Income Tax Appellate Tribunal - Agra
Renu Agarwal, Agra vs Assessee on 28 December, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
AGRA BENCH, AGRA
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND
SHRI A.L. GEHLOT, ACCOUNTANT MEMBER
ITA No.405/Agr/2011
Assessment Year: 2007-08
Asstt. Commissioner of Income Tax-2, vs. Shri Ajay Agarwal,
Agra. 65, New Raja Mandi Colony,
Agra.
(PAN: AAMPA 0705 E)
ITA No.348/Agr/2011
Assessment Year: 2007-08
Shri Ajay Agarwal, vs. Addl. Commissioner of Income Tax,
A-35, New Agra, Range-2, Agra.
Agra.
(PAN: AAMPA 0705 E)
ITA No.349/Agr/2011
Assessment Year: 2007-08
Smt. Renu Agarwal, vs. Addl. Commissioner of Income Tax,
A-35, New Agra, Range-2, Agra.
Agra.
(PAN: AAUPA 2106 M)
ITA No.404/Agr/2011
Assessment Year: 2007-08
Asstt. Commissioner of Income Tax-2, vs. Smt. Renu Agarwal,
Agra. 65, New Raja Mandi Colony,
Agra.
(PAN: AAUPA 2106 M)
ITA No.406/Agr/2011
Assessment Year: 2007-08
Asstt. Commissioner of Income Tax, vs. Smt. Kamlesh Agarwal,
Circle-1, Agra. 22, Shikha Enclave,
Dayal Bagh, Agra.
(PAN: AAUPA 2100 P)
2 ITA Nos.405,348,349,404,406,407&
466/Agr/2011
A.Ys. 2007-08
ITA No.407/Agr/2011
Assessment Year: 2007-08
Asstt. Commissioner of Income Tax, vs. Shri Sagar Anand,
Circle-1, Agra. 22, Shikha Enclave,
Dayal Bagh, Agra.
(PAN: ADXPA 9132 B)
ITA No.466/Agr/2011
Assessment Year: 2007-08
Asstt. Commissioner of Income Tax-2, vs. Shri Hemant Anand,
Agra. 65, Raja Mandi Colony,
Agra.
(PAN: ADGPA 4039 G)
(Appellants) (Respondents)
Appellant by : Shri Sahib P. Satsange, C.A.
Respondent by : Shri Waseem Arshad, Sr. D.R.
Date of Hearing : 28.12.2012
Date of Pronouncement of order : 08.02.2013
ORDER
PER A.L. GEHLOT, ACCOUNTANT MEMBER:
ITA Nos.405 & 348/Agr/2011 are Cross appeals filed by the Revenue and assessee against the order dated 31.03.2011 passed by the ld. CIT(A)-I, Agra for the A.Y. 2007-08 in the case of Shri Ajay Agarwal. ITA Nos.349 & 404/Agr/2011 are Cross appeals filed by the Revenue and assessee against the order dated 31.03.2011 passed by the ld. CIT(A)-I, Agra for the A.Y. 2007-08 in the case of Smt. Renu Agarwal. ITA No.406/Agr/2011 is appeal filed by the Revenue against 3 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 the order dated 31.03.2011 passed by the ld. CIT(A)-I, Agra for the A.Y. 2007-08 in the case of Smt. Kamlesh Agarwal. ITA No.407/Agr/2011 is appeal filed by the Revenue against the order dated 31.03.2011 passed by the ld. CIT(A)-I, Agra for the A.Y. 2007-08 in the case of Shri Sagar Anand. ITA No.466/Agr/2011 is appeal filed by the Revenue against the order dated 10.05.2011 passed by the ld.
CIT(A)-I, Agra for the A.Y. 2007-08 in the case of Shri Hemant Anand.
2. Some of the grounds raised in all the appeals are based on identical set of facts, therefore, for the sake of convenience all the appeals are decided by this common order. Learned Representatives of the parties submitted that the facts of these appeals lead in the case of Shri Ajay Agarwal, ITA Nos.405 & 348/Agr/2011 which are Cross appeals filed by the Revenue and assessee. They have argued these appeals accordingly. In the light of the facts, to know the exact grounds of appeal, we reproduce the grounds raised by the Revenue in ITA No.405/Agr/2011 and by the assessee in ITA No.348/Agr/2011 as under :-
ITA No.405/Agr/2011 by the Revenue"1. That the Ld. CIT(A)-I, Agra has erred in Law and on facts in deleting the addition of Rs.3 crores made by the AO by disallowing the payment made to M/s Churu Trading Co. Pvt. Ltd., relying upon the principle laid down by the Hon'ble AAR in the case Compagnie 4 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 Finance Hamon (Supra) without considering the fact that the background of the agreement with Churu Trading Co. Pvt. Ltd. it is amply clear that the fee was basically in the nature of arrangement of the fund and no way was it in the connection of transfer of shares of Agarwal Group to the Maheshwari Group, therefore, the amount of Rs.8.5 Crores paid to M/s Churu Trading Co. Pvt. Ltd. is not distinctly related to and integrally connected with the transfer of shares for being admissible as deduction u/s 48(i) of the I.T. Act.
2. That the Ld. CIT(A)-I, Agra has erred in Law and on facts in deleting the addition of Rs.3,13,200/- made by the on the ground that the AO has already accepted active role of SR Halve in these proceedings before CLB and allowed the fees amounting to Rs.78,56,800/- paid to Shri Halve considering that the fees paid to him in connection with the transfer of shares therefore, if any, expenditure was incurred while visiting Delhi to attend these proceedings and Agarwal Group reimbursed those expenses then they should also be allowed as being incurred in connection with the transfer of shares is not acceptable in view of the facts that the nature of expenses itself shows that it has nothing to do with the transfer of shares and can not be construed that such expenditure has been incurred wholly and exclusively in connection with the transfer.
3. The Ld. CIT(A)-I, Agra has erred in Law and on facts in deleting the addition of Rs.5,00,000/-, made by the AO by disallowing payment of Rs.10,00,000/- Shri Ajay Agarwal & Smt. Kamlesh Agarwal to Shri Dayal Saran, Advocate on the basis of bills raised by Shri Dayal Saran, Advocate without considering the facts that there is no evidence on record to show that the legal expenses has been made for legal services extended in the process of valuation of share or in the process of compromise concerning the transfer of shares.
4. That the appellant craves leave to add or delete or alter or modify any one or amore ground(s) of appeal during the appellate proceedings.
5. That the order of the CIT (Appeals)-1, Agra being erroneous in law and on facts be set aside and that the order of the Assessing Officer be restored."5 ITA Nos.405,348,349,404,406,407&
466/Agr/2011 A.Ys. 2007-08 ITA No.348/Agr/2011 by the Assessee "1. Because the learned authorities below have erred on facts and in law in disallowing a deduction of Rs.2,50,000 under section 48(i) for payment made to Rabo India Securities (P) Ltd. The disallowance made is liable to be deleted.
2. Because the learned Authorities below have erred on facts and in law in disallowing a deduction of Rs.6,65,000 under section 48(i) for payment made to Mrs. Bina Gupta, Advocate. The disallowance made is liable to be deleted.
3. Because the learned CIT(A) has erred on facts and in law in enhancing the disallowance of Mrs. Bina Gupta, Advocate by Rs.40,000 without issue of specific notice under section 251(2) of the Income x act, 1961.
4. Because the learned authorities below has erred on facts and in law in disallowing a deduction of Rs.1,50,000 under section 48(i) for payment made to Mr. Sudipto Sarkar, Advocate. The disallowance made is liable to be deleted.
5. Because the learned authorities below has erred on facts and in law in charging interest under section 234C. The assessee was prevented by sufficient cause to deposit the second installment of advance tax on or before 15.12.2006 as no capital gains was payable as the assessee intended to deposit the same in notified bonds in terms of section 54EC of the Income Tax Act, 1961 for claiming exemption, which were not available. The interest charged is liable to be deleted.
6. That the appellant craves leave to add or delete any of the grounds hereinbefore."
3. The facts of the case are that the impugned assessment order was passed u/s.
143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) vide order dated 30.11.2009 determining the assessed income at Rs.54,92,51,000/- as against the 6 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 returned income of Rs.51,74,12,800/-. Returned income included, an income earned by way of Long Term Capital Gain (LTCG) on sale of share holding by the assessee in two unlisted companies viz. M/s. Amar Ujala Publications Ltd. and M/s. A & M Publications Limited as per a compromise reached between two groups during the course of proceedings before the Company Law Board (hereinafter referred as CLB), one headed by the assessee, hereinafter referred as Agarwal Group and another headed by Shri Atul Maheshwari, hereinafter referred as Maheshwari Group. While computing the LTCG, the assessee claimed deduction under section.48(i) of the Act for certain professional and legal expenses paid to certain persons in connection with the litigation before the CLB resulting into passing of a final order by the CLB vide order dated 01.11.2006, directing the Maheshwari Group to purchase all the share holding of Agarwal Group (35.34%) by paying an aggregate amount of Rs.160 Crores which was to be divided among the members of the Agarwal Group in the ratio of their share holding. Out of the total amount of Rs.160 Crores paid by the Maheshwari Group, the assessee received Rs.56,29,34,703/-. Total amount of Rs.11,35,59,600/- was paid by the Agarwal Group to various Professionals and Lawyers for fighting their case before the CLB for settlement of their dispute with the Maheshwari Group and these expenses were also divided among the members of Agarwal Group out of which the expenses attributable to the assessee comes to Rs.4,06,10,000/-. Against the 7 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 receipt of the amount of Rs.56,29,34,703/-, the assessee claimed Rs.4,06,10,000/-
as expenses incurred in connection with the sale of shares and computed a LTCG of Rs.50,85,60,103/- after deducting the indexed cost of acquisition of these shares and the same was included in the returned income of Rs.51,74,12,800/-. Out of total expenses of Rs.4,06,10,000/- claimed by the assessee, the A.O. allowed only Rs.87,71,800/- as expenses incurred in connection with the transfer of shares eligible for deduction under section 48(i) of the Act and balance amount of Rs.3,18,38,200/- was disallowed holding that they are not incurred in connection with transfer of shares and thus the LTCG on sale of shares in the assessment order was determined at Rs.54,03,98,303/- and therefore, the assessment order was completed at an assessed income Rs.54,92,51,000/-. The details of computation of LTCG as found are as under :-
(I) LTCG on Sale of Shares of Amar Ujala Publications Sale Proceeds Rs.49,95,32,495/-
Less
(i)Indexed Cost of Rs.76,87,425/-
acquisition
(ii). Expenditure in
connection with share Rs.4,06,10,000/- Rs.4,82,97,425/-
transfer
Rs.45,12,35,070/-
Less: Exemption u/s 54EC Rs. 50,00,000/-
8 ITA Nos.405,348,349,404,406,407&
466/Agr/2011
A.Ys. 2007-08
Rs.44,62,35,070/-
(I) LTCG on Sale of Shares of M/s A & M Publications Ltd.
Sale Proceeds Rs. 6,34,02,208/-
Less
Indexed Cost of Rs. 10,77,175/-
acquisition
Rs.6,23,25,033/-
Total Long Term Capital Gain
(i) On sale of shares of M/s Amar Ujala Rs. 44,62,35,070/-
Publication Ltd.
Rs. 6,23,25,033/-
(ii) On sale of M/s A& M Publication Ltd.
Rs.50,85,60,103/-
Total LTCG Add Share Transfer Expenditure disallowed in the Rs. 3,18,38,200 Asst. Order Rs.54,03,98,303 TOTAL ASSESSED LTCG
4. The A.O. disallowed Rs.3,18,38,200/-out of Rs.4,06,10,000/-. The Agarwal Group itself consisted of two families i.e. Ajay Agarwal family and Kamlesh Agarwal (widow of elder brother Shri Anil Agarwal) family. Members of each family who received sale consideration of shares of two companies are detailed as under:-
9 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 Ajay Agarwal Family Kamlesh Agarwal Family
i) Ajay Agarwal i) Kamlesh Agarwal
ii) Renu Agarwal ii) Sagar Anand
iii) Hemant Anand iii) Saurabh Anand
5. The whole expenditure of Rs.11,35,59,600/- was divided between two families of Agarwal Group as noted in the order of the CIT(A) at pages no.18 &
19. The expenditures were divided between the three members of each family, the details noted from the order of the CIT(A) is reproduced below for ready reference as under:-
Name of the Assessee Ajay Agarwal Renu Hemant Kamlesh Sagar Saurabh Total Agarwal Anand Agarwal Anand Anand Name & Address of Amount (Rs.) & Amount (Rs.) & Amount (Rs.) & Amount (Rs.) & Amount (Rs.) Amount (Rs.) & (Rs.) person / party to whom (Date of (Date of (Date of (Date of & (Date of (Date of payment made Payment) Payment) Payment) Payment) Payment) Payment) M/s Churu Trading Co. 3,00,00,000 1,00,00,000 25,00,000 85,00,000 1,70,00,000 1,70,00,000 8,50,00,000 Pvt. Ltd. (15.11.2006) (13.11.2006) (13.11.2006) (13.11.2006) (13.11.2006) (13.11.2006) Continental Building, 135, Dr. A.B. Road, Mumbai M/s S.R. Halbe & 78,56,800 28,06,000 5,61,200 22,40,000 44,80,000 44,80,000 2,27,37,200 Associates, Advocates (14.12.2006) (14.12.2006) (14.12.2006) (02.01.2007) (02.01.2007) (02.01.2007) Fountain Chambers, 3rd Floor, 50,000 Nanabhai Lane, (19.05.2005) Fountain, Mumbai 50,000 (26.12.2005) 23,200 (01.03.2006) 90,000 (02.05.2006) 1,00,000 (03.08.2006) Mrs. Bina Gupta & 8,75,000 3,12,500 62,500 --- 5,00,000 5,00,000 44,22,400 Others, Advocates (03.02.2007) (03.02.2007) (03.02.2007) (03.02.2007) (03.02.2007) Khaitan House, B-1, Defence Colony, 1,00,000 1,00,000 7,70,400 New Delhi (04.04.2005) (15.05.2005) 30,000 1,00,000 (23.04.2005) (31.05.2005) 10 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 50,000 1,50,000 (06.10.2005) (02.06.2005) 1,00,000 1,00,000 (01.03.2006) (07.10.2005) 85,000 1,87,000 (05.02.2006) (15.11.2005) 1,50,000 1,00,000 (23.03.2006) (28.03.2006) 50,000 (05.04.2006) 1,00,000 (12.07.2006) Mr. Sudipto Sarkar, 1,50,000 --- --- --- --- --- 1,50,000 Advocate (02.04.2006) 31, Broad Street, Kolkata Rabo India Securities 2,50,000 --- --- --- --- --- 2,50,000 Pvt. Ltd. (01.02.2006) Forbes Building, 2nd Floor, Chiranjit Rai Marg, Fort, Mumbai Mr. Dayal Saran, 5,00,000 --- --- --- --- 5,00,000 10,00,000 Advocate 19.02.2007 63, Nehru Nagar, Agra Grand Total 4,06,10,000 1,38,55,500 31,23,700 1,07,40,000 2,19,80,000 2,32,50,400 11,35,59,600
6. However, the facts and submissions from both sides noted by the CIT(A) in his order in detail which are as under:- (Paragraph nos. 4 to 11 of the order of the CIT(A)) "4. In the appeal filed before me against the assessment order dated 30.11.2009, the appellant took 15 grounds of appeal. Ground nos. 1, 12, 14 and 15 are general in nature and covered by the other grounds and hence no separate adjudication is required on these grounds. In Ground no. 13, levy of interest u/s 234C is disputed. In Ground nos. 2 to 9 the appellant has disputed various disallowances made for the expenses paid by the appellant to different Professionals and Lawyers claimed to have been paid by him in connection with the sale of shares. In Ground no.10 and 11, the appellant has taken alternative pleas arguing the receipt of sale consideration of shares being tax free because in his view this amount was received on family settlement and on loss of source of income respectively, though he himself 11 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 offered this amount for taxation after computing LTCG on receipt of sale consideration of shares. First, I have dealt with the various legal and professional expenses claimed by the appellant u/s 48(i) from the sale consideration of shares, which was not allowed by the AO while computing LTCG in the assessment order.
5. Before dealing with the issue of allowability u/s 48(i) of various legal and professional fees paid by the appellant as deduction for computation of LTCG, it would be appropriate to discuss the facts and circumstances of the case giving the details of all events which finally culminated in sale of shareholding in two companies by the Agarwal Group to the Maheshwari Group. Brief facts of the case as culled out from the assessment order and also subsequently filed by the Ld. AR of the appellant during the hearing of the appeal and further examined by the present AO during the remand stage are as under:
5.1 "Amarujala" a hindi newspaper was started by Late Shri Dorilal Agarwal and Late Shri Murari Lal Maheshwari sometime in the year 1948.
While Shri Dorilal Agarwal had 53% stake and Shri Murari Lal Maheshwari had 47% stake under the name and style of the firm as National Journal. The said firm was inter alia engaged in the publication of news paper.
5.2 On 31.08.1979, the said firm was dissolved and two new firms viz. M/s Amaruajala Publications and M/s Amarujala Prakashan were formed. While M/s Amarujala Publications was operating in Agra and publications centres at Moradabad, Allahabad, Banaras, Jhansi and Kanpur were added later on. M/s Amarujala Prakashan carried on the work of publishing newspapers in Bareilly with Meerut, Panchkula (Chandigarh), Jallandur, Noida, Dehradun and Haldwani came to be added later. The two partnership firms had the members of only the two families of Agarwals and Maheshwaries with the respective stakes continued in the ratio of 53% and 47% respectively in both the said firms.
5.3 On 29.03.2001 the said two firms were converted into two separate Public Limited Companies and registered under Part IX of the Companies Act, 1956 in the name of M/s Amarujala Publications Limited and M/s Amarujala Prakashan Limited. The share holdings in the said two companies remained at 53% and 47% respectively vis-à-vis members of Agarwal and Maheshwari families.
12 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 5.4 Thereafter, from effective date of 01.04.2003 M/s Amarujala Prakashan Limited got merged into M/s Amarujala Publicaions Limited and all the newspapers with diverse editions came to be owned by M/s Amarujala Publications Limited. The shareholding even after the merger remained at 53% with Agarwal family and 47% with Maheshwari family.
5.5 Another company in an around 1997 in the name and style M/s A&M Publications Pvt. Limited was incorporated and the shareholding in the said company was once again in the very same proportion of 53% and 47% in favour of the Agarwal family and Maheshwari family respectively. It was always the understanding between both the families that they would have equal level of participation in the management of both companies. It was also the understanding between both the families right from the inception that the stakes and the level of risk would also be in the proportion of the holding. Thereafter, since 1997 two companies remained in operation i.e M/s Amarujala Publication Ltd. and M/s A&M Publication Pvt. Ltd.
5.6 Since the inception of the Amar Ujala publication and even after formation of aforesaid two companies, it was also the understanding between the said two families that the stakes and the level of the risk in the companies would be in proportion to the shareholding of the different members of either of two families. It was on the basis of the aforesaid understanding Shri Atul Maheshwari belonging to Maheshwari family was made the Managing Director of M/s Amarujala Publications Ltd. and Shri Ashok Agarwal and Shri Ajay Agarwal belonging to Agarwal family were made Chairman and later the whole time Director with level of control, management and superintendence of the business of the company at par with the Managing Director. Mr Saurabh Anand of Agarwal family was appointed as whole time Director of the Company to look after the marketing affairs and participate in the day to day affairs. Even though there was no formal division of work between the various members on the Board of the Company vis-à-vis the various publications which were taken out from Agra, Jhansi, Jallandur, Meerut, Panckula (Chandigarh), Kanpur, Allahabad, Varanasi, Moradabad, Barielly, Noida, Dehradun and Haldwani, however, for convenience these publications were managed by different members of the Board of the Company. For example the Agra Edition was looked after by Shri Ajay Agarwal since 1984 as he was stationed at Agra from the very beginning, Shri Atul Maheshwari was discharging the responsibility of the Editor of Meerut Edition. The publications units of Jallandur, Noida, Panchkulla (Chandigarh) which 13 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 were managed by Atul Maheshwari turned out to be loss making units. Hence somewhere in 2004, members of Agarwal family mooted the idea of shutting these publications, particularly after realising that these units even did not show any prospects of improvements. This suggestion was not approved by members of the Maheshwari family. In the meantime Shri Ashok Agarwal of Agarwal family joined hands with the Maheshwari family and upset the equilibrium and then he mooted the idea to appoint his son Shri Manu Anand as whole time Director with substantial power in the Company. This was opposed by the rest of the members of the Agarwal family as the said appointment sought to not only tilts the balance of power but also sought to divest Shri Ajay Agarwal of his existing powers as a whole time Director. With such developments, dispute arose between Agarwal family and Maheshwari family somewhere in 2004 on the issue of control of publication business of Amar Ujala News Papers in different cities. In this dispute, Shri Ashok Agarwal though belonging to the Agarwal family joined the Maheshwari family to get his son appointed as whole time Director.
5.7 The share holding in both the companies before dispute were 53% with Agarwal family and 47% with Maheshwari family. However after dispute the share holding pattern between rest of Agarwal Family (excluding family of Ashok Agarwal) hereinafter referred as the Agarwal Group and Maheshwari Family along with the family of Ashok Agarwal hereinafter referred as the Maheshwari Group in both companies became as under:-
Name of the assessee No. of Shares
Amar Ujala A&M
Publications Ltd. Publications Ltd.
Agarwal Group
Ajay Agarwal 13.79% 5,51,567 7.00% 70,000
Renu Agarwal 3.88% 1,55,000 6.00% 60,000
Hemant Anand 0.01% 100 4.67% 46,700
Saurabh Anand 6.62% 2,65,050 8.83% 88,300
Sagar Anand 6.62% 2,65,050 8.83% 88,300
Kamlesh Agarwal 4.41% 1,76,566 -
Total 35.33% 14,13,333 35.33% 3,53,300
Maheshwari Group
Ashok Agarwal 6.30% 2,51,867 7.00% 70,000
Daya Agarwal 6.00% 60,000
Manu Anand 11.37% 4,54,800 4.67% 46,700
Atul Maheshwari 8.87% 3,55,000 10.00% 1,00,000
14 ITA Nos.405,348,349,404,406,407&
466/Agr/2011
A.Ys. 2007-08
Snehlata Maheshwari 14.63% 5,85,000 8.00% 80,000
Tanmay Maheshwari 5.50% 55,000
Rajul Maheshwari 23.50% 9,40,000 18.00% 1,80,000
Varun Maheshwari 5.50% 55,000
Total 64.67% 25,86,667 64.67% 6,46,700
Grand Total 40,00,000 10,00,000
5.8 From the above chart, it is clear that after dispute, the Agarwal family excluding the family of Ashok Agarwal (Agarwal Group) became minority share holder having only 35.33% of share holdings and Maheshwari family along with the family of Ashok Agarwal (Maheshwari Group) became majority shareholder having 64.67% of shareholdings in both companies. Both groups were further divided into different families on the basis of three sons of Shri Dori Lal Agarwal and two sons of Shri Murari Lal Maheshwari. Constituents of these five families are given below:
Agarwal Group Maheshwari Group
Late Shri Dorilal Agarwal (father) Late Shri Muraril lal Maheshwari (father)
Shri Ashok Agarwal (son) Majority Majority
Manu Anand (son) Shri Atul Maheshwari (son)
Group Group
Smt Snehlata Maheshwari (wife)
Late Shri Anil Agarwal (son)
Kamlesh Agarwal (wife) Shri Rajul Maheshwari (son)
Minority
Saurabh Anand (son) Note: Family of Shri Ashok Agarwal later joined
Group Maheshwari family as discussed in earlier para
Sagar Anand (son) and thus forming Majority Group along with
Maheshwari family
Shri Ajay Agarwal (son)
Renu Agarwal (wife)
Hemant Anand (son)
5.9 It was under the aforesaid circumstances in order to carry out the publication business of Amar Ujala News Paper in smooth manner, a settlement was reached between all the five branches of two families within the Agarwal and Maheshwari Group for division of Amar Ujala Publication business. The working was done by Shri Mukesh Tandon, the Auditor of the company. The business was divided into five units. Shri Saurabh Anand being the youngest member was given the first option to choose the unit, 15 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 after him Shri Ajay Agarwal was given the option. Shri Saurabh chose the unit consisting of Edition at Kanpur, Allahabad and Varanasi while Shri Ajay Agarwal chose the unit comprising edition at Agra, Jhansi and part of Noida (Delhi and Haryana). Apart from the help of Shri Mukesh Tandon, Shri Dayal Saran, Tax consultant and a close family friend also helped in arriving at the settlement. Finally on 2.12.2004, a final and concluded agreement was arrived at between the parties at the office of Shri Dayal Saran. Under the said agreement the following issues were concluded.
(i) The two of the family companies i.e. M/s Amarujala Publications Ltd. and M/s A & M Publications (P) Ltd. were to be restructured, while the former shall go to Agarwal Group and the latter shall go to Maheshwari Group. The shares were to be transferred at book value and the Directors would resign.
(ii) That apart, a new company was to be incorporated for giving equal rights on the title of Amarujala to both the Companies.
(iii) While M/s Amarujala Publications Ltd. was to retain Agra, Jhansi and part of Noida (Delhi & Haryana), Kanpur, Allahabad, Varanasi and Lucknow and M/s A & M Publications (P) Ltd. was to get part of Noida (UP Belt), Meerut, Barielly, Jallandur, Panchkula, Dehradun, Haldwani and Moradabad.
(iv) To overcome the problem of newsprint outstanding it was decided that the amount of Rs. 15Cr. will be introduced as call money from which the family deposits will be deducted.
(v) The restructuring process were to end by 31.03.2005 and from 01.04.2005 the two companies were to run separately, including editorial, advertisements with National and Regional Staff to be arranged independently for the respective Groups.
(vi) The difference of payout will be settled in equal instalments within one from 01.04.2005.
(vii) After the completion of MOU and amount of Rs. 10 Cr. were to be introduced in the form of existing shareholders depositing 30% if the said amount by 15.12.2004 and the remaining 70% by 10% every week in the 7th week after 15.12.2004.
(viii) Shri Mukesh Tandon be given the responsibility of restricting the bank interest and bank borrowing of both the Companies.
16 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 Thereafter a circulation titled "circulation chart" giving division along with the basis among various Group publication wise was also frozen between the parties in terms of the aforesaid agreement.
5.10 However, the above agreement was not implemented and a Board Meeting on 07.03.2005 was called .In the agenda of this meeting, the following business was sought to be transacted :
(i) The Company opting for Corporate Governance.
(ii) Induction of professional Directors in the Board
(iii) Restructuring of the Editorial system of the Company
(iv) Constitution of various Committees for the purpose of decision making process
(v) Banking operations revamped by deleting the cheque signing power to the Branch Head/Account Head of the Publication in addition to the concerned Director.
(vi) Appointment of Shri Manu Anand as Whole time Director
(vii) Altering the duties and power of the functional directors.
5.11 Shri Ajay Agarwal, the appellant, opposed the agenda of this meeting and insisted for implementation of the agreement arrived at with the Maheshwari Group on 02.12.2004 but the Board in its meeting held on 07.03.2005 passed the agenda even though members of Agarwal Group dissented from it.
