HIGH COURT OF B OMBAY APPROVED THE CONSENT TERMS GIVING DIRECTION TO THE CO MPANY TO PURCHASE THE SHARES OF FAMILY MEMBERS OF DOSHI GROUP AN D TO PAY EXTRA AMOUNT OF RS. 900/- PER SHARE AS A PREMIUM OVER & ABOVE FACE VALUE OF RS. 100/- PER SHARE. THE AMOUNT PAID AS A PREMIUM WAS CLAIMED AS A REVENUE EXPENDITURE, BUT THE SAME WAS DISALLOWED BY THE A.O AND THE DISALLOWANCE WAS CONFIRM ED BY THE CIT(A). THE ISSUE REACHED BEFORE THE TRIBUNAL. THE OP ERATIVE PART OF THE SAID DECISION IS AS UNDER : '29. FROM THE CASE-LAWS REFERRED TO IN THE SAID COMME NTARY, IT IS AMPLY CLEAR THAT WHILE ACCEPTING THE COMPROMISE OR SE TTLEMENT BETWEEN THE TWO WARRING GROUPS, FOR A PROCEEDING UND ER SS. 397 AND 398 OF THE COMPANIES ACT, 1956, THE COURT WILL K EEP IN MIND THE PRIME INTEREST OF THE COMPANY AS WELL AS PUBLIC IN TEREST. THEREFORE, TO SAY THAT THE INTEREST OF ONLY TWO WARRI NG GROUPS HAS BEEN KEPT IN MIND IS NOT CORRECT. IT IS DIFFICULT TO CONTRIBUTE OR ACCEPT THE VIEW CANVASSED BY THE REVENUE THAT THE ASSESS EE HAS 9 OBTAINED ANY RIGHT OR ADVANTAGE WHICH WOULD AFFECT ITS CAPITAL STRUCTURE. THE SETTLEMENT IN THIS REGARD, AS POINTED O UT EARLIER, WAS THAT AS A RESULT OF THE COMPROMISE THE ASSESSEE ACQUIRED T HE SHARES AND THE SHARE CAPITAL WAS REDUCED. NOW THIS ASPECT OF T HE MATTER, AS WE HAVE STATED EARLIER, MERELY REPRESENTED THE MODE O F SETTLEMENT AND IT CANNOT, THEREFORE, BE THE TEST TO BE APPLIED TO DETERMINE THE QUESTION WHETHER THE ASSESSEE DERIVED ANY BENEFIT ON CAP ITAL ACCOUNT. IN FACT, THE M/S. BRAHMA BAZAZ HOTELS LTD. A .Y. 2006-07 ASSESSEE HAD GOT RID OF THE DISADVANTAGEOUS RELATIONSHIP W HICH RESULTED AS A RESULT OF DISPUTES BETWEEN THE TWO WARRING GROUPS OF SHAREHOLDERS. THE SUPREME COURT HAD OCCASION TO CONSIDE R SIMILAR CONTROVERSY IN THE CASE OF CIT VS. AHOK LEYLAND LTD. 1 973 CTR (SC) 9: (1972) 86 ITR 549 (SC) IN WHICH THE APEX COURT H AS HELD THAT THE PRINCIPLES WHICH FLOW FROM THE ABOVE CITED DECISIONS C LEARLY SUGGEST FIRSTLY THAT THE ENDURING BENEFIT IN ITSELF IS N OT A CONCLUSIVE TEST. SECONDLY, IT IS NECESSARY TO CONSIDER WHETHER THE ENDURING ADVANTAGE CONSISTED MERELY FACILITATING THE ASSESSEE'S OP ERATION OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEE'S B USINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY W HILE 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 REGA RD TO THE ABOVE TEST IN THE CASE OF EMPIRE JUT CO. LTD. (SUPRA), THE POINT WHICH WOULD ARISE FOR CONSIDERATION WOULD BE WHETHER THE EX PENDITURE INCURRED FOR GETTING RID OF THE MINORITY SHAREHOLDER S, WHO WERE CREATING DIFFICULTIES, WOULD BE AN EXPENDITURE ON RE VENUE ACCOUNT. THE AUTHORITIES RELIED UPON BY THE LEARNED COUNSEL FO R THE ASSESSEE SHOW THAT PAYMENT MADE TO SECURE PEACE AND HARMONY AN D SMOOTH MANAGEMENT OF THE COMPANY, THE INTEREST OF BUSINESS WOU LD SERVE AND THAT IS THE WHOLE PURPOSE OF SUCH PAYMENT. THEREFO RE, THE AMOUNT PAID FOR THIS PURPOSE WAS ON REVENUE ACCOUNT. A PPLYING THOSE PRINCIPLES, THE POSITION TO OUR MIND IS CLEAR THA T BY GETTING RID OF THE MINORITY SHAREHOLDERS, THE COMPANY COULD NOT B E SAID TO HAVE ACQUIRED ANY ENDURING BENEFIT. SECONDLY, EVEN IF IT IS ASSUMED THAT AN ENDURING BENEFIT HAS BEEN OBTAINED, EVEN THE N SUCH ENDURING BENEFIT IS NOT RELATABLE TO FIXED CAPITAL STRUCTURE OF THE COMPANY BECAUSE IT HAS NEITHER INCREASED THE ASSESSEE'S A SSETS NOR THE COMPANY COULD BE SAID TO HAVE ACQUIRED ANY RIGHT OF INCOME YIELDING NATURE. THE ACT OF WRITING OFF OF SHARE CAP ITAL BY WAY OF REDUCTION, MAY, ON THE FIRST BLUSH, SUGGEST THAT THE CA PITAL STRUCTURE OF THE COMPANY HAS BEEN AFFECTED, BUT IT IS NOT SO I F THE FACTS ARE EXAMINED A LITTLE MORE CLOSELY. THE REDUCTION OF THE SHARE CAPITAL WAS MERELY A CONSEQUENCE OF THE AGREEMENT WHICH HAS TO BE GIVEN EFFECT TO, THAT TOO BY AN ORDER OF THE COURT WHERE THE INTEREST OF THE COMPANY AS WELL AS OF THE PUBLIC HAS TO BE NECESSARILY K EPT IN MIND. THUS WRITING OFF OF SHARE CAPITAL BY WAY OF REDUCTION AS PER THE TERMS OF CONSENT DECREE MERELY WAS A CONSEQUENTIAL ACTI ON AND DID NOT ITSELF REPRESENT ANY EFFECT ON THE CAPITAL STRUCT URE OR THE ACQUISITION OF ANY RIGHT YIELDING INCOME OR ADVANTAG E ON CAPITAL ACCOUNT. THEREFORE, WE HAVE NO HESITATION IN HOLDING THAT THE IMPUGNED EXPENDITURE, WHICH WAS INCURRED IN ORDER TO FACILITATE THE SMOOTH RUNNING OF THE BUSINESS BY GETTING RID OF THE RE CALCITRANT GROUP OF SHAREHOLDERS, WAS AN EXPENDITURE INCURRED OUT OF BUSINESS EXPEDIENCY AND, THEREFORE, WHOLLY AND EXCLUSIVELY IN CURRED IN THE COURSE OF CARRYING ON OF THE BUSINESS. SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN THE CASE OF ATU L CHEMICALS INDUSTRIES LTD. (SUPRA) WHEREIN THE TRIBUNAL CONSIDERIN G THE EARLIER DECISION IN THE CASE OF INLAND REVENUE VS. CARRON CO. 45 TAX CASES 10 18 AND OTHER CASES, CAME TO THE SAME CONCLUSION. THE LE ARNED DEPARTMENTAL REPRESENTATIVE HAS POINTED OUT THAT A R EFERENCE HAS BEEN GRANTED AGAINST THE SAID DECISION. THEREFORE, IT WAS PLEADED THAT IT HAS NOT REACHED FINALITY. SO FAR AS THIS CONTE NTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE IS CONCERNED, WE ARE OF THE OPINION THAT MERELY GRANTING A REFERENCE OF THE QUE STION WILL NOT SHOW THAT THE DECISION IS WRONG. UNLESS IT IS DISTURBED, IT IS A SOUND DECISION, ESPECIALLY 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 IN DUSTRIES 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 T HE SAME AS A REVENUE EXPENDITURE CANNOT BE SAID TO BE ERRONEOUS FO R EXERCISING THE JURISDICTION U/S. 263. BOTH THE CONDITIONS THAT (1 ) ORDER MUST BE ERRONEOUS AND (2) SAME SHOULD BE PREJUDICIAL TO THE IN TEREST 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 T HAT TO THE EXTENT OF THE ISSUE OF THE ALLOWABILITY OF THE PREMIU M PAID IN THE BUY BACK DEAL TO MAC CHARLEYS INDIA LIMITED, THE ASSESSM ENT ORDER CANNOT BE SAID TO BE ERRONEOUS AND TO THAT EXTENT, TH E 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 TH ERE WAS A MISTAKE ON HIS PART. HENCE, ON THE SAID ISSUE, THE ORDER STANDS. 5.1 WE FIND SIMILAR ISSUE HAD ALSO COME UP BEFORE T HE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF USV LTD., VS. JCIT. WE FIND THE TRIBUNAL VIDE ITA NO.376/M/2001 ORDER DATED 18- 12-2006 FOR A.Y. 1998-99 DECIDED THE ISSUE IN FAVOUR OF THE ASS ESSEE BY OBSERVING AS UNDER : 80. WE HEARD THE RIVAL SUBMISSIONS, GONE THROUGH THE ORDERS OF THE REVENUE AUTHORITIES AND THE DECISIONS CITED BY TH E CONTENDING PARTIES. FIRST WE WILL TAKE UP THE CONTENTIONS OF THE REVENUE THAT THE LITIGATIONS WERE IN FACT ONLY DIVISION OF FAMILY ASSETS AND FOR CONTROLLING OF THE BUSINESS OF THE ASSESSEE. CONSIDERING TH E FACTS AND CIRCUMSTANCES OF THE CASE AND THE DISPUTE BETWEEN T HE CONTENDING PARTIES, CLB HAS ALREADY GIVEN A FINDING I N ITS ORDER THAT THE PENDENCY DEFINITELY AFFECTED THE REPUTATION AND GAVE FALSE SIGNAL IN THE PHARMACEUTICAL INDUSTRY AND SERIOUSLY AF FECTED THE GROWTH AND PROSPERITY OF THE ASSESSEE COMPANY. EVEN IF T HE STARTING POINT OF THE DISPUTE IS CONTROLLING OF THE ASSETS, THESE FINDINGS OF THE CLB CANNOT BE DISCARDED OUT OF CONTEXT;. THE FACTS BR OUGHT ON RECORD CLEARLY SHOW, AS WE HAVE MENTIONED IN PARA 70 OF THE ORDER THAT THE ASSESSEE WAS RANKING 23RD IN DECEMBER, 1994. 