Income Tax Appellate Tribunal - Pune
Bramha Bazaz Hotels Ltd.,, Pune vs Assessee on 18 September, 2012
N THE INCOME TAX APPELLATE TRIBUNAL
Pune Bench "A" , Pune
Before Shri G.S. Pannu, Accountant Member
and Shri R.S. Padvekar, Judicial Member
ITA No. 770/PN/2011
(Asstt. Year :2006-07 )
M/s. Bramha Bazaz Hotels Ltd., ... Appellant
Raja Bahadur Mill Road,
Pune
PAN : AACB7054L
v.
Commissioner of Income Tax- I, Pune ... Respondent
B-Wing, PMT Bldg., Pune
Appellant by : Shri Kishore Phadke
Respondent by : Shri Mukesh Verma, CIT
Date of Hearing : 18/9/2012
Date of Pronouncement : 28- 9-12
ORDER
Per R.S. Padvekar, JM
In this appeal, the assessee challenged the impugned order of the Ld CIT-I, Pune, passed u/s. 263 of the I.T. Act, 1962, dated 31st March 2011 for the A.Y. 2006-07. The assessee has taken the following effective grounds :
"1. The learned CIT-1, Pune erred in law and on facts in directing disallowance of expenditure on buy-back of shares amounting to Rs.3,45,95,921/- without appreciating that the said expenditure was based on business expediency and hence, allowable u/s 37.
2. The learned CIT-I, Pune erred in law in assuming jurisdiction u/s 263 w.r.t. expenditure on buy-back of shares without appreciating the fact that when two possible views are available, adopting one view does not lead to any error which needs to be corrected by resorting to section 263 of the ITA, 1961."
2. The facts which reveal from the record are as under. The assessee is in the business of hotel. The assessment of the assessee u/s. 143(3) was completed vide assessment order dated 29.12.2008. Subsequently, Ld CIT, Pune, by exercising his jurisdiction u/s. 263 passed the order directing the A.O to disallow the sum of Rs.3,45,95,921/- which was claimed as a revenue expenditure in respect of premium paid at the time 2 ITA No. 770/PN/2011 M/s. Brahma Bazaz Hotels Ltd.
A.Y. 2006-07 of buy back of the shares as per CLB order. The assessee company incorporated in the year 1987 and the hotel activity was started in the year 1998-99. The assessee company was formed by the Agarwal Group represented by various family members, who were the shareholders and Board of Directors consisting of the family members. The assessee company had undertaken the project for acquiring the property in the Government auction to establish hotel. The assessee made the tie up with the Meridien Group in the commercial interest of the company. The assessee needed huge funds and hence, equity participation of some investors was sought and funds were generated for the desired project of Five Star Delux Hotel. The shares were held by (a) Agarwal group, (b) Mac Charles group and (c) Gupta group. The dispute started in the stakeholders of the assessee company from the year 2002-03 as regards management aspects, control, borrowing pattern, etc., Though the attempts were made to resolve the differences between the shareholders group considering the interest of the company, but dispute could not be settled amicably.
3. One of the group of the shareholders i.e. Mac group started filing cases against the assessee company including the criminal and civil cases also, against the Agarwal group. The assessee company was subjected to charges of mis-management and oppression by the Mac group. The matter was carried before the Combay Law Board (CLB), Delhi by invoking Sec. 397-398 of the Companies Act, 1956. There was the battle of litigation in the CLB. During the period of the litigation, assessee's hotel business suffered. As per the M.O.U. between the assessee and Meridien group, the expansions, modernizations, replacements and other obligations which were contractual undertakings of the assessee could not be properly addressed. In sum and substance, due to the legal battle between the group of the shareholders, the business interest of the assessee company was seriously affected. Accordingly, the company put the proposal before the CLB for buy back of the shares of some group of shareholders. Accordingly, Mac group shares were decided to be bought back by the assessee company. In this background, the assessee company was required to pay the buy back premium for putting the end to the battle between groups of the shareholders. The extra amount paid over and above the face value of the assessee company in the "buy back deal" was claimed as a revenue business expenditure. The 3 ITA No. 770/PN/2011 M/s. Brahma Bazaz Hotels Ltd.
A.Y. 2006-07 A.O. was convinced that the premium on the buy back of the shares which was required to be paid by the assessee company was for protecting the business interest. Moreover, as per the directions of the CLB, assessee acquired the entire capital of the Mac group (Mac Charles India Ltd.) i.e. 50% of the total capital. Accordingly, the assessee acquired 48,75,094 shares from Mac Charles India Ltd. by paying extra amount of Rs.3,45,95,521/-. Though the A.O accepted the claim of the assessee but, the Ld CIT, Pune was of the opinion that it was a capital expenditure and the A.O ought to have gone into depth of the said issue and the A.O. has completed the assessment without application of his mind and hence, the assessment order passed by the A.O u/s. 143(3) was erroneous as well as prejudicial to the interest of the revenue. The decision of the ITAT, Mumbai, in the case of Echjay Industries Limited Vs. CIT, 88 TTJ 1089 (Mum) was cited before the Ld CIT, but he did not consider that decision by stating that it is not clear whether said decision has been accepted by the revenue or whether the matter is pending before the High Court. The Ld CIT -I, Pune directed to A.O to make addition of Rs.3,45,95,921/- by treating the same as a capital expenditure. Now on this particular issue, the assessee is in appeal before us.