5.12 Subsequent to the above Board meeting, on advice of a lawyer Shri S.R. Halbe the Agarwal Gropup jointly filed an urgent application under Regulation 44 of the Companies Act, 1956- CP No. 26 of 2005 before the Company Law Board and further a petition under section 397 and 398 of the Companies Act, 1956- CA No. 75 of 2005 to seek the implementation of the agreement arrived at 02.12.2004 which otherwise was not possible since both companies were closely held companies and their shareholding was in minority too. In the above mentioned petitions, the Agarwal Group mainly prayed for implementation of the settlement arrived at between the families of both group vide agreement dated 02.12.2004 and to declare the various resolution passed in the meeting of the Board of Directors of the company 17 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 on 07.03.2005 as illegal, null and void including the appointment of Shri Manu Anand as whole time Director.
5.13 On 22.03.2005 the Hon'ble Company Law Board passed an injunction order restraining the Maheshwari Group from giving effect to the resolution passed in the Board Meeting dated 7.03.2005 regarding Bank operations, directing Shri Ajay Agarwal to continue as Editor of the Agra Publication and restraining the appointment of Shri Manu Anand as whole time director. Against this order, the Maheshwari Group preferred an appeal before the High Court of Allahabad and the Hon'ble High court vide order dated 08.04.2005 directed the Company Law Board to pass a reasoned order. Thereafter the Hon'ble Company Law Board after giving opportunity to both Groups passed an order dated 15.04.2005 holding that the balance of convenience lies in favour of the petitioners i.e. the Agarwal Group (including the appellant) and the petitioners have made out a prima facie case and would suffer irreparable loss if relief as prayed are not granted and therefore, till the final disposal of the petition, the respondents are restrained from giving effect to the resolutions passed in the Board Meeting dated 7.03.2005 regarding Bank operations. Secondly the petitioners will continue to be the Editor of the Agra Publications and thirdly, the respondents are restrained from giving effect to the appointment of respondent no. 3 (Shri Manu Anand) as a whole time director.
5.14 Thereafter, an order dated 25.01.2006 was passed by the CLB. In this order, it is mentioned that with a view to resolve the dispute amicably, both groups during the course of the hearing agreed on 30.11.2006 that Maheshwari Group would indicate the value of the company with the first option to Agarwal Group either to buy the shares held by Maheshwari Group or sell their shares on the basis of the value of the company indicated by the Maheshwari Group. In the hearing held on 17.01.2006, the Maheshwari Group indicated the value the company M/s Amarujala Publications Ltd and M/s A & M Publications (P) Ltd. at Rs. 390 crores. Out of total value of shares of the company at Rs. 390 crore, value of share held by the Maheshwari Group came to be Rs. 252 crore (64.67%) and that held by the Agarwal Group came to be Rs. 138 crore (35.33%). In the hearing held on 23.01.2006, the Agarwal Group elected the option of purchasing the shares held by the Maheshwari Group. Vide this order, the Agarwal Group was allowed to purchase the share holding of the Maheshwari Group valued at Rs. 252 crore with certain conditions as discussed in para 2. of the said order of the CLB dated 25.01.2006 as per which payment was required to be 18 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 made by the Agarwal Group in following manner as given in clause (4) of the para 2:
(a). 5% of the consideration will be made within 2 weeks from the date of the order and another 5% within the next two weeks
(b). 30% within 3 months from the date of the order
(c). 30% within 6 months from the date of the order
(d). 30% within 9 months from the date of the order
(e). The full amount payable to the respondent group ( the Maheshwari Group) by the petitioner ( the Agarwal Group) shall be completely paid within 9 months of the passing of the order and as per the schedule contained hereinabove. No default in the schedule given hereinabove shall be made by the petitioner group."
It is further provided in clause (5) of the para 2 that in case of default in payment and in non-compliance of the Schedule of payment as provided in clause 4, the Agarwal Group shall not only immediately cease to have the management control and the control shall automatically vest in the Maheshwari Group but also the Agarwal Group shall immediately transfer their shareholding in the companies to the Maheshwari Group on the basis of the same valuation of Rs. 390 crore. The Maheshwari Group will have the liberty to forefeit 10% of the total consideration payable to them.
5.15 Subsequently, it was found that the Agarwal Group was arranging fund for purchase of share holding of the Maheshwari Group from Zee Tele Films (Essel Group) and 5% of the consideration amounting to Rs. 12.5 crore was paid from the current account of M/s Media West India Ltd. owned Zee Group arranged by a financial consultant M/s Churu Trading Co. Pvt. Ltd.. As basic understanding reached between both groups before passing of the order dated 25.01.2006 by the CLB was that the company should remain with either of two groups, it was feared by the Maheshwari Group that the company might be taken over by the Zee Group subsequently, if purchase of their share holding by the Agarwal Group is financed by them. Therefore, they filed application before CLB seeking for directions to the 19 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 Agarwal Group to deposit their shares in the escrow account alleging that the Agarwal Group has violated the terms of the consent order dated 25.01.2006 and as such, they should be directed to sell their shares to the Maheshwari Group. On this application of the Maheshwari Group, the CLB passed order dated 04.04.2006, directing the Agarwal Group to deposit their shares in escrow account and also till the disposal of the application of the Maheshwari Group, payments of further installments by the Agarwal Group was deferred. Finally the above application of the Maheshwari Group was disposed off by the CLB vide its order dated 10.07.2006 after observing and discussing in detail in this order that the Agarwal Group did not have financial capacity to purchase share and the MOU with M/s Media West was so unrealistic, that no man of ordinary prudence , leave alone a business person, would be convinced that it is pure and simple financial arrangement and such MOU lead only to the strong presumption that there is more to the understanding expressed in the MOU than what the eye meet and then holding that consent order dated 25.01.2006 was obtained by the Agarwal Group by suppressing the material known fact relating to the financing agreement with the lenders for purchase of shares from the Maheshwari Group, which had the inbuilt default clause giving right to the lenders to dispose of 49% of the existing shares of the company which had the risk of the company going to outsiders ( as feared by the Maheshwari Group to Zee Group) and hence considering the basic understanding that one group should go out of the company, the CLB directed in this order that the Agarwal Group would sell their share holding to the Maheshwari Group. This order of CLB was not challenged by the Agarwal Group and after a compromise terms were arrived at between both groups, a final order dated 01.11.2006 was passed by the CLB directing the Maheshwari Group to pay Rs. 155 crore to Agarwal Group for purchase of their share holding. Extract of this final order is reproduced as under:
" As per the compromise terms arrived at between the parties, the respondents were to pay a sum of Rs. 155 crores to the petitioners towards their shares and this amount was to be deposited in the escrow account maintained in the State Bank of Patiala, Shastri Branch, New Delhi, as a per my earlier order. The respondents are arranging for depositing this money. Yesterday, I had passed an order directing the bank to transfer a sum of Rs. 17 crores out of the escrow account to the personal accounts of the petitioners and simultaneously hand over 65.33 shares belonging to the respondents to the respondents.20 ITA Nos.405,348,349,404,406,407&
466/Agr/2011 A.Ys. 2007-08 I further direct:
1. On receipt of the balance of Rs, 138 Crores in the escrow account, the Manager, State Bank of Patiala will release the balance shares of the petitioners now held in escrow to the respondents.
2. The petitioners are at liberty to withdraw the said sum of Rs. 138 crores or transfer the same to any account that they desire and the Manager, State Bank of Patiala will permit them to do so on receipt of a requisition signed by all the petitioners.
3. The respondents are at liberty to manage the affairs and shareholding of the company in any manner without any interference by the petitioners' group
4. The petitioner's group shall cease to remain either as shareholder/s office bearer/s or director/s of the company and shall have no concern whatsoever with the company.
5. On an earlier occasion, the money deposited in the escrow account by the petitioners was directed to be paid to M/s Mediawest Private Limited and the bank had issued TDS Certificate in the name of Amar Ujala Publication Limited for the interest accrued thereon. The Manager, State Bank of Patiala is directed to issue a one issued in favour of Amar Ujala Publication Limited after observing the necessary formalities in this regard.
6. The suit in Agra will be dismissed as withdrawn. 7 Let a certified copy of this order be served on the Manager, SBP for compliance.
Since the matter has been compromised, the petition is closed with liberty to revive in case of any difficultly in working out the terms of this order."
5.16 Pursuant to the compromise arrived between the Agarwal Group and the Maheshwari Group after a prolonged litigation carried before the CLB as discussed in aforesaid paras, the total sale consideration of the 35.33% share holding of the Agarwal Group was agreed at Rs. 160 crores out of which Rs 5 crores was paid to Shri Ajay Agarwal as advance by way of bank draft who was duly authorized to receive this advance amount on behalf of all the members of the Agarwal Group and the balance of Rs. 155 crores was paid 21 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 in full in pursuant to the order passed by the Principal Bench Company Law Board, New Delhi dated 01.11.2006 in the Escrow account (opened on the direction of the Honb'le CLB in its order dated 25.01.2006) and then the whole amount of Rs. 160 crore was distributed by the Escrow agent appointed by the Company Law Board, Smt. Bina Gupa to all six members of the Agarwal Group in the ratio of their share holding. Thus, the consideration received on sale of the shares holding in M/s Amarujala Publications Ltd. and M/s A & M Publications Ltd. by the members of the Agarwal Group was divided as under: -
Name of the Amar Ujala Publications A & M Publications Ltd.
assessee Ltd.
No. of Value No of Value Total Value
Shares Shares
Ajay Agarwal & Family
Ajay Agarwal 5,51,567 49,95,32,495 70,000 6,34,02,208 56,29,34,703
Renu Agarwal 1,55,000 14,03,77,392 60,000 5,43,44,750 19,47,22,142
Hemant Anand 100 90,565 46,700 4,22,98,330 4,23,88,895
Kamlesh Agarwal & Family
Saurabh Anand 2,65,050 24,00,45,340 88,300 7,99,77,356 32,00,22,696
Sagar Anand 2,65,050 24,00,45,340 88,300 7,99,77,356 32,00,22,696
Kamlesh Agarwal 1,76,566 15,99,08,868 --- 15,99,08,868
Total 14,13,333 1,28,00,00,000 3,53,300 32,00,00,000 1,60,00,00,000
6.1 As the entire appeal proceeding taken before me is for disputing the expenses of Rs. 3,18,38,200/- disallowed by the AO out of Rs. 4,06,10,000/-
while computing the LTCG, the details of these expenses as explained by the Ld. AR during the assessment proceeding as well as appellate proceeding are discussed in this para. In fact Agarwal Group itself consisted of two families i.e. Ajay Agarwal Family and Kamlesh Agarwal (widow of elder brother Anil Agarwal) Family. Members of each family who received sale consideration of shares of two companies mentioned in para 3.1 are as under:
Ajay Agarwal Family Kamlesh Agarwal Family
a) Ajay Agarwal (i) Kamlesh Agarwal
22 ITA Nos.405,348,349,404,406,407&
466/Agr/2011
A.Ys. 2007-08
b) Renu Agarwal (ii) Sagar Anand
c) Hemant Anand (iii)Saurabh Anand
6.2 The whole expenditure of Rs. 11,35,59,600/- was divided between two families of Agarwal Group as under:
Name & Address of person Ajay Agarwal Kamlesh Agarwal Total Purpose of payment / party to whom payment and family (Rs.) and family (Rs.) (Rs.) made M/s Churu Trading Co. 4,25,00,000 4,25,00,000 8,50,00,000 Fees paid for acting as "arranger" for Pvt Ltd. arranging Rs. 252 crores for the proposal Continental Building, for acquisition of 64.67% Equity shares 135, DR. A.B. Road held by Maheshwari Group as per Mumbai agreement.
Later, since the shares could not be
acquired due to subsequent order of CLB
and Rs. 22 crore more was received than
the initial amount of Rs. 138 crore on
sale of shares, Rs. 8.5 crore was paid as
consideration for enhancing the value of
shares as a part of strategy
M/s S.R. Halbe & 1,12,24,000 1,12,00,000 2,24,24,000 Fees paid for formulation of the strategy for
Associates filing petition before the Company Law
Advocates Board for protection of the interest of
Fountain Chambers Minority Shareholders, which resulted in
3rd Floor, Nanabhai Lane, enhancement in the value of the shares on
Fountain account of the reasons that the Majority
Mumbai Shareholders quoted the value of the shares
thinking that the Minority cannot pay the
price for acquisition of their 64.67%.
Reimbursement of travelling, loading and
3,13,200 3,13,200 boarding expenses.
Mrs Bina Gupta 26,52,000 17,70,400 44,22,400 Fees for preparation of petition including
Advocate appearance before the Company Law
Khaitan House Board.
B-1, Defence Colony Fees for appearance before the Hon'ble
New Delhi Allahabad High Court and Supreme Court
including Consultation taken from time to
time in respect of the transfer of shares
being Escrow Agent.
Mr. Sudipto Sarkar 1,50,000 1,50,000 Appearance Fees before the Company Law
Advocate Board on various dates viz 17.01.2006,
31, Broad Street 24.01.2006 and 25.01.2006
Kolkata
Rabo India Securities (P) 2,50,000 2,50,000 Paid for Strategic and Financial advisory
Ltd services
Forbes Building, 2nd
Floor, Chiranjit Rai
23 ITA Nos.405,348,349,404,406,407&
466/Agr/2011
A.Ys. 2007-08
Marg, Fort Mumbai
Mr. Dayal Saran, 5,00,000 5,00,000 10,00,000 Fees for the Consultation taken from time
Advocate to time in respect of the transfer of shares
63, Nehru Nagar Agra
Total 5,75,89,200 5,59,70,400 11,35,59,600
6.3 Further the above expenditures were divided between the three members of each family as under:-
Name of the Assessee Ajay Renu Hemant Kamlesh Sagar Saurabh Total Agarwal Agarwal Anand Agarwal Anand Anand Name & Address of person Amount (Rs.) Amount (Rs.) Amount (Rs.) Amount (Rs.) Amount (Rs.) Amount (Rs.) (Rs.) / party to whom payment & (Date of & (Date of & (Date of & (Date of & (Date of & (Date of made Payment) Payment) Payment) Payment) Payment) Payment) M/s Churu Trading Co. Pvt. 3,00,00,000 1,00,00,000 25,00,000 85,00,000 1,70,00,000 1,70,00,000 8,50,00,000 Ltd. (15.11.2006) (13.11.2006) (13.11.2006) (13.11.2006) (13.11.2006) (13.11.2006) Continental Building, 135, Dr. A.B. Road, Mumbai M/s S.R. Halbe & 78,56,800 28,06,000 5,61,200 22,40,000 44,80,000 44,80,000 2,27,37,200 Associates, Advocates (14.12.2006) (14.12.2006) (14.12.2006) (02.01.2007) (02.01.2007) (02.01.2007) Fountain Chambers, 3rd Floor, 50,000 Nanabhai Lane, Fountain, (19.05.2005) Mumbai 50,000 (26.12.2005) 23,200 (01.03.2006) 90,000 (02.05.2006) 1,00,000 (03.08.2006) Mrs. Bina Gupta & Others, 8,75,000 3,12,500 62,500 --- 5,00,000 5,00,000 44,22,400 Advocates (03.02.2007) (03.02.2007) (03.02.2007) (03.02.2007) (03.02.2007) Khaitan House, B-1, Defence Colony, 1,00,000 1,00,000 7,70,400 New Delhi (04.04.2005) (15.05.2005) 30,000 1,00,000 (23.04.2005) (31.05.2005) 50,000 1,50,000 (06.10.2005) (02.06.2005) 1,00,000 1,00,000 (01.03.2006) (07.10.2005) 85,000 1,87,000 (05.02.2006) (15.11.2005) 1,50,000 1,00,000 (23.03.2006) (28.03.2006) 50,000 (05.04.2006) 1,00,000 24 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 (12.07.2006) Mr. Sudipto Sarkar, 1,50,000 --- --- --- --- --- 1,50,000 Advocate (02.04.2006) 31, Broad Street, Kolkata Rabo India Securities Pvt. 2,50,000 --- --- --- --- --- 2,50,000 Ltd. (01.02.2006) Forbes Building, 2nd Floor, Chiranjit Rai Marg, Fort, Mumbai Mr. Dayal Saran, Advocate 5,00,000 --- --- --- --- 5,00,000 10,00,000 63, Nehru Nagar, Agra 19.02.2007 Grand Total 4,06,10,000 1,38,55,500 31,23,700 1,07,40,000 2,19,80,000 2,32,50,400 11,35,59,600
7.1 In para 12 of the assessment order, the AO has discussed the nature of various expenditure incurred by the appellant on payment of various legal and professional fees to decide about the claim of the appellant for deduction u/s 48(i) out of these expenses and the same are reproduced as under:
12.1 Payment of Rs. 8,50,00,000/- to Churu Trading Co. Pvt.
Ltd. Mumbai & Rs. 2,50,000/- to Rabo India Securities Pvt. Ltd., Mumbai The Agarwal Group started exploring the means for acquisition of majority shareholding of Maheshwari Group. In the process they approached Rabo India Securities Pvt. Ltd. Who acted as strategic and financial advisor to Agarwal Group (the Acquirers) with respect to proposed acquisition of the balance shareholding in the companies held by investors other than acquirers in association with the set of like minded investors. So the transaction entered into with Rabo India Securities Pvt. Ltd. was basically a initial strategic planning for the acquisition of majority shareholdings whereas the Agarwal Group in its returns of income had shown sale of their shareholdings to the majority shareholders. The process initiated by Agarwal Group for the acquisition and amount paid to Rabo India Securities Pvt. Ltd. was in no way in connection with process of transfer of shares and hence such expenditure cannot be considered as expense distinctly related and integrally connected with the transfer of shares.
25 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 Similarly, during the process of acquisition of majority share holding of Maheshwari Group, the Agarwal Group entered into agreement with Churu Trading Pvt. Ltd. who acted as arranger for arranging Rs. 252 crores to acquire majority shareholding in the companies by Maheshwari Group. As per the terms of Churu Trading Pvt. Ltd. The Agarwal Group was to pay Rs. 8.5 crores for consideration of arranging the fund as arranger fee to Churu Trading Company Pvt. Ltd. The arranger fee was due on achieving the financial closure of Rs. 252 crores notwithstanding whether the Agarwal Group shall be able to draw down the arranged funds or not. This was an all inclusive and not refundable fees. In the background of the agreement with Churu Trading Co. Pvt. Ltd. it is amply clear that the fee was basically in the nature of arrangement of the fund and no way it was in the connection of transfer of shares of Agarwal Group to the Maheshwari Group, therefore, the amount of Rs. 8.5 Crores paid to M/s Churu Trading Co. Pvt. Ltd. is not distinctly related to and integrally connected with the transfer of shares for being admissible as deduction U/s 48(i) of the I.T. Act.
12.2 Payment of Rs. 2,24,24,000/- + Rs. 3,13,200/- to M/s S.R. Halbe & Associates, Mumbai:
A payment of Rs. 2,24,24,000/- have been claimed on account of fees paid to M/s S. R. Halbe and Associates, Mumbai for formulation of the strategy for filing petition before the CLB for protection of the interest of minority shareholders, appearance and attending the proceedings before CLB, briefing the lawyers and attending the hearing before Hon'ble Allahabad High Court and Hon'ble Supreme Court, advising and drafting the terms of settlement in connection with transfer, holding discussions and conferencing with minority shareholders. The payment of Rs. 2,24,24,000/- is a lumpsum payment for the services rendered by M/s S.R. Halbe. Since there is no itemwise billing for various activities and considering that major portion of fee is attributable to the proceedings before CLB in connection with transfer of share, the payment of Rs. 2,24,24,000/- is accepted that it has been incurred in connection with the transfer of shares.26 ITA Nos.405,348,349,404,406,407&
466/Agr/2011 A.Ys. 2007-08 However, in addition to above, Rs. 3,13,200/- has been shown as reimbursement of traveling, lodging and boarding expenses to M/s S.R.Halbe & Associates. On perusal of documents on record and bill of M/s S.R. Halbe & Associates such expenses do not find any place to be directly connected with transfer of shares of the Agarwal Group. The nature of expenses itself shows that it has nothing to do with transfer of shares and cannot be constructed that such expenditure has been incurred wholly and exclusively in connection with the transfer.
12.3 Payment of Rs. 44,22,400/- to Mrs. Bina Gupta, Advocate, New Delhi The payment of Rs. 44,22,400/- has been claimed as fee for preparation of petition, appearance before the CLB and fee for appearance before Hon'ble Allahabad High Court and Hon'ble Supreme Court including consultation from time to time in respect of transfer of shares. Out of these expenses it is noticed that certain expenses has been incurred in cash on vouchers from the accounts of different members of Agarwal Group which are basically reimbursement of expenses related to traveling, lodging and boarding etc. It is noticed that an amount of Rs. 6,25,000/-
has been claimed by Shri Ajay Agarwal and an amount of Rs. 7,37,000/- has been claimed by Smt. Renu Agarwal as deduction, however looking at the supporting bills such payments falls under the category of various miscellaneous accounts of logistic expenses which are not distinctly related and integrally connected with the transfer of shares, therefore, they are not admissible for deduction u/s 48.
12.4 Payment of Rs. 1,50,000/- to Mr. Sudipto Sarkar, Advocate A payment of Rs. 1,50,000/- has been claimed as payment to Mr. Sudipto Sarkar, Advocate on account of appearance fees before the CLB on various dates. However, on perusal of orders of CLB it is noticed that he has appeared on behalf of Agarwal Group during the acquisition process of majority shareholding of Maheshwari Group on behalf of petitioners (Agarwal Group). The consolidated payments also included expenses on account of 27 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 logistic provisions. Since such expenses are not distinctly related to and integrally connected with the transfer of shares, therefore, it cannot be treated that the expenses have been paid wholly and exclusively in connection with transfer of shares. Therefore, such expense is not allowable as deduction u/s 48(i) of I.T.Act.
12.5 Payment of Rs. 10,00,000/- to Mr. Dayal Saran, Advocate, Agra A consolidated payment of Rs. 10,00,000/- (Rs. 5,00,000/- each by Ajay Agarwal family and Kamlesh Agarwal family) has been shown as fee for consultation taken from time to time in respect of the transfer of shares. However, there is no evidence on record showing such expenditure being distinctly related and integrally connected with the transfer of shares. There is no evidence which can corroborate that any legal services have been extended in the process of valuation of share or in the process of compromise concerning the transfer of shares. Such a legal expense does not find any place that they are intrinsically linked with the transfer of shares and therefore it cannot be allowed as deduction.
7.2 In view of above discussion as contained in para 12 of the assessment order, the AO has held following expenditures as not distinctly related to and integrally connected with the transfer of shares for being admissible as deduction u/s 48(i) of the IT Act and hence disallowed by him.
Sl. Name of Party to whom Amount
No. payment is made
(Rs.)
(i) M/s Churu Trading Co. Pvt. Ltd. Rs. 8,50,00,00/-
(ii) Rabo India Securities Ltd. Rs. 2,50,000/-
(iii) Mr. Sudipto Sarkar Rs. 1,50,000/-
(iv) Mr. Dayal Saran Rs. 10,00,000/-
28 ITA Nos.405,348,349,404,406,407&
466/Agr/2011
A.Ys. 2007-08
7.3 Following expenditures were partly allowed
Sl. Name of Party to whom Amount Claimed Amount Allowed Reason for not
No. payment is made u/s 48(i) Allowing Balance
(Rs.) Amount
(Rs.)
(i) M/s S.R. Halbe & Rs. 2,24,24,000/- Rs. 2,24,24,000/- Rs. 3,13,200/- (as
Associates reimbursement of boarding,
( as fees) lodging and travelling
( as fees) + expenses)
Rs. 3,13,200/- (as Note: this expense was fully
reimbursement of claimed by Shri Ajay
boarding, lodging and Agarwal (appellant)
travelling expenses)
(ii) Mrs. Bina Gupta Rs. 44,22,400/- Rs. 30,60,400/- Rs. 6,25,000/- in the
hand of Shri Ajay Agarwal
(appellant) + Rs.
7,37,000/- in the hand of
Smt. Renu Agarwal holding
that these expenses falls
under the category of
various miscellaneous
accounts of logistics
expenses not distinctly
related and integrally
connected with transfer of
shares
7.4 In view of above decision of the AO as discussed in para 12 of the assessment order with respect to payments made to six parties for various professional and legal services provided to the Agarwal Group in connection with their dispute with the Maheshwari Group taken before the CLB which ultimately resulted into sale of their share holdings in two closely held unlisted companies, following payments were disallowed to the appellant out of Rs. 4,06,10,000/- claimed by him u/s 48(i) Name to whom payment Amount Disallowed made (Rs.) Smt. Bina Gupta 6,25,000 Sudipto Sarkar 1,50,000 S.R. Halbe & Asso. 3,13,200 Dayal Saran 5,00,000 Rabo India Securities (P) 2,50,000 29 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 Ltd.
Churu Trading Co. (P) 3,00,00,000
Ltd.