11 SUBSEQUENTLY FROM DECEMBER, 1995 TO DECEMBER, 1998 I T WAS LAGGING SOMEWHERE BETWEEN 30 TO 36. IN DECEMBER, 199 9, IMMEDIATELY AFTER THE SETTLEMENT, ITS RANK WENT UP TO 23 AND BY APRIL, 2000, IT WAS 19, WHICH ITSELF SHOWS THAT THE SETT LEMENT HAS TAKEN THE ASSESSEE OUT OF THE TROUBLE PERIOD. THE CONTE NTION OF THE LEARNED COUNSEL RECORDED VIDE PARA 68 IS ALSO RELEVANT IN THIS CONTEXT. ASSESSEE WAS APPROACHED BY LIPHA, PART OF MERK GROUP AND ORIGINATOR OF BULK DRUG METFORMIN FOR ALLIANCE BUT IT WAS TO BE DROPPED BECAUSE OF THE DISPUTE; SO ALSO THE TALK WITH ' LANOCARE' OF AUSTRALIA AND NEW ZEALAND FOR LAUNCHING OF SKIN CARE PRODUCTS. THE NEGOTIATION WITH ALFA WASSERMANN WAS ALSO DROPPED BECAU SE OF THE DISPUTES. THESE ALL INDICATE THAT THE AFFAIRS OF THE CO MPANY WERE NOT RUNNING WELL DUE TO THE DISPUTES BETWEEN THE FAMILY M EMBERS. THEREFORE, SAYING THAT THE SETTLEMENT IS TO CONTROL TH E ASSETS OF THE COMPANY ITSELF IS OVERSIMPLIFICATION. HAD THESE DISPUT ES NOT BEEN SETTLED, THE COMPANY WOULD NOT HAVE REVIVED WELL. IT IS NOT CORRECT TO SAY THAT REACHING SUCH A CONCLUSION IS OUT OF CONTEX T. 81. NOW WE COME TO THE DECISIONS 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-OPER ATIVE BANK LTD. V. ITO (SUPRA) AND SHAILENDRA KUMAR V. UNION OF INDI A (SUPRA), DOES NOT FURTHER REVENUE'S CASE. IN THE CASE OF MADURAI DIST RICT CENTRAL CO-OPERATIVE BANK LTD. (SUPRA), HON'BLE SUPREME COUR T HELD, IT ACT IS A PERMANENT ENACTMENT AND IN THE CASE OF SHAILENDR A KUMAR V. UNION OF INDIA (SUPRA), HON'BLE ALLAHABAD HIGH COURT HELD THAT IT ACT IS A SELF-CONTAINED CODE AND THE TAXABILITY OR O THERWISE OF RECEIPTS TO BE DETERMINED WITH REFERENCE TO THE PROV ISIONS OF THE ACT. IT DOES NOT MEAN THAT A FINDING OF FACT BY AN A UTHORITY, 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 T HE SCHEME OF ACT OF 1961, AID CAN BE TAKEN FROM THE FUNDAMENT AL RULES GOVERNING THE SERVICE CONDITIONS OF THE CENTRAL GOVER NMENT EMPLOYEES OR FROM THE PROVISIONS OF A STATUTE WHICH IS N OT COGNATE OR PAN MATERIA TO THE ACT OF 1961. THE IT ACT IS A SE LF-CONTAINED CODE AND THE TAXABILITY OF HOUSE RENT ALLOWANCE, CIT Y COMPENSATORY ALLOWANCE AND DEARNESS ALLOWANCE OR OF ANY OTHER ALL OWANCE WILL HAVE TO BE SEEN ONLY WITHIN THE SCHEME OF THE ACT OF 1961. THEIR LORDSHIPS FURTHER RELIED UPON THE LEGAL PROPOSI TION AS EXPLAINED BY THEIR LORDSHIPS OF HON'BLE SUPREME COURT IN THE CASE OF S. MOHAN LAL V. R. KONDIAH , WHICH READS AS UNDER: IT IS NOT A SOUND PRINCIPLE OF CONSTRUCTION TO INTERPR ET EXPRESSIONS USED IN ONE ACT WITH REFERENCE TO THEIR USE IN ANOTHE R ACT, MORE SO IF THE TWO ACTS IN WHICH THE SAME WORD IS USED ARE NOT COGNATE ACTS. NEITHER THE MEANING NOR THE DEFINITION OF THE TERM IN ONE STATUTE AFFORDS A GUIDE TO THE CONSTRUCTION OF THE SAME TERM I N ANOTHER 12 STATUTE AND THE SENSE IN WHICH THE TERM HAS BEEN UNDER STOOD IN THE SEVERAL STATUTES DOES NOT NECESSARILY THROW ANY LIGHT ON THE MANNER IN WHICH THE TERM SHOULD BE UNDERSTOOD GENERALLY. ON THE OTHER HAND, IT IS A SOUND, AND INDEED, A WELL KNOWN PRINCIP LE OF CONSTRUCTION THAT MEANING OF WORDS AND EXPRESSIONS USED I N AN ACT MUST TAKE THEIR COLOUR FROM THE CONTEXT IN WHICH THE Y APPEAR. FROM THE ABOVE IT IS CLEAR THAT THEIR LORDSHIPS OBSERV ED THAT FOR INTERPRETATION OF THE MEANING OF THE WORDS AND EXPRE SSIONS USED IN ONE ACT MAY NOT HAVE THE SAME MEANING IN ANOTHER ACT . IT IS NOT TO SAY THAT THE FACTS FOUND OUT BY A COMPETENT AUTHORITY CANNOT BE TAKEN AT ALL INTO CONSIDERATION TO ARRIVE AT THE CON CLUSION. 82. COMING TO THE DECISION RELIED UPON BY THE REVE NUE AUTHORITIES IN THE CASE OF CIT V. MALAYALAM PLANTATI ONS LTD. (SUPRA), THE ISSUE BEFORE THEIR LORDSHIPS WAS WHETHER THE ESTATE DUTY PAID BY THE RESIDENT COMPANY INCORPORATED OUTSIDE INDIA ON BEHALF OF THE PRINCIPAL NOT DOMICILED IN INDIA IS DEDUCTIBLE F ROM ITS PROFITS WHILE COMPUTING THE ASSESSABLE INCOME UNDER SECTION 10( 2)(XV) OF THE INDIAN IT ACT, 1922. AT P. 149, THEIR LORDSHIPS D ISCUSSING THE ISSUE ON THE BASIS OF THE DECISION OF THE HON'BLE SUPREM E COURT IN THE CASE OF BADRIDAS DAGA V. CIT OBSERVED : 'THIS DECISI ON, THOUGH NOT DIRECT IN POINT, LAYS DOWN THE PRINCIPLE THAT A N EXPENDITURE CAN BE DEDUCTED ONLY IF IT ARISES OUT OF THE CARRYING ON OF THE BUSINESS AND IS INCIDENTAL TO IT.' IN FACT, THIS DECISION SUPPOR TS THE CASE OF THE ASSESSEE. DISCUSSING THE ISSUE, THEIR LORDSHIPS HELD : 'THE EXPENDITURE INCURRED BY THE ASSESSEE IN HIS CAPACITY A S AGENT OF ANOTHER IS NOT A DEDUCTIBLE ITEM.' IN OTHER WORDS, TH E DECISION WENT AGAINST THE ASSESSEE BECAUSE IT WAS A PAYMENT MADE AS AN AG ENT. 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 REVEN UE AUTHORITIES IN THE CASE OF ADARSHA DUGDHALAYA V. CIT (SUPRA), THIS WAS A CASE WHEREIN AS DIRECTED BY THE AWARD, PAYMENTS W ERE MADE BY THE ASSESSEE TOWARDS ARBITRATORS' FEES, SOLICITORS' FEES A ND 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 OBLI GATIONS 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 REVENU E BUT CAPITAL EXPENDITURE. AT P. 61, THE HON'BLE HIGH COURT HELD : 'IN THE PRESENT CASE, HOWEVER, THE EXPENDITURE INCURRED IS NOT FOR TH E PURPOSE OF PROTECTING THE ASSETS BUT FOR THE PURPOSE OF ASCERTAIN ING WHAT THEY ARE ON SETTLEMENT OF THE DISPUTES BETWEEN THE PARTNERS IN RELATION TO THEM. IN OUR OPINION, THEREFORE, HAVING REGARD T O THE ESSENTIAL NATURE OF THE LITIGATION AND THE PURPOSE FOR WHICH I T WAS CONTESTED, WE DO NOT THINK THAT THE EXPENSES OF LITIGATION CLAIM ED BY THE ASSESSEE COULD BE ALLOWED TO IT AS EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF CARRYING ON ITS BUSINESS.' COMING TO 13 THE INSTANT CASE OF THE ASSESSEE, THE FACTS ARE DISTINGUISH ABLE. HAD THE DISPUTE NOT SETTLED, THE CONTINUANCE OF BUSINESS OF THE ASSESSEE ITSELF WOULD HAVE JEOPARDIZED. 