Orissa High Court
Unknown vs Cit on 4 December, 2019
ITA No.19 of 2014
08. 04.12.2019 Heard Shri T.K. Satapathy, learned standing counsel
for the appellant-Income Tax Department.
2. Instant appeal is against the order passed by learned
Income Tax Appellate Tribunal, Cuttack Bench, Cuttack in ITA
No.160/CTK/2013, dated 06.06.2014, dismissing the appeal
filed by the revenue.
3. Perused the impugned order in detail. Learned
Tribunal while dismissing the appeal has rightly discussed the
contention raised by the revenue and has held in favour of the
assessee. For ready reference, relevant paragraphs-9 to 11 of
the impugned order are reproduced hereunder:
"9. We heard the rival submission and carefully
considered the same along with the orders of tax
authorities below. So far the technical issue
relating to the power of the assessing officer in
respect of addition made by disallowing
compensation paid to the lenders for de-rating is
concerned, we noted that in this case the assessing
officer has made the addition in respect of the
income for which reasons for escapement of
assessment were recorded by him i.e. unabsorbed
depreciation. Merely the additions so made stand
deleted by the CIT (A) will not make the action of
the assessing officer illegal if he has added any
other income chargeable to tax which has escaped
assessment and which comes to his notice
subsequently, in the course of the proceedings u/s
147. We have gone through the decisions of Delhi
High Court in the case of Ranbaxy Laboratories Ltd
vs CIT, 336 ITR 136 (Del) and that of Mumbai High
Court in the case of CIT vs Jet Airways (I) Ltd, 331
ITR 236. We noted that in both these decisions no
addition has been made by the assessing officer on
the basis of the reasons recorded by him that the
income chargeable to tax has escaped assessment.
In view of this fact Hon'ble High Court deleted the
additions which were made in respect of the issues
other than the issues in respect of which
proceedings u/s 147 were initiated. In the
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impugned case, the addition for the unabsorbed
depreciation was duly made along with
disallowance for compensation paid to the lenders
for de-rating of the shares on account of arriving of
the settlement for long term borrowing of the
company which got merged with the assessee
company, by the assessing officer. The reasons
u/s 148 was duly recorded for escapement of the
income in respect of unabsorbed depreciation. The
disallowance of unabsorbed depreciation was
deleted by the Appellate Authority that does not
mean no addition was made by the assessing
officer on the basis of the reason to believe
recorded by him. The section 147 of the Income
Tax Act talks of assessing officer not of the
appellate authority. These decisions in our opinion
are not applicable to the facts of the case. In our
opinion, there is no illegality in this case as per the
provision of section 147 of the Income Tax Act. We
accordingly dismiss this technical plea of the ld.
A.R.
10. Now, we will deal with the plea of the ld.
A.R. whether the expenditure incurred by ICCL
which got amalgamated in the assessee in respect
of compensation paid to the lenders against the
reduction of the de-rating. This is an undisputed
fact that ICCL had borrowed money from its
lenders i.e. with six bankers and two financial
institutions. The ICCL was not able to make the
payment or to fulfill its commitment towards the re-
payment of the long term debt. Therefore a debt
restricting plan for ICCI was approved and the
terms lenders had suggested in 2003 for derating
of existing equity shares of ICCL by 95%, and to
convert part of debt by lenders into ICCL equity.