Total amount disallowed 3,18,38,200
In view of the findings of the AO as discussed above, Rs. 3.18,38,200/- was added in the returned income of the appellant and assessed income was determined at Rs. 54,92,51,000/- ( 51,74,12,800 + 3,18,38,200) 8.1 The above addition has been disputed by the appellant in grounds no. 2 to 9 taking each amount separately for six amounts contained in the total disallowance of Rs. 3,18,38,200/- pleading that all these expenses are incurred in connection with transfer of shares and in support of these grounds in the written submissions filed on 15.10.2010, the Ld. AR has first tried to explain the circumstances under which the Agarwal Group had to go to the Honb'le CLB under a strategy to compel the majority shareholder i.e. the Maheshwari Group to purchase their shareholding at an maximum possible enhanced share price as determined by them under the direction of the CLB because book value of the shares were miniscule and also their earlier attempt of division of family business of publication as per the agreement arrived at between two groups on 02.12.2004 failed due to not being honoured by the Maheshwari Group by passing a Board Resolution on 07.03.2005. In the written submission, it was explained by the Ld. AR that after experiencing unprecedented problems from the majority share holders viz., Maheshwari Group (including family of Ashok Agarwal), who were forcing / making situation so that the Agarwal Group may be thrown out from these companies and sell their holding to them as they were in minority, they filed petition before the Company Law Board, Principal Bench, New Delhi. It was further explained by the Ld. AR that if they would have exited from the company, they would have realized miniscule price of their shareholding. Therefore, it was mutually decided by Agarwal Group to move to the CLB, agitate jointly so that they obtain proper price and share the expenses incurred on the litigation. In order to clarify the whole circumstances under which the Agarwal Group moved to CLB, it has been explained by the Ld. AR that it is to be understood that CLB is a dispute resolution mechanism constituted under section 10E of the Companies Act, 1956 and it is regulated by the Company Law Board Regulations, 1991. He further explained that in view of the petition filed by the Agarwal Group and after many rounds of the hearings before the CLB, the Principal Bench, New 30 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 Delhi on 25.01.2006 passed order requiring the Respondents-Maheshwari Group to quote a price of total shareholding and Petitioners-Agarwal Group will have first right to acquire. Thus Agarwal Group adopted a strategy to enhance/improve the value of the shares and this could only be done with the help and guidance of a suitable person who could back the deal and act as a strategic investor to fund the deal for the acquisition of the share holding of the majority share holders. He further elaborated that under this planning of the strategy, the Agarwal Group first opted for purchase of shareholding of the Maheshwari Group determined at Rs. 252 crore by showing that they were arranging finance with the help of two consultancy companies , M/s Raboo India Securities (P) Ltd. and M/s Churu Trading Co. Pvt. Ltd. which arranged finance through M/s Media West and other Marchant Bankers and first installment of 5% amounting to Rs. 12.5 crore as per the order dated 25.01.2006 was also paid. As explained by the Ld. AR, since the financial arrangement made by the Agarwal Group with M/s Media West and other Merchant Bankeres was not found to be straight forward and a takeover of the company by the ZEE Group was suspected because the financial arrangement was made with M/s Media West in such a manner that ultimately at least 49% of shares would have been sold to the lender and as per the market information, the lender M/s Media West was a front company of ZEE group, the CLB with its subsequent order dated 10.07.2006 cancelled the option of the Agarwal Group to buy the Shares of the Maheshwari Group and ordered the Maheshwari Group to buy the shares of the Agarwal Group. It was also argued by the Ld. AR that against this order of the CLB, the Agarwal Group further did not go in appeal because they were ultimately interested in selling their share holding. As per the compromise reached before the CLB, it was the basic understanding that one Group should go out of the company so that company remains with either of two groups and not fall in the hands of outsiders, the CLB ordered that right to purchase the shares of the Agarwal Group would revert to the Maheshwari Group and since it served the purpose of the Agarwal Group, they did not appeal against the order of the CLB. As per the Ld. AR, finally both the Petitioners (the Agarwal Group) and the Respondents (the Maheshwari Group) subsequently entered into a compromise before the Hon'ble CLB to enable the latter to take over the companies and the formers be paid the value of the shares, which the Agarwal Group was able to get enhanced with the backing of the financers/merchant bankers etc. Thus Hon'ble Company Law Board passed an order dated 01.11.2006 for the compromise between both parties without any restrictive covenants as the Agarwal Group was being paid the value of shares and the Maheshwari 31 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 Group were acquiring the same. Pursuant to the final order of the CLB, Rs. 160 crore was paid to the Agarwal Group which was Rs. 22 crore more than the initial value of Rs. 138 crore for 35.33% share holding of the Agarwal Group as determined by the Maheshwari Group in view of the order dated 25.01.2006 of the CLB and hence it was argued by the Ld. AR that all these enhancement of the value of the shares became possible because of the strategy of the Agarwal Group planned on the advice and help of various lawyers and professionals to whom fees were paid as per the details given in para 6.2. After receipt of full amount of Rs. 160 crore, it was divided among the six members of Agarwal Group in the ration of their share holding as given in the chart in para 5.16.
8.2 In order to further clarify the strategy of the Agarwal Group in going to CLB to get the value of shares enhanced, following submissions were made by the Ld. AR on 08.03.2011:
" Members of the Agarwal Group sought advice of eminent lawyer Shri S.R. Halbe and were advised that if they could join together and file petition before the Company Law Board under section 397 and 398 of the Companies Act, 1956 they would be able to seek the implementation of the MOU which otherwise was not possible since these were closely held companies and their shareholding was in minority too. To achieve this plan a strategy to be drawn in a planned way without brining into knowledge of any person.
Hence the petition before the Hon'ble Company Law Board was prepared and filed with the help and assistance of various legal luminaries. Meetings were held between the members of Agarwal Group, S.R. Halbe and other advocates to strategise the plan and it was decided that one of the best way to extract the price was to pray before the Hon'ble Board, who has the powers of the Court that the Petitioners were will to purchase the shares of the Respondents at value they quoted and in case this was to go through then Agarwal Group has to seek assistance of financers or else the matter may get out of hand. Shri Ajay Agarwal and Shri Saurabh Anand travelled to Mumbai and met Chairman and members of Zee Group and M/s Churu Trading Co., they agreed to help them in this plan, but sought to seek charges for this favour, which the members of the Agarwal Group agreed to since if this strategy worked they would have 32 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 realised a good price of their shareholdings under directions from Company Law Board.
On 22.03.2005 the Hon'ble Company Law Board passed an injunction order restraining the Maheshwari Group from giving effect to the resolution passed in the Board Meeting dated 7.03.2005 regarding Bank operations, directing Shri Ajay Agarwal to continue as Editor of the Agra Publication and restraining the appointment of Shri Manu Anand as whole time director. Against this order Maheshwari Group preferred an appeal before the High Court of Allahabad and the Hon'ble High court vide order dated 08.04.2005 directed the Company Law Board to pass a reasoned order. Thereafter the Hon'ble Company Law Board after giving opportunity to both the Group passed an order dated 15.04.2005 as under.
I have heard the learned counsels of both sides and also seen the records of the case as well as submissions now made by them. It is admitted position that this is family concern and shareholding is held by close family members. Moreoever, the respondent company is a result of conversion of pre existing partnership firm, therefore, prima facie the principle of partnership firm should apply in this case as decided by this Board in the case of M/s Tirath Ram Ahuja Ltd. and Ors. (CP No. 57/99).
The case of the petitioners is that the power structure which was being maintained for 20 years is being tilted in favour of respondent in the garb of so called professionalism so as to marginalise the petitioners. The respondents on other hand are relying on the articles of association as well as the resolutions passed in the Board Meeting of 7.03.05 where the petitioners were also present. The petitioners having participated in the Board Meeting have to follow the principles of "Majority decision".
In case of the respondent company was not looking to be a partnership firm on the face of it, most of the arguments advanced by the respondents would have come to their rescue. However, as already stated the majority decision is not applicable in the case of partnership firm, as stated earlier. It is a matter of detailed discussion and final stage as to whether the relinquishment of Editorship of Agra Edition, the new financial structure framed by the respondent company and appointment of R-3 who is also a son of Respondent-2, would tilt the balance of power in the respondent company or not. This can be decided only when the main petition is heard and arguments are led by learned counsels of both sides on the points of facts and law. In the meantime, it appears that the status quo ante at least 3 issues needs to be maintained till the disposal of 33 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 this petition, which would otherwise cause irreparable loss to the petitioner. In case the arguments of the learned counsels are accepted it would tantamount to disposal of the petition itself. The balance of convenience therefore, lies in favour of the petitioners. I am of the considered view that the petitioners have made out a prima facie case and would suffer irreparable loss if relief as prayed are not granted. As such, till the final disposal of the petition, the respondents are restrained from giving effect to the resolutions passed in the Board Meeting dated 7.03.2005 regarding Bank operations. Secondly the petitioners will continue to be the Editor of the Agra Publications and thirdly, the respondents are restrained from giving effect to the appointment of respondent no. 3 as a whole time director.
Thereafter after several rounds of hearings the Chairman of the Hon'ble Company Law Board intervened and requested both the Groups to settle their disputes amicable to preserve the family held company. It was at this stage the strategy adopted by the Agarwal Group to augment the price of their share holding was to be tested. Thus during the course of the hearing the parties agreed on 30.11.2005 that Maheshwari Group would indicate the value of the company with the first option to Agarwal Group either to buy the shares held by Maheshwari Group or sell their shares on the basis of the value of the company. In the meanwhile members of the Agarwal Group as a part of their strategy started revealing information that they were going to buy out the shareholding of the majority ie Maheshwari Group by way of discussion with the various merchant bankers and other persons in the market in order to raise finance. This action of theirs caught the attention of Maheshwari Group who in the course of the hearing indicated the value the company M/s Amarujala Publications Ltd and M/s A & M Publications (P) Ltd. at Rs. 390 Crores. To further put the Maheshwari Group unaware of their dealings with Zee Group they opted to buy the share holding of the majority shareholders i.e. Maheshwari Group so that the price may not be back tracked again as previously it was Maheshwari Group who had back tracked the MOU for settlement which was their proposal. Thereafter the Hon'ble Company Law Board constituting the Bench of the President on 24.01.2006 passed the following order.
1. With a view to resolve the disputes amicably, the parties had agreed on 30.11.2005 that the respondents would indicate the value of the company with the first option to the petitioners either to buy the shares held by the 34 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 respondents or sell the petitioners' shares to the respondents on the basis of the value of the company indicated by the respondents. In the hearing held on 17.01.2006, the respondents indicated the value of the company including that of A&M Publications Pvt. Ltd. at Rs. 390 crores. In the hearing held on 23.01.2006, the petitioners elected the option of purchasing the shares held by the respondents.
2. It has been agreed by the parties that sale of shares by the respondents shall be subject to the following:
1. There will be a lock-in period of 3 years on the shares of the respondents that are purchased by the petitioner Group.
2. The petitioners shall not transfer any shares of the companies or raise the shareholding in the companies or cause any shares to be allotted and will not enter into any agreement/transactions in such manner that result in the following:
(a) Results in purchaser of the shares (Petitioners' Group) ceasing to hold 51% of the shareholding of the companies at any point of time for a period of next 3 year even after IPO.
(b) Ceasing to have management control of the companies and all and every policy decision of the company shall be taken by the petitioner Group.
(c) That the petitioner Group shall also have majority Directors on the Board of the company.
(d) However, the petitioners are at liberty to go in for public issue after payment of full consideration for the shares in terms of Clause (4) below subject to clauses (a) and (b) above.
3. The management control of the company shall only be transferred to the petitioner Group on payment of 40% of the agreed amount payable to the respondent Group by the petitioners. In the meantime, the shares sought to be sold by the respondents and also the installments of consideration paid by the petitioners shall be kept in escrow account and on full payment, the money will be released to the respondents and all the shares will be transferred to the petitioners.
4. The payment shall be made by the petitioners' Group in the following manner:
(a)5% of the consideration will be paid within 2 weeks from the date of the order and another 5% within the next two weeks.
(b)30% within 3 months from the date of the order.
(c) 30 % within 6 months from the date of the order.
(d)30% within 9 months from the date of the order.
(e) The full amount payable to the respondent Group by the petitioners shall be completely paid within 9 months of the passing of the order and as per the schedule contained herein above. No default in the schedule given hereinabove shall be made by the petitioner Group.
5. In case of default in payment and in non-compliance of the Schedule of payment as provided in clause 4, the petitioner Group shall not only immediately cease to have the management control and the control shall 35 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 automatically vest in the respondent Group but also the petitioner Group shall immediately transfer their shareholding in the companies to the respondent Group on the basis of the same valuation of Rs. 390 crores. The respondents will have liberty to forfeit 10% of the total consideration payable to the respondents.
6. Since the management of the company will be handed over to the petitioners only after receipt of 40% of the consideration, the respondents shall ensure the following:
(a)There shall be no additional capital commitments.
(b)There shall be no sale or purchase of assets.
(c) There shall be no closure or starter of new additions.
(d)All payments beyond Rs. 50,000/- shall be with joint signatures of one of the petitioners as also any contract of value of more than Rs. 50,000/-.
(e) There shall be no change in the senior management.
(f) There shall be no change in the board of directors.
(g)There shall be no change in the capital structure.
(h)There shall be no fresh borrowings.
7. After the management control of the company is transferred to the petitioners on receipt of 40% of the consideration, till the full payment is received by the respondents, the same conditions as in clause (6) above will continue to apply and wherever joint signature of petitioners has been stipulated, it shall be with joint signatures of one of the respondents.
8. Within a week of the date of the order, the respondents shall furnish to the petitioners current financial position (in terms of the last trail balance, fund commitments etc.) of both the companies.
9. Likewise, within a week M/S A&M. Publications Pvt. Ltd. will provide to the petitioners with the share certificates with respect to their shareholding in the company.
3. Since the above terms were discussed and agreed to in my presence, the parties should scrupulously abide by the above terms. Further, since right from the beginning, both the parties expressed their desire to keep the business of the company within the family and that is why the option was given to the petitioners to either buy or sell, the petitioners having opted to take the full ownership and control of the company - that is within the family, they shall not either directly or indirectly facilitate or negotiate or shop around with any third party for a period of 3 years to either acquire the ownership or control of the company.
4. The parties are at liberty to approach the Bench on case of any difficulty in working out this order.
Maheshwari Group never anticipated and were completely unaware of the strategy of Agarwal Group were completely taken aback with the option of Agarwal Group to buy out their shareholdings at the value of Rs. 252 Crores. Thereafter they started scouting that how Agarwal Group was able to raise funds of such large amount and started fearing of losing the 36 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 Company. After obtaining vital information they again filed petition before the Hon'ble Company Law Board that Agarwal Group have violated the terms of the consent order dated 25.01.2006 and they should be directed to sell their shares to Maheshwari Group. The Hon'ble Company Law Board reversed the option from acquisition of the company from Agarwal Group to Maheshwari Group after hearing the counsels of the latter that the funding of money from M/s Mediawest arranged by M/s Churu Trading Co. was in contravention to the consent order, meaning thereby that the earlier order of the Board became ineffective, unenforceable and non est and the right to purchase the shares reverted to Maheshwari Group with the same binding terms that they shall not borrow or make financial arrangements.
The relevant portion of the order of the Hon'ble Company Law Board dated 10.07.2006 is reproduced as under.
12. I have considered the pleadings and arguments of the counsel. Before dealing with the merits of the case, it would be appropriate to summarize, point wise, the recitals in the MOU between the petitioners and Media West. a. The subject matter of the MOU is financing the acquisition of 64.67% shares presently held by the respondents.
b. Immediately after the value of the company was disclosed by the respondents on 17.1.2006, the petitioners held discussions with a well known undisclosed merchant banking institution which had indicated that purchase of 64.67% shares was eminently a bankable proposition and the petitioners could divest their own 35.33% holding in the market at an appropriate time. While the merchant banker was agreeable to fund major part of the requirement, it insisted that the petitioners should recruit another investor to fund one third to half of the requirement. On the suggestion of the merchant banker, the petitioners approached Media West, one of the names suggested by the merchant bankers and Media West agreed to fund not more than 40% of the requirement. c. After the consent order, further discussions were held jointly with the merchant banker and Media West and it was agreed that Media West would lend Rs. 101 crores, being 40% of the total amount of Rs. 252 crores where after the merchant banker will lend the balance amount of Rs. 151 crores.
d. The security for the amount of Rs. 252 crores lent jointly by Media West and the merchant banker would be 35.33% shares held by the petitioners, which shall be subject to restraint against all transfers. e. During the currency of the loans, these shares will stand pledged in favour of Media West and merchant banker and the shares acquired from the respondents of 64.67% will be retained as collateral security. The voting rights of 35.33% shares shall not be exercisable in any manner prejudicial to the interest of the lenders.
37 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 f. The petitioners would have the option to repay the loans at any time within a period of 6 months of acquiring the entire shares, with 15% interest per annum, before the lenders exercise their option to sell the shares. g. The merchant banker will have the right to make public offer for sale or private placement to financial investors of the 35.33% shares at any time after 6 months but within 36 months from the date on which the petitioners acquire the entire shares and the lenders will appropriate the proceeds proportionately. After 3 years, the merchant banker will have the right to sell either by public offer or by private placement of additional 13.67% shares thus totaling to 49% shares. The receipt of the proceeds of sale of 49% shares would fully and finally release the petitioners from all debts, liabilities and obligations due to the lenders and the balance 51% shares will be released unconditionally to the petitioners. h. Till that time, no dividend shall be declared without the consent of the lenders. i. If the petitioners do not accept the scheme prepared by the merchant banker for sale of 35.33% shares, the shares shall be immediately transferred in the joint name of the lenders and the petitioners will pay 15% interest per annum right from the beginning repayable within a period of 48 months from the date of the loan. During the currency of the loan, 64.67% shares shall continue to be retained as collateral security by the lenders. j. If the interest on the loan remains unpaid for more than a year, after notice to the petitioners, the lenders may offer for sale to public or by private placement, the 35.33% shares and the proceeds shall be appropriated proportionately by the lenders first towards interest and thereafter the principal.
k. If the remaining principal amount and the interest is not paid within 48 months, the lenders shall have a right to make a public offer of such number of shares out of 64.67% shares so that the petitioners continue to retain 51% shares.
l. In the event, public offer for sale does not take place within a period 12 months from the date of acquisition, the parties may renegotiate and the new agreement shall provide for public offer by the petitioners for repaying the loan by the lenders with simple interest at 15% per annum. m. The lenders may transfer their rights under this agreement to any party willing to abide by the consent order and the rights and obligations of the lenders shall vest in the new investors. Further, it is open to Media West to transfer its right to the merchant banker and vice versa. n. In the event of any dispute, the same shall be referred to an arbitrator named in the MOU, whose decision shall be final.
o. Media West will release-the amount in installments as per the consent order subject to the petitioners producing the agreement with the merchant banker before the 2nd installment is paid.
p. Once the entire consideration due on 64.67% shares is paid, the petitioners shall execute pledge documents in respect of 35.33% shares and the share certificates shall be kept in escrow. Likewise, the shares in respect of 64.67% also shall be kept in escrow and retained as collateral security.
38 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 q. In a number of places in the MOU, it is stipulated that the parties will strictly comply with the terms of the consent order.
13. The counsel for the respondents argued on two main points - one is that the consent order itself was obtained by concealing the fact that the petitioners had already entered into certain terms with the lenders and the same had not been disclosed at the time of entering into the consent terms. This act of the petitioners, according to the learned counsel, amounts to a fraud as his clients had been induced to enter into consent terms by concealment of vital facts by the petitioners. The second argument is that the MOU with Media West is a scam document and the purpose of the petitioners, is to hand over the control and management including the shares to the Essel Group and as such they have breached the premises on which the consent terms were entered into i.e. the company is to be within-the family.
14. It is on record that before the respondents disclosed the value of the company, they filed an application expressing an apprehension that the petitioners were shopping around for sale of the shares which the petitioners expressly denied in their reply. Simultaneously, the respondents also sought for keeping the shares of the petitioners in escrow so that their shares are not dealt with in any manner. Even though, initially the petitioners were unwilling to do so as the same was not part of the consent order, ultimately they deposited their shares with the escrow account. In my order dated 04.04.2006, I held that there was no specific stipulation in the consent order that the petitioners could not borrow to pay for the consideration and a such, borrowing per se, cannot be considered to be in breach of the consent terms. I had also expressed a prima facie view in that order that a perusal of the MOU with Media West indicated that none of the terms in the same was in breach of the consent terms. However, after hearing the counsel for the parties now, I find that the respondents are justified in claiming that they had been induced to enter into the MOU without full disclosure of vital facts and that the MOU read as a whole, would reflect, as detailed below, to be in breach of the consent terms.
15. It was argued by Shri Sarkar, that the petitioners did not and could not have entered into any arrangement with the lenders before the Company Law Board passed the consent order as they would not have known the terms of the consent. This argument is contrary to facts. In the MOU itself, it is stated that after the respondents disclosed the value of the company, the petitioners had held discussions with the Merchant Bankers who had indicated that the purchase of 64.67% shares was a bankable proposition and that the petitioners could divest their 35.33% shares in the market at an appropriate time and that on the suggestion of the Merchant Banker, Media West was approached, who agreed to fund 40% of the cost of acquisition. Therefore, prior in time to the date of consent order, the petitioners had tied up the financing arrangement. Further, the 3 year in period had already been decided in the hearing on 30.11.2005. The whole MOU revolves around the shares of the company and the lock in period. From the terms of the MOU, it is evident that the entire funding arrangement is based on the existing shares of the company, part of which could be 39 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 sold to public or through private placement for repayment of the loans. In other words, from the proceeds of an IPO of the existing shares, the loans are to be repaid. As I have narrated in the last portion of 1st paragraph ante, the issue relating to IPO was added in the consent order at the request of the petitioners that if the company needed funds, it could go for an IPO, subject to ensuring that even after the IPO, the petitioners would continue to hold not less than 51% shares. In other words, the IPO was for issue of new shares, the proceeds of which would go to the company. The intention of going for IPO of the existing shares was never expressly indicated not could be implied during the discussions even though the petitioners were aware that their 35.33% shares would be subject to public offer in terms of the discussions with the lenders. But in the arguments, Shri Sarkar took a stand that even the existing shares could be sold through IPO. When the petitioners knew, at the time when the consent terms were being discussed before me that the entire financing arrangement was based on the advise of the Merchant Bankers that the petitioners could dispose of their shares of 34.33% shares through IPO, they should have disclosed the same when they sought for permission to go for IPO, but instead they wanted the same for raising funds for the company. Thus, the petitioners are guilty of not only of suppression of this material fact that the 34.33% shares would be subject to sale through IPO, but also induced the petitioners to agree for IPO on the ground that the company might need further funds. This is evident from the consent order also. In paragraph 2(d) of the consent order, it is not stated that the petitioners are at liberty to divest their shares through public offer but it is stated that they are at liberty to go for public issue indicating the understanding of the respondents that the IPO would be for new shares. Shri Datar contended that if the respondents had known that the petitioners were to fund the acquisition by sale of their own shares, the respondents would not have agreed to the consent terms. I find full justification in this argument.
16. The above argument would become relevant only if the terms of the MOU indicate the possibility of the shares being sold to repay the loans. In CA 148 of 2006, the respondents have elaborately dealt with their objections and apprehensions on the terms of the MOU. However, in the reply to this application, the petitioners have not addressed on any of these objections and apprehensions of the respondent. In terms of the MOU, the petitioners have the right to repay the entire loan of Rs. 252 crores along with interest at the rate of 15% per annum within a period of 6 months of acquisition of shares. When Shri Datar pointed out that when the petitioners have not been able to mobilize even a sum of Rs. 12.5 crores being 5% of the first installment on their own, how they would be able to mobilize this huge amount within a period of 6 months after acquisition of shares to repay the loans, there was no response form the counsel for the petitioners. The inevitable consequence of the failure of the petitioners to repay the loan within the stipulated time, is that the lenders would acquire the right to dispose of the shares either by public offer or private placement. In other words, as rightly pointed out by Shri Datar, built in default has been provided to enable the lenders to deal with the shares. Further, it is worth noting that the MOU not only provides for sale to the public but also by private placement. Here comes the linkage 40 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 between Media West and the Essel Group which is admittedly a competitor to the company and which has been acquiring news paper companies.
17. In terms of the MOU, Media West is to fund the petitioners to the tune of Rs. 101 crores and the balance sum of Rs. 151 crores is to be funded by the Merchant Bankers. In all, the amount involved in acquisition of the shares of the respondents is about Rs. 252 crores and the petitioners are borrowing the entire amount. The admitted position is that Media West is a Group company of Essel Group. Media West is not an NBFC nor a finance company as is evident from the its object clause in the Memorandum. It is also an admitted fact that the paid up capital of Media West is only Rs. 1 lac and its net worth is negative, having incurred a loss of over Rs. 11 crores in the last year. Its business income for the last two years is nil. With this financial position, there is nothing on record to show how Media West is going to mobilize Rs. 100 crores to fund the acquisition of the shares of the respondents. Whether it is going to borrow on interest or to be assisted by someone else without interest is not clear. For lending such a huge amount to the petitioners there are no terms in the MOU relating to security, either financial or otherwise to be provided by the petitioners. The security is obviously only the shares of the company, whether it is 35.33% or 64.67% or the whole 100%. The said security in the form of shares, covers the lending by both Media West and the unnamed Merchant Banker. Normally, when a large amount of money is lent against shares, especially those of an unlisted closely held company, due diligence is carried out of the company to find out the fair value of the shares, but, in the present case, admittedly, nothing was done. Even though the respondents have raised all these issues in CA 148, the petitioners have not responded to the same in their reply. The motive of a company, having no cash resources, in lending such a huge amount, cannot be but for an oblique purpose. Considering the fact that Media West has been used as a special purpose vehicle by Essel Group, the claim of which has not been denied by the petitioners, to acquire other newspaper companies, it appears that even the present funding to the petitioner is with the object of taking over control of the company. The very fact that the MOU provides that whatever might be the consideration that the lenders would receive on sale of 49% shares, the same would release the petitioners of all their liabilities, obligations etc. would indicate that the present lending arrangement by the lenders is not based either on commercial or financial consideration, especially when no due diligence of the company has been carried out. It is rather a strange arrangement by which the lenders expect that proceeds from sale of 35.33% / 49% shares would cover their entire loans given for acquisition of 64.67% shares, that too with 15% interest. It is more so, as far as the Merchant Banker is concerned. No Merchant Banker would fund such a huge amount of Rs. 151 crores on the strength of shares of a closely held, unlisted company, without due diligence. From the MOU it is seen that it was the Merchant Banker who had suggested that the petitioners could approach Media West for part financing of the acquisition. Further, the provisions in the MOU that the lenders could sell the shares by private placement and that the lenders have the right to transfer their rights to any party etc, definitely rises a doubt whether, this right has been conferred on the lenders only to facilitate Essel Group to acquire the 41 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 shares. Non disclosure of the name of the Arbitrator also raises a doubt about the independence of the unnamed arbitrator. Shri Sarkar argued that it is of no concern of either the respondents or this Board to examine why and how Media West would fund the acquisition and why it is taking the risk. In normal circumstance, the contention of the learned counsel may be correct. But in the present case, when a party alleges breach of the terms of the consent order, to adjudicate on the allegation, this Board has to examine all aspects. Even though it is claimed that since the MOU specifically provides that 51% shares would continue to be held by the petitioners as also the control and management of the company as stipulated in the consent order, it is to be noted that the restriction of the holding and management is only for a period of 3 year. The terms of the MOU are so unrealistic and one sided, that it appears that the MOU is a prelude to hand over the control of the company after a period of 3 years. Further, that it was not to the knowledge of the respondents that the funding for acquisition would be arranged on the basis of the existing shares of the company and therefore, mere continuing with the 51% shares by the petitioners is of no justification.
18. The facts that Media West, without any financial resources of its own agreeing to fund a huge sum of Rs. 101 crores, that Media West is a Group company of Essel which has been acquiring news paper companies, that the petitioners have not been able to establish their financial strength to pay of the loans within the stipulated time, that the liberty given to the lenders to.sell the shares by private placement and their right to transfer their rights under the MOU to any party, that the petitioners have refused to produce the MOU with the Merchant Bankers who had suggested the name of Media West to the petitioners, etc lead only to the strong presumption that there is more to the understanding expressed in the MOU than what the eyes meet. In other words, the whole arrangement of financing for the acquisition of shares of the respondents does not appear to be a straight forward one and it is only a prelude to the final take over of the company after the period of 3 years. This adverse presumption is inevitable in the light of the refusal of the petitioners to disclose the MOU with the Merchant Banker, who has agreed to fund a huge sum of Rs 152 crores even without a due diligence.
19. Thus, I find that not only the consent order is vitiated by non disclosure of material facts by the petitioners and inducement to agree for IPO, even the spirit of the order is found to have been flouted by the petitioners. The terms of the MOU are so unrealistic, that no man of ordinary prudence, leave alone a business person, would be convinced that it is a pure and simple financial arrangement. Under these circumstances, either the consent order should be recalled or the respondents should be given the option of purchasing the shares of the petitioners. Shri Sarkar vehemently argued that this Board has no power either to recall the consent order or to modify the same. He further submitted that on any account, the respondents can not have the right to purchase the shares of the petitioners. It is a settled law when an order is obtained, whether it is consent order or otherwise, by fraud, concealment of material facts, misrepresentation and the like, it is the bounden duty of the court which passed the order, to set aside or recall the said order. In the cases cited by Shri Datar, it has been held so. In the 42 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 cases cited by Shri Sarkar that executing court cannot go beyond the decree, no element of fraud, concealment of material facts or misrepresentation had been alleged. Therefore, there is every justification to recall the consent order, but, I do not propose to recall the same but, try to work out the said order in the spirit under which the same was passed.