84. THE DECISION OF THE JURISDICTIONAL HIGH COURT, R ELIED UPON BY THE LEARNED CIT(A), IN THE CASE OF PREMIER CONSTRUCT ION CO. LTD. V. CIT (SUPRA) IS ALSO DISTINGUISHABLE ON FACTS. THIS WAS A CA SE WHEREIN A DISPUTE AROSE BETWEEN THE DIRECTORS OF THE COMPANY AND ITS SHAREHOLDERS. THEIR LORDSHIPS HELD THAT THE COMPANY IS N OT JUSTIFIED IN CLAIMING THE EXPENSES INCURRED BY IT IN THE SAID L ITIGATION AS EXPENSES OF ITS BUSINESS. HOWEVER, THEIR LORDSHIPS FURTHE R HELD : 'IN ORDER THAT THE EXPENSE OF A CIVIL LITIGATION COULD B E PERMISSIBLE AS AN EXPENSE WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PU RPOSE OF THE BUSINESS OF THE ASSESSEE, THE EXPENSE MUST HAVE BEEN INCUR RED BY THE ASSESSEE IN ITS CHARACTER AS A TRADER AND THE TRANSAC TION IN RESPECT OF WHICH THE PROCEEDINGS WERE TAKEN MUST HAVE ARISEN OUT OF, OR MUST HAVE BEEN INCIDENTAL TO, THE ASSESSEE'S BUSIN ESS. AN ASSESSEE COULD BE SAID TO HAVE INCURRED THE EXPENDITURE IN HIS CHARACTER AS A TRADER IF THE LITIGATION WAS NECESSARY T O BE CARRIED ON BY THE ASSESSEE OR DEFENDED BY IT TO PROTECT ITS TRADE O R BUSINESS OR TO AVERT A DANGER OR THREAT TO ITS CARRYING ON OF IT S BUSINESS'. IN OTHER WORDS, THE ALLOWABILITY OR NON-ALLOWABILITY OF EXPENDITURE, EVEN IF IT IS INCURRED FOR THE PURPOSE OF LITIGATION, DEPENDS ON THE FACTS OF THAT PARTICULAR CASE. THE STAND OF THE REVENU E AUTHORITIES IN THE INSTANT CASE OF THE ASSESSEE IS THAT THIS IS PURELY A D OMESTIC QUARREL BETWEEN THE SHAREHOLDERS. IT IS FURTHER THE ST AND OF THE REVENUE AUTHORITIES, AS IS CLEAR FROM THE ORDER OF TH E CIT(A), THAT THE EXPENSES MAY, IN SOME INDIRECT WAY BE CONDUCIVE TO THE BENEFIT OF THE BUSINESS OR TO THE BETTERMENT OF THE BUSINESS, EV EN THEN, IT CANNOT BE HELD, IT IS AN EXPENDITURE WHOLLY AND EXC LUSIVELY FOR THE PURPOSE OF BUSINESS. IN THE INSTANT CASE OF THE ASSESSEE WE H AVE SEEN THAT HAD THE SETTLEMENT NOT BEEN TAKEN, THE BUSIN ESS 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 BUSIN ESS TURNOVER AND PROFIT BECAUSE OF THIS LITIGATION HAS NEV ER 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 MENTION ED IN PARA 70 OF THIS ORDER, THE RANKING GIVEN AND ALSO THE PART IES 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 THA T THE BUSINESS OF THE ASSESSEE OR THE GROWTH POTENTIAL OF THE ASSE SSEE HAD DEFINITELY BEEN AFFECTED. IN SHORT, WE ARE OF THE OP INION THAT THE VIEW CANVASSED BY THE LEARNED COUNSEL IS TO BE ACCEPTED . 86. COMING TO THE DECISION RELIED UPON BY THE LEARN ED COUNSEL, IN THE CASE OF DALMIA JAIN & CO. LTD. V. CIT (SUPRA), THE HON'BLE SUPREME COURT HELD : 'WHERE LITIGATION EXPENSES ARE I NCURRED BY THE ASSESSEE FOR THE PURPOSE OF CREATING, CURING OR COMP LETING THE 14 ASSESSEE'S TITLE TO THE CAPITAL, THEN THE EXPENSES INCURR ED MUST BE CONSIDERED AS CAPITAL EXPENDITURE. BUT IF THE LITIGAT ION EXPENSES ARE INCURRED TO PROTECT THE BUSINESS OF THE ASSESSEE THEY MUS T BE CONSIDERED AS A REVENUE EXPENDITURE.' IN THE INSTANT C ASE OF THE ASSESSEE THE FACTS CLEARLY SHOW THAT THE BUSINESS OF THE ASS ESSEE DUE TO INFIGHTING BETWEEN THE TWO GROUPS OF THE FAMI LY MEMBERS, WAS IN A DIFFICULT SITUATION AND THE ASSESSEE LOST MANY B USINESS OPPORTUNITIES FOR ITS GROWTH. EVEN IF THE PAYMENTS WER E TO SETTLE THIS DISPUTE BUT THE DETERMINATE CHARACTER IS TO PROTE CT THE BUSINESS AS WELL AND, THEREFORE, THIS DECISION OF THE HON 'BLE SUPREME COURT SUPPORTS ASSESSEE'S CASE. HENCE, THE APPEAL O F THE ASSESSEE ON THIS GROUND IS ALLOWED. 5.2 SINCE THE TRIBUNAL HAS ALREADY TAKEN A VIEW IN FAVOUR OF THE ASSESSEE ON THIS VERY ISSUE AND NOTHING CONTRARY WA S BROUGHT TO OUR NOTICE BY THE LD. DEPARTMENTAL REPRESENTATIVE AGAIN ST THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE IN THE PRECEDIN G YEAR, THEREFORE, RESPECTFULLY FOLLOWING THE SAME AS WELL AS THE DECI SION OF MUMBAI BENCH OF THE TRIBUNAL CITED (SUPRA), WE FIND NO INF IRMITY IN THE ORDER OF THE CIT(A) ALLOWING THE PREMIUM PAID ON BU Y BACK OF SHARES AS A REVENUE EXPENDITURE. THE DECISION OF T HE HONBLE SUPREME COURT IN THE CASE OF BROOK BOND INDIA LTD., (SUPRA) AS ARGUED BY THE LD. DEPARTMENTAL REPRESENTATIVE IS DI STINGUISHABLE AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE . FURTHER, THE SAME HAS ALREADY BEEN DISCUSSED IN THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2006-07. IN THIS VIEW OF THE MATTER AND IN VIEW OF THE DETAILED REASONING GIVEN BY THE LD.CIT(A) WHILE ALLOWING THE PREMIUM PAID ON ACCOUNT OF BUY BACK OF SHARES AS REVENUE EXPENDITURE, WE FIND NO INFIRMITY IN THE SA ME. ACCORDINGLY, THE ORDER OF THE CIT(A) ON THIS ISSUE IS UPHELD AND THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 15 6. GROUNDS OF APPEAL NO.6 BY THE REVENUE READS AS U NDER : THE ID. COMMISSIONER OF INCOME-TAX (APPEALS) GROSSLY ER RED IN NOT CONFIRMING THE DISALLOWANCE OF RS. 10,27,230/- M ADE IN THE ASSESSMENT U/S 43B WHEN THE ASSESSEE HAD CLEARLY MAKE THE PAYMENTS AFTER THE PRESCRIBED DUE DATES. 6.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO MA DE ADDITION OF RS.10,27,230/- U/S.43B ON THE GROUND THAT THE ASSES SEE HAS PAID PF LIABILITY OF RS.7,10,205/- AND ESI LIABILITY OF RS. 3,17,025/- AFTER THE PRESCRIBED DUE DATE MENTIONED IN THE RESPECTIVE ACT . 7. BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE AMOU NTS WERE ACTUALLY PAID ON OR BEFORE THE DUE DATES BY THE ASS ESSEE BY WAY OF CHEQUE TO THE STATE BANK OF INDIA, BUND GARDEN BRAN CH, PUNE. HOWEVER, THE AUDITOR HAS CONSIDERED THE DATE ON WHI CH STATE BANK OF INDIA HAS DEPOSITED THE CHEQUES WITH THE PF/ESI AUTHORITIES. THE LD.CIT(A) THEREFORE DIRECTED THE AO TO VERIFY T HESE FACTS AND ALLOW CONSEQUENTIAL RELIEF U/S.43B OF THE I.T. ACT. 7.1 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REV ENUE IS IN APPEAL BEFORE US. 8. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES. WE FIND THE AO DISALLOWED AN AMOUNT OF RS.1 0,27,230/- ON THE GROUND THAT THE ASSESSEE HAS PAID THE PF AND ES I DUES BEYOND THE DUE DATES MENTIONED IN THE RESPECTIVE ACT. THE DETAILS OF SUCH DISALLOWANCE ARE AS UNDER : 16 PF LIABILITIES (RS.) DUE DATE PAID DATE 2,33,975/ - 15.01.200 24.01.200 2,35,773/ - 15.02.200 02.03.200 2,40,457/ - 15.03.200 22.03.200 7,10,205/ - TOTAL ESIC LIABILITIES (RS.) DUE DATE PAID DATE 21,098/ - 21.05.200 24.05.200 21,701/ - 21.06.200 24.06.200 21,634/ - 21.07.200 25.07.200 21,517/ - 21.08.200 23.08.200 22,152/ - 21.09.200 6 22.09.200 6 25,506/ - 21.10.200 26.10.200 29,184/ - 21.11.200 24.11.200 29,172/ - 21.12.200 27.12.200 30,331/ - 21.01.200 02.03.200 30,725/ - 21.02.200 7 02.03.200 7 31,220/ - 21.03.200 28.03.200 32,785/ - 21.04.200 7 26.04.200 7 3,17,025/ - TOTAL 9. BEFORE THE CIT(A) IT WAS ARGUED THAT THE ASSESSE E HAS PAID THE AMOUNTS ON OR BEFORE THE DUE DATES BY WAY OF CH EQUES, HOWEVER, THE AUDITORS HAS CONSIDERED THE DATE ON WH ICH THE SBI HAS DEPOSITED THE CHEQUES WITH THE PF/ESI AUTHORITIES A S THE DATE OF PAYMENT. HOWEVER, IT IS AN UNDISPUTED FACT FROM THE ABOVE DETAILS THAT THE PAYMENTS HAVE BEEN MADE MUCH PRIOR TO THE DUE DATE OF FILING OF RETURN. 9.1 IT HAS BEEN HELD IN VARIOUS JUDICIAL DECISIONS THAT PF & ESI DUES, IF PAID BEFORE FILING OF THE RETURN PRESCRIBE D U/S.139(1) IS AN ALLOWABLE DEDUCTION. THE LATEST DECISION IN THIS R EGARD IS THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F CIT VS. M/S. HINDUSTAN ORGANICS CHEMICALS LTD. VIDE ITA NO. 399/2012 17 ORDER DATED 11-07-2014, A COPY OF WHICH WAS FILED B Y THE LD. COUNSEL FOR THE ASSESSEE AT THE TIME OF HEARING OF THE CASE. SINCE IN THE INSTANT CASE THE ASSESSEE HAS PAID/DEPOSITED TH E PF & ESI DUES MUCH PRIOR TO THE DUE DATE OF FILING OF THE RETURN, THEREFORE, WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A). THE GROUN D RAISED BY THE REVENUE IS ACCORDINGLY DISMISSED. 