4. We have heard the rival submissions of the parties and perused the record. The Ld Counsel relied on the decision 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 his 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 prejudicial to the interest of revenue. He submits that the decision of the Tribunal in the case of Echjay Industries Limited (Supra) has been approved by the Hon'ble High Court of Bombay by dismissing the appeal filed by the Revenue against the said decision i.e. Income Tax 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 capital expenditure as the same is a revenue expenditure as held in the case of Echjay Industries Limited 4 ITA No. 770/PN/2011 M/s. Brahma Bazaz Hotels Ltd.
A.Y. 2006-07 (Supra). He pleaded that merely the revenue 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 the assessee company. One group of the shareholders i.e. Mac Charles India Ltd. filed the cases against the other groups of the shareholders as well as the company alleging the serious charges of the mis-management and oppression. To protect the business interest of the assessee company, proposal was put before the CLB, New Delhi to buy back the shares from Mac Charles India Ltd. by payment of extra premium over and above the face value. The assessee paid Rs.3,45,95,521/- on the shares and claimed the deduction as a revenue expenditure.
6. In the case of Echjay Industries Ltd.,(Supra) there were similar facts and in the said case also, there were two warring groups of the shareholders. The legal battle between the 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 Bombay approved the consent terms giving direction to the company to purchase the shares of family members of Doshi group and 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 confirmed by the CIT(A). The issue reached before the Tribunal. The operative part of the said decision is as under :
"29. From the case-laws referred to in the said commentary, it is amply clear that while accepting the compromise or settlement between the two warring groups, for a proceeding under ss. 397 and 398 of the Companies Act, 1956, the Court will keep in mind the prime interest of the company as well as public interest. Therefore, to say that the interest of only two warring groups has been kept in mind is not correct. It is difficult to contribute or accept the view canvassed by the Revenue that the assessee has obtained any right or advantage which would affect its capital structure. The settlement in this regard, as pointed out earlier, was that as a result of the compromise the assessee acquired the shares and the share capital was reduced. Now this aspect of the matter, as we have stated earlier, merely represented the mode of settlement and it cannot, therefore, be the test to be applied to determine the question whether the assessee derived any benefit on capital account. In fact, the 5 ITA No. 770/PN/2011 M/s. Brahma Bazaz Hotels Ltd.
A.Y. 2006-07 assessee had got rid of the disadvantageous relationship which resulted as a result of disputes between the two warring groups of shareholders. The Supreme Court had occasion to consider similar controversy in the case of CIT vs. Ahok Leyland Ltd. 1973 CTR (SC) 9: (1972) 86 ITR 549 (SC) in which the apex Court has held that the principles which flow from the above cited decisions clearly suggest firstly that the enduring benefit in itself is not a conclusive test. Secondly, it is necessary to consider whether the enduring advantage consisted merely facilitating the assessee's operation or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while 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 regard to the above test in the case of Empire Jut Co. Ltd. (supra), the point which would arise for consideration would be whether the expenditure incurred for getting rid of the minority shareholders, who were creating difficulties, would be an expenditure on revenue account. The authorities relied upon by the learned counsel for the assessee show that payment made to secure peace and harmony and smooth management of the company, the interest of business would serve and that is the whole purpose of such payment. Therefore, the amount paid for this purpose was on revenue account. Applying those principles, the position to our mind is clear that by getting rid of the minority shareholders, the company could not be said to have acquired any enduring benefit. Secondly, even if it is assumed that an enduring benefit has been obtained, even then such enduring benefit is not relatable to fixed capital structure of the company because it has neither increased the assessee's assets nor the company could be said to have acquired any right of income yielding nature. The act of writing off of share capital by way of reduction, may, on the first blush, suggest that the capital structure of the company has been affected, but it is not so if 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 kept in mind. Thus writing off of share capital by way of reduction as per the terms of consent decree merely was a consequential action and did not itself represent any effect on the capital structure or the acquisition of any right yielding income or advantage 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 recalcitrant group of shareholders, was an expenditure incurred out of business expediency and, therefore, wholly and exclusively incurred in the course of carrying on of the business. Similar issue came up for consideration before the Tribunal in the case of Atul Chemicals Industries Ltd. (supra) wherein the Tribunal considering the earlier decision in the case of Inland Revenue vs. Carron Co. 45 Tax Cases 18 and other cases, came to the same conclusion. The learned Departmental Representative has pointed out that a reference has been granted against the said decision. Therefore, it was pleaded that it has not reached finality. So far as this contention of the learned Departmental Representative is concerned, we are of the opinion that merely granting a reference of the question 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."
6 ITA No. 770/PN/2011M/s. Brahma Bazaz Hotels Ltd.
A.Y. 2006-07
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 Industries 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 the same as a revenue expenditure cannot be said to be erroneous for exercising the jurisdiction u/s. 263. Both the conditions that (1) order must be erroneous and (2) same should be prejudicial to the interest 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 that to the extent of the issue of the allowability of the premium paid in the buy back deal to Mac Charleys India Limited, the assessment order cannot be said to be erroneous and to that extent, the 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 there was a mistake on his part. Hence, on the said issue, the order stands.
8. In the result, assessee's appeal is allowed.
The order is pronounced in the open Court on 28 September 2012 .
Sd/- Sd/-
(G.S. PANNU) (R.S.PADVEKAR )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Pune, dated the 28th September, 2012
US
Copy of the order is forwarded to :
1. The Appellant
2. The Respondent
3. The ACIT - Circle 1(1), Pune
4. The D.R. "A" Bench, Pune
5. Guard File
/- true copy-/
By order
Senior Private Secretary
Income Tax Appellate Tribunal
Pune