20. As far as the right of the respondents to acquire the shares of the petitioners is concerned, reference to the chronology of events is necessary. Even though, initially the petitioners were against the suggestion of their going out of the company and were only interested in the division of the company, later, it was only at the suggestion of the counsel for the petitioners, the consent order resulted. The foundation of the suggestion of the counsel for the petitioners is that one of the two Groups should control the company in exclusion of the other Group. Both in the replies to the applications and during the arguments, there was not even a whisper that the petitioners would be able to mobilize funds to avoid the lenders from taking over the control of the shares. Instead, their stand has been that there is no provision in the consent order restraining the petitioners from raising funds on the strength of the shares of the company. Thus, it is crystal clear that the petitioners are not in a position to fund the purchase of the shares of the respondents without the backing of the shares of the company, which, I have held the petitioners cannot do so. Therefore, since, I have come to the conclusion that the consent order was obtained by concealment of material fact and that the petitioners have breached the terms of the said order, even in the absence of any stipulation in the consent order to the specific effect, the respondents will have the right to purchase the shares of the petitioners. In this connection, I may refer to the decision of the Supreme Court in Rambahadur Thakur's case wherein the Supreme Court has held that when a consent order is recorded by this Board, it is its duty to interpret the terms of the consent order with a view to ensure that the same is worked out. Therefore, the contention of Shri Sarkar that only if there is a default in payment of the installments of consideration, the respondents will have the right to purchase the shares of the petitioners and not otherwise is not correct as the basic premises under which the parties decided to end the disputes was that only one Group would continue with the company. Now that it is established that the petitioners cannot acquire the shares of the respondents, the latter has the right to purchase the former. Likewise, his contention that in the event of breach of any other terms of the consent order, this Board can only put the petitioners to terms is also is not correct, as in the present case, the consent order itself has been obtained by concealment of material facts and misrepresentation.
21. In view of my findings that the consent order had been obtained by suppressing the material known fact that financing for acquisition of the shares of the respondents was based on an understanding of sale of the shares of the company and that in view of the inbuilt default clause giving right to the lenders to dispose of 49% of the existing shares of the company, which was never disclosed, I hold, on the basic understanding that one Group should go out of the company, that the right to purchase the shares of the petitioners would now revert to the respondents. They will be bound by all the terms of the consent order dated 25.1.2006 which were applicable to the petitioners with the stipulation that the 43 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 respondents shall not borrow or make any financial arrangements on the strength of either of their own shares or of the shares now held by the petitioners for acquisition of the shares of the petitioners. They shall also disclose all the financial arrangements that they propose to make for acquiring the shares of the petitioners before making payment towards the 1st installment. The amount of Rs. 12.5 crores deposited by the petitioners in escrow will be released to them immediately along with interest accrued thereon, without any part of the same being forfeited. On production of a copy of this order by the petitioners, the escrow agent - State Bank of Patiala, Shastri Bhavan Branch - will release the payment. However, it will continue to keep custody of the share certificates of both the Groups, which are already in escrow with it. The petitioners are released from all their obligations arising out of the consent order. The schedule of payment by the respondents will be the same as in Paragraph 2(4) of the order dated 25.1.2006, beginning with deposit of the first installment on the 1st August 2006 (and not before), with the escrow agent.
22. CA 62 of 2006 and CA 148 of 2006 are disposed of in the above terms. As far as other applications mentioned in this order are concerned, I have already passed interim orders, which, in the changed circumstances, will be treated as final orders to be strictly complied with by both the parties.
23. This order is stayed upto 31.7.2006 to enable the parties prefer appeal/s, if so advised.
Thus Agarwal Group had the option to file appeal before the High Court, which they chose not to, since their purpose according to the planned strategy was being served and they were able to realise higher best value of their share holding. Further the perusal of the agreement dated 2.02.2006 with M/s Churu Trading Co (P) Ltd. who were the arrangers involved by Zee Group were entitled arranger fees of Rs. 8.50 Crores. However said fees was due on achieving the financial closure of Rs. 252 Crore (to the value of acquisition of shares of Maheshwari Group), which was to be paid within 30 days from the date of acquisition of the shares or 31st December 2006, whichever is earlier. This particular saving clause was purposely added by Agarwal Group as a part of planned strategy since the plan to acquisition was a safeguard to ensure the high value realisation of the shares owned and held by Agarwal Group. It would not be out to place to mention here that this action is further substantiated with the fact that the said amount has been remitted after 03.11.2006 when the realisation of their share holding was received by Agarwal Group after the compromise order dated 01.11.2006 of the Hon'ble Company Law Board.
The said order is reproduced as under.
44 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 As per the compromise terms arrived at between the parties, the respondents were to pay a sum of Rs. 155 crores to the petitioners towards their shares and this amount was to be deposited in the escrow account maintained in the State Bank of Patiala, Shastri Branch, New Delhi, as per my earlier order. The respondents are arranging for depositing this money. Yesterday, I had passed an order directing the bank to transfer a sum of Rs. 17 crores out of the escrow account to the personal account of the petitioners and simultaneously hand over 65.33 shares belonging to the respondents to the respondents.
I further direct:
1. On receipt of the balance Rs. 138 crores in the escrow account, the Manager, State Bank of Patiala will release the balance shares of the petitioners now held in escrow to the respondents.
2. The petitioners are at liberty to withdraw the said sum of Rs. 138 crores or transfer the same to any account that they desire and the Manager, State Bank of Patiala will permit them to do so on receipt of a requisition signed by all the petitioners.
3. The respondents are at liberty to manage the affairs and shareholding of the company in any manner without any interference by the petitioners' Group
4. The petitioners' Group shall cease to remain either as shareholder/s office bearer/s or director/s of the company and shall have no concern whatsoever with the company.
5. On an earlier occasion, the money deposited in the escrow account by the petitioners was directed to be paid to M/S Mediawest Private Limited and the bank had issued TDS Certificate in the name of Amar Ujala Publication Limited for the interest accrued thereon. The Manager, State Bank of Patiala is directed to issue a fresh TDS in the name of Mediawest Private Limited in lieu of the one issued in favour of Amar Ujala Publication Limited after observing the necessary formalities in this regard.
6. The suit in Agra will be dismissed as withdrawn.
7. Let a certified copy of this order be served on the Manager, SBP for compliance.
Since the matter has been compromised, the petition is closed with liberty to revive in case of any difficulty in working out the terms of this order.
It may be noted that the compromise order has been passed within the limitation period when the parties had the option to file appeal against the order dated 10.07.2006 of the Hon'ble Company Law Board. This compromise could be entered into with the intervention of all those involved including arranger of funds, legal consultants Shri S.R. Halbe, 45 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 Smt Bina Gupta, Shri Dayal Saran etc. and it was agreed amongst the parties that since Agarwal Group was realising sizeable amount more than even in their offer, they would accept the same and not raise any questions as the manner by which Maheshwari Group was raising the funds which were to be paid as consideration for the shareholding of Agarwal Group.
The perusal of the record will reveal that the Agarwal Group was able to realise Rs. 160 Crores towards the total value of their share holding in M/s Amarujala Publications Ltd. and M/s A&M Publications (P) Ltd, which over more by Rs. 22 Crores than the earlier amount of Rs. 138 Crores in the order of the Hon'ble Company Law Board dated 01.11.2006. This excess realisation could be made with primarily the intervention of the arranger on account of the reason that the assessee had agreed with M/s Mediavest India (P) Ltd, who were the financers and had remitted part payment in the Escrow account opened in State Bank of Patiala during the course of the proceedings before the Hon'ble Company Law Board when the Agarwal Group after seeking the option for the acquisition of the share holding of Maheshwari Group as a part of their strategy. As per agreement with them the shares owned by Agarwal Group constituted security jointly for the money to be advanced by the Financer and Merchant bankers. In the course of the discussions after the compromise before the Company Law Board the arrangers were duty bound to make the shares free of all encumbrances, however claimed that at least 50% of the excess realisation i.e., Rs. 11 Cr becomes due to them. But since they had been involved in strategising the entire sequence of the events it found appropriate to remit them Rs. 8.50 Cr as originally agreed upon. It would not be out of place to submit that the extra consideration of the value of the shares received is considering the expenditure incurred/ to be incurred by Agarwal Group.
Your honour's kind attention is also invited to the Professional Bill of S.R. Halbe & Associates, relevant portion reproduced hereunder which will amply prove that strategy had been formulated for protecting the interests of the minority shareholders. It is submitted that the payment made for S.R. Halbe & Associates has been accepted as deduction under section 48 of the Income Tax Act.
1. Formulation of strategy for protecting the interests of Minority share holders in Amar Ujala Publications Ltd. and A & M Publications Private Ltd.
2. Conducting correspondence before and after filing of the CLB Petition.
46 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08
3. Advising on the conduct of various Board Meetings of Amar Ujala Publications Ltd. as well as A & M Publications Pvt. Ltd.
4. Drafting of CLB Petition and briefing the senior Counsels like Mr. Sarkar, Mr. Abhishek Manu Singhavi, Mr. Manmohan etc.
5. Appearing and attending all the proceedings before the CLB.
6. Briefing the lawyers and attending the hearings in Allahabad High Court.
7. Briefing the counsels and attending the hearing before Supreme Court of India
8. Advising and Drafting the Terms of Settlement in connection with transfer including Transfer Deeds.
9. Holding discussions and conferences from time to time with minority shareholders.
The perusal of the submissions above, evidences placed on record and the proceedings before the Hon'ble Company Law Board will reveal that there was a well planned strategy to augment the value of the shares and all the payments being in the nature of expenditure are intimately related and integrally connected with the transfer and also in the nature of the cost of improvement resulting in the enhancement in the value of the share holding of Agarwal Group in the Companies M/s Amarujala Publications Ltd. and M/s A & M Publications (P) Ltd and correctly claimed as deduction under clause (i) and or (ii) of section 48 of the Income Tax Act'61."
8.3 After explaining the strategy of the Agarwal Group to move to CLB for getting the value of their share holding enhanced before they are sold and sale of their share was carried out smoothly, the Ld. AR has drawn my attention to the written arguments put forward by him in the submissions filed on 15.10.2010 justifying the claim of the appellant for the expenses disallowed by the AO totaling to Rs. 3,18,38,200/- out of total expenses of Rs. 4,06,10,000/- claimed by him as deduction u/s 48 (i) as taken in Ground nos. 2 to 8. The same are reproduced as under:
" It is respectfully submitted that the section 48 of the Income Tax Act'61 provides the Mode of Computation of the Income under the head Capital gains, which reads as under -
The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :-47 ITA Nos.405,348,349,404,406,407&
466/Agr/2011 A.Ys. 2007-08
(i) Expenditure incurred wholly and exclusively in connection with such transfer;
(ii) The cost of acquisition of the asset and the cost of any improvement thereto:
The above section broadly contemplates three amounts for the purpose of computing income chargeable under the head 'capital gains'. The first is the full value of the consideration for which the capital assets has been transferred. The second is the expenditure incurred wholly and exclusively in connection with such transfer and the third and the last is the cost of acquisition of the capital asset including the cost of any improvement thereto. In clause (i) of Section 48 of the Act, the legislature has used the expression "expenditure incurred wholly and exclusively in connection with such transfer".
The expression presupposes
(a) there should be an expenditure
(b) the said expenditure should be in connection with the transfer of the capital asset and
(c) it should be wholly and exclusively incurred in connection with the said transfer.
In regard to the expression "wholly and exclusively employed in Section 37(1) of the Act, the following Commentary from Sampath Iyengar's Law of Income Tax (Edited by Shri Rajaratnam 10th Edition) is worth quoting: -
"......... The first adverb 'wholly' in the above phrase, laid out or expended, wholly and exclusively', refers to the quantum of the expenditure, the sum of money spent. The second adverb 'exclusively', has reference to the motive or object behind the expenditure. Unless such motive or object is exclusively, i.e., solely, for promoting the business, the expenditure will not qualify for deduction."
In the light of the above exposition of law, it is clear that the legal expenses distinctly related to and integrally connected with the transfer of shares is admissible for deduction under section 48(i) of the Act. The sole object of the expenditure incurred towards legal fees should be in connection with the transfer of shares. Legal fees for seeking advice on the modalities of transfer and the drafting of agreement or deed of transfer would undoubtedly qualify for deduction.
48 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 As per this Section cost of acquisition of asset and cost of any improvement is to be deducted from the consideration received as a result of transfer of the capital asset. It is held by the Bombay High Court in the case of Commissioner of Income Tax Vs. Shakuntala Kantilal [(1991) 190 ITR 56] that the expression used in Section 48 of the Act, viz., "expenditure incurred wholly and exclusively in connection with such transfer" has wider connotation than the expression, "for the transfer". This view has been accepted by the Madras High Court in the case of Commissioner of Income Tax Vs. Bradford Trading Co. P. Ltd. [261 ITR 222].
By reason of employing such a wide expression i.e. 'in connection with', something more than what is attributable to the final act of transfer of shares is admissible for deduction provided the intimate connection between the expenditure and the act of transferring shares is established. In the case of the assesses even the services of legal or other professional extended to the process of valuation of shares or the participation in the deliberations that led to the settlement concerning the transfer of shares, the legal charges on that account are also allowable as deduction.
As already submitted before that the words "expenditure incurred wholly and exclusively in connection with such transfer" as envisaged under section 48 of the Income Tax Act'61 are wide enough to cover all the expenses incurred by the assessee in securing the value of the shares which he realized pursuant to the litigation before the Company Law Board, "in connection with" used in clause (i) of section 48 are very wide in their ambit.
The expression "in connection with" is important and has to be construed to have expansive meaning. While explaining the meaning of similar an inter-changeable expressions viz "pertaining to" and "in relation to", the Honb'le Supreme Court observed in the case of Doypack Systems Pvt. Ltd 1988(36)ELT201(SC):
"48. The expression "in relation to" (so also "pertaining to"), is a very broad expression which presupposes another subject matter. These are words of comprehensiveness which might both have a direct significance as well as an indirect significance depending on the context see State Wakf Board vs. Abdul Aziz (AIR 1968 Madras 79,81 paragraph 8 and 10) , following and approving Nitai Charan Bagchi vs. Suresh Chandra Paul (66 C.W.N. 767), Shyam Lal vs. M. Shayamlal (A.I.R. 1933 All. 649) and 76 Corpus Juris Secundum 621.49 ITA Nos.405,348,349,404,406,407&
466/Agr/2011 A.Ys. 2007-08 Assuming that the investments in shares and lands do not form part of the undertaking but are different in subject matters, even than these would be brought within the purview of the vesting by reason of the above expressions. In this connection reference may be made to 76 Corpus Juris Secundem at pages 620 and 621 where it is that that the term "relate" is also defined as meaning to bring into association or connection with. It has been clearly mentioned that "relation to" has been held to be equivalent to or synonymous with as to "concerning with" and "pertaining to". The expression "pertaining to" is an expression of expansion and not of contraction."
In the decision of British Columbia Appellate Court, Vancouer in Nanaimo Community Hotel ltd. vs. Canada, which arose under the Excise Profits Tax Act, 1940, the following passage is instructive of the real import of the phrase "in connection with":
"Mr. Cunlifee argues that that section presupposes that an assessment has been made, and that as I understand him, the words "in connection with"
mean "consequent upon". I do not think that is the correct construction to be put upon these words. One of the very generally accepted meaning of "connection" is "relation" between thing one which is "bound up with or involved in another"; or again " having to do with". The words include matters accruing prior to as well as subsequent to or consequent upon so long as they are related to the principal thing. The phrase " having to do with"
perhaps gives as good a suggestion of the meaning as could be had? I think section 66 is sufficient to oust the jurisdiction of this Court to deal with a decision on which an assessment is subsequently made."
In that case, the court was with interpreting section 66 of the Income War Tax Act which read as under:
"66. Subject to the provisions of this Act, the exchequer Court shall have exclusive jurisdiction to hear and determine all questions that may arise in connection with any assessment made under this Act."
In V.A. Vasumathi vs CIT 123 ITR 94 (Ker) the Kerala High Court observed while interpreting section 48(1) of the Income Tax Act that the words "in connection with such transfer" means intrinsically related to the transfer and the expenditure has to be connected with the transfer.
Thus the crucial test to be applied is whether the expenditure was incurred wholly and exclusively in connection with the transfer and it is immaterial where it was incurred prior or subsequent to the transfer of the title.
50 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 Section 55(1)(b) of the Income Tax Act'61 defines the cost of improvement as under -
"Cost of any improvement", -
(1) in relation to a capital asset being goodwill of a business [or a right to manufacture, produce or process any article or thing] [or right to carry on any business] shall be taken to be nil; and (2)In relation to any other capital asset, -
(i) where the capital asset became the property of the previous owner or the assessee before the [1st day of April,1981] means all expenditure of a capital nature incurred in making any additions or alterations to the capital assets on or after the said date by the previous owner or the assessee, and
(ii) in any other case, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property, and, where the capital asset became the property of the assessee by any of the modes specified in [sub section (1) of] section 49, by the previous owner, But does not include any expenditure which is deductible in computing the income chargeable under the head "Interest on securities", "Income from house property" , "Profits and gains of business or profession", or "Income from other sources", and the expression "improvement" shall be construed accordingly.
The perusal of the above definition will reveal that the assessee's case falls under section 55(2)(ii) and the expenditure of a capital nature incurred in making any additions or alterations to the capital asset amounts to the cost of the improvement.
In relation to Cost of Improvement Goodwill of a business or a right to Nil manufacture, produce or process any article or thing or right to carry on any business.
Capital asset, which became the property All expenditure incurred in making any of the previous owner or assessee before additions or alterations to the capital asset the 01.04.1981. on or after the said date (01.04.1981) by the previous owner or the assessee.
In any other case All expenditure of a capital nature incurred in making any additions or 51 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 alterations by the assessee after it became his property or by the previous owner.
In the case of the assessee's it is beyond doubt that the there has been an actual payment to the arranger, strategist, legal counsels with whose help and guidance including expertise, the assessees were able to enhance and alter the value of the shares. Thus there was an improvement to the asset and not to the title of the asset. The title of the assessee's was never in dispute. The word improve has various shades of meaning and it includes everything by doing which is an enhancement in the value of the asset or there is a rise in its price or the asset is to grow better or it is even followed up by something better.
The improvement in the value of the asset was on account of the reasons that the • Seed capital was available at the right time • Effective and diligent skills were made available by way of expert • There was always the assistance of merchant bankers, financer and arranger Had this strategy would not been adopted the value would have been much lower as will be evident from the breakup up value calculated on the basis of the balance sheet of both the companies for the year ending 31.03.2006.
Further, the direct nexus of the expenditure incurred/cost of improvement by the assessee is established with reference to the various orders of the Hon'ble Company Law Board which in pursuance to the petition filed by the assessee and other members of the family termed as "Agarwal group". Each person to whom payment was made by the assessee was by virtue of his shareholding. Thus the real, intimate and proximate nexus between the incurring of the expenses and the transfer of the shares is established, without adopting the strategy the assesses could have never been able to extract such a high price of the shares sold.
With regards to the payments made to the aforementioned persons the nexus of the expenditure incurred is proved with reference to the bills and the nature of the service rendered by each to the assessee and other members of the family. The detail of the payment made immediately after 52 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 the receipt of sale consideration of shares establish that the same was intrinsically related to and were in connection with transfer of share.
All the payments were made immediately on receipt of the consideration, except the payments of Rs. 13,78,200 as under -
M/s S.R. Halbe & Associates Rs. 3,13,200
Advocates
Fountain Chambers
3rd Floor, Nanabhai Lane,
Fountain
Mumbai
Mrs Bina Gupta and others Rs.6,25,000
Advocate
Khaitan House
B-1, Defence Colony New Delhi
Mr. Sudipto Sarkar Rs. 1,50,000
Advocate
31, Broad Street
Kolkata
Rabo India Securities Pvt. Ltd Rs.2,50,000
Forbes Building, 2nd Floor,
Chiranjit Rai Marg, Fort
Mumbai
Total Rs 13,78,200
The observations of the learned Assessing officer in respect of the payments made by the assessee and claimed as deduction under section 48 of the IT Act'61 is tabled as under:
Name & Address of person/ Total Purpose of payment As per the Assessing Officer party to whom payment made M/s Churu Trading Co. Pvt 8,50,00,000 Fees paid for acting as "arranger" The Agarwal Group entered into agreement Ltd. for arranging Rs. 252 Crores for for arranging 252 Crores to acquire Continental Building, the proposal for acquisition of majority shareholding in the companies. As 135, DR. A.B. Road 64.67% Equity shares held by per the agreement the arranger fees was Mumbai Maheshwari Group as per due on achieving a financial closure of Rs.
agreement. (Copy Enclosed) 252 Crore whether the Agarwal Group shall be able to draw down the arranged Syndication with banks, financial funds or not. This was an all inclusive and institutions and others for the not refundable fees. Thus it is amply clear acquisition.
that the fee basically was in the nature of Tie-up with Mediavest India Pvt. arrangement of the fund and no way it Ltd for deposit of Rs. 12.65 Crores was in the connection of transfer of shares in the Escrow Account with the of Agarwal Group to Maheshwari Group.53 ITA Nos.405,348,349,404,406,407&
466/Agr/2011 A.Ys. 2007-08 Company Law Board before the stipulated date on behalf of the Appellants.
M/s S.R. Halbe & 2,24,24,000 Fees paid for formulation of the The payment is accepted to have been
Associates strategy for filing petition before incurred in connection with the transfer of
Advocates the Company Law Board for shares
Fountain Chambers protection of the interest of
3rd Floor, Nanabhai Lane, Minority Shareholders, which
Fountain resulted in enhancement in the
Mumbai value of the shares on account of
the reasons that the Majority
Shareholders quoted the value of
the shares thinking that the
Minority cannot pay the price for
acquisition of their 64.67%.
Reimbursement of travelling, These expenses do not find any place to be
3,13,200 loading and boarding expenses. directly connected with the transfer of
shares
Mrs Bina Gupta 44,22,400 Fees for preparation of petition Out of these expenses it is noticed that
Advocate including appearance before the certain expenses has been incurred in cash
Khaitan House Company Law Board. on vouchers from the accounts of different
B-1, Defence Colony members of Agrawal Group which are
New Delhi Fees for appearance before the basically reimbursement of expenses
Hon'ble Allahabad High Court and relating to travelling, lodging and
Supreme Court including boarding etc. It is noticed that an amount of
Consultation taken from time to Rs.6,25,000 has been claimed by Shri Ajay
time in respect of the transfer of Agarwal and an amount of Rs. 7,37,000 has
shares been claimed by Smt. Renu Agarwal as
deduction, however looking at the
supporting bills such payment falls under
the category of various miscellaneous
accounts of logistics expenses which are
not distinctly related and integrally
connected with the transfer of shares.
Mr. Sudipto Sarkar 1,50,000 Appearance Fees before the On the perusal of the orders of CLB it is
Advocate Company Law Board on various noticed that he has appeared on behalf of
31, Broad Street dates viz 17.01.2006, 24.01.2006 the Agarwal Group during the acquisition
Kolkata and 25.01.2006 process of majority shareholding of
Maheshwari Group. The consolidated
payments also included expenses on
account of logistic provisions and such
expenses cannot be treated having been
paid wholly and exclusively in connection
with transfer.
Rabo India Securities (P) 2,50,000 Paid for Strategic and Financial The transaction entered into was basically
Ltd advisory services an initial strategic planning for the
Forbes Building, 2nd Floor, acquisition of majority shareholding
Chiranjit Rai Marg, Fort whereas Agarwal Group in its returns of
Mumbai income had shown sale of their
shareholdings to majority shareholders.
Thus the amount paid is in no way
connected with the process of transfer of
shares and hence the expenditure cannot be
considered as expense distinctly related and
integrally connected with the transfer
Mr. Dayal Saran 10,00,000 Fees for the Consultation taken There is no evidence on record showing
Advocate from time to time in respect of the such expenditure distinctly related and
63, Nehru Nagar transfer of shares integrally connected with the transfer of
Agra shares. There is no evidence that which can
corroborate that any legal services have
54 ITA Nos.405,348,349,404,406,407&
466/Agr/2011
A.Ys. 2007-08
been extended in the process of valuation of
share or in the process of compromises
concerning the transfer of shares.
Total 11,35,59,600
Thus the perusal of the table above will reveal that the learned assessing officer disallowed the claim of the assessee on account of the following reasons:
(i) Payments in relation to the acquisition process of majority shareholding (assessee's contribution) a. M/s Churu Trading Co. Pvt. Ltd. Rs. 3,00,00,000 b. Mr. Sudipto Sarkar, Advocate Rs. 1,50,000 c. M/s Rabo India Securities (P) Ltd Rs. 2,50,000
(ii) Payments not directly connected with transfer of shares a. M/s S.R. Halbe & Associates, Advocates Rs. 3,13,200 b. Mrs Bina Gupta, Advocate Rs. 6,25,000 c. Mr. Dayal Saran, Advocate Rs. 5,00,000 During the course of the assessment proceedings the assessee filed complete details of the payments made along with the copies of the bills raised by the above persons.
It cannot admit of doubt that in an ordinary transaction of transfer of an asset inter parties the fixation of the consideration or price is an integral part of the transaction. This fixation of the consideration for the transfer was finally effected only by the decision of the Company Law Board and thus forms an integral part of the process of transfer. On account of share being of unlisted company, restrictions on transfer in the market, the assessee had no alternative but to plan a strategy to get maximum sale price of share by moving to Company Law Board /arranging of arranger/financer/merchant banker which ultimately lead to realization of the sale consideration on transfer of shares. This is elaborately and fully proved with reference the perusal of the orders of the Hon'ble Company Law Board which will reveal that the assessee and the other members of the family termed as "Agarwal Group" were minority shareholders and collectively held 35.33% shares in both the companies. On account of the dispute with the other shareholders, who collectively held 64.67%, since the latter wanted to oust them they jointly moved petition before the Hon'ble Company Law Board. These minority 55 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 shareholders, who were the petitioners were given the first option to decide either to sell their shares or to purchase the shares of the respondents i.e., the majority shareholders namely, "Maheshwari Group". To obtain finance for the acquisition of shares, the minority shareholders jointly approached M/s Churu Trading Co. (P) Ltd. to make financial arrangement for the acquisition of 64.67% shares held by the majority shareholders. They finally identified financers and merchant bankers, who agreed to make available necessary funds. During the course of hearing, the Hon'ble Company Law Board held on 23.01.2006, that the petitioners elected to purchase 64.67% shares held by the respondents and the consideration for the same worked out to Rs. 252 Crores.