10. GROUNDS OF APPEAL NO. 7 & 8 BEING GENERAL IN NA TURE ARE DISMISSED. ITA NO.773/PN/2013 (A.Y. 2008-09) : 11. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER ; 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-T AX (APPEALS) IS CONTRARY TO LAW AND TO THE FACTS AND CIRCUMSTANCES O F THE CASE. 2. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) G ROSSLY ERRED IN ALLOWING AN AMOUNT OF RS. 32,00,000/- FROM OUT OF THE PAYMENT OF RS.2,00,00,000/- MADE BY THE ASSESSEE TO M/S. JAY ARTS BY HOLDING THE SAME AS REVENUE EXPENDITURE INSTEAD OF CON FIRMING THE ASSESSMENT ON THIS ISSUE WHEREIN THE ENTIRE PAYMENT HAD B EEN TREATED AS CAPITAL EXPENDITURE. 3. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) G ROSSLY ERRED IN FAILING TO APPRECIATE THAT THE PAYMENTS RELATED T O THE ORIGINAL WORK PERTAINING TO FURNITURE AND FIXTURES, WHEN THE HOTEL WAS STARTED, AND ALSO THE ASSESSEE HAD CAPITALISED THE CONCER NED ASSETS; AND, IN THE CIRCUMSTANCES, NO PART OF THE PAYMENT COU LD BE TREATED AS REVENUE EXPENDITURE. 4. THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) GRO SSLY 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 GIVIN G ANY FINDING THAT THE INTEREST PAID WAS AN INTEGRAL PART OF THE PR OFIT-EARNING PROCESS AND HAD NOT BEEN INCURRED FOR ACQUISITION OF A SSETS. 5. THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) G ROSSLY ERRED IN FAILING TO APPRECIATE AND APPLY THE RATIO OF THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF PRAB HAT THEATRE (P)LTD, VS CIT (1979)118 ITR 953(BOM.) WHEREIN IT WA S HELD THAT COMPENSATION BY WAY OF INTEREST WAS NOT ALLOWABLE AS BU SINESS EXPENDITURE. 18 6. THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) GR OSSLY ERRED IN DIRECTED THE ASSESSING OFFICER TO ALLOW DEPRECIATION ON THE CAPITAL EXPENDITURE WITHOUT APPRECIATING THAT THE A SSET WAS PUT TO USE FROM THE A.Y. 2000-01 AND HAD ALSO ALREADY DEPREC IATED; AND, MOREOVER, THERE IS NO PROVISION IN THE ACT TO ALLOW A DJUSTMENT TO WDV AS WOULD ENABLE COMPUTING DEPRECIATION. 7. FOR THESE AND SUCH OTHER GROUNDS AS MAY BE URGED AT THE TIME OF THE HEARING, THE ORDER OF THE LD. COMMISSIONER OF INC OME- TAX(APPEALS) MAY BE VACATED AND THAT OF THE ASSESSING OF FICER BE RESTORED. 8. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER O R DELETE ANY OF THE ABOVE GROUNDS OF APPEAL DURING THE COURSE OF THE APPELLATE PROCEEDINGS BEFORE THE HON'BLE TRIBUNAL. 11.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSE SSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVE D THAT M/S. JAY ARTS WAS ASSIGNED THE WORK OF INTERIOR DESIGN OF 10 6 ROOMS OF THE HOTEL IN THE YEAR 1997. THE SAID WORK WAS COMPLETE D BY THE SAID PARTY. SOME EXTRA WORKS WERE ALSO ASSIGNED TO THE SAID PARTY. AS REGARDS THE OVERALL CONSIDERATION, DISPUTE AROSE BE TWEEN THE SAID PARTY AND THE ASSESSEE FOR WHICH A CASE WAS FILED B EFORE THE CIVIL COURT. THE CIVIL COURT IN ITS JUDGEMENT DATED 10-0 8-2007 GRANTED COMPENSATION TO M/S. JAY ARTS AGAINST THE WORK DONE WITH RESPECT TO INTERIOR DESIGNING OF 106 ROOMS OF THE HOTEL IN THE YEAR 1997 AND SOME ADDITIONAL WORK. THE ASSESSEE DEBITED COMPENS ATION OF RS.2 CRORES PAID TO M/S. JAY ARTS IN ITS PROFIT AND LOSS ACCOUNT FOR A.Y. 2008-09. THE ASSESSING OFFICER NOTED THAT JAY ARTS WAS THE INTERIOR DECORATOR FOR THE ASSESSEE AND ALL THE PAY MENTS MADE TO JAY ARTS DURING THE PERIOD 1997 TO 2001 HAVE BEEN CAPIT ALISED AND TAKEN INTO FIXED ASSETS UNDER THE HEAD FURNITURE A ND FIXTURES. THEREFORE, HE WAS OF THE OPINION THAT THE PAYMENTS MADE OUT OF THE COMPENSATION SHOULD ALSO BE IN THE NATURE OF CAPITA L EXPENDITURE. 19 HE ACCORDINGLY ISSUED A SHOW CAUSE NOTICE TO THE AS SESSEE ASKING IT TO EXPLAIN AS TO WHY THE PAYMENTS MADE TO JAY ARTS SHOULD NOT BE DISALLOWED AS BEING CAPITAL IN NATURE. THE ASSESSE E MADE A DETAILED SUBMISSION WHICH HAS BEEN REPRODUCED BY THE ASSESSI NG 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 EXT RA WORKS WERE ALSO ASSIGNED TO THE SAID PARTY. AS REGARDS THE OVE RALL CONSIDERATION, DISPUTE AROSE BETWEEN THE SAID PARTY AND THE ASSESS EE. THE SAID PARTY MADE A LARGE DEMAND OF DAMAGES ON THE ASSESSEE COMP ANY. 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 FOLL OWING 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 RS.3,49,26,892 3 ORIGINAL ESTIMATE AS PER THE SAID PARTY WAS FOR 106 ROOMS @ RS.2,23, 704/- PER ROOM 3 THE COMPANY INSISTED FOR 106 ROOMS @ RS.2,10,000 PE R ROOM 5 EXTRA WORK LOBBY, COURTYARD, STAIR - CASE ETC. WAS GIVEN TO THE SAID PARTY 7 AT THE CONCLUSION OF THE WORK, THE SAID PARTY ASKED FOR SE TTLEMENT OF RS.1.8 CR. 11 DISPUTE AS TO WHETHER MOCK - UP ROOMS MAKING WAS AN INTEGRAL PART OF THE SAID PARTYS WORK 15 CLAIM OF THE COMPANY THAT THERE WERE DELAYS IN COMP LETION WORK BY THE SAID PARTY 19 COMPANY CLAIMED THAT THE WORKMANSHIP OF THE SAID PA RTY WAS BAD 19 COMPANY (BBHL) LODGED A COUNTER CLAIM OF RECOVERY O F RS.2,56,72,442/- ON THE SAID PARTY 29 - 35 FINDINGS GIVEN BY THE COURT 27 ORDER THAT THE COMPANY HAS TO PAY RS.2.07 CR. WITH SIMPLE INTE REST @12% FROM 1-4-99 20 YEARLY INTEREST 24,87,880 NO. OF YEARS 9 YEARS TOTAL INTEREST 2,23,90,919 (I.E. 52% OF TOTAL LIABILITY) ORIGINAL AMOUNT 2,07,32,332 (I.E. 48% OF THE TOTAL LIABILITY) TOTAL LIABILITY AS ON 1-2-2008 (SAY) 4,31,23,251 (I.E. 100%) - ON 22/2/2008, THE ENTIRE LIABILITY WAS SETTLED FOR RS.3,50,00,000/-. NOW, IF THE SAID OVERALL LIABILITY IS SEGREGATED IN THE RATIO OF 52% : 48%, THE INTEREST EXPENDITURE THAT OUGHT TO HAVE BE EN CLAIMED FOR A. Y. 2008-09 WORKS OUT TO RS.1,82,00,000/- AND THE BA LANCE AMOUNT OF RS.1,68,00,000/- COULD BE CONSIDERED AS LIQUIDATED DAMAGES ARISING OUT OF A COURT CASE SETTLEMENT IN EITHER CASE, THE DEDUCTION OF RS.3,50,00,000/- OUGHT TO HAVE BEEN CLAIMED BY THE COMPANY. BY MISTAKE, DEDUCTION OF RS.2,00,00,000 HAS ONLY BE CL AIMED. KINDLY GRANT THE BALANCE AMOUNT OF DEDUCTION. ALTERNATIVELY, IF YOUR GOODSELF INTEND TO TREAT THE A MOUNT OF RS.1,68,00,000 AS CAPITAL EXPENDITURE, THE SAME OUGH T TO BE TAKEN BACK TO A.Y. 2001-02 AND DEPRECIATED ACCORDINGLY. T HE WORKING OF THE SAID DEPRECIATION WILL BE AS FOLLOWS : 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 RS.2,92,85,946 (I. E. RS.1,82,00,000 INTEREST + RS.1,10,85,946 ACCUMULATED DEPRECIATION). IT IS SUBMITTED, THE APPROPRIATE VIEW NEEDS TO BE ADOP TED SO THAT THE GENUINE BONAFIDE EXPENDITURE (THOUGH EMANATING FROM SERIOUS CONTRACTUAL DISPUTE) OF THE ASSESSEE COMPANY IS NOT DIS ALLOWED. 12. HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIE D WITH THE EXPLANATION GIVEN BY THE ASSESSEE. HE NOTED THAT T HE AMOUNT PAID TO M/S. JAY ARTS IS RELATED TO THE FIXED ASSETS CRE ATED DURING THE PERIOD WHEN THE HOTEL WAS SET UP WHICH IS IN THE NA TURE OF CAPITAL 21 EXPENDITURE. THE COMPENSATION GRANTED TO JAY ARTS HAS ACCRUED TO THIS ASSET. THEREFORE, THE COMPENSATION PAID IS AL SO A CAPITAL EXPENDITURE. HE ACCORDINGLY HELD THAT THE AMOUNT O F RS.2 CRORES PAID TO JAY ARTS CANNOT BE ALLOWED AS AN EXPENDITUR E U/S.37 OF THE I.T. ACT. 12.1 AS REGARDS THE ALTERNATE CLAIM OF THE ASSESSEE THAT THE DEPRECIATION ON THE ABOVE EXPENDITURE SHOULD BE ALL OWED IF IT IS TREATED AS CAPITAL EXPENDITURE, THE ASSESSING OFFIC ER NOTED THAT THE ASSESSEE HAS PUT TO USE THESE ASSETS FROM A.Y. 2000 -01. SINCE THEN IT IS CLAIMING DEPRECIATION ON THE ABOVE AMOUNTS PA ID TO M/S. JAY ARTS. THE SAID ASSET WAS ALREADY WORN OUT AND IS D EPRECIATED. SINCE THE AMOUNT HAS BEEN PAID IN F.Y. 2007-08 AND CORRESPONDING LIABILITY WAS NEVER SHOWN IN THE BALANCE SHEET IN T HE PREVIOUS YEARS, THEREFORE, THE CHANGE IN ASSET SCHEDULE CANNOT BE D ONE. HE ACCORDINGLY HELD THAT DEPRECIATION CANNOT BE ALLOWE D ON THIS PAYMENT MADE BY THE ASSESSEE. HE ACCORDINGLY DISAL LOWED THE CLAIM OF THE ASSESSEE. 13. BEFORE THE CIT(A) THE ASSESSEE MADE ELABORATE S UBMISSIONS BASED ON WHICH THE LD.CIT(A) GAVE PART RELIEF TO TH E ASSESSEE BY HOLDING THAT SINCE THE LIABILITY TO PAY THE INTERES T HAS ACCRUED DURING THE RELEVANT ASSESSMENTS YEARS AND THE SAME HAS BEE N INCURRED AS BONAFIDE EXPENDITURE, THE CORRESPONDING INTEREST EL EMENT PAID DURING THOSE YEARS, I.E. RS. 32 LAKHS FOR A.Y. 2008 -09 AND BALANCE RS. 1, 50,00,000/- FOR A.Y. 2009-10 ARE TO BE ALLOW ED AS REVENUE 22 EXPENDITURE. THE RELEVANT OBSERVATION OF THE LD.CI T(A) READS AS UNDER : 6.3. I HAVE CONSIDERED THE SUBMISSIONS MADE. AT TH E OUTSET, IT NEEDS TO BE EXAMINED AS TO WHETHER THE AMOUNTS IN QUESTION ARE CONTRACTUAL 'AMOUNTS, IN RESPECT OF WHICH LIQUIDATE D DAMAGES ARE PAYABLE. IN THIS REGARD THE ORDER OF THE 6 TH ADDITIONAL JUDGE, SMALL CAUSES COURT, AND JOINT CIVIL JUDGE, SR. DIVISION, PU NE HAS BEEN EXAMINED IN GREAT DETAIL. THE FINDINGS OF THE LEARNE D JUDGE ARE RECORDED AT PAGES 22 TO 37 OF THE ORDER. IT IS CLEA RLY RECORDED AT PAGES 24, 26, 27, 31 OF THE ORDER THAT THERE IS NO WRITTEN CONTRACT BETWEEN THE TWO PARTIES VIZ. JAY ARTS AND THE APPELL ANT COMPANY. THE MAIN DISPUTE BETWEEN THE TWO PARTIES IS REGARDI NG THE RATE APPROVED PER ROOM AND THE PAYMENTS IN ACCORDANCE WI TH SUCH RATES. THE DISPUTE IS REGARDING THE APPROVAL OF EST IMATES 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 V ERIFICATION OF WORK DONE BY JAY ARTS THROUGH ARCHITECT, THE ORDER OF THE COURT IS AGAINST THE APPELLANT. ACCORDINGLY, EXCLUDING THE IN TEREST COMPONENT THE AMOUNT OF RS.2,07,32,232 WHICH HAS BE EN DIRECTED TO BE PAID BY THE COURT TO JAY ARTS IS IN RESPECT OF OU TSTANDING BILLS OF THE CONTRACTOR. THE APPELLANT COMPANY FAILED TO MAK E PAYMENT OF THE RIGHTFUL CLAIMS OF THE CONTRACTOR WHEN SUCH AMO UNTS WERE DUE AND INSTEAD OF PAYMENT, MADE COUNTER CLAIMS AND ALL EGATIONS AGAINST THE-'CONTRACTOR. THE WITHDRAWAL OF THE APPE LLANT'S SUIT BEFORE THE BOMBAY HC IS AN ACCEPTANCE OF THE INCORR ECT CLAIMS REGARDING THE PAYMENTS DUE TO THE CONTRACTOR. IT HA S BEEN SUBMITTED THAT THE APPELLANT HAD DECIDED TO CONTEST THE CIVIL COURT'S DECISION BEFORE THE HON'BLE MUMBAI HIGH COURT BUT CONSIDERIN G BUSINESS WISDOM AND WITH A VIEW TO END THE PROTRACTED LITIGA TION, THE APPELLANT PREFERRED TO SETTLE THE COMPENSATION ISSU E BY WAY OF AN MOU WITH M/S JAY ARTS. ACCORDINGLY, THE APPELLANT HA S TREATED THIS EXPENDITURE AS LIQUIDATED DAMAGES AND DEBITED THE S AME TO ITS P&L ACCOUNT. 6.4. THE DEFINITION OF LIQUIDATED DAMAGES AS IT EME RGES FROM BLACK'S LAW DICTIONARY IS 'AN AMOUNT CONTRACTUALLY STIPULAT ED AS A REASONABLE ESTIMATION OF THE ACTUAL DAMAGES TO BE R ECOVERED BY ONE PARTY IF THE OTHER PARTY BREACHES.' IN OTHER WORDS, THERE HAS TO BE A CONTRACTUAL LIABILITY CLEARLY SPELT OUT IN A WRITTE N CONTRACT AS TO THE CONSEQUENCE OF BREACH OF CONTRACT BY ONE OR THE OTH ER PARTY. SIMILAR IS THE DEFINITION OF COMPENSATION FOR BREACH OF CON TRACT U/S 74 OF THE INDIAN CONTRACT ACT, 1872, WHICH PROVIDES FOR PAYME NT OF REASONABLE COMPENSATION IN CASES OF BREACH OF CONTR ACT, IRRESPECTIVE OF WHETHER ANY ACTUAL DAMAGE/ LOSS HAS BEEN PROVED TO HAVE BEEN CAUSED, NOT EXCEEDING THE AMOUNT OR AS THE CASE MAY BE THE PENALTY STIPULATED IN THE CONTRACT. IN THE PRESENT CASE, IT IS SEEN THAT THERE IS NO WRITTEN AGREEMENT OR CONTRACT BETWEEN THE APPELL ANT AND M/S JAY ARTS. THERE IS THEREFORE, NO CONTRACTUAL OBLIGAT ION TO PAY LIQUIDATED DAMAGES. 23 6.5. HOWEVER, THERE IS A COURT ORDER DIRECTING THE APPELLANT TO PAY THE COMPENSATION AND INTEREST THEREON. THE COURT HA S DIRECTED THAT THE COMPENSATION PAID TO M/S JAY ARTS RELATED TO AMO UNTS WHICH WAS PAYABLE BY THE APPELLANT IN RESPECT OF THE WORK S EXECUTED BY THE SAID PARTY, ALTHOUGH DISPUTED BY THE APPELLANT. THE AMOUNT OF RS.2,07,32,232 AT THE LEAST RELATES TO THE OUTSTAND ING AMOUNTS PAYABLE TO M/S JAY ARTS AND HAVE BEEN DIRECTED TO BE PAID DURING THE YEAR BY THE CIVIL COURT. IT IS WELL SETTLED THA T WHERE A SUIT FOR DAMAGES IS ENTERTAINED BY A COURT OF LAW, THE RIGHT TO RECEIVE DAMAGES AND THE CORRESPONDING LIABILITY TO PAY DAMA GES ACCRUE OR ARISE ONLY WHEN THE MATTER IS FINALLY DECIDED BY TH E COURTS. THEREFORE, IN A CASE WHERE THE CLAIM FOR DAMAGES IS NOT INITIALLY ACCEPTED AND THE MATTER IS DISPUTED BEFORE THE COUR T, THE ACCEPTANCE BY BOTH OF PARTIES OF THE JUDGMENT AND DECISION OF THE COURT WILL SIGNAL THE ACCRUAL OF THE RIGHT TO RECEIVE AND THE CONCOMITANT LIABILITY TO PAY THE COMPENSATION AS DECREED BY THE COURT. IN THE PRESENT CASE, THE APPROVAL IS SIGNALED AT THE TIME WHEN THE PARTIES TO THE DISPUTE ENTERED INTO A MEMORANDUM OF COMPROM ISE FOLLOWING THE DECISION OF THE COURT. THIS HAS BEEN SO HELD BY THE MADRAS BENCH OF ITAT IN KAVERI ENGINEERING INDUSTRIES LTD. VS DC IT REPORTED IN 43 ITD 527 AND INTERNATIONAL SERVICES VS ITO REPORTED IN 43 ITD 25. 