Subsequently as per the assessee the derating was
done @50% and for that compensation was paid to
the financial institutions otherwise they would
have not agreed for reduction of de-rating. In our
opinion, if the shares are de-rated by 95%, the
lenders would have got more shares on conversion
of loan in to equity. Once the de-rating is reduced,
the natural consequence is that the lenders got less
shares in ICCL on conversion of the loan into
equity. This means that the lenders will be getting
the share on conversion of loan into equity at
settlement at a higher price. The company
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therefore, would have compensated the lender so
that they may arrive at a settlement. This is our
opinion is the true nature of the transaction. For
deciding the issue we have to look into the true
nature of the transaction not to the nomenclature or
colour of the transaction what the assessee would
have given to it. The compensation, therefore, so
paid to the lenders amounting to Rs.7,41,74,113/-
therefore can by no stretch of imagination be
regarded to be on revenue account. This amount
has been paid in our opinion to compensate the
lenders because they got shares in ICCL on
conversion of debt at a higher price. Consequently,
at the time of amalgamation the lenders will get
less shares in IMFA as in place of 14 equity shares
of ICCL, one equity share of IMFA was allotted was
allotted. In case the shares would have been
(ineligible) rated by 95%, the lenders would have
got more shares in ICCL on conversion of part of
the debt into equity. In consequence thereof on
amalgamation, the lenders would have got more
shares in IMFA in exchange of shares in ICCL. No
person of ordinary prudence what to talk of lenders
have agreed to such amendment until and unless
they have been compensated for the loss arising
due to the less value of the shares received by
them. The expenditure so incurred cannot be
regarded for facilitating the business of the
assessee or liquidating the recurring claims as
contended by the ld. A.R. The true nature of the
expenditure is that the company was compensated
the lenders as they agreed to take the shares in
ICCL at a higher price than what was proposed by
them in their structured settlement during the year
2003. The expenditure so incurred is clearly on
capital account, it cannot be regarded to have been
incurred for serving the debt or to have been
incurred for the purpose of the amalgamation. This
expenditure can also not be regarded to have been
incurred for the purpose of the amalgamation as
the debts has been converted into the equity
shares at a lesser value prior to the merging of the
ICCL into IMFA and compensation has been paid to
the lenders on conversion of the debts into equity
shares at a higher value. The compensation so
paid is directly linked with the loss suffered by the
lenders on account of conversion of debts into
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equity shares due to the amended proposal. The
assessee gets benefited in consequence that it has
to allot less shares in its company to the erstwhile
share holder of ICCL. Thus this expenditure has
clearly being incurred by the assessee on capital
account for the purpose of share capital. Therefore,
the expenditure cannot be allowed as a revenue
expenditure u/s 37 (1) as it is a capital
expenditure. The assessee also cannot get
deduction u/s 35DD of the Income tax Act as this
expenditure has nothing to do with the
amalgamation and incurrence of this expenditure
was made for allotting the shares in ICCL not for
the purpose of amalgamation of ICCL with the
assessee.
11. We have gone through the case laws as
relied on by ld. A.R. The decision of Hon'ble
Supreme Court in the case of Empire Jute Co. Ltd
vs CIT [1980] 124 ITR 455 (SC) in our opinion will
not assist the assessee as the issue involved in
that case does not relate for paying the
compensation to the lender on conversion of the
long term debt into equity share at a higher value
as has been expected by the lender. The
expenditure so incurred is not for facilitating the
day-to-day trading operations of the assessee
company and enabling the management and
conduct of the assessee company's business to be
carried on more efficiently. The decision of Hon'ble
Supreme Court in the case of CIT vs Shantilal Pvt.
Ltd, [1983] 144 ITR 57 (SC) deals with the award
of compensation by an arbitration award on a
dispute between the parties. The question involved
relate to whether the loss suffered by the assessee
was a loss incurred in a speculative transaction.
Thus, this decision will not apply to the facts of the
case. The decision of Delhi High Court in CIT vs.
Desiccant Rotors International Pvt. Ltd (supra) will
also not apply with the facts of the case as the
amount was paid for settlement of suit for
infringement of patent. The issue was whether the
amount so paid is penalty or business expenditure.
In the case of CIT vs. Karamchand Premchand Pvt.
Ltd. [1993] 200 ITR 281 (Guj) the issue relate to the
payment made for securing or augmenting
electrical power supply whether it is a revenue
expenditure or capital expenditure. The Hon'ble
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Court took the view that the expenditure has been
incurred for profit making apparatus and due to its
profit making structure can be operated with
greater productivity therefore, payment will take
the character of revenue expenditure. The
compensation in the case of the assessee has not
been made for profit apparatus or for increase in
producing but for compensating the share capital.
This decision therefore is not applicable in the case
of the assessee. We have also perused the case of
Chennai bench in the case of ACIT vs WS
Industries, 128 ITR 98. This decision relate to the
claim made by the assessee for discharging the
corporate guarantee given for its subsidiary
company under the settlement with the banks by
affecting one time settlement. This decision has
not to deal with the compensation paid on capital
account. Thus this decision is also not applicable
to the facts of the case before us. We therefore,
dismiss the ground nos.8 to 11. "
4. Considering the submission made and keeping in
view the observations made by the learned Tribunal as quoted
above, we are in complete agreement with the view taken by
the learned Tribunal in the impugned order and find no case
is made out to interfere with the same.
5. Hence, the appeal, being devoid of merits, deserves to
be dismissed and is accordingly dismissed.
All connected Misc. Case(s)/I.A(s) if any, is/are
accordingly dismissed.
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( K.S. Jhaveri ) Chief Justice ................................ (K.R.Mohapatra) mp Judge