As per the Memorandum of Understanding dated 06.02.2006 with M/s Mediavest India Private Limited dated 06.02.2006 Agarwal Group was under an obligation to pledge their holding of 35.33% as security jointly for the monies advanced. The relevant paras of the agreement are reproduced as under.
2. The 35.33% shares held by the "Acquirers" shall constitute the security jointly for the monies advanced by the Financer and the Merchant Banker for the acquisition of 64.67% shares from the Agarwal and Maheshwari families and the 35.33% shares shall (till 64.67% holdings are acquired by the Acquirers by paying off the entire consideration due thereon) be subject to restrain against all transfers or other encumbrances other than the transfer to the Agarwal and Maheshwari families provided in the agreement recorded by the CLB order in the event of the acquirers not being able to fulfil their part of the obligations and are required to sell their holdings to the Agarwal and Maheshwari families.
3. After the entire consideration is paid and till the amounts financed by the Financer and Merchant Banker are fully settled in terms of the arrangement spelt out hereon, the 35.33% shares held by the Acquirers shall stand pledged in favour of the Financers and the Merchant Banker jointly in proportion to the amounts funded by them respectively. In addition the 64.67% shares acquired from the Agarwal and Maheshwari families shall also be retained as collateral security for the monies advanced by the Financer and the Merchant Banker till the amounts due to them is settled in terms of the agreement reached between the parties. But it is agreed that while the voting rights on 64.67% shares shall not be exercisable in any manner which would be prejudicial to the interests of the Financer and Merchant Banker. The Financers have agreed in terms of the above agreement to advance a sum of Rs. 101 Crores equivalent to 40% of the consideration due to the Agarwal and Maheshwari families in terms of the 56 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 settlement between the Acquirers and the said families on the following further terms.
4. The Acquirers shall execute an undertaking accepting that they shall not transfer or create any charge or other encumbrance on the 35.33% shares held by them and also affirm that apart from the stipulation in the agreement recorded by the CLB that in the event of non performance of the terms of the settlement by the Acquirers the said shares shall be transferred to the Agarwal and Maheshwari families, no restraint or encumbrances on the said 35.33% shares exist as of date.
5. When the entire consideration due on the 64.67% shares are paid the agreed pledge of 35.33% shares held by the Acquirers shall be executed by an appropriate pledge document as advised by the legal advisers of the Financers and the Merchant Bankers and the share certificates shall be delivered to the common bankers nominated by the Financers and the Merchant Banker along with the pledge document. Again when the share certificate relating to 64.67% shares are received by the Acquirers under the CLB order, the Acquirers shall authorize the solicitors jointly nominated by the Acquirers, Financers and the Merchant Bankers to receive the share certificates from the Agarwal and Maheshwari families (which are to be put under escrow as agreed under the agreement recorded before the CLB) and after transferring the same in the name of the Acquirers in the records of the Companies as provided under the law, keep it in their custody so as to comply with the restraint against the transfer of the same and be retained as collateral security till the liabilities due to the Financers and the Merchant Bankers are settled in terms of this agreement.
Thereafter, on 08.02.2006, the Maheshwari Group-respondents filed application before the Hon'ble Company Law Board seeking for directions to the petitioners to deposit the share certificates relating to 35.33% shares held by them with the Escrow agent, State Bank of Patiala. The first installment of about Rs. 12.5 Crores being 5% of the total consideration was to be deposited in the Escrow account. It was alleged by the respondents that the petitioner had not paid the 1st installment out of their own funds but instead the money had been drawn from the account of M/s Mediavest India (P) Ltd. The latter being the financer who had been brought in by the arranger M/s Churu Trading Co. (P) Ltd.
Thus the action to bring the arranger M/s Churu Trading P. Ltd. and others namely Rabo India Securities Ltd. to whom the assessee has made payments was part and parcel of the strategy to extract the maximum price of the shares held by the assessee. The assessee never wanted to acquire the company as it was always a minority shareholders as will even be 57 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 evident from the petition filed under section 397 and 398 before the Honb'le Company law Board. This was a well planned strategy evolved on account of the reason that both the companies were unlisted one being a closely held public company and the other being a private limited company and thus there was always a restriction in the transfer of the shares to any outsider.
The learned Assessing Officer in making the disallowance of the payment made to M/s Churu Trading Company Pvt. Ltd. has relied merely on the one of the clauses of the agreement dated 01.02.2006 between them and the assessee which is reproduced as under:
• Agarwal Group in consideration of arranging Rs. 252 Crores for the acquisition of 64.67% shares of the Companies shall pay Rs. 8.5 Crores (All inclusive) towards Arranger fees to us. The Arranger fees shall be due on achieving the financial closure of Rs. 252 Crores not withstanding whether the Agarwal Group shall be able to draw down the arranged funds or not. It will be an all inclusive and non refundable fees.
He has ignored the last clause of the said agreement which provided for the payment of the arranger fees, which is reproduced as under:
• The payment of the said fees shall be made to us within 30 days from the date of the acquisition of 64.67% shares held by Maheshwari Group by way of the transfer in the name of Agarwal Group or 31st December, 2006, which ever is earlier. However, as the acquisition never took place in view of reversal of orders by the Company Law Board, the agreement relied upon by the learned Assessing Officer became in-operational since the arranger fees was in respect of the acquisition, as even accepted by the him in his order, which was the reason for making the disallowance.
It is respectfully submitted that the Agarwal Group tied up for strategic and financial advisory services with Rabo India Securities Pvt. Ltd. as per their agreement dated 10.01.2006 and vide the order of the CLB dated 23.01.2006 consented to acquire the 64.67% share holding of the Majority ie Maheshwari Group. Thereafter these agreements, as per the strategy of the assessee were entered into first with M/s Churu Trading 58 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 Company Pvt. Ltd on 01.02.2006 and subsequently with M/s Mediavest India Private Limited on 06.02.2006.
The Hon'ble Company Law Board vide its order dated 10.7.2006 reversed the option for the acquisition of the companies in favour of the Maheshwari Group and till that date only an amount of Rs. 12.50 Crores was deposited in the designated Escrow account by M/s Mediavest India Pvt. Ltd on behalf of the assessee and no other payments were made, this amount was refunded subsequently along with the interest by the Bankers namely State Bank of Patiala as will be evident from the order of the CLB dated 01.11.2006.
Thus as per the agreement dated 01.02.2006 with M/s Churu Trading company Pvt. Ltd. the assessee had to pay arranger fees within 30 days from the date of acquisition or 31st December, 2006 which ever was earlier, since the acquisition never took place hence the agreement became void. Hence no payment was made to them in terms of the agreement. However since the assessee was able to realize Rs. 160 Crore which was Rs. 22 Crores more than the value of their holding of the quoted value by the Maheshwari Group ie 138 Crore (35.33% of Rs. 390 Crores) as per the strategy was required to pay M/s Churu Trading Company an amount of atleast 50% of this excess ie Rs. 11 Crores. The assessee finally agreed to pay them Rs. 8.50 Crores only ie upto the extent of the amount of the Arranger fees. The same is amply proved with reference to the communications filed. Hence the payment made on 15.11.2006 to M/s Churu Trading Company Pvt. Ltd was not of the arranger fees but for the excess amount alike to overriding charge. By adopting this strategy the assessee forced the Maheshwari Group to reach a situation where they could reap the maximum price/value of the shares.
In respect of the payments made to Mr. Sudipto Sarkar, Advocate. Mrs Bina Gupta, Advocate and Mr. Dayal Saran, Advocate the learned Assessing officer's observation are incorrect as these legal luminaries were involved in strategizing the actions of the assessee to enable him to extract the maximum price and in connection with the transfer of the capital asset. Had these action not been taken by the assessee he would parted with miniscule amount or made there would have been a serious deadlock in the management and how the CLB would have interfered is cannot be stated in actual terms. Even per se the expenses paid to the Mrs. Bina Gupta, Advocate and M/s S.R. Halbe & Associates were in the nature 59 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 of reimbursement and for logistics then they ought to have been allowed in particular when the payments made to M/s S.R. Halbe & Associates, Advocate have been held to have been incurred in connection with the transfer of the shares by the learned Assessing Officer himself.
As regards payment Mr. Dayal Saran, Advocate the copy of his bill evidencing the payment made by the assessee was filed, which amply prove the nature of services rendered being in connection with the transfer of the shares. The observation that the same was not in connection with the process of the valuation or compromise is incorrect. He was engaged with the Amarujala group since more than three decades and was involved since the beginning of the dispute between the management who even tried to bring upon a compromise between the management at all levels. However when the dispute reached the level of the CLB Agarwal Group from time to time discussed the strategy with him and involved him to travel and number of times with them in meeting with Mr S.R. Halbe, Advocate and Mrs. Bina Gupta, Advocate.
During the course of assessment proceedings, it was submitted that the assessee's claim for deduction against sale/transfer consideration which resulted into profit or gains under the head capital gains within the meaning of section 45 was :
(i) Either addition to the cost being capital expenditure incurred;
(ii) Directly wholly and exclusively related in connection with the transfer;
(iii)Was nothing but reimbursement of expenditure incurred in particular in fixing the sale consideration as enhanced value of transfer which was considering the said expenses.
It is also submitted that whether the amount paid falls under section subsection (i) or (ii) of section 48 is not material as the assessee has not claimed any benefit of indexation in respect of the improvement cost. The assessee is also submitted that the expenditure incurred can be treated as cost of improvement / or addition to cost of share on account of the reasons that the action of the assessee has resulted in the enhancement in the value of the shares.
60 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 Further, that in respect of the explanation of the amounts claimed as deduction under section 48 for the purpose of computation of capital gains the following amounts paid by the assessees within the "Agarwal Group"
can be considered as expenses towards cost of improvement, being paid prior to the transfer of shares Shri Ajay Agarwal Rs. 13,78,200 Smt. Renu Agarwal Rs. 7,37,000 The remaining amount paid are in respect of the expenditure incurred wholly and exclusively in connection with transfer. It was also clarified that in Schedule-CG of the Income Tax Return in ITR- 4, the entire payment made by each of the assessee has been shown in Column 3(b)(ii), the same may be taken as corrected in that column to the extent stated above and the remaining be considered in Column 3(b)(iii) of the Schedule. The reason for showing the entire amount in Column 3(b)(ii) was on account of the data input in the software. It is reiterated that there is no impact on the computation of capital gain as per the return filed on account of the reason that assessee has not claimed indexation on the cost of improvement.
Thus the facts beyond doubt that -
a. The minority group were being ousted by the major shareholders, which compelled them to approach the Hon'ble Company Law Board. The petition with the Company Law Board can only be filed by shareholders having more than 10% holding, thus collectively the assessee and other members of the family held 35.33%.
b. The assessee's status in the company M/s Amarujala Publication Ltd. and M/s A & M Publications Ltd. was a shareholder.
c. The gain which has been offered for taxation on sale of shares (Capital asset) is a long term Capital gain.
d. Whatever has been spent by the assessee in connection with/ pertaining to the shares- capital asset is the expenditure in connection with/improvement in its cost and intrinsically related to the transfer of the asset.61 ITA Nos.405,348,349,404,406,407&
466/Agr/2011 A.Ys. 2007-08 e. There were restrictions of transfer to outsiders. The expenditure incurred on filing the petition before the CLB to obtain maximum sale consideration by the minority share holder. The same finally resulted in enhanced realisation on transfer of the capital asset-shares, as the majority shareholders quoted the maximum value for the purchase of shares, so that they do not lose the right of the management of the Companies. This expenditure has intimate connection with the act of transfer of shares and is allowable under section 48. The same in integrally connected with the transfer of the shares. The expression "in connection with" used in the section 48 is wider and more liberal in meaning.
f. Since the shares owned by the assessee were in unlisted companies, there were restrictions and the same could not be transferred/sold to an outsider. The Company Law Board held that the same can be purchased by the majority share holders. To remove this encumbrance and obtain better price the assessee moved the Company Law Board, attained order for option to acquire and sell to any other person. Ultimately reversed the option and got the present sale consideration of shares.
g. The main recipients of expenditure have paid tax at the maximum marginal rates. It is worth mentioning that the same amount cannot be taxed or disallowed in the hands of the assessee which would amount to double taxation. As such the same income cannot be taxed twice.
In view of above facts and circumstances of the case the disallowances made are liable to be deleted."
8.4 The Ld. AR further filed details of services rendered by various lawyers and professionals on 14.03.2011 to explain his position that the payments made to them was in connection with the transfer of shares. These details as submitted by the Ld. AR are as under:
"---
4. That the explanation of the nature of the services rendered by various parties to whom payments have been made is as under. It is submitted that the copies of the bills and other evidences stands filed during the course of the assessment proceedings and stands placed before your honour in the paper book.62 ITA Nos.405,348,349,404,406,407&
466/Agr/2011 A.Ys. 2007-08 M/s Churu Trading Company Pvt. Ltd. Continental Building 135, Dr A.B. Road, Mumbai They were involved in the formulation of strategy to act as arranger assist for arrangement of the funds to the tune of Rs. 252 Crores for Agarwal Group including tying up with Media West (P) Ltd. and other Merchant Bankers to acquire the shares of the majority share holders on the basis of the option exercised by the Agarwal Group in pursuance to the order of the Hon'ble CLB dated 25.01.2006.
It was always an understanding between them and Agarwal Group that since the latter had no financial capacity to fund the acquisition the entire funding was to be secured by the holding of 35.33% in the companies, which was kept as a mortgage/pledged with the financer.
It was also known as discussed as a part of the strategy between them and Agarwal Group that this act of financing may be subject to diligence by Maheshwari Group but by building the action to seek option to acquire the companies before the CLB was primarily to freeze a price of the shareholding and seek valuation, which by any other act could not have arisen since they were minority shareholders and both the companies had restriction of transfer of the shareholding to any outsider on account of being closely held or being a private limited company.
Agarwal Group was not obliged to do any diligence of the funds being drawn by the arranger for them and as such strategically acts were being done to enforce Maheshwari Group to do diligence so that they would file agitate before CLB and seek to buy out the shares of the minority ie Agarwal Group at the valuation fixed by them. This act was sure to go in favour of Agarwal Group since during the course of proceeds before the CLB it was understood that the Bench wanted both the parties to amicably settle the issue and conclude that the family business be continued by one of the party, thus one of the party had to go out of the company.
This tilt of the Bench for the minority shareholders made all the more necessary for Agarwal Group and M/s Churu Trading to mutually put a clause in the agreement that the arranger fees was to be paid to them within 30 days from the date of acquisition of shares or 31st December 2006, which ever was earlier.
Further after the order of the CLB dated 10.07.2006 wherein the option to acquire the companies was reverted to Maheshwari Group M/s Churu Trading was involved in the negotiations and removal of the encumbrances placed by the financers namely M/s Mediawest who had kept the shareholding of Agarwal Group as security for financing the deal. M/s Churu Trading had committed arrangement of Rs. 252 Crores in terms of the CLB order, which was later reversed. All the shares owned by Agarwal Group was hypothecated to Mediawest and other financers and without their explicit consent Agarwal Group could not have transferred shares.63 ITA Nos.405,348,349,404,406,407&
466/Agr/2011 A.Ys. 2007-08 It was by their persistent efforts and negotiations, Maheshwari Group finally agreed to pay Rs 22 Crores over and above the compromise amount of Rs. 138 Crore totaling to Rs. 160 Crores for the Shareholding of Agarwal Group. There after M/s Churu Trading insisted for the payment of Rs. 11 Crore ie 50% of the excess but finally agreed to Rs. 8.50 Crores ie the original agreed amount which was paid only after the receipt of the consideration by Agarwal Group. M/s Rabo India Securities Pvt . Ltd. Forbes Building 2nd Floor, Chiranjit Rai Marg, Fort, Mumbai Strategic and financial advisory services Mrs Bina Gupta, Advocate Khaitan House, B-1, Defence Colony, Agra Preparation of the petitions before CLB including appearances before CLB, high Court and Supreme Court and involved till the time of the transfer of shares. It was only after her letter was issued to the bankers that payments were made of the consideration by the bankers to Agarwal Group. Mr. Sudipto Sarkar Advocate, 33 Broad Street Kolkatta Appearance before CLB on various dates as will be evident from the orders in particular on 17.01.2006, 24.01.2006 and 25.01.2006 Mr. Dayal Saran Advocate, 63, Nehru Nagar, Agra Involved in the planning and strategy right since the inception i.e. when the MOU was agreed upon by the parties including consultation upto the period of the receipt of the sale consideration by Agarwal Group. The whole transfer consideration was finalized in his presence and he was wholly involved in the finalization of strategy in discussion with Shri S.R. Halbe.
The Ld. AR in next para of his submission filed on 14.03.2011, has further summarized all the actions of the Agarwal Group from the date of filing of petition before the CLB till the date of passing of order dated 01.11.2006 by the CLB to emphasise his contention that all these actions were undertaken under a strategy to get maximum value of shares from the Maheshwari Group on their sale in which the above lawyers and professionals helped and hence fees paid to them should be considered as paid wholly and exclusively in connection with sale of shares. The same is reproduced as under:
"5. That from the perusal of the submissions made before the honour the following actions will substantiate that all the payments made by Agarwal Group and intimately connected with the transfer of their shares holding to Maheshwari Group at an value which was enhanced only on account of the strategic planning and actions to filed petitions before Hon'ble Company Law Board, which otherwise not yielded any results.64 ITA Nos.405,348,349,404,406,407&
466/Agr/2011 A.Ys. 2007-08 Petition was filed by Agarwal Group before the Hon'ble CLB since they were minority shareholder knowingly that Bench normally protects the interest of minority.
Since Maheswari Group which on their insistence had sought division of the business between them and Agarwal Group, had back tracked on the MOU drawn by the auditor Shri Mukesh Tandon in 2004 Agarwal Group was very careful in planning their strategy by seeking valuation of the Companies to be quoted by Maheshwari Group before the CLB and exercising the option to acquire the companies. This planning was made keeping in mind the habit and intention of Maheshwari Group to backtrack before the CLB of the value mentioned by them and created actions and drama to acquire the shares of the majority shareholders by bringing M/s Media west through the help of M/s Churu Trading and others who had committed arrangement of Rs. 252 Crores and even got deposited an amount of Rs. 12.50 Crore in the escrow account as per the order of the CLB dated.
It was known to all the parties that Agarwal Group never had the financial capacity to acquire the stake of the majority share holders to the tune of Rs. 252 Crores but still was strategically creating feelers in the market that they would acquire the company which was being done merely to freeze the valuation of the companies to Rs. 390 Crores as quoted by Maheshwari Group.
Agarwal Group did not deposit their share certificates with State Bank of Patiala, Shastri Bhawan as was done by Maheshwari Group, evident from order of CLB dated 04.04.2006 Agarwal Group strategically compelled Maheshwari Group to file a fresh applications petition before the CLB to set the ball rolling in their court to direct CLB to make Maheshwari Group to take over the shares of the minority as per the order dated 10.07.2006 thereby reversing its earlier dated 25.01.2006 but invoking similar conditions of funding such payout as were put in the original order of CLB dated 25.01.2006 .
After the receipt of the aforesaid order Agarwal Group could file appeal before the High Court but chose not to do the same since their purpose had been solved by bringing an enhanced valuation to their shareholdings.
Further Agarwal Group did not insist in pursuing in any litigation with Maheshwari Group to ensure that the terms of the conditions of funding as were originally placed on them the payout which were same for the Maheshwari group had been violated or not. This goes further to prove and establish the point that Agarwal group always wanted an exit route at a good value which was only achieved by 65 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 litigating before CLB and stragically planning with the help of various parties to whom payment was made only after the receipt of the consideration.
That the perusal of the recitals of the Memorandum of Understanding between Agarwal group and M/s Mediavest India (P) Ltd. which has been stated in the order of the CLB dated 10.07.2006 will reveal that security for the amount of Rs. 252 Crores lent jointly by them and the merchant banker would be 35.33% shares held by the minority shareholders which shall be subject to restraint against all transfers. Since mediavest had placed funds to the tune of Rs. 12.50 Crores on behalf of Agarwal Group in the escrow account as evident from the order of CLB dated 27.03.2006. This clause had been invoked, thereby when the order of CLB dated 25.01.2006 was reversed by order dated 10.07.2006 and M/s Churu Trading were involved in revoking those restraint/ encumbrances and make available these shares free to be transferred to Maheshwari Group.
That it was submitted before the learned Assessing Officer vide submission dated 30.11.2009 that an following amounts can be considered as expenses towards cost of improvement, being paid prior to the transfer of shares by members of Agarwal Group viz. Shri Ajay Agarwal Rs. 13,78,200 and Smt Renu Agarwal Rs. 7,37,000."
8.5 The Ld. AR has also discussed in his written submission that various case laws relied on by the AO in the assessment order do not apply to the facts of the case of the appellant. He also quoted the case law of Compagnie Finance Hamon (2009) 310 ITR 1 (AAR) relied upon by the AO to argue his case that as per this decision, if the services of legal or other professional extended to the process of valuation of shares or the participation in the deliberation led to the settlement concerning the transfer of shares, the legal expenses on that account will be allowed as deduction and in the case of the appellant, since the fixation of price for transfer was finally effected only by the decision of CLB , the action of the appellant being part of the Agarwal Group, going to CLB forms an integral part of the process of transfer of shares and hence all the legal and professional expenses relating to the proceeding carried out before CLB should be allowed as expenses carried out in connection with the transfer of shares. He also argued that the fact that the AO himself has allowed the payment made to M/s S.R. Halbe & Associates, the main person who devised the entire strategy proves the case of the appellant that all these expenses are interrelated and connected with the transfer of shares. For the ready reference, the arguments taken by the Ld. AR with respect to various case 66 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 laws relied upon by the AO and the case laws relied upon by him are reproduced as under:
"6 That the learned Assessing Officer has relied on the decision following decisions whose facts are not applicable to the case of the assessee a. Smt Sita Nanda vs. CIT (2001) 251 ITR 575 (Del) Whether, therefore, payment of interest being in shape of damages for late payment of unearned increase was inadmissible as deduction under section 48(i) - Held, yes b. B.N. Pinto vs CIT (1974) 96 ITR 306 (Mys.) Assessee, on death of her husband received certain amount from firm in which her husband was a partner on her executing release deed - Assessee gave break up of consideration amount and claimed deduction towards lawyers fees, travelling expenditure and damages for mental worry and suffering on account of wrongful withholding and detention of property by firm - Whether, since there was no evidence to support claim of assessee, it was liable to be rejected - Held, yes - Whether, moreover, in view of fact that expenditure claimed was not specific that it was in connection with transfer, it would not fall within ambit of section 48(i) so as to be a permissible deduction - Held, yes c. D.D. Chittranjan vs CIT 193 ITR 238 (Mad.) In so far as the claim of the assessee for deducting the payment of Rs. 40,000 made to Moosa Haji Ahmed was concerned, that payment had absolutely no connection whatever with the properties acquired by the assessee, which were also later disposed of by him and which had led to the arising of the capital gains. It was not disputed that O. S. No.109 of 1970 related to property at No. 24, Cunningham Road, Bangalore, which was bequeathed in favour of the wife of the assessee, Sumathi, under the will of her father Ramalingam. Even under the terms of the compromise decree, the amount of Rs. 40,000 was payable not by the assessee but by his wife. In other words, with reference to the payment of Rs. 40,000, no obligation was cast on the assessee for such payment and that too from out of the amounts realised by him by the sale of the properties at Nos. 52 and 53, Lalbagh Road, Bangalore. If the assessee had paid Rs. 40,000 to Moosa Haji Ahmed, that at best was in fulfilment of the obligation of his wife, Sumathi, to him under the terms of the compromise decree and with reference to the property at No. 24, Cunningham Road, Bangalore. By the discharge of such an obligation by the assessee, the cost of acquisition of the properties sold by the assessee cannot be permitted to be swollen. In the events that happened, the title of the assessee to properties at Nos. 52 and 53, Lalbagh Road, Bangalore, became absolute on the execution of the sale deeds in favour of the assessee by Abdul Razack and Mir Abdul Subhan on payment of Rs. 30,000 and the dismissal of the suits instituted by Swaminathan and Amarnath in O. S. Nos. 318 and 319 of 1972 so that, on the sale by the assessee of the properties at Nos. 52 and 53, Lalbagh Road, 67 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 Bangalore, he had an unfettered right over the sale proceeds of Rs. 85,000. No material was also placed before this Court to show that the view taken by the authorities below that out of the amount of Rs. 15,000 claimed by the assessee as expenses, a sum of Rs. 3,119 was inadmissible, as that amount was spent in connection with the litigation launched by the wife of the assessee is, in any manner, incorrect. We have carefully considered the order of the Tribunal and we find that the Tribunal had taken into account all the relevant facts to conclude that the claim made by the assessee cannot be sustained.
Similarly the perusal of the decision of the Authority of Advance Rulings in the case of Compagnie Finacriere Hamom (2009) 310 ITR 1 (AAR) relied upon by the learned Assessing Officer wherein in it has been held that-
legal expenses distinctly related to and integrally connected with the transfer of shares is admissible for deduction under section 48(i). The sole object of the expenditure incurred towards legal fees should be in connection with the transfer of the shares. Legal fees for seeking advice on the modalities of transfer and drafting of agreement or deed of transfer would undoubtedly qualify for deduction. It must be noted that the expression 'in connection with such transfer' is wider and more liberal in meaning than the phraseology 'for the transfer'. By reason of employing such a wide expression ie 'in connection with' something more than what is attributable to the final act of transfer of shares is also admissible for deduction provided the intimate connection between the expenditure and the act of transferring shares is established. For instance, if the services of legal or other professional extended to the process of valuation of shares or the participation in the deliberations led to the settlement concerning the transfer of shares, the legal expenses on that account will also be allowable as deduction. However, that the legal fees etc. paid to lawyers for filing petition under section 397 and 398 in the CLB and for making appearance before the Board prior to the passing of the final order giving green signal for the transfer of shares is not admissible for deduction. In other words the legal expenses for the initial period of dispute are not intrinsically linked with the transfer of shared and therefore it cannot be allowed as deduction.
The perusal of the above decision is applied to the facts of the case will reveal that the strategy adopted by Agarwal Group was to exit as even admitted by the CLB in its order dated 10.07.2006 that the basic understanding was that one group should go out of the company, but Agarwal by adopting a successful strategy by bringing about enhancement in their value of shareholding with the help of the parties involved by it such arranger and various legal luminaries incurred expenses by making payment to them which was in connection with the transfer of the shares as corroborated with reference to the orders of the CLB and various evidences placed on record. It 68 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 cannot be admit of doubt that in an ordinary transaction of transfer of an asset inter parties fixation of the consideration or price is an integral part of the transaction. This fixation of price for transfer was finally effected only by the decision of CLB and thus forms an integral part of the process of transfer. Further the fact that the learned Assessing Officer himself has allowed the payment made to M/s S.R. Halbe & Associates the main person who devised the entire strategy proves the case of the assessee that all these expenses are interrelated and connected with the transfer of shares.