6.6. THE PAYMENTS IN QUESTION SPREAD OVER TWO ASSES SMENT YEARS NAMELY A.YS. 2008-09 AND 2009-10 PERTAINED TO CAPIT AL EXPENDITURE FOR THE INTERIOR OF THE HOTEL ROOMS. THE SAME RELAT ES MOSTLY TO FURNITURE AND FIXTURE, FALSE CEILING, AND OTHER CARP ENTRY WORK. SOME OF THE AMOUNTS RELATE TO INTERIOR WORK IN THE HOTEL LOBBY, COURTYARD, STAIRCASE, TERRACE ETC. BUT MAJORITY OF THE EXPENDI TURE RELATES TO WOOD WORK WHICH REQUIRES CONSTANT UPGRADATION, REPA IRS AND REPLACEMENT. THE COURT HAD DIRECTED THAT THE AMOUNT OF COMPENSATION TO BE PAID TO M/S JAY ARTS WAS RS.2,07, 32,232 (ON ACCOUNT OF OUTSTANDING AMOUNTS DUE) WHICH WORKS OUT TO 48% OF THE TOTAL LIABILITY. AS PER COURT ORDER, THE INTERE ST TO BE PAID W.E.F. 1.4.1999 TILL PAYMENT IS RS.2,23,90,919 WHICH TRANS LATES TO 52% OF THE TOTAL LIABILITY. THE APPELLANT HAS SETTLED THE CLAIM AT RS.3,50,00,000. ON THE PRO RATA BASIS, THE CAPITAL EXPENDITURE AND INTEREST COMPONENT IS SEEN TO BE AS PER FOLLOWING T ABLE : PARTICULARS AMOUNT (AS PER COURT) REMARKS AMOUNT (AS PER MOU) ADDITIONAL AMOUNT TO BE PAID INTEREST TO BE PAID FOR 9 YRS TOTAL LIABILITY PAYABLE AS PER COURT ORDER 20,732,332 22,390,919 43,123,251 (I.E. 48% OF THE TOTAL LIABILITY) (I.E. 52% OF TOTAL LIABILITY) (I.E. 100%) 16,800,000 18,200,000 35,000,000 ACCORDINGLY, THE ASSESSING OFFICER'S ACTION IN TREA TING THE AMOUNT PAID DURING THE YEAR AS CAPITAL EXPENDITURE IS UPHE LD. HOWEVER, THE ASSESSING OFFICER IS DIRECTED TO ALLOCATE THE CAPIT AL EXPENDITURE (PRO RATA) OF RS.1,68,00,000 TO THE BLOCK OF ASSETS OF B UILDING AND ALLOW DEPRECIATION THEREON. THE JUSTIFICATION FOR ALLOCAT ING THE CAPITAL ASSET TO BUILDING IS THAT THE RATES OF DEPRECIATION FOR B UILDING AND FURNITURE AND FIXTURE ARE THE SAME I.E. 10% FOR THE A.Y. 2008- 09. 24 6.7. SO FAR AS THE INTEREST AMOUNT OF RS.1,82,0 0,000 (DETAILS AS PER PARA 6.6) IS CONCERNED, A VIEW COULD BE TAKEN AS UP HELD BY THE HON'BLE SUPREME COURT IN BOMBAY STEEL NAVIGATION CO .(P) LTD. VS CIT REPORTED IN 56 ITR 52 THAT WHETHER A PARTICULAR EXP ENDITURE IS INCURRED FOR PURPOSES OF BUSINESS MUST BE DETERMINE D ON CONSIDERATION OF ALL FACTS AND CIRCUMSTANCES AND BY THE APPLICATION OF PRINCIPLES OF COMMERCIAL TRADING. IN VIEW OF THE DI SCUSSION AT PARA 6.5 ABOVE SINCE THE LIABILITY TO PAY THE INTEREST HAS A CCRUED DURING THE RELEVANT ASSESSMENT YEARS, AND THE SAME HAS BEEN IN CURRED AS BONAFIDE EXPENDITURE, THE CORRESPONDING INTEREST EL EMENT PAID DURING THOSE YEARS VIZ. RS.32,00,000 FOR A.Y. 2008-09 AND BALANCE RS.1,50,00,000 FOR A.Y. 2009-10 ARE TO BE ALLOWED A S REVENUE EXPENDITURE. THEREFORE, GROUNDS NO. 2 TO 4 FOR A.Y. 2008-09 AND GROUND NOS. 1 TO 3 FOR A.Y. 2009-10 ARE TREATED AS PARTLY ALLOWED. 13.1 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE RE VENUE IS IN APPEAL BEFORE US. 14. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND IN THE INSTANT CASE 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 PAR TY AND THE ASSESSEE, A CASE WAS FILED BEFORE THE CIVIL COURT W HO IN ITS JUDGMENT DATED 10-08-2007 HAD GRANTED COMPENSATION TO JAY ARTS AGAINST THE WORK DONE WITH RESPECT TO INTERIOR DESI GNING OF THE HOTEL IN THE YEAR 1997 AND SOME ADDITIONAL WORK. THE A SSESSEE HAD DEBITED COMPENSATION OF RS. 2 CRORES PAID TO JAY AR TS 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 ENTI RE LIABILITY WAS SETTLED FOR RS.3,50,00,000/- AS PER MOU DATED 22-02 -2008 AFTER THE 25 PUNE SESSIONS COURT ORDER DATED 10-08-2007. IF THE SAME IS SEGREGATED IN THE RATIO OF 52% AND 48% THEN THE INT EREST EXPENDITURE COMES TO RS.1,82,00,000/- BEING 52% OF THE TOTAL LIABILITY AND THE BALANCE AMOUNT OF RS.1,68,00,000/ - COULD BE CONSIDERED AS LIQUIDATED DAMAGES ARISING OUT OF A C OURT 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 PAYMENT S MADE TO JAY ARTS DURING THE PERIOD 1997 TO 2001 HAVE BEEN CAPIT ALISED AND TAKEN INTO FIXED ASSETS UNDER THE HEAD FURNITURE AND FIXT URES. WE FIND THE LD.CIT(A) ALLOWED AN AMOUNT OF RS.32 LAKHS OUT OF T HE SAID RS.1,82,00,000/- BEING REVENUE IN NATURE FOR THE IM PUGNED ASSESSMENT YEAR AND THE BALANCE AMOUNT OF RS.1,50, 00,000/- IN THE SUBSEQUENT YEAR ON THE GROUND THAT THERE IS A COURT ORDER DIRECTING THE ASSESSEE TO PAY COMPENSATION AND INTEREST THERE ON. ACCORDING TO HER, THE AMOUNT OF RS.2,07,32,232/-, I.E. 48% OF THE TOTAL LIABILITY RELATES TO THE OUTSTANDING AMOUNTS AND THE BALANCE AMOUNT IS TOWARDS INTEREST. SINCE THE ASSESSEE HAS SETTLED T HE CLAIM OF RS.3,50,00,000/-, THEREFORE, ON PRORATA BASIS, THE CAPITAL EXPENDITURE COMES TO RS.1,68,00,000/- AND THE INTEREST PORTION COMES TO RS.1,82,00,000/-. 14.1 SO FAR AS THE ISSUE OF ACCRUAL OF LIABILITY TO PAY DAMAGES FROM THE DATE ON WHICH THE MOU IS SIGNED FOR FULL AND FI NAL SETTLEMENT, WE FIND THE ORDER OF LD.CIT(A) IS SUPPORTED BY THE DECISION OF THE MADRAS BENCH OF THE TRIBUNAL IN THE CASE OF KAVERI ENGINEERING 26 INDUSTRIES LTD., (SUPRA) REPORTED IN 43 ITD 25. TH E TRIBUNAL HAS OBSERVED AS UNDER (SHORT NOTES) : CD WAS FUNCTIONING AS A SENIOR DIRECTOR OF GW LTD. W HICH EARLIER REPRESENTED TWO FOREIGN FIRMS. THE AFORESAID TWO FORE IGN FIRMS TRANSFERRED THEIR BUSINESS CONNECTIONS TO THE ASSESSEE FIRM CONSISTING OF THREE PARTNERS, NAMELY CDS WIFE, DAUGHTE R AND SON. THEREUPON, GW LTD. FILED A SUIT ALLEGING, INTER ALIA , THAT CD HAD IN A CLANDESTINE MANNER GOT HOLD OF THE BUSINESS OF THE FORE IGN PRINCIPALS, AND CLAIMED, INTER ALIA, LIQUIDATED DAMA GES. BY THEIR ORDER DATED 30-04-1982, THE HIGH COURT AWARDED TO T HE PLAINTIFF A SUM OF RS. 42 LAKHS AS AND BY WAY OF LIQUIDATED DAMAGES. CD, FIRSTLY BY INTERLOCUTORY PETITION, GOT THE OPERATION OF THE JUDGMENT STAYED AND, SECONDLY, ON 28-10-1991, A MEMORANDUM OF COMPR OMISE WAS ENTERED INTO BY THE PARTIES TO THE DISPUTE, UNDER WHI CH THE ASSESSEE-DEFENDANT PAID A SUM OF RS. 17 LAKHS TO GW LTD. I N FULL AND FINAL COMPROMISE/SETTLEMENT OF THE CLAIMS AND COUNTER CLAIMS INVOLVED IN THE DISPUTE. THEREUPON, BY THEIR ORDER D ATED 31-10- 1991, THE HIGH COURT CONFIRMED THE SAID MEMORANDUM O F COMPROMISE. FOR THE ASSESSMENT YEAR 1983-84, THE ASSESSEE-F IRM SET UP A CLAIM FOR REVENUE DEDUCTION IN A SUM OF RS. 1 4 LAKHS ON THE GROUND THAT THE LIQUIDATED DAMAGES OF RS. 42 LAKHS AWA RDED BY THE HIGH COURT ON 30-4-1982 WERE TO BE SHARED EQUALLY BY THE ASSESSEE-FIRM AND ITS TWO FOREIGN PRINCIPALS. THE ASSESSING OFFICER, HOWEVER, NEGATIVED THE ASSESSEE'S CLAIM. ON APPEAL, THE COMMISSIONER (APPEALS) UPHELD THE ITO'S ORDER. ON SECOND APPEAL: HELD THERE IS A DIFFERENCE BETWEEN A STATUTORY LIABILITY A ND A LIABILITY ARISING ON ACCOUNT OF A BREACH OF CONTRACT OR BREACH OF FAITH. STATUTORY LIABILITY ARISES ON THE HAPPENING OF THE TA XABLE EVENT. SUCH LIABILITY ARISES BY REASON OF THE STATUTE ITSELF A ND MERELY BECAUSE THE ASSESSEE DISPUTES THE LIABILITY, ITS ACCRUAL DO ES 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. I N SUCH CASES, THE LIABILITY DOES NOT ARISE MERELY BECAUSE A CLAIM FOR DA MAGES IS MADE. THE LIABILITY ARISES THE MOMENT THE ASSESSEE ACCEPTS THE C LAIM. IF, ON THE CONTRARY, THE ASSESSEE DISPUTES THE CLAIM, THE LI ABILITY 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 AC CRUE TILL THE CLAIM IS ADJUDICATED UPON OR IT IS ACCEPTED BY THE ASSE SSEE. IN THE INSTANT CASE, THE HIGH COURT AWARDED DAMAGES O N 30-4-1982. AT THE FIRST BLUSH, IT APPEARED THE LIABILITY TO PAY THE DAMAGES GOT FASTENED ON TO THE ASSESSEE ON THAT DAY. BUT A CLOSER LOO K AT THE FACTS OF THE CASE WOULD INDICATE TO THE CONTRARY. AS P OINTED OUT EARLIER, THE PARTIES TO THE DISPUTE SUBSCRIBED TO A MEM ORANDUM OF COMPROMISE DATED 28-10-1991. THAT MEANT THAT IT WAS O NLY ON THAT DAY THAT THE ASSESSEE ACCEPTED ITS LIABILITY TO PAY LIQ UIDATED DAMAGES. IT WAS SIGNIFICANT TO NOTE THAT BY THE ACT A ND DEED OF 27 SUBSCRIBING TO A MEMORANDUM OF COMPROMISE, BOTH THE PA RTIES TO THE DISPUTE HAD NOT ACTED UPON THE ORDER DATED 30-4- 1982. AND THE MEMORANDUM OF COMPROMISE DATED 28-10-1991 SIGNALLED T HE ACCEPTANCE BY BOTH THE PARTIES TO THE DISPUTE OF' TH E MODE AND MECHANICS OF RESOLUTION OF THE DISPUTE BETWEEN THEM. S ECONDLY, THERE WAS ALSO THE SIGNIFICANT FACT THAT THE DIVISION B ENCH OF THE HIGH COURT STAYED THE JUDGMENT AND DECREE DATED 30-4 -1982. THE EFFECT OF THE TERMS ON WHICH THE STAY WAS GRANTED WAS THAT GW LTD. DID NOT HAVE ANY ABSOLUTE RIGHT TO RECEIVE THE AMOUN T OF RS. 42 LAKHS AT THAT STAGE. SINCE THE RIGHT TO RECEIVE AND T HE CORRESPONDING LIABILITY TO PAY A CERTAIN AMOUNT WERE CO-EQUAL, CO EXTENSIVE AND CONCOMITANT, THE ASSESSEE COULD NOT BE REGARDED AS HAV ING BEEN VISITED WITH AN ENFORCEABLE LIABILITY TO PAY THE SUM AWARDED BY WAY OF DAMAGES. FURTHER, IN VIEW OF THE SUPREME COURT DE CISION IN CIT V. HINDUSTAN HOUSING & LAND DEVELOPMENT TRUST LTD. [1 986] 261 ITR 524 /27 TAXMAN 450A THE LIABILITY OF THE ASSESSEE-F IRM TO PAY ITS SHARE OF THE LIQUIDATED DAMAGES AROSE ON 31-10-19 91 WHEN THE MEMORANDUM OF COMPROMISE WAS MADE THE DECREE OF THE COURT. IT SHOULD, THEREFORE .FOLLOW THAT THE ASSESSEE'S CLAIM MUST FAIL. THEREFORE, THE LIABILITY TO PAY THE ASSESSEE'S SHAR E OF THE DAMAGES AS FINALLY QUANTIFIED ON COMPROMISE WOULD HAVE TO BE D EALT WITH IN THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WH ICH THE DATE 31- 10-1991 FELL. 14.2 SO FAR AS TREATING THE EXPENDITURE OF RS.1,82, 00,000/- AS INTEREST IS CONCERNED, WE FIND THE LD.CIT(A) FOLLOW ING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF BOMBAY STEE L NAVIGATION COMPANY (P) LTD., VS. CIT REPORTED IN 56 ITR 52, HA S DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND ACCORDINGLY ALL OWED INTEREST EXPENDITURE OF RS.32 LAKHS FOR THE IMPUGNED ASSESSM ENT YEAR AND THE REMAINING RS.1,50,00,000/- REVENUE EXPENDITURE IN THE SUBSEQUENT YEAR. WE FIND THE HONBLE SUPREME COURT IN THE CASE OF BOMBAY STEAM NAVIGATION COMPANY (1953) PVT. LTD. , WHILE 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 SHI PPING COMPANIES, THE ASSESSEE-COMPANY WAS INCORPORATED ON AUGUST 10, 1953, TO TAKE OVER CERTAIN PASSENGER AND FERRY SERVI CES CARRIED ON BY ONE OF THE FORMER. ON AUGUST 12, 1953, THE ASSESSEE-CO MPANY TOOK 28 OVER ASSETS, WHICH WERE FINALLY VALUED AT RS. 81,55,000 , AND AGREED THAT THE PRICE WAS TO BE SATISFIED PARTLY BY ALLOTMENT OF 29,990 FULLY PAID UP SHARES OF RS. 100 EACH AND THE BALANCE WAS TO BE TREATED AS A LOAN AND SECURED BY A PROMISSORY NOTE AND HYPOTHECATIO N OF ALL MOVABLE PROPERTIES OF THE ASSESSEE-COMPANY. THE BAL ANCE REMAINING UNPAID FROM TIME TO TIME WAS TO CARRY SIMPLE INTERE ST AT 6 PER CENT. BY A SUPPLEMENTAL AGREEMENT THE ORIGINAL AGREEMENT WAS MODIFIED TO THE EFFECT THAT THE BALANCE SHALL BE PAID BY THE AS SESSEE-COMPANY AND UNTIL IT WAS PAID IN FULL THE ASSESSEE-COMPANY SHAL L 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 ACCOUNTING YEARS THE ASSESSEE PAID INTEREST ON THE BALANCE OUTSTANDING AND THE QUESTION WAS WHETHER THE INTERE ST PAID WAS ALLOWABLE AS A DEDUCTION UNDER SECTION 10(2)(III) OR (XV) OF THE INDIAN INCOME-TAX ACT, 1922, IN COMPUTING ITS PROFIT S: HELD, (I) (PER SHAH AND SIKRI JJ.) THAT THE EXPRESSION ' CAPITAL' USED IN SECTION 10(2)(III), IN THE CONTEXT IN WHICH IT OCCUR RED, MEANT MONEY AND NOT ANY OTHER ASSET: THERE WAS IN TRUTH NO CAPI TAL BORROWED BY THE ASSESSEE IN THIS CASE. AN AGREEMENT TO PAY THE BALANCE OF CONSIDERATION DU E BY THE PURCHASER DID NOT IN TRUTH GIVE RISE TO A LOAN. THE REFORE, THE CLAIM FOR DEDUCTION OF THE AMOUNT OF INTEREST UNDER SECTION 1 0(2)(III) WAS NOT ADMISSIBLE. (II) (BY THE FULL COURT) THAT, HOWEVER, THE INTERES T PAID BY THE ASSESSEE WAS BUSINESS EXPENDITURE AND WAS ALLOWABLE AS A DEDUCTION UNDER SECTION 10(2)(XV). THE TRANSACTION OF ACQUISI TION OF ASSETS WAS CLOSELY RELATED TO THE COMMENCEMENT AND CARRYING ON OF THE ASSESSEE'S BUSINESS AND INTEREST PAID ON THE UNPAID' BALAN CE OF THE CONSIDERATION FOR THE ASSETS ACQUIRED HAD, IN THE N ORMAL COURSE, TO BE REGARDED AS EXPENDED FOR THE PURPOSE OF THE BUSINES S WHICH WAS CARRIED ON IN THE ACCOUNTING PERIODS. STATE OF MADRAS VS. COELHO [1964] 53 I.T.R. 186 (S.C.) FOLLOWED. THE EXPENDITURE MADE UNDER A TRANSACTION WHICH IS S O CLOSELY RELATED TO THE BUSINESS THAT IT COULD BE VIEWED AS AN INTEG RAL PART OF THE CONDUCT OF THE BUSINESS, MAY BE REGARDED AS REVENUE EXPENDITURE LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS. EXPENDITURE FOR SATISFYING LIABILITY UNRELATED TO THE BUSINESS, EVEN IF INCURRED FOR AVOIDING DANGER, APPREHENDED OR REAL, TO THE CONDUCT OF THE BUSINESS, CANNOT BE SAID TO BE REVENUE EXPENDIT URE. IN CONSIDERING WHETHER EXPENDITURE IS REVENUE EXPEN DITURE, THE COURT HAS TO CONSIDER THE NATURE AND THE ORDINARY C OURSE OF BUSINESS AND THE OBJECTS FOR WHICH THE EXPENDITURE IS INCURRE D. THE QUESTION WHETHER A PARTICULAR EXPENDITURE IS REVENUE EXPENDIT URE INCURRED FOR THE PURPOSE OF THE BUSINESS MUST BE VIEWED IN THE LARGER CONTEXT OF BUSINESS NECESSITY OR EXPEDIENCY. IF THE OUTGOING OR EXPENDITURE IS SO RELATED TO THE CARRYING ON OR CONDUCT OF THE BUSINESS THAT IT MAY BE REGARDED AS AN INTEGRAL PART OF THE PROFIT-EARNI NG PROCESS AND NOT FOR ACQUISITION OF AN ASSET OR A RIGHT OF A PERMANEN T CHARACTER, THE POSSESSION OF WHICH IS A CONDITION TO THE CARRYING ON OF THE BUSINESS, 29 THE EXPENDITURE MAY BE REGARDED AS REVENUE EXPENDITURE. TAX IS PAYABLE UNDER SECTION 10(1) BY AN ASSESSEE ON HIS P ROFITS OR GAINS TURNED IN THE BUSINESS, PROFESSION OR VOCATION CAR RIED ON BY HIM IN THE YEAR OF ACCOUNT. IF NO BUSINESS AT ALL IS C ARRIED 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 RS.32,00,000/- OUT OF THE PAYMENT OF RS.2,00,00,000 /- TO M/S. JAY ARTS TREATING THE SAME AS REVENUE EXPENDITURE. 