7 Your honour's kind attention is invited to the following decisions -
Mrs. June Perrett v. Income-tax Officer, Ward-1, Chikmagalur [2008] 169 TAXMAN 124 (KAR.) Assessee received a portion of sale proceeds of a house in India bequeathed by her father - Executors of Will, who resided abroad, had incurred certain expenses to obtain probate and letter of administration and to secure order of eviction against unauthorized occupant - While computing capital gains, assessee claimed deduction of those expenditure - Whether amounts paid by executors as Court fee at time of obtaining letter of administration and to secure an order of eviction against unauthorized occupant had to be treated as expenditures in connection with transfer of property and, therefore, assessee was entitled to claim deduction of expenditures incurred by executors - Held, yes Commissioner of Income-tax v. R. Ramanathan Chettiar [1985] 152 ITR 489 (MAD.) Assessee sold lands by converting them into plots, and for this purpose, maintained separate office for preparing lay-out plans, etc. - assessee claimed deduction of expenditure incurred on traveling, stationary, salary and repairs to office premises, in computing capital gains - whether impugned expenses could be considered as solely incurred in connection with transfer of land and were accordingly deductible - Held, Yes.
V.A. Vasumathi v. Commissioner of Income Tax [1980] 4 Taxman 94 (Ker.) Whether expenditure incurred in litigation claiming enhancement of compensation awarded under the land acquisition act was wholly and exclusively incurred in connection with transfer of capital asset and allowable under section 48(i) - Held, Yes.
Commissioner of Income-tax.v. Plashfood (P.) Ltd. [2009] 2 DTLONLINE 45 (Delhi) Assessee claimed deduction of certain expenditure on account of brokerage, professional fees, etc, from capital gains arising from sale of certain shares - Assessing Officer and Commissioner (Appeals) agreed that expenditure was wholly and exclusively in connection with transfer of shares but allowed only a part of such expenditure - Tribunal allowed entire expenditure, as claimed by 69 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 assessee, on appreciation of evidence which showed that professional involved had incurred substantial expenditure in negotiations with foreign buyers - Whether since authorities proceeded on basis that expenditure incurred was wholly and exclusively for transfer of shares, issue of quantum of expenditure incurred was wholly a matter of appreciation of evidence - Held, yes - Whether since Tribunal had come to conclusion on an appreciation of evidence that assessee had made out a case justifying deduction of entire expenditure incurred, no question of law arose from Tribunal's order - Held, yes In a case of the firm which owed about Rs. 25 lakhs to the bank as loan which could not be paid, the partners decided to dissolve the firm and sell the business of the firm as going concern. It could not be done due to the liability to the bank. The Court directed deposit of Rs. 25 lakhs with the Registrar of the Court to be kept in fixed deposit with the bank free from any lien and all attachments until further orders of the Court. The sale was completed subject to prior payment to the bank and before releasing the balance amount to the partners, the assessee claimed the payment made to the bank in computation of short-term capital gain on sale of assets of the firm. The claim was negatived by the Assessing Officer and up to the stage of Tribunal. The Court held that the sale consideration was less the liability to the bank. Meeting of the liability of the bank was before sale of the assets and was deductible from the consideration for computation of capital gain. In holding so, the Court took support from decision in CIT v. Shakuntala Kantilal [1991] 190 ITR 56/58 Taxman 106 (Bom.) in which it was held that an expenditure incurred in removing encumbrance would be deductible in computation of capital gain. This case was affirmed in CIT v. Abrar Alvi [2001] 247 ITR 312/117 Taxman 95 (Bom.). As such, the case was decided in favour of the assessee in Gopee Nath Paul & Sons v. Dy. CIT [2005] 278 ITR 147/147 Taxman 629 (Cal.)
9. All the submissions made by the Ld. AR to justify the payments made to various lawyers and professionals in connection with their legal and professional services were in connection with transfer of shares being a part of strategy because before they were sold, their value was substantially enhanced , even from the initial value of Rs. 138 crore ( value of 35.33% share of the Agarwal Group as determined by the Maheshwari Group initially) with the services and help provided by them and hence completely allowable u/s 48(i) instead of part allowance made by the AO, were forwarded to AO for his comment and to justify as to why only part allowance of such expenses were made in the light of the decision of the Authority for Advance Rulings in the case of Compagnie Finance Hamon (2009) 310 ITR 1 relied upon by the AO while disallowing the expenses of Rs. 3,18,38,200/-. In compliance to my direction and after examination of the written submission of the appellant, the AO filed his remand report vide his letter dated 23.03.2011 and the same is reproduced as under:
70 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 " First, we should consider the judgment given by AAR in the case of Compagnie Financiere Hamon (2009) 177 Taxman 511 (AAR - NEW DELHI). I am reproducing all the relevant portions of the judgment below so that it can be considered in its entirety.
RULING 2nd Question Whether in computing the capital gains, deduction is admissible under section 48 of the IT Act on account of legal expenses incurred in relation to transfer of shares ?
11. As regards the second question, it has been contended by the applicant's representative that legal expenses before the CLB has been incurred to the tune of Rs. 89,02,063 (approx.) and the said expenditure is in correction with the transfer of shares. The applicant has claimed the deduction of these legal expenses under the 1st clause of section 48 of the Act.
12. The applicant has given the details of legal proceedings that preceded the transfer of shares starting from the filing of Company Petition Nos.
19/2007 and 133 of 2007 by the Indian Promoters and by the applicant respectively before the Company Law Board (CLB). These companies Petitions were filed under sections 397 and 398 of the Companies Act for relief against oppression of minority shareholders and mismanagement of the company. Ultimately, as stated, the parties settled the disputes and arrived at a settlement. The Memorandum of Settlement was signed on 6-5-2008. According to the terms of the settlement, the Indian Promoters of Indian Company and/or nominees of Promoter No. 1 in C.P. 133/2007 agreed to purchase 25 Lakh shares owned by the applicant @ Rs. 65 each. Besides, the parties agreed to the retention of remaining shares of 4.95 lakhs by the applicant. The CLB, thereafter, passed an order on 9-5-2008 to give effect to the terms of settlement. After narrating these facts, the applicant stated as follows:
"That the applicant till date during the entire process of settlement culminating into proposed transfer of shares of the Indian Company borne legal expenses to the tune of Euros 1,49,445 (equivalent to Rs. 8,902,063)."
The applicant has not furnished any break up of the said figure or the details pertaining to the expenses. The applicant's counsel has relied on the decision of Kerala High Court in V.A. Vasumathi v. CIT (1980) 123 ITR 94 wherein the expenditure incurred for the purpose of litigation in the Civil Court, pursuant to a reference under section 20 of the Land Acquisition Act, was allowed as deduction under section 48(i).
13. In order to appreciate the above issue, it is desirable to refer to the provisions of section 48 of the Act which read as under:--
71 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 "Mode of computation--The income chargeable under the head 'Capital gains' shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital assets the following amounts, namely:--
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto;"
14. The above section broadly contemplates three amounts for the purpose of computing income chargeable under the head 'Capital gains'. The first is the full value of the consideration for which the capital assets has been transferred. The second is the expenditure incurred wholly and exclusively in connection with such transfer and the third and the last is the cost of acquisition of the capital asset including the cost of any improvement thereto. In clause(i) of section 48 of the Act, the Legislature has used the expression "expenditure incurred wholly and exclusively in connection with such transfer". The expression presupposes
(a) there should be an expenditure
(b) the said expenditure should be in connection with the transfer of the capital asset and
(c) it should be wholly and exclusively incurred in connection with the said transfer.
In regard to the expression 'wholly and exclusively' employed in section 37(1) of the Act, the following Commentary from Sampath Iyengar's Law of Income Tax (Edited by Shri Rajaratnam 10th Edition) is worth quoting:-
"...The first adverb 'wholly' in the above phrase, 'laid out or expended, wholly and exclusively', refers to the quantum of the expenditure, the sum of money spent. The second adverb 'exclusively', has reference to the motive or object behind the expenditure. Unless such motive or object is exclusively, i.e., solely, for promoting the business, the expenditure will not qualify for deduction."
While interpreting section 48(i) of the act, Delhi High Court in the case of Smt Sita Nanda v. CIT (2001) 251 ITR 575, observed as under:-
". . .The crucial words in the provisions are 'in connection with such transfer'. The expression means intrinsically linked with the transfer. Such expenditure has to be wholly and exclusively in connection with the transfer. Even if such expenditure has some nexus with the transfer it does not qualify for deduction unless it is wholly and exclusively in connection with the transfer . . . ."
Similarly, the following observation of Mysore High Court in the case of B.N. Pinto v. CIT (1974) 96 ITR 306 can be usefully recalled:-
72 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 "What can be deducted under section 48(i) is expenses incurred wholly and exclusively in connection with the transfer. The damages for mental worry and suffering on account of wrongful withholding and detention of her property cannot, by any stretch of imagination, be said to be expenses incurred wholly and exclusively in connection with the transfer. The claim in respect of lawyer's fees is also indefinite and vague and is not specific that it was in connection with the transfer, like, for example, drafting of the deed or such purposes intimately connected with the transfer. Similarly, regarding the traveling expenses, it is not specific that it was in connection with the transfer."
15. In the light of the above exposition of law, it is clear that the legal expenses distinctly related to and integrally connected with the transfer of shares is admissible for deduction under section 48(i) of the Act. The sole object of the expenditure incurred towards legal fees should be in connection with the transfer of shares. Legal fees for seeking advice on the modalities of transfer and the drafting of agreement or deed of transfer would undoubtedly qualify for deduction. It must also be noted that the expression 'in connection with such transfer' is wider and more liberal in meaning than the phraseology 'for the transfer.' (Ref: CIT v. Shakuntala (1991) 190 ITR 56, 59, Bombay High Court). By reason of employing such a wide expression i.e., 'in connection with' ,something more than what is attributable to the final act of transfer of shares is also admissible for deduction provided the intimate connection between the expenditure and the act of transferring shares is established. For instance, if the services of legal or other professional extended to the process of valuation of shares or the participation in the deliberations that led to the settlement concerning the transfer of shares, the legal charges on that account will also be allowable as deduction. We do not think, however, that the legal fees etc. paid to the lawyers for filing the petitions under sections 397 and 398 in the Company Law Board and for making appearance before the Board prior to the passing of final order giving green signal for the transfer of shares are admissible for deduction. In other words, the legal expenses for the initial period of dispute are not intrinsically linked with the transfer of shares and therefore it cannot be allowed as deduction.
_____________________________________________________________ Now, a brief description of facts of the case are in order. • The assessee went to CLB for acquiring the shares of Maheswari Group and even succeeded in getting a judgement from CLB in his favour. CLB asked Maheshwari Group to quote a price for 65% of shares held by them which came to around Rs. 252 Crores.
• For completing the takeover the assessee engaged Churu Trading Co. for arranging the finances and other consultancy work. Churu Trading Co. in turn engaged Media West and other merchant bankers and raised Rs. 12.5 crores. The 73 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 assessee was also in talk with Zee Group, a big media group interested in expansion, soliciting help in the take over.
• As per CLB guidelines the assessee had to arrange the finances on his own, in which he failed, then he was forced to sell the shares to Maheshwari Group.
So, from the discussion above, it can be said that there are three requirements for allowability of expenditure U/s 48:
(a) there should be an expenditure
(b) the said expenditure should be in connection with the transfer of the
capital asset and
(c) it should be wholly and exclusively incurred in connection with the said transfer.
Requirement mentioned in point (a) above is not under contention in the present case. Requirement mentioned in point (b) above i.e. the 'connection' is to be examined. The expenditure after being proved in 'connection' has to be further checked whether it is "wholly and exclusively" for such transfer or not. Only when these three criteria are satisfied in succession can the expenditure be allowed. This examination follows below:-
1. The assessee approached the CLB for the express purpose of resolving the dispute and protecting his minority shareholder interest and also for acquiring the shares of Maheshwari Group. There is nothing on record and no evidence to suggest that the assessee was actually trying to sell his shares. In the case of Compagnie Financiere Hamon (2009) 177 Taxman 511 (AAR - New Delhi) as discussed above, the expenses relating to filing the appeal U/s 397 & 398 with the CLB were disallowed as it was not disallowed as it was not wholly and exclusively linked with the transfer even though they had a nexus with the transfer. These expenses were held to be for protecting minority shareholder interest and not for transfer. So, as discussed above, more than a mere 'nexus' but intricate link with transfer is required for allowability of the expenditure.
2. The commentery from Sampath lyenger as discussed above says that the second adverb 'exclusively', has reference to the motive or object behind the expenditure. Unless such motive or object is exclusively, i.e., solely, for promoting the business, the expenditure will not qualify for deduction. In this case motive or object, as evidenced by the proceedings before the CLB is acquisition of shares and not selling of shares. Assessee's contention about a larger game plan of selling at this stage is based on conjectures and surmises without any proof.
3. The expenditure paid by the assessee to Churu Trading Co. includes interest expenses incurred to Media West and other merchant bankers for raising a war chest of Rs. 12.5 crores for acquisition of shares. This interest expenditure by any stretch of imagination cannot be judged for selling the shares.
4. So, for allowability of expenditure in connection with transfer U/s 48 nexus of that expenditure with the transfer is necessary but not sufficient. In the present case such vague nexus may not be doubted but requirements for allowability U/s 48 and as 74 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 per various case laws are not satisfied as per discussion above. So, the A.O. is correct in disallowing such expenditure."
10. In response to the above remand report, a rejoinder was filed by the Ld. AR vide letter dated 29.03.2011 and the same is reproduced as under:
" With reference to your honour's letter dated 25.03.2011 along with the remand report of the learned assessing officer, it is respectfully submitted as under.
The learned assessing officer has placed his reliance on the decision of the AAR in the case of Compagnie Finaciere Hamon (2009) 310 ITR 1 (AAR) and observed that the expenditure is not wholly and exclusively incurred in connection with the transfer of the shares on account of the following reasons.
1. The assessee had approached the CLB with the express purpose of resolving the dispute and protect his minority shareholder interest and also for acquiring the shares of Maehshwari Group. There is nothing on record to suggest that the assessee was actually trying to sell his shares.
2. More than mere nexus but intricate link with transfer is required for allowability of the expenditure.
3. Assessee's contention about a larger game plan of selling is based on conjectures and surmises without any proof.
4. The expenditure paid by the assessee to Churu Trading Co. includes interest expenses incurred to Media west and other merchant bankers for raising a war chest of Rs. 12.5 Crores for acquisition of shares. This interest expenditure by any stretch of imagination cannot be judged for selling the shares The para wise comment on the above observations is as under:
1. That there is no admit of doubt as to the minority shareholding of the assessee and the fact that in the year 2004 a settlement for the MOU was drawn between the Agarwal and the Maheshwari Group by which division of the various publication units was made on the insistence of the latter. Both the companies were closely held unlisted Companies converted from partnership firm in existence since 1962 and hence it was strategized to seek the 75 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 CLB route for the maximum realisation of the price. But Agarwal group already having a past experience of backtrack by the Maheshwari Group had to be cautious in its moves even in the petition under section 397 and 398 of the Companies Act'61 as that was the only mode by which the minority could approach the CLB and protect its interest and rights. Your honour's kind attention is invited to para 1(a) of the main prayer made in the petition filed by the Agarwal Group before the Hon'ble Company Law Board which reads as under.
"Directing the Respondents to act upon the settlement arrived at between the parties on 2.12.2004, as particularly mentioned in Para 8.13 to 8.18 above."
Thus there was always an intention of the Agarwal Group to go out of the company by taking the various publications units as was decided in the MOU for settlement. Further the perusal of the Para 21 of the order of the CLB dated 10.07.2006 will reveal that even the CLB was always of the view that one of the Group had to go out of the Company. As already submitted before that the act to acquire was merely to freeze a valuation of the share holding of the minority.
The learned Assessing Officer has not commented and controverted on the following actions of the Agarwal Group establishing the strategy to obtain enhanced valuation of the shares holding of the minority shareholders which are enumerated as under.
• Petition was filed by Agarwal Group before the Hon'ble CLB since they were minority shareholder knowingly that Bench normally protects the interest of minority.
• Since Maheshwari Group which on their insistence had sought division of the business between them and Agarwal Group, had back tracked on the MOU drawn by the auditor Shri Mukesh Tandon in 2004 Agarwal Group was very careful in planning their strategy by seeking valuation of the Companies to be quoted by Maheshwari Group before the CLB and exercising the option to acquire the companies.
• This planning was made keeping in mind the habit and intention of Maheshwari Group to backtrack before the CLB of the 76 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 value mentioned by them and created actions and drama to acquire the shares of the majority shareholders by bringing M/s Media west through the help of M/s Churu Trading and others who had committed arrangement of Rs. 252 Crores and even got deposited an amount of Rs. 12.50 Crore in the escrow account.
• It was known to all the parties that Agarwal Group never had the financial capacity to acquire the stake of the majority share holders to the tune of Rs. 252 Crores but still was strategically creating feelers in the market that they would acquire the company which was being done merely to freeze the valuation of the companies to Rs. 390 Crores as quoted by Maheshwari Group.
• Agarwal Group did not deposit their share certificates with State Bank of Patiala, Shastri Bhawan as was done by Maheshwari Group, evident from order of CLB dated 04.04.2006 • Agarwal Group strategically compelled Maheshwari Group to file a fresh applications petition before the CLB to set the ball rolling to direct CLB to make Maheshwari Group to take over the shares of the minority as per the order dated 10.07.2006 thereby reversing its earlier dated 25.01.2006 but invoking similar conditions of funding such payout as were put in the original order of CLB dated 25.01.2006 .
• After the receipt of the aforesaid order Agarwal Group could file appeal before the High Court but chose not to do the same since their purpose had been solved by bringing an enhanced valuation to their shareholdings.
• Further Agarwal Group did not insist in pursuing in any litigation with Maheshwari Group to ensure that the terms of the conditions of funding as were originally placed on them about the payout which were same for the Maheshwari group had been violated or not. This goes further to prove and establish the point that Agarwal group always wanted an exit route at a good value which was only achieved by litigating before CLB and stragically planning with the help of various parties to whom payment was made only after the receipt of the consideration.
77 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 Thus it is amply proved with reference to the strategy and the orders of the CLB that the assessee always wanted to exit the company by getting a fair value of his shareholding.
2. It must also be noted that the expression in connection with such transfer' is wider and more liberal in meaning than the phraseology 'for the transfer' (Ref: CIT vs. Shakuntala Kantilal, 190 I.T.R. 56,59, Bombay High Court). By reason of employing such a wide expression i.e. 'in connection with', something more than what is attributable to the final act of transfer of shares is admissible for deduction provided the intimate connection between the expenditure and the act of transferring shares in the case of the assessee is established and yet the learned Assessing Officer has arbitrarily observed that there is no intricate link. In the case of the assessee the strategy adopted is proved with reference to the proceedings before the CLB and the final act of Agarwal Group that they settled the dispute once they were sure of the realisation of the enhanced value of their shareholding. The entire sequence of the events when understood cumulatively proves that all the expenditure incurred in intimately connected with the transfer of the shares.
3. That sequence of the events as submitted in Para 1 above, orders of the CLB, bill of M/s S.R. Halbe & Associates whose expenditure has been accepted as deductible under section 48 will prove that a strategy had been adopted and not that a game plan was devised on mere surmises and conjectures.
4. That the perusal of the agreement dated 01.02.2006 between the Agarwal Group and M/s Churu Trading company Pvt. Ltd will reveal that initially all inclusive arranger fees was agreed and there is no iota of reference to payment of any interest. The deposit in the escrow account by M/s Media West was in consonance to the order of the CLB. The perusal of the memorandum of understanding agreement between the Agarwal Group and M/s Media West (which has been reproduced in the order of the CLB dated 10.07.2006) will reveal that they were entitled to interest on certain conditions, however after this order of the CLB wherein directions were issued to refund the amount of Rs. 12.50 Crores deposited in the escrow account the bank has paid interest to them on the deposit made, no interest has been paid by the assessee. This fact is amply proved 78 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 with reference to the order of the CLB dated 01.11.2006 and para 5 is reproduced as under.
5. On an earlier occasion, the money deposited in the escrow account by the petitioners was directed to be paid to M/s Mediawest Private Limited and the bank had issued TDS certificate and the bank had issued TDS Certificate in the name of Amarujala Publication Limited for the interest accrued thereon. The Manager, State Bank of Patiala is directed to issue a fresh TDS in the name of the Mediawest Private Limited in lieu of one issued in favour of Amarujala Publication Limited after observing the necessary formalities in this regard.
Further the learned Assessing officer has completely ignored the alternative submissions made before your honour that even if the expenditure incurred was for the acquisition of the shares of the companies, which is a capital asset and the acquisition does not take place the same was in the nature of the capital loss since the expenditure has been actually incurred by the assessee and the same is liable to be reduced from the capital gains incurred in the sale of the shares to Maheshwari Group.
In view of the above facts and circumstances of the case the addition made is liable to be deleted.
11.1 After considering the written submissions of the Ld. AR and remand report as well as rejoinder of the Ld. AR, a joint hearing of the Ld. AR and the AO was held on 29.03.2011 and 31.03.2011 to discuss about the allowability of various expenses claimed by the appellant as deduction u/s 48(i) while computing the LTCG but allowed by the AO only partly as discussed in para
7. of this order. In this hearing as argued by the AO, the payment made to M/s Churu Trading Co. and other consultants was contended by him to have been paid for acquiring 64.67% share holding of Amar Ujala Group and as per him this payment cannot be allowed as deduction u/s 48(i) for computing capital Gain on sale of remaining 35.33% shares. However, the Ld. AR contended that the Agarwal Group went to CLB as a part of strategy to first show that they are interested in buying majority shareholding of Maheshwari Group to get the value of shares enhanced and later since they were not having sufficient fund, they decided to exit by selling the shares in their possession in which they ultimately succeeded and hence payment to M/s 79 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 Churu Trading Co. and other consultants being part of this strategy to get the value of shares enhanced and fixed before selling of these shares, these expenses should be allowed u/s 48(i) for computing the LTCG. He further argued that there is mention of strategy formulation in the bill of M/s S.R. Halbe & Associates for protecting the interest of minority shareholders for which Shri Halbe provided necessary assistance to the Agarwal Group to file petition to CLB. For these services, Rs. 2,24,24000/- was paid to Shri Halbe. He contended that if payment to Shri Halbe is accepted by the AO in the assessment order, the strategy as mentioned in the bill and as explained by him in his previous submissions (as discussed in para 8.2 and 8.4) should also be accepted.
In the remand report of the AO, regarding payment made to M/s Churu Trading Co., it has been reported that it includes interest expenses incurred to M/s Media West and other Merchant Bankers for raising a war chest of Rs. 12.5 crore for acquisition of shares. During discussion, the AO admitted that there is no documentary evidence to show that this payment includes interest paid to M/s Media West but he contended that for arranging certain funds from M/s Media West, as per business practice, certain interest should have been paid to M/s Media West and since M/s Churu Trading Co. arranged fund from M/s Media West, the appellant should have paid interest to M/s Media West through M/s Churu Trading Co. and therefore in view of the present AO, the amount paid to M/s Churu Trading Co. should include the interest payable to M/s Media West and the same should be calculated at the rate prevailing in the market at that time. However, he could not quantify the amount of alleged interest amount included in the payment made to M/s Churu Trading Co. supported by any documentary evidence. In the agreement with M/s Media West, the rate of interest is mentioned as 15%. If this interest rate is applied, the amount of interest on the fund of Rs.12.5 crore arranged through M/s Churu Trading Co. from M/s Media West for about 6 months [from Feb 06(when the amount was deposited in escrow account) to July 06 (when the order of CLB was passed cancelling the order for purchase of shares by the Agarwal Group and releasing the amount from escrow account)] would come to about Rs. 93.75 lac ( 12.5x 0.15x 6/12) only as against the total amount of Rs. 8.5 crore paid to M/s Churu Trading Co. As against the contention of the AO that the payment to M/s Churu Trading Co. includes interest payment on arranging the fund, the Ld. AR argued that there was separate agreement with M/s Media West and M/s Churu Trading Co. As per the agreement with M/s Churu Trading Co., only arranger fees of Rs. 8.5 crore was to be paid by the Agarwal Group which was subsequently paid 80 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 after shares were finally sold and it does not include any interest payment, if any payable to M/s Media West. As per the agreement with the Media West, interest was required to be paid @ 15% along with loan within six months of acquisition of shares of 64.67% of Amar Ujala Group. It was contended by him that since shares were not acquired, no interest was paid to Media West and since the amount was lying in escrow account, interest was paid by the bank.
During discussion one alternate plea was taken by the Ld. AR without prejudice to his earlier submission that deduction u/s 48(i) should be provided for payment to M/s Churu Trading and other consultant. As per the alternative plea, he contended that payment to M/s Churu Trading Co. and other consultant is not disputed and since the payment has been made and shares have not been acquired, it resulted into loss to the appellant and such loss should be allowed as short term capital loss. However, the AO contended that since payment was made for acquiring 64.67% shares and no transfer of shares has taken place, no capital loss would arise as per section 45 because no transfer of shares in this regard has taken place as provided in the said section. I agree with the AO and in my opinion also, such expenses cannot be allowed as short term capital loss.
11.2 After the discussion on 29.03.2011, the Ld. AR further filed a written submission on 31.03.2011 clarifying that there was restrictive clause in the Memorandum and Article of Association of both companies because of that they could not have sold the shares. Therefore, as a part of strategy, the Agarwal Group bid for the acquisition of the shareholding of majority shareholders to enhance and fix the valuation of the shares and once this purpose was achieved then they exited with the valuation determined. Citing this strategy, He again contended that the expenses incurred in connection with such proceedings before CLB was in connection with the transfer of the shares which was the resultant to the strategic movement of the Agarwal Group. In this submission, it was also contended that due to moving to CLB and passing of the order by the CLB, the restrictive clause against the transfer of shares in the Memorandum and Article of Association of both companies got removed and shares were transferred and resulted in the capital gain and therefore all the expenses incurred on lawyers and professional in connection with the proceeding before CLB was pleaded to be allowed. For a ready reference, this submission of the Ld. AR is also produced for ready reference:-
81 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 " That it has been explained that both companies in which the share holdings of the Agarwal Group which have been transferred and the income there from has been shown under the head Long Term Capital Gains were closely held unlisted Companies converted from partnership firm.
The perusal of the Memorandum and Articles of M/s Amarujala Publications Ltd. which was filed along with the petition under section 397 and 398 of the Companies Act'56 will reveal the there were restrictive covenants i.e., restrictions in the transfer of the shares, as established with reference to Clause 49 of the Articles is reproduced as under
Board may refuse to register transfer Subject to the provisions of Section 111 of the Act and Section 22A of the Securities (Contracts) Regulation Act, 1956 or any statutory modification or re enactment thereof, the Board of Directors may refuse whether in pursuance of any power of the Company under the Articles or otherwise to register the transfer of, or transmission by operation of law of the right to any shares or interest of a member in or debentures of the Company. The Company shall within two months from the date on which the instrument of transfer or the intimation of such transmission, as the case may be, was delivered to the Company, send notice of the refusal to the transferee and the transfer or to the person giving intimation of such transmission, as the case may be, giving reasons for such refusal. Provided that registration of a transfer shall not be refused on the ground that the transferor being either alone or jointly with any other person or persons, indebted to the Company on any account whatsoever except when the Company has a lien on shares.