14.4 SO FAR AS THE DECISION OF THE HONBLE BOMBAY H IGH COURT IN THE CASE OF PRABHAT THEATRES (P) LTD., (SUPRA) RELI ED ON BY THE REVENUE IS CONCERNED, WE FIND THE SAME IS NOT APPLI CABLE TO THE FACTS OF THE PRESENT CASE AND IS DISTINGUISHABLE. IN THAT CASE, THE ASSESSEE COMPANY WAS CARRYING ON BUSINESS OF EXHIBI TING MOTION PICTURES IN A THEATRE WHICH HAD BEEN TAKEN ON LEASE BY TWO PARTNERSHIP FIRMS. SINCE THE LESSEES OF THE THEATR E 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 RES PECTIVE PARTNERS. THE OWNER OF THE THEATRE FILED A SUIT ALLEGING THAT THE LESSEES HAD ILLEGALLY ALLOWED THE ASSESSEE COMPANY TO USE THE T HEATRE FOR ITS BUSINESS PURPOSES AND THE ASSESSEE COMPANY WAS IMPL EADED AS A PARTY DEFENDANT IN THE SUIT. THE SUIT ENDED IN A C OMPROMISE AND BY A CONSENT DECREE THE ASSESSEE COMPANY WAS DECLARED TO BE THE LAWFUL TENANT OF THE OWNER OF THE THEATRE ON CONDIT ION THAT THE ASSESSEE COMPANY AGREED TO PAY RENT FROM 1950 AND C OMPENSATION BY WAY OF INTEREST. IN PURSUANCE OF THAT DECREE, T HE ASSESSEE 30 COMPANY PAID INTEREST OF RS.34,080/- TO THE OWNER O F THE THEATRE AND CLAIMED IT AS A DEDUCTION IN THE COMPUTATION OF ITS ASSESSABLE INCOME FOR THE A.Y. 1959-60. THE ASSESSING OFFICER DISALLOWED THE CLAIM HOLDING THAT THE EXPENDITURE WAS IN THE N ATURE OF CAPITAL EXPENDITURE. ACCORDING TO THE ASSESSING OFFICER, THE ASSESSEE HAD AGREED TO COMPROMISE AND PAID RENT AND INTEREST BEC AUSE IT WAS IN ILLEGAL OCCUPATION OF THE PROPERTY AND IT WOULD HAV E BEEN REQUIRED TO VACATE THE PREMISES IN THE EVENT OF DISPUTING TH E COMPROMISE AND BY A CONSENT DECREE THE ASSESSEE MANAGED TO LEGALIS E THE OCCUPATION OF THE BUILDING. THE AAC ALLOWED AN AMOUNT OF RS.5 ,400/- ONLY. ON FURTHER APPEAL, THE TRIBUNAL FOUND THAT NONE OF THE LEASES THAT WERE EXECUTED FROM TIME TO TIME WAS FILED, THAT ONL Y THE CONSENT DECREE IN A SUIT WAS FILED AND HELD THAT THE ASSESS EE FAILED TO ESTABLISH THAT IT WAS IN OCCUPATION OF THE THEATRE AS A TENANT FROM THE VERY BEGINNING. THE TRIBUNAL FURTHER HELD THAT THE AMOUNT OF INTEREST WAS PAID BY THE ASSESSEE IN ORDER TO LEGAL ISE THE ASSESSEES RIGHT TO OCCUPATION AND NOT FOR PRESERVING ITS TENA NCY RIGHT AND HENCE THE PAYMENT OF INTEREST WAS CAPITAL EXPENDITU RE. UNDER THESE CIRCUMSTANCES, THE HONBLE HIGH COURT UPHELD THE OR DER OF THE TRIBUNAL. THE RELEVANT OBSERVATION OF THE HONBLE H IGH COURT AT PAGE 957 READS AS UNDER : SO FAR AS QUESTION NO. 3 IS CONCERNED, THE TRIBUNAL HAS BEEN CAREFUL ENOUGH TO POINT OUT THAT THERE WAS NO MATERIAL ON R ECORD TO INDICATE THE TIME FROM WHICH THE ASSESSEE COMPANY START ED OCCUPYING THE KIBE THEATRE. WITHOUT KNOWING THE TIM E WHEN THE ASSESSEE COMPANY WAS IN OCCUPATION OF THE THEATRE IT WIL L BE DIFFICULT FOR THE TRIBUNAL TO COME TO A DEFINITE FI NDING AS REGARDS THE LIABILITY FOR AN AMOUNT OF RS. 34,080 WHICH WAS DESCRI BED AS THE AMOUNT OF INTEREST IN THE CONSENT DECREE. IT WILL NOT BE OUT OF PLACE TO REFER TO THE FACT THAT THE CLAIM IN THE SUIT FOR ARREARS OF INTEREST 31 WAS RS. 70,500 WHILE IN THE CONSENT DECREE THAT AMOUN T WAS REDUCED TO RS. 44,600. IN THE PLAINT AN AMOUNT OF RS. 9,500 WAS CLAIMED BY WAY OF INTEREST WHILE IN THE CONSENT DECRE E A SUM OF RS. 40,882 WAS AGREED TO BE PAID BY WAY OF INTEREST AND C OURT 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 A SSESSEE BEFORE THE TAXING AUTHORITIES AND THE TRIBUNAL. IN THAT VIE W OF THE MATTER, THE TRIBUNAL CAME TO THE CONCLUSION THAT THIS SUM OF RS. 34,080 WAS AGREED TO BE PAID UNDER THE COMPROMISE DECREE IN ORD ER TO LEGALISE THE ASSESSEE'S RIGHT FOR OCCUPATION AND NOT FOR PRESERVIN G ITS TENANCY RIGHTS. ACTUALLY IT FOUND THAT EVEN THE DEDU CTION OF RS. 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 W AS CONCERNED, IT WAS DISALLOWED IN VIEW OF THIS CONCLUSION OF THE TRIBUN AL BECAUSE AS A RESULT THEREOF WHAT WAS DESCRIBED AS PAYMENT OF INT EREST WAS IN FACT CAPITAL EXPENDITURE WHICH WAS NOT ALLOWABLE AS A BUSINESS EXPENDITURE. 14.5 HOWEVER, IN THE INSTANT CASE, ALL THE DETAILS ARE AVAILABLE AND THE FACTS ARE ENTIRELY DIFFERENT. THEREFORE, THE D ECISION RELIED ON BY THE REVENUE IS NOT APPLICABLE TO THE FACTS OF THE P RESENT CASE. IN THIS VIEW OF THE MATTER AND IN VIEW OF THE DETAILED REASONING GIVEN BY THE LD.CIT(A), WE FIND NO INFIRMITY IN ALLOWING RS.32 LAKHS OUT OF INTEREST OF RS.1,82,00,000/- AS REVENUE EXPENDIT URE FOR THE IMPUGNED ASSESSMENT YEAR. ACCORDINGLY, WE UPHOLD T HE SAME. 14.6 SO FAR AS THE ORDER OF THE CIT(A) IN DIRECTING THE ASSESSING OFFICER TO ALLOW DEPRECIATION ON THE CAPITAL EXPEND ITURE IS CONCERNED, WE FIND NO INFIRMITY IN THE SAME. WHEN CERTAIN AMOUNT IS ALLOCATED TOWARDS CAPITAL ASSETS OF THE ASSESSEE COMPANY, THE ASSESSEE IS ENTITLED TO CLAIM DEPRECIATION ON THE S AME. WE, THEREFORE, FIND NO INFIRMITY IN THE ORDER OF THE CI T(A) ON THIS ISSUE AND ACCORDINGLY UPHOLD THE SAME. THE GROUNDS RAISE D BY THE REVENUE ARE ACCORDINGLY DISMISSED. 32 ITA NO.774/PN/2013 (A.Y. 2009-10) : 15. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER : 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-T AX (APPEALS) IS CONTRARY TO LAW AND TO THE FACTS AND CIRCUMSTANCES O F THE CASE. 2. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) GR OSSLY ERRED IN ALLOWING THE ASSESSEE'S CLAIM OF DEDUCTION OF RS.1,50, 00,000/-, BEING PAYMENT MADE TO M/S. JAY ARTS, AS REVENUE EXPEND ITURE INSTEAD OF CONFIRMING THE ASSESSMENT OF THE SAID SUM BY TH E ASSESSING OFFICER AS CAPITAL EXPENDITURE. 3. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) GR OSSLY ERRED IN ALLOWING THE INTEREST PAID ON ARREARS OUTSTAN DING AS A REVENUE EXPENDITURE BY RELYING ON THE DECISION IN TH E CASE OF BOMBAY STEEL NAVIGATION CO P LTD VS CIT(56 ITR 52), WITHOUT GIVING ANY FINDING THAT THE INTEREST PAID WAS AN INT EGRAL PART OF THE PROFIT-EARNING PROCESS AND HAD NOT BEEN INCURRED FOR ACQUISITION OF ASSETS. 4. THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) GR OSSLY ERRED IN FAILING TO APPRECIATE AND APPLY THE RATIO OF THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF PRAB HAT THEATRE (P)LTD, VS CIT (1979)118 ITR 953(BOM.) WHEREIN IT WA S HELD THAT COMPENSATION BY WAY OF INTEREST WAS NOT ALLOWABLE AS BU SINESS EXPENDITURE. 5. THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) GR OSSLY ERRED IN DIRECTED THE ASSESSING OFFICER TO ALLOW DEPRECIATIO N ON THE CAPITAL EXPENDITURE WITHOUT APPRECIATING THAT THE A SSET WAS PUT TO USE FROM THE A.Y. 2000-01 AND HAD ALSO ALREADY DEPREC IATED; AND, MOREOVER, THERE IS NO PROVISION IN THE ACT TO ALLOW ADJUSTMENT TO WDV AS WOULD ENABLE COMPUTING DEPRECIATION. 6. FOR THESE AND SUCH OTHER GROUNDS AS MAY BE URGED AT THE TIME OF THE HEARING, THE ORDER OF THE LD. COMMISSIONER OF INC OME- TAX(APPEALS) MAY BE VACATED AND THAT OF THE ASSESSING OF FICER BE RESTORED. 7. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER O R DELETE ANY OF THE ABOVE GROUNDS OF APPEAL DURING THE COURSE OF THE APPELLATE PROCEEDINGS BEFORE THE HON'BLE TRIBUNAL. 15.1 AFTER HEARING BOTH THE SIDES, WE FIND THE ABOV E GROUNDS RAISED BY THE REVENUE ARE IDENTICAL TO GROUNDS OF A PPEAL FILED BY REVENUE IN ITA NO.773/PN/2013. WE HAVE ALREADY DEC IDED THE ISSUE AND THE GROUNDS RAISED BY THE REVENUE HAVE BE EN DISMISSED. FOLLOWING THE SAME RATIO, THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 33 16. IN THE RESULT, ALL THE 3 APPEALS FILED BY THE R EVENUE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 02-12-2014. SD/- SD/- (SHAILENDRA KUMAR YADAV) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEM BER PUNE DATED: 02 ND DECEMBER, 2014 SATISH COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. THE CIT(A)-I, PUNE 4. THE CIT-I, PUNE 5. THE D.R, B PUNE BENCH 6. GUARD FILE BY ORDER // TRUE COPY // ASSISTANT REGISTRAR ITAT, PUNE BENCHES, PUNE