Similarly in the case of M/s A&M Publications Private Limited, the same being a Private Limited Company there were restrictive covenants i.e., restrictions on transfer of shares. Thus in case Agarwal Group wanted to exit from the company at any point of time as even evident from the MOU drawn up for settlement in the year 2004, there were restrictive rights and the valuation of the shares would have been negligible. Thus being 82 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 minority shareholders they were strategically advised to approach CLB which they could only do by invoking sections 397 and 398 of the Companies Act'56. It was a part of this strategy to bid for the shareholding of the majority to enhance and fix the valuation and once purpose was solve then exit with the valuation. Thus expenses have been in connection with the transfer of the share which was the resultant of the strategic movement of the Agarwal Group. It was only subsequent to the order of the CLB that this restrictive right got removed and the shares were transferred in both the Companies which resulted in the capital gain which has been shown as income of the assessee.
With regards observations of the learned Assessing Officer for the alternate submissions of the assessee it is submitted that there is no doubt that the expenditure incurred alternatively can be considered admissible under section 57(iii).There is in fact nothing in the language of section 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of section 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. However the claim of assessee is that the expenditure incurred was in connection with the transfer of his share holding and has a live link by being intimately connected with the transfer of the shares if the entire sequence of the events and the strategy taken into consideration."
11.3 The above submission of the Ld. AR was considered in the hearing held on 31.03.2011 with the Ld. AR as well as the AO. In the light of all the submissions made by the Ld. AR so far, it was finally argued by the Ld. AR that the Agarwal Group went to CLB under a strategy to get the value of shares of both the companies enhanced and freezed for which first they showed that they are interested in buying the shares knowing very well that they had no capacity to buy the shares held by the majority share holders (64.67%) and therefore, they made such financial arrangements which was in contravention of the conditions fixed by CLB in its order dated 25.01.2006 to arrange finance in which M/s Churu Trading Co. helped them through Media West and other Merchant Bankers. He further argued that because of this arrangement, the other party i.e. the Maheshwari Group got alarmed and 83 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 they further moved to CLB to restrain the Agarwal Group to buy majority share holding and even agreed to pay Rs. 22 crore extra amount over and above the 35.33% of valuation of shares of Rs. 390 crore which comes to Rs. 138 crore and finally in view of their strategy as explained earlier, the Agarwal Group got Rs. 160 crore by selling their 35.33% of share holding in both companies. The Ld. AR argued that the excess realization of Rs. 22 crore could be made possible primarily with the intervention of the arranger i.e. M/s Churu Trading Co. He also argued that the Maheshwari Group agreed to pay Rs. 22 crore extra so that the shares which were pledged as security with M/s Media West could be lifted and shares are sold to the Maheshwari Group. For this purpose the arranger M/s Churu Trading Co.
demanded for 50% of the extra amount realized by the Agarwal Group but ultimately as per the initial agreement only Rs. 8.5 crore was paid. In view of the above background of the facts of the case, the Ld. AR argued that since because of intervention of M/s Churu Trading Co., the share value was further got enhanced by Rs. 22 crore, the payment made to M/s Churu Trading Co. amounting to Rs. 8.5 crore should be allowed to have been paid for transfer of shares.
The AO argued that CLB gave option to the Agarwal group, either to buy majority shares holding (64.67%) or sell their share holding ( 35.33%) but they first choose to buy majority share holding and hence whatever expenditure was incurred for arranging the finance should not be considered to have been incurred in connection with the transfer of shares. Therefore in view of the AO, since M/s Churu Trading Co. was engaged to arrange the fund, payment made to them are for arranging the fund and not in connection with the transfer of shares and hence payment of Rs. 8.5 crore made to M/s Churu Trading Co. should not be allowed as deduction u/s 48(i). The AO also pointed out that the intention of the Agarwal Group was initially not to sell the shares, otherwise they would have not pledged the 35.33% of their shares holding as security for obtaining the fund. Therefore in his opinion, initially the intention of the appellant was to buy the majority share holding and hence the expenditure incurred for arranging the fund for buying the majority share holding should not be allowed and hence he contended that the payment made to M/s Churu Trading Co. and other consultants for arranging the fund and preparation of CLB petition and appearing before the CLB for arguing the case of the appellant should not be allowed u/s 48(i)".
7. The finding of the CIT(A) is reproduced as under:- (Para 12.1. to 16.3) 84 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 "12.1 I have considered all the facts of the case as discussed in the assessment order and as presented before me by the Ld. AR through his various submissions and as emerged during the discussion with the Ld. AR and the AO during the hearing held on 29.03.3011 and 31.03.2011 and also considered the arguments taken by the present AO in his remand report dated 23.03.2011 and further rejoinder filed by the Ld. AR so far discussed in the previous paras. In view of the facts of the case discussed so far, it emerges that initially the Agarwal Group went to CLB u/s 397 and 398 for protection of the interest of minority shareholders on the advice of Shri H.R. Halbe because these are the sections available in the Companies Act under which they could have gone to CLB for its intervention as the earlier agreement arrived at between the members of Agarwal family and Maheshwari family for partition of family business of Amar Ujala publication business was back tracked by the Maheshwari Group and control of Agarwal Group was marginalized by the Board's resolution passed by the company on 07.03.2005 under the leadership of Maheshwari Group and Ashok Agarwal holding majority shareholding (64.67%) . After going through the petitions filed by the Agarwal Group before the Honb'le CLB, CP No. 26 of 2005 and CA No. 75 of 2005, it is quite clear that these petitions were filed to seek the implementation of the agreement arrived at with the Maheshwari Group on 02.12.2004 which otherwise was not possible since both companies were closely held companies and their shareholding was in minority too. In the above mentioned petitions, the Agarwal Group mainly prayed for implementation of the settlement arrived at between the families of both group vide agreement dated 02.12.2004 and to declare the various resolution passed in the meeting of the Board of Directors of the company on 07.03.2005 as illegal, null and void including the appointment of Shri Manu Anand as whole time Director.
12.2 After various rounds of hearings held before the CLB, when it became clear that partition of Amar Ujala publication business between both Groups was not possible , an understanding was reached between both Groups that both companies should remain with either of two Groups and with this understanding value of the shares of both companies was determined by the Maheshwari Group at Rs 390 crore with value of share holding with the Maheshwari Group at Rs. 252 crore (64.67%) and with the Agarwal Group at Rs. 138 crore (35.33%). With such sequence of events, there appears to be formulation of some strategy at the part of Agarwal Group on the advice of Shri S.R. Halbe to go to CLB on the pretext of protecting the minority right u/s 397 and 398 of the Companies Act and 85 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 create such atmosphere that ultimately value of company is determined at its market value and then giving them an opportunity to sell their share holding at the market determined price. Such strategy as formulated by Shri S. R. Halbe has even been recognized by the AO in the assessment order wherein in para 12.2 he has held that the payment of Rs. 2,24,24,000/- to him is a lump-sum payment for the services rendered by him and since there is no item-wise billing for various activities and considering that major portion of fees is attributable to the proceedings before CLB in connection with transfer of share, the payment of Rs. 2,24,24,000/- is accepted that it has been incurred in connection with the transfer of shares. Nature of all the services rendered by Shri S.R. Halbe is discussed on page 38 of this order, which clearly talk about the formulation of strategy for protecting the interest of Minority shareholders. Therefore, I find force in the argument of the Ld. AR that if payment to Shri Halbe is accepted by the AO in the assessment order, the strategy as mentioned in the bill and as explained by him in his submission as discussed in para 8.2 and 8.4 should also be accepted.
12.3 Though in the petition filed before the CLB, the main prayer is made only with regard to partition of family business , however with subsequent sequence of events as discussed in sub-para 5.14 onwards of para 5 and as explained by the Ld. AR in his written submission discussed in para 8.2 , it is quite apparent that with such strategy of going to CLB u/s 397 & 398 for protection of interest of Agarwal Group being minority shareholder, they succeeded in getting the Maheshwari Group agreed during the course of hearing before CLB on 30.11.2005 that the Maheshwari Group would indicate the value of the company shares with first option to Agarwal Group either to buy the shares held by Maheshwari Group or sell their shares on the basis of the value of the shares determined by the Maheshawari Group. During the course of hearing before CLB , the Maheshwari Group indicated the value of shares of the company at Rs. 390 crore devided between the share holding of the Maheshwari and the Agarwal Group at Rs. 252 crore and Rs. 138 crore respectively. Looking to the background of the case as discussed in para 5, I also intend to agree with the argument of the Ld. AR that with their apprehension that Maheshwari Group may again back track and decide not to buy the shares of Agarwal Group at the value determined before the CLB after the Agarwal Group decide to sell these shares, the Agarwal Group initially decided to buy the shares holding of the Maheshwari Group valued at Rs. 252 crore. Thereafter, a consent order was passed by the CLB through its order dated 24.01.2006 giving option to the 86 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 Agarwal Group to buy the shares held by Maheshwari Group at Rs. 252 crore as it was elected by the Agarwal Group.
12.4 Subsequent sequence of events further justifies the claim of the Ld. AR that knowing very well that they do not have capacity to buy the majority share holding, it was decided as per the strategy that the Agarwal Group would first elect to buy the share holding of the Majority Group to get the value of shares further enhanced and fixed before selling of their part of shares and ultimately succeeded in realizing Rs. 22 crore more than the value of their share holding initially determined at Rs. 138 crore. This strategy was explained by the Ld. AR that the Agarwal Group did not have financial capacity to buy the share holdings of the Maheshwari Group and their intention was always to sell their shareholdings and they also did not trust the Maheshari Group for selling shares to them because earlier agreement of partitioning of family business was back tracked by them and therefore, they entered in a strategic financial arrangement with Essel/Zee Group through its front company M/s Media West by which it was planned to get the finance of Rs. 252 crore arranged to buy the company. This financial arrangement was made through M/s Churu Trading Co. but since the intention of the Agarwal Group was not to buy and run the company and they always wanted to sell their shareholdings, a MOU was drawn with M/s Media West in such a way that a clause was put to sell the share holding to the lender or any other private party by private placement to repay the loan. It was also later noted by the Honb'le CLB that the M/s Media West did not have capacity to lend such high amount of fund and hence fund was ultimately to come from Essel/Zee Group through M/s Media West which has been acquiring news paper companies for Essel/Zee Group. However, this financial arrangement in which sale of shares of the company was built in was not disclosed to the CLB, though such financial arrangement was made before the consent order dated 25.01.2006 was passed by the CLB. With such built-in provision in the MOU with M/s Media West to ultimately sell the shares of the company to some other private party and bringing it to the Knowledge of the Maheshwari Group, the Agarwal Group again succeeded to get the Maheshwari Group filed a petition before the CLB praying that the Agarwal Group violated the terms of the consent order dated 25.01.2006 and they should be directed to sell their shares to them at the value determined by them at Rs. 138 crore. On this petition, the Honb'le CLB again passed a detailed order dated 10.07.2006 (already discussed in the submission filed by the Ld. AR as reproduced in para no.8.2) clearly observing as under:
87 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08
17. In terms of the MOU, Media West is to fund the petitioners to the tune of Rs. 101 crores and the balance sum of Rs. 151 crores is to be funded by the Merchant Bankers. In all, the amount involved in acquisition of the shares of the respondents is about Rs. 252 crores and the petitioners are borrowing the entire amount. The admitted position is that Media West is a Group company of Essel Group.
Media West is not an NBFC nor a finance company as is evident from the its object clause in the Memorandum. It is also an admitted fact that the paid up capital of Media West is only Rs. 1 lac and its net worth is negative, having incurred a loss of over Rs. 11 crores in the last year. Its business income for the last two years is nil. With this financial position, there is nothing on record to show how Media West is going to mobilize Rs. 100 crores to fund the acquisition of the shares of the respondents. Whether it is going to borrow on interest or to be assisted by someone else without interest is not clear. For lending such a huge amount to the petitioners there are no terms in the MOU relating to security, either financial or otherwise to be provided by the petitioners. The security is obviously only the shares of the company, whether it is 35.33% or 64.67% or the whole 100%. The said security in the form of shares, covers the lending by both Media West and the unnamed Merchant Banker. Normally, when a large amount of money is lent against shares, especially those of an unlisted closely held company, due diligence is carried out of the company to find out the fair value of the shares, but, in the present case, admittedly, nothing was done. Even though the respondents have raised all these issues in CA 148, the petitioners have not responded to the same in their reply. The motive of a company, having no cash resources, in lending such a huge amount, cannot be but for an oblique purpose. Considering the fact that Media West has been used as a special purpose vehicle by Essel Group, the claim of which has not been denied by the petitioners, to acquire other newspaper companies, it appears that even the present funding to the petitioner is with the object of taking over control of the company. The very fact that the MOU provides that whatever might be the consideration that the lenders would receive on sale of 49% shares, the same would release the petitioners of all their liabilities, obligations etc. would indicate that the present lending arrangement by the lenders is not based either on commercial or financial consideration, especially when no due diligence of the company has been carried out. It is rather 88 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 a strange arrangement by which the lenders expect that proceeds from sale of 35.33% / 49% shares would cover their entire loans given for acquisition of 64.67% shares, that too with 15% interest. It is more so, as far as the Merchant Banker is concerned. No Merchant Banker would fund such a huge amount of Rs. 151 crores on the strength of shares of a closely held, unlisted company, without due diligence. From the MOU it is seen that it was the Merchant Banker who had suggested that the petitioners could approach Media West for part financing of the acquisition. Further, the provisions in the MOU that the lenders could sell the shares by private placement and that the lenders have the right to transfer their rights to any party etc, definitely rises a doubt whether, this right has been conferred on the lenders only to facilitate Essel Group to acquire the shares. Non disclosure of the name of the Arbitrator also raises a doubt about the independence of the unnamed arbitrator. Shri Sarkar argued that it is of no concern of either the respondents or this Board to examine why and how Media West would fund the acquisition and why it is taking the risk. In normal circumstance, the contention of the learned counsel may be correct. But in the present case, when a party alleges breach of the terms of the consent order, to adjudicate on the allegation, this Board has to examine all aspects. Even though it is claimed that since the MOU specifically provides that 51% shares would continue to be held by the petitioners as also the control and management of the company as stipulated in the consent order, it is to be noted that the restriction of the holding and management is only for a period of 3 year. The terms of the MOU are so unrealistic and one sided, that it appears that the MOU is a prelude to hand over the control of the company after a period of 3 years. Further, that it was not to the knowledge of the respondents that the funding for acquisition would be arranged on the basis of the existing shares of the company and therefore, mere continuing with the 51% shares by the petitioners is of no justification.
18. The facts that Media West, without any financial resources of its own agreeing to fund a huge sum of Rs. 101 crores, that Media West is a Group company of Essel which has been acquiring news paper companies, that the petitioners have not been able to establish their financial strength to pay of the loans within the stipulated time, that the liberty given to the lenders to.sell the shares 89 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 by private placement and their right to transfer their rights under the MOU to any party, that the petitioners have refused to produce the MOU with the Merchant Bankers who had suggested the name of Media West to the petitioners, etc lead only to the strong presumption that there is more to the understanding expressed in the MOU than what the eyes meet. In other words, the whole arrangement of financing for the acquisition of shares of the respondents does not appear to be a straight forward one and it is only a prelude to the final takeover of the company after the period of 3 years. This adverse presumption is inevitable in the light of the refusal of the petitioners to disclose the MOU with the Merchant Banker, who has agreed to fund a huge sum of Rs 152 crores even without a due diligence.
12.5 It is very clear from the findings of the CLB as discussed in para 17 of its order dated 10.07.2006 reproduced above that the lending arrangement of funding to the Agarwal Group for buying the majority share holding of 64.67% was not based either on commercial or financial consideration because such arrangement was made without any due diligence , which was found by the Honb'le CLB as strange arrangement and therefore, after getting convinced that the Agarwal Group was not genuinely interested in buying the majority share holding and running the company, the Honb'le CLB reversed its earlier order and asked the respondents i.e. Maheshwari Group to purchase the share holding of the Agarwal Group as per the direction contained in subsequent paras 19 to 21 of its order dated 10.07.2006 reproduced below:
"19 Thus, I find that not only the consent order is vitiated by non disclosure of material facts by the petitioners and inducement to agree for IPO, even the spirit of the order is found to have been flouted by the petitioners. The terms of the MOU are so unrealistic, that no man of ordinary prudence, leave alone a business person, would be convinced that it is a pure and simple financial arrangement. Under these circumstances, either the consent order should be recalled or the respondents should be given the option of purchasing the shares of the petitioners. Shri Sarkar vehemently argued that this Board has no power either to recall the consent order or to modify the same. He further submitted that on any account, the respondents can not have the right to purchase the shares of the petitioners. It is a settled law when an 90 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 order is obtained, whether it is consent order or otherwise, by fraud, concealment of material facts, misrepresentation and the like, it is the bounden duty of the court which passed the order, to set aside or recall the said order. In the cases cited by Shri Datar, it has been held so. In the cases cited by Shri Sarkar that executing court cannot go beyond the decree, no element of fraud, concealment of material facts or misrepresentation had been alleged. Therefore, there is every justification to recall the consent order, but, I do not propose to recall the same but, try to work out the said order in the spirit under which the same was passed.
20 As far as the right of the respondents to acquire the shares of the petitioners is concerned, reference to the chronology of events is necessary. Even though, initially the petitioners were against the suggestion of their going out of the company and were only interested in the division of the company, later, it was only at the suggestion of the counsel for the petitioners, the consent order resulted. The foundation of the suggestion of the counsel for the petitioners is that one of the two Groups should control the company in exclusion of the other Group. Both in the replies to the applications and during the arguments, there was not even a whisper that the petitioners would be able to mobilize funds to avoid the lenders from taking over the control of the shares. Instead, their stand has been that there is no provision in the consent order restraining the petitioners from raising funds on the strength of the shares of the company. Thus, it is crystal clear that the petitioners are not in a position to fund the purchase of the shares of the respondents without the backing of the shares of the company, which, I have held the petitioners cannot do so. Therefore, since, I have come to the conclusion that the consent order was obtained by concealment of material fact and that the petitioners have breached the terms of the said order, even in the absence of any stipulation in the consent order to the specific effect, the respondents will have the right to purchase the shares of the petitioners. In this connection, I may refer to the decision of the Supreme Court in Rambahadur Thakur's case wherein the Supreme Court has held that when a consent order is recorded by this Board, it is its duty to interpret the terms of the consent order with a view to ensure that the same is worked out. Therefore, the contention of Shri Sarkar that only if there is a default in payment of the installments of consideration, the respondents will 91 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 have the right to purchase the shares of the petitioners and not otherwise is not correct as the basic premises under which the parties decided to end the disputes was that only one Group would continue with the company. Now that it is established that the petitioners cannot acquire the shares of the respondents, the latter has the right to purchase the former. Likewise, his contention that in the event of breach of any other terms of the consent order, this Board can only put the petitioners to terms is also is not correct, as in the present case, the consent order itself has been obtained by concealment of material facts and misrepresentation.
21. In view of my findings that the consent order had been obtained by suppressing the material known fact that financing for acquisition of the shares of the respondents was based on an understanding of sale of the shares of the company and that in view of the inbuilt default clause giving right to the lenders to dispose of 49% of the existing shares of the company, which was never disclosed, I hold, on the basic understanding that one Group should go out of the company, that the right to purchase the shares of the petitioners would now revert to the respondents."
12.6 The above observation of the Honb'le CLB in its order dated 10.07.2006 clearly shows that the intention of the Agarwal Group was never to purchase the share holding of the Maheshwari Group for acquiring and running the company and with such unrealistic financial arrangement as analysed by the CLB in its above mentioned order, it appears that after acquiring both companies with the finance arranged through Essel/Zee Group, they planned to sell the shares of both companies to Essel/Zee Group because they did not trust Maheshwari Group for the reasons already discussed. However, during the proceeding before the CLB, the initial understanding between both Groups was that the Amar Ujala publication business should not go out of the control of either of two Groups but the Agarwal Group also wanted to extract the maximum value for their shareholding and therefore, they compelled the Maheshwari Group to buy their share holding by entering into a MOU with a rival group ( Essel/Zee Group) through its front company apparently showing that they are interested in buying the company, even though this MOU was just a ploy to force the Maheshwari Group to buy their share holding at a value more than what was offered by them. The MOU with M/s Media West was not viable at all for getting the desired fund, has been clearly observed by the Honb'le 92 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 CLB in its order dated 10.7.2006 wherein, it is discussed by them that the terms of the MOU are so unrealistic, that no man of ordinary prudence, leave alone a business person, would be convinced that it is pure and simple financial arrangement.
12.7 After reversal of order by the Honb'le CLB and ordering the Maheshwari Group to buy 35.33% share holding of the Agarwal Group, a negotiated settlement was arrived between both Groups in which the Maheshwari Group agreed to pay Rs. 160 crore to the Agarwal Group, which was Rs. 22 crore more than the earlier value determined by the Maheshwari Group for 35.33% of the shares held by the Agarwal Group. Out of this agreed sale consideration of Rs. 160 crore, the Maheshwari Group paid Rs. 5 crore to Shri Ajay Agarwal even in advance on behalf of the Agarwal Group. Finally, order dated 01.11.2006 of the Honb'le CLB was passed settling the dispute between both Groups and confirming the sale of shares by the Agarwal Group to the Maheshwari Group at a total sale consideration of Rs. 155 crore along with Rs. 5 crore which was already paid in advance to Shri Ajay Agarwal and thus total sale consideration of Rs. 160 crore was received by the Agarwal Group. After realizing Rs.160 crore sale consideration, the Agarwal Group did not insist on pursuing any litigation with the Maheshwari Group to ensure that the terms of the conditions of funding as were originally placed on them, the payout which were same for the Maheshwari group had been violated or not because as argued by the Ld. AR , the Agarwal Group as per their strategy, ultimately succeeded in their goal to realize the best value of the shares held by them in both companies and they were not at all interested in acquiring the company and to run it as also observed by the Honb'Le CLB in its order dated 10.07.2010 as discussed earlier . I agree with the Ld. AR that such sequence of events goes further to prove and establish the point that the Agarwal Group always wanted an exit route at a good value which could be achieved only by litigating before the CLB and strategically planning with the help of various parties to whom payments were made only after the receipt of the consideration.
12.8 As per the Ld. AR in the proceeding before the CLB, all legal and professional persons engaged by the Agarwal Group viz: Mr. S.R. Halbe, Mrs Bina Gupta, M/s Churu Trading Company Pvt. Ltd., M/s Rabo India Securities Pvt. Ltd., Mr. Sudipto Sarkar, Mr Dayal Saran , contributed to make the strategy of the Agarwal Group successful to realize the best value of the shares held by them in both companies and therefore, it was argued by 93 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 the Ld. AR that payments made to all of them should be fully allowed u/s 48(i) as expenses incurred in connection with transfer of shares as claimed by the appellant while computing the capital gain in the return of income instead of allowing only part of the payments made to Shri. S.R. Halbe and Smt. Bina Gupta in the assessment order as discussed in para no. 7 of this order. I also find force in the argument of the Ld. AR that the Maheshwari Group agreed to pay Rs. 22 crore extra so that the shares which were pledged as security with M/s Media West could be lifted and shares are sold to the Maheshwari Group. For this purpose the arranger M/s Churu Trading Co. demanded for 50% of the extra amount realized by the Agarwal Group but ultimately as per the initial agreement, only Rs. 8.5 crore was paid. In view of the above background of the facts of the case, the Ld. AR argued that since because of intervention of M/s Churu Trading Co., the share value was further got enhanced by Rs. 22 crore, the payment made to M/s Churu Trading Co. amounting to Rs. 8.5 crore should be allowed to have been paid for transfer of shares. However, the contention of the AO during the discussion was that the intention of the Agarwal Group was initially not to sell the shares, otherwise they would not have pledged the 35.33% of their shares holding as security for obtaining the fund. Therefore in his opinion, initially the intention of the appellant was to buy the majority share holding and hence the expenditure incurred for arranging the fund for buying the majority share holding should not be allowed and hence he contended that the payment made to M/s Churu Trading Co. and other consultant for arranging the fund and preparation of CLB petition and appearing before the CLB for arguing the case of the appellant should not be allowed u/s 48(i).
12.9 As far as the intention of the Agarwal Group for buying the shares of Majority Group is concerned for which the AO is drawing inference on the basis of pledging of 35.33% shares with the lender, it has become quite clear from the order dated 10.07.2006 of the Honb'le CLB itself that the financial arrangement with M/s Media West ( which was also not having any financial capacity to lend such heavy amount of fund and this company being a front for Zee Group, the fund was ultimately to come from Zee Group) was made in such a manner that ultimately the shares of the company was to be sold to the lender or some outside agency by private placement and therefore, the Honb'le CLB canceled its earlier order giving option to the Agarwal Group to buy the shares of the Maheshwari Group by recording its observation in the said order dated 10.07.2006 that the terms of the MOU are so unrealistic, that no man of ordinary prudence, leave 94 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 alone a business person, would be convinced that it is pure and simple financial arrangement. Therefore, just on the basis of pledging of the shares with the lenders, it cannot be said that intention of the appellant was initially to buy the shares of the company as argued by the AO. Noticing the ulterior motive of the Agarwal Group, they were ordered by the Honb'le CLB vide its order dated 04.04.2006 to deposit their shares in Escrow Account. Under these facts and circumstances, argument of the Ld. AR that the financial arrangement through M/s Churu Trading Company Pvt. Ltd. was made in contravention to the terms of the CLB order under a plan of strategy to show that the Agarwal Group is interested in buying the shares to compell the Maheshwari Group to buy the shares at enhanced value, appears to be more credible because the end result of the proceedings before the CLB proves the strategy as explained by the Ld. AR. The whole strategy has been summarised by the Ld. AR in para no. 5 of his submission filed on 14.03.2011 and the same has been reproduced in para 8.4 of this order on page no.53 & 54. Therefore, payment made to M/s Churu Trading Company Pvt. Ltd. appears to be very much part of the strategy of the Agarwal Group to get the value of shares enhanced before these shares are sold. Since the shares of the Agarwal Group were pledged with lender (M/s Media West) that was arranged by M/s Churu Trading Company Pvt. Ltd. and it has also been admitted by the AO that these shares were pledged, therefore, the argument of the Ld. AR that the Maheshwari Group agreed to pay Rs. 22 crore extra so that the shares which were pledged as security with M/s Media West could be lifted and shares are sold to the Maheshwari Group and for this purpose the arranger M/s Churu Trading Co. was paid Rs. 8.5 crore as per the initial agreement despite its demand for 50% of the extra amount realized by the Agarwal Group, appears to be quite convincing and therefore, I find force in the argument of the Ld. AR that since because of intervention of M/s Churu Trading Co., the share value was further got enhanced by Rs. 22 crore, the payment made to M/s Churu Trading Co. amounting to Rs. 8.5 crore should be allowed to have been paid for transfer of shares.
12.10 For allowability of deduction u/s 48(i), both the AO as well as the Ld. AR have relied on a decision of Authority for Advance Ruling (AAR) in case of Compagnie Finance Hamon (2009) 310 ITR 1 (AAR) in which it has been held in para no. 15 of its order as under:
"15..................By reason of employing such a wide expression i.e., 'in connection with' ,something more than 95 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 what is attributable to the final act of transfer of shares is also admissible for deduction provided the intimate connection between the expenditure and the act of transferring shares is established.
For instance, if the services of legal or other professional extended to the process of valuation of shares or the participation in the deliberations that led to the settlement concerning the transfer of shares, the legal charges on that account will also be allowable as deduction.
We do not think, however, that the legal fees etc. paid to the lawyers for filing the petitions under sections 397 and 398 in the Company Law Board and for making appearance before the Board prior to the passing of final order giving green signal for the transfer of shares are admissible for deduction. In other words, the legal expenses for the initial period of dispute are not intrinsically linked with the transfer of shares and therefore it cannot be allowed as deduction............"
The operative part of the decision cited on previous page is divided in three parts shown under bold letter, which may act as guiding principle in the present case for deciding the allowability of any legal or professional expenses as deduction under section 48(i). However, in the above decision with the guiding principles as discussed in its para 15, the issue of allowability of expenses u/s 48(i) was left open for the AO to quantify the admissible amount and if the assessee is not in a position to furnish the details of expenditure towards professional fees to lawyers, the AO was asked to allow a reasonable amount towards this item. Considering the argument of the AO that the payment made to M/s Churu Trading Co. Pvt. Ltd. and other consultants for arranging the fund and preparation of CLB petition and appearing before the CLB for arguing the case of the appellant should not be allowed u/s 48(i), the allowability of deduction u/s 48(i) for payments made to these professionals and lawyers has been examined keeping in view the facts and circumstances of the case so far analysed in this para and the principles as laid down in para 15 of the order of AAR. My decision for allowability of deduction u/s 48(i) for each payment made to various Lawyers and Professionals is as under:
96 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 12.10.1 Payment of Rs. 8,50,00,000/- to Churu Trading Co. Pvt. Ltd.
Mumbai & Rs. 2,50,000/- to Rabo India Securities Pvt. Ltd., Mumbai Both these parties were engaged by the Agarwal Group for providing financial advisory services and assisting them to arrange funds to acquire shares of Majority Group in both companies.
In this process, the Agarwal Group first approached Rabo India Securities Pvt. Ltd. that acted as strategic and financial advisor to Agarwal Group for acquisition of shares and through this party as explained by the Ld. AR, they were introduced to the second party i.e. M/s Churu Trading Company Pvt. Ltd. that later played important role till the shares held by the Agarwal Group were sold instead of purchasing the shares of Majority share holder as per their strategy. As after M/s Churu Trading Company Pvt. Ltd. came into picture and were got involved in the formulation of the strategy of the Agarwal Group, role of M/s Rabo India Securities Pvt. Ltd. ended very soon and therefore, they were paid a nominal amount of Rs. 2,50,000/- on 01.02.2006 instead of a consideration of Rs. 5,00,000/- payable as initiation fees and 1% of Gross Transaction Value subject to a minimum of Rs. 3,00,00,000/- as success fees as per the agreement dated 10.01.2006 entered with them. This payment was made much before the date of the order of Honb'le CLB i.e. 10.07.2006, when the Maheshwari Group was ordered to purchase the share holding of the Agarwal Group and therefore, the argument of the Ld. AR in respect of the role of M/s Rabo India Securities Pvt. Ltd. cannot be accepted that it played any role in enhancing the value of shares before they are sold. My this view gets further strengthened by the fact that no success fees was paid by the appellant to M/s Rabo India Securities Pvt. Ltd. as per the agreement after final order was passed by the Honb'le CLB on 01.11.2006 in which the appellant succeeded as per his strategy. In view of the above facts and looking to the limited role played by this party in arranging financiers for the Agarwal Group in acquisition of shares and its exit at very initial stage, there was no chance for it to play any role in formulation of any strategy as explained by the Ld. AR, which compelled the Maheshwari Group to purchase shares from them at enhanced value fearing sale of the company to Zee Group at subsequent stage due to a financial arrangement made with its front company through another arranger i.e. M/s Charu Trading Company Pvt. Ltd. Therefore, in respect of the payment made to M/s Rabo India Securities Pvt. Ltd., I agree with the AO that the process initiated by Agarwal Group 97 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 for the acquisition and amount paid to Rabo India Securities Pvt. Ltd. was in no way connected with the process of transfer of shares and hence such expenditure cannot be considered as expense distinctly related and integrally connected with the transfer of shares. Applying the principle laid down by the Honb'le AAR in the case of Compagnie Finance Hamon(supra) also, the payment made to M/s Rabo India Securities Pvt. Ltd. would not be allowable as deduction u/s 48(i) because its services did not extend to the process of valuation of shares or the participation in the deliberations that led to the settlement concerning the transfer of shares. Therefore, I confirm the decision of the AO to disallow deduction of Rs. 2,50,000/- u/s 48(i) for payment made to Rabo India Securities Pvt. Ltd.
Similarly, during the process of acquisition of majority share holding of Maheshwari Group, the Agarwal Group also entered into another agreement with M/s Churu Trading Pvt. Ltd. that acted as arranger for arranging Rs. 252 crores to acquire majority shareholding in the companies. As per the terms of agreement dated 01.02.2006 with M/s Churu Trading Co. Pvt. Ltd, the Agarwal Group was to pay Rs. 8.5 crores as arranger fee to it for arranging the fund. The arranger fee was to become due on achieving the financial closure of Rs. 252 crores notwithstanding whether the Agarwal Group shall be able to draw down the arranged funds or not. In view of these terms of agreement with M/s Churu Trading, the main contention of the AO is that as M/s Churu Trading Co. was engaged to arrange the fund, payment made to them are for arranging the fund and not in connection with the transfer of shares and hence payment of Rs. 8.5 crore made to M/s Churu Trading Co. should not be allowed as deduction u/s 48(i). However, the Ld. AR explained during the appeal proceeding that the Agarwal Group went to the CLB under a strategy to get the value of shares of both the companies enhanced and freezed for which first they showed that they are interested in buying the shares knowing very well that they had no capacity to buy the shares held by the majority share holders (64.67%) and therefore, they made such financial arrangements which was in contravention of the conditions fixed by the CLB in its order dated 25.01.2006 to arrange finance in which M/s Churu Trading Co. helped them through M/s Media West and other Merchant Bankers. He further argued that because of this arrangement, the other party i.e. the Maheshwari Group got alarmed and they further moved to CLB to restrain the Agarwal Group to buy majority share holding and even agreed to pay Rs. 22 crore extra amount over and above the 35.33% of valuation of shares of Rs. 390 crore which comes to Rs. 138 crore and finally as per their strategy as explained 98 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 earlier, the Agarwal Group got Rs. 160 crore by selling their 35.33% of share holding. The Ld. AR argued that the excess realization of Rs. 22 crore could be made possible primarily with the intervention of the arranger i.e. M/s Churu Trading Co. He also argued that the Maheshwari Group agreed to pay Rs. 22 crore extra so that the shares which were pledged as security with M/s Media West could be lifted and shares are sold to the Maheshwari Group. For this purpose, the arranger M/s Churu Trading Co. demanded for 50% of the extra amount realized by the Agarwal Group but ultimately as per the initial agreement only Rs. 8.5 crore was paid. In view of the above background of the facts of the case, the Ld. AR argued that since because of intervention of M/s Churu Trading Co., the share value was further got enhanced by Rs. 22 crore, the payment made to M/s Churu Trading Co. amounting to Rs. 8.5 crore should be considered to have been paid for transfer of shares and hence should be allowed as deduction u/s 48(i).
In order to understand the nature of payment made to M/s Churu Trading Co., the agreement dated 01.02.2006 made with this party is produced as under:
" Further to our letter dated 20.01.2006 and subsequent meeting we had you, therein our have given us the copy of the Company Law Board Order dated January 25, 2006 recording the terms of agreement between you on one hand and Maheshwari Group on the other hand, to acquire 64.67% shares of Amar Ujala Publication Ltd. and A & M Publications Pvt. Ltd. (hereinafter referred to as Companies) held by Maheshwari Group for a consideration of Rs. 252 Crores.
We would like to state that we have carefully examined the said CLB Order dated January 25, 2006 and also sought legal advice to understand the various implications emerging out of the said order. We have arrived at conclusion that the proposal of acquiring 64.67% shares held by Maheshwari Group in the Companies, by Agarwal Group is a bankable proposition. However, it is important to bring to your kind notice that due to certain conditions of the order, which are restrictive or prohibitive in nature, the market appetite to this kind of lending would be affected.
With the background, we are agreeable to act as an arranger of arranging Rs. 252 Crores through syndication with Banks, Financial Institutions and others for the acquisition of 99 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 64.67% shares held by Maheshwari Group in the companies in terms of the Company Law Board order dated January 25, 2006 on the following terms and conditions:
• We as arranger shall arrange Rs. 252 Crores for Agarwal Group to acquire 64.67% equity shares of Amar Ujala Publication Ltd. and A & M Publications Pvt. Ltd. in term of the above referred order of the Company Law Board on such terms and conditions, which are not prejudicial to the Company Law Board Order dated January 25, 2006 and to be decided in consultation with Agarwal Group.
• We shall put our best efforts to ensure that the funds are arranged to be available on or before the due dates of payments as per the schedule of payment given in the CLB Order.
• Agarwal Group in consideration of arranging Rs. 252 Crores for the acquisition of 64.67% shares of the Companies shall pay Rs. 8.5 Crores (All Inclusive) towards Arranger fee to us. The Arranger fees shall be due on achieving the financial closure of Rs. 252 Crores not withstanding whether the Agarwal Group shall be able to draw down the arranged funds or not . It will be an all inclusive and non- refundable fees.
• The payment of the said fees shall be made to us within 30 days from the date of the acquisition of 64.67% shares held by Maheshwari Group by way of the transfer in the name of Agarwal Group or 31st December, 2006, whichever is earlier.
We hope, the above terms shall be acceptable to you. We shall appreciate your acknowledgement of the said letter by counter signing it as a token of your confirmation.
We look forward to work with you for facilitating your proposed acquisition."
As per the above agreement, arranger fees of Rs. 8.5 crore was to become due on achieving the financial closure of Rs. 252 crore (not withstanding whether the Agarwal Group draws down the arranged fund or not) and only after arranging the full fund of Rs. 252 crore, the arranger fees was to be paid within 30 days from the date of the acquisition of 64.67% 100 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 shares held by Maheshwari Group by way of the transfer in the name of Agarwal Group or 31st December, 2006, whichever is earlier. Thus it is very clear from this agreement that condition for payment of arranger fees was making of arrangement of full amount of Rs. 252 crore by M/s Churu Trading Co. and its payment was to be made irrespective of acquisition of 64.67% shares, if shares had been acquired, it should have been paid within 30 days from the date of the acquisition of these shares otherwise payment was to be made by 31st December 2006. With such terms in the agreement, the question of payment of such arranger fees would have arisen only when the fund of Rs. 252 crore was arranged. Such agreement is in form of a Contingent Contract as provided in the section 31 of the Indian Contract Act, 1872, which depends on happening or not happening of some event, collateral to such contract. In the present case, liability to pay the arranger fees by the Agarwal Group to the M/s Churu Trading Co Pvt. Ltd. would have arisen only in case of the event of arranging the fund of Rs. 252 crore had happened. But by the time M/s Churu Trading Co. Pvt. Ltd could arrange fund of Rs. 12.5 crore, the Honb'le CLB on the petition of the Maheshwari Group (filed fearing the suspected takeover by Zee Group as already discussed in detail in para 5.15) , passed an order dated 04.04.2006 deferring the payments of further installments and thereafter, vide order dated 10.07.2006 cancelled its earlier order of giving option to the Agarwal Group to purchase 64.67% shares and ordered the Maheshwari Group to purchase 35.33% shares of the Agarwal Group. After this order had been passed by the CLB, the condition for arranging the fund of Rs. 252 crore by M/s Churu Trading Co. as per the agreement dated 01.02.2006 was not possible to be fulfilled and hence in view of section 32 of the Indian Contract Act, 1872, this agreement became void and hence payment of arranger fees of Rs. 8.5 crore did not become due and therefore, liability for payment of such fees of Rs, 8.5 crore to M/s Churu Trading Co. for arranging the fund of Rs. 252 crore did not arise. However, Rs. 8.5 crore was still paid to M/s Churu Trading Co. and therefore, the question is as to for what services this payment was made. In the light of the facts and circumstances as discussed above, it is very clear that contention of the AO that Rs. 8.5 crore paid to M/s Churu Trading Co. is for arranging the fund of Rs. 252 crore is not correct. The AO has already accepted the formulation of strategy and allowed the payment of fees to Shri S.R. Halbe for this purpose and as per the facts of the case already discussed in this order in para 5 and 8, it is quite clear that M/s Churu Trading Co. played an important role in this strategy by which the Agarwall Group were ultimately able to sell their share holding at enhanced value. Therefore, I find force in the argument of 101 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 the Ld. AR that since because of intervention of M/s Churu Trading Co., the share value was further got enhanced by Rs. 22 crore, the payment of Rs 8.5 crore was made to M/s Churu Trading Co. on 15.11.2006 ( after final order dated 01.11.2006 was passed by the Honb'le CLB) as agreed earlier, though they demanded 50% of such extra amount realized by the Agarwal Group and therefore, payment of Rs. 8.5 crore should be allowed as deduction u/s 48(i) to have been paid for transfer of shares. Another argument of the AO that the payment made to M/s Churu Trading Co. includes interest on the fund arranged by it is also not found to be tenable as discussed in para 11.4. Taking into account all these facts and circumstances of the case, I find that participation of M/s Churu Trading Co. in the strategy formulated by the Agarwal Group helped them in the deliberations before the Honb'le CLB from 04.04.2006 onwards till final settlement on 01.11.2006 to realize Rs. 22 crore more sale consideration and ultimately led to finalizing the sale of shares by the Agarwal Group and therefore, I am of the considered view that the payment of Rs 8.5 crore made to M/s Churu Trading Co. should be allowed as deduction u/s 48(i) because as per the principle laid down by the Honb'le AAR in the case of Compagnie Finance Hamon(supra) also, such payments should be allowed as deduction u/s 48(i) being paid for services extended by it to the process of valuation of shares by helping the Agarwal Group during the participation in the deliberations before the Honb'le CLB that led to the settlement concerning the transfer of shares. Therefore, the AO is directed to allow deduction of Rs. 3,00,00,000/- u/s 48(i) for payment made to M/s Churu Trading Co. Pvt. Ltd. as part of the share of appellant out of total payment of Rs. 8.5 crore.
In view of my above decision, out of total disallowance of Rs.3,02,50,000/- made by the AO in respect of these two payments disputed in Ground no. 4, deduction for Rs, 3,00,00,000/- paid to M/s Churu Trading Co. Pvt. Ltd. is allowed and disallowance of deduction for Rs, 2,50,000/-paid to M/s Rabo India Securities Ltd. is confirmed and accordingly Ground No. 4 is partly allowed.
12.10.2 Payment of Rs. 2,24,24,000/- + Rs. 3,13,200/- to M/s S.R. Halbe & Associates, Mumbai:
A payment of Rs. 2,24,24,000/- have been claimed on account of fees paid to M/s S. R. Halbe and Associates, Mumbai for formulation of the strategy for filing petition before the CLB for protection of the interest of minority shareholders, appearance and attending the proceedings before CLB, 102 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 briefing the lawyers and attending the hearing before Hon'ble Allahabad High Court and Hon'ble Supreme Court, advising and drafting the terms of settlement in connection with transfer, holding discussions and conferencing with minority shareholders. The payment of Rs. 2,24,24,000/- is a lump-sum payment for the services rendered by M/s S.R. Halbe. The payment of Rs. 2,24,24,000/- has been accepted by the AO as incurred in connection with the transfer of shares and deduction of Rs. 78,56,800/- has been allowed u/s 48(i) being share of the appellant in the total payment of Rs. 2,24,24,000/- made to Mr Halbe because he found that there was no item-wise billing for various activities and the major portion of fee was attributable to the proceedings before CLB in connection with transfer of share,.
After having accepted that the payment of fees made to Shri Halbe was attributable to the proceedings before the Honb'le CLB in connection with transfer of shares, he disallowed the claim of the appellant for deduction of Rs. 3,13,200/- paid to Shri Halbe towards the reimbursement of traveling, lodging and boarding expenses which he claimed on account of incurring these expenditure while visiting Delhi in connection with proceeding before CLB. These expenses were disallowed by the AO giving his finding in the assessment order that such expenses do not find any place to be directly connected with transfer of shares of the Agarwal Group and the nature of expenses itself shows that it has nothing to do with transfer of shares and cannot be construed that such expenditure has been incurred wholly and exclusively in connection with the transfer of shares. As against this decision of the AO, in the Ground no. 5, the appellant has contended that when the fees paid to him is held to have been incurred in connection with the transfer of shares, other incidental expenses reimbursed to him in connection with proceeding before CLB should also be allowed. It has been argued by the Ld. AR that even per se the expenses of Rs. 3,13,200/- paid to Shri S.R.Halbe were in the nature of reimbursement and for logistics then they ought to have been allowed in particular when payments of fees made to him is held to have been incurred in connection with the transfer of shares by the AO. I also consider that once the AO has found that the services rendered b yShri Halbe was mainly related to the proceedings before CLB in connection with transfer of share and allowed the full fees paid to him for deduction u/s 48(i), there is no logic to deny the deduction for the reimbursement of incidental expenses on travelling, lodging, boarding etc., which he incurred while visiting Delhi in connection with the proceeding before CLB that was seized with the matter of settling the dispute between the Agarwal Group and the Maheshwari Group to decide as to how shares of one group is sold 103 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 to other group so that both companies under dispute remain in control of one Group only and the other Group gets best price on sale of their shares and ultimately it was decided that the Agarwal Group was to sell its shares to the Maheshwari Group at mutually agreed price. Considering this background of the proceedings before the CLB, the AO has already accepted the active role of Shri Halbe in these proceedings before the Honb'le CLB and allowed the fees paid to him considering that the fees paid to him was in connection with the transfer of shares and therefore, if any expenditure was incurred by him while visiting Delhi to attend these proceedings and the Agarwal Group reimbursed those expenses , they should also be allowed as being incurred in connection with the transfer of shares. As the full amount of these expenses being Rs. 3,13,200/ has been claimed by the appellant, AO is directed to allow deduction for Rs.3,13,200/- also u/s 48(i) and accordingly Ground No. 5 is allowed.
12.10.3 Payment of Rs. 44,22,400/- to Mrs. Bina Gupta, Advocate, New Delhi The AO has given his finding in the assessment order that the payment of Rs.
44,22,400/- was claimed to have been made to Smt. Bina Gupta as fee for preparation of petition, appearance before the CLB and fee for appearance before Hon'ble Allahabad High Court and Hon'ble Supreme Court including consultation from time to time in respect of transfer of shares. Out of total payment of Rs. 44,22,400/- made to Smt. Bina Gupta by all the members of Agarwal Group, the appellant's share of payment made to her is Rs.15,40,000/- . Out of the amount of Rs.15,40,000/- claimed by the appellant as deduction u/s 48(i) on account of payments made to Smt. Bina Gupta, it was noticed by the AO that certain expenses were incurred in cash on vouchers which are basically reimbursement of expenses related to traveling, lodging and boarding etc. totaling to an amount of Rs. 6,25,000/- and hence looking at the supporting bills, he concluded that such payments fell under the category of various miscellaneous accounts of logistic expenses which are not distinctly related and integrally connected with the transfer of shares and therefore, he held that Rs. 6,25,000/- is not admissible for deduction u/s 48(i). Disputing this disallowance, the appellant in Ground No.6 contended that all payments have been made wholly and exclusively in connection with the transfer of the capital asset and hence the addition made is liable to be deleted. In order to examine the allowability of deduction u/s 48(i) for payments made to Smt. Bina Gupta, the bill wise details of payments made to her is given as under:
104 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 Bill Date Details of Bill Amount Paid Date 04.04.2005 Retainer fees, drafting and finalizing Rs.1,00,000/- 04.04.2005 Companypetition, conference with clients and other advocates and appearance before CLB 26.06.2005 Contesting CLB order in Allahabad High Court Rs. 30,000/- 23.04.2005 16.07.2005 Drafting, filing SLP before SC and Rs. 50,000/- 06.10.2005 appearancebefore the court 05.10.2005 Fees for appearance before CLB on 26.09.2005, Rs.1,00,000/- 01.03.2006 27.09.2005, 30,09,2005 and 03.10.2005 30.05.2005 Fees for conference with other advocates and Rs. 85,000/- 05.02.2006 appearance before CLB on 25.07.2005 and 26.07.2005 29.08.2005 Fees for engaging Sudipto Sarkar to appear before Rs. 75,000/- 23.03.2006 CLB on 24.08.2005 including conference 06.10.2005 Fees for engaging Sudipto Sarkar to appear before Rs. 75,000/- 23.03.2006 CLB on 03.10.2005 including conference 27.01.2006 Fees for appearance before CLB on 17.01.2006, Rs. 50,000/- 05.04.2006 24.01.2006 and 25.01.2006 29.07.2005 Fees for engaging Sudipto Sarkar to appear before Rs.1,00,000/- 12.07.2006 CLB on 25.07.2005 including conference 01.08.2006 Lump-sum payment made on finalization of CLB Rs.8,75,000/- 03.02.2007 case after settlement including working as escrow agent Rs.15,40,000/-
Looking to above details of the bills, it is clear that while disallowing, Rs.6,25,000/- out of above expenses, the AO has wrongly held these bills as raised only for travelling, lodging, boarding and other logistics while ,it can be seen from the above chart that these bills were mainly raised by Smt. Bina Gupta in connection with the proceedings before the CLB after petition u/s 397 & 398 of the Companies Act was filed before it. Looking to the facts of the case as discussed in detail in para 5 of this order , initially when petition was filed before the CLB, the Agarwal Group mainly wanted the publication business being partitioned among the family members as per the initial agreement arrived between them on 02.12.2004 but only after many rounds of hearing before the CLB, it became clear that partition of the publication business is not possible, a compromise was reached before the CLB that one group has to go out and the outgoing group would sell their share holding at the best possible value of shares and thereafter order dated 25.01.2006 was passed by the CLB giving first option to the Agarwal Group to buy shares and therefore, if any strategy was formulated by the Agarwal Group for enhancing the value of shares, it would have come into play only after this date and hence all the payments to parties involved in this strategy 105 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 was made after final settlement and passing of final order by the CLB on 01.11.2006 allowing the Agarwal Group to sell their shares at mutually agreed price of Rs.160 crore which was enhanced by Rs.22 crore than the original valuation of Rs. 138 crore and thus the Agarwal Group succeded in his strategy with the help of those parties who were paid after this settlement such as Mr. S.R. Halbe, M/s Churu Trading Co. Pvt Lt., Mr. Dayal Saran. Other than these three parties, if Mrs. Bina Gupta had played any role in this strategy, such role would have been played by her only after 25.01.2006 and finally she also acted as agent for escrow account for making payout to all members of the Agarwal Group as well as transferring the shares received from the Agarwal Group in the escrow account to the Maheshwari Group. The payment of Rs.8,75,000/- has been made on 03.02.2007 after final settlement and clearing all payments and transfer of shares from escrow account. Therefore, payments of Rs. 8,75,000/- is allowable as deduction u/s 48(i) being in connection with the transfer of shares as rightly allowed by the AO, though nothing has been discussed in the assessment order while accepting the claim of the appellant in respect of the amount of Rs. 8,75,000/-. Other payments totaling to Rs. 6,65,000/- has been paid to Mrs. Bina Gupta in the initial stage of CLB proceeding in connection with preparation of petition , appearing before the CLB , engaging other lawyers for consultation and making appearance before the CLB and also to contest the case of the Agarwal Group before the High Court and the Supreme Court and these payments were mainly made in connection with protecting the minority rights of the Agarwal Group u/s 397 and 398 of the Companies Act and to argue their case for partitioning of publication business among the family members. Such payments to Smt. Bina Gupta had nothing to do with the transfer of shares as held by the Honb'le AAR in case of Compagnie Finance Hamon(supra),that such legal fees etc. paid to the lawyers for filing the petitions under sections 397 and 398 in the Company Law Board and for making appearance before the Board prior to the passing of final order giving green signal for the transfer of shares are not admissible for deduction. Since final decision for transfer of shares from either of two groups was taken in the CLB order dated 25.01.2006, any payment made to Smt. Bina Gupta for the bills raised for her services on or prior to this date would not be allowable as deduction u/s 48(i). Sum of such payments comes to Rs. 6,65,000/- on adding all bills of Smt. Bina Gupta raised for services rendered on or before 25.01.2006 and listed in the chart shown on page no.90 & 91 of this order. In the assessment order, the AO has not given any computation as to how he arrived to the amount of disallowance of Rs. 6,25,000/- and since after adding all the bills for which 106 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 deduction u/s 48(i) cannot be allowed, it comes to Rs. 6,65,000/- , AO is directed to disallow deduction u/s 48(i) for Rs. 6,65,000/- instead of Rs.6,25,000/- in respect of payment made to Smt. Bina Gupta. Therefore, Ground no. 6 is dismissed and amount of disallowance is enhanced from Rs. 6.25,000/- to Rs. 6,65,000/-. Though no specific notice for enhancement of this disallowance was given to the appellant but in the hearing held on 29.03.2011, the Ld. AR was told that for other payments made to consultants, only that payment would be allowed which is paid in connection with transfer of shares and not for making petition to be filed before the Honb'le CLB and appearance before CLB and for this purpose, the Ld. AR was required to submit the chart of bill-wise payment made to each consultant giving purpose of payment. While submitting such chart, it was submitted by the Ld. AR that Smt. Bina Gupta was appointed as escrow agent by the Company Law Board and her professional services were involved in the transfer of the shares which are included in the payments made to her. The total consideration realised by the assessee on the transfer of shares is Rs. 160 crores and at least the payment made to Smt. Bina Gupta which has been allowed by the Assessing Officer be treated as "expenses in connection with transfer" since they can reasonably be attributed to the professional charges for escrow agent. Since, there was no specific discussion made by the AO in the assessment order to allow the payments made to Smt. Bina Gupta and only an amount of Rs. 6,25,000/- was mentioned for disallowance without giving any computation, I made the computation of allowable payments and disallowable payments as mentioned above on the basis of the principle laid down by the Honb'le AAR in the case of Compagnie Finance Hamon(supra) relied upon by both the AO as well as Ld. AR and I find that it would be appropriate to disallow deduction for Rs. 6,65,000/- and allow deduction for Rs. 8,75,000/- out of total claim of Rs.15,40,000/- made in respect of payments made to Smt. Bina Gupta.
12.10.4 Payment of Rs. 1,50,000/- to Mr. Sudipto Sarkar, Advocate The appellant has claimed to have made payment of Rs. 1,50,000/- to Mr. Sudipto Sarkar, Advocate on account of appearance fees before the CLB on 17.01.2006, 24.01.2006 and 25.01.2006. The AO noted on perusal of orders of CLB that Shri Sarkar appeared on behalf of Agarwal Group during the acquisition process of majority shareholding of Maheshwari Group on behalf of petitioners (Agarwal Group). The consolidated payments also included expenses on account of logistic provisions and therefore he 107 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 held that such expenses are not distinctly related to and integrally connected with the transfer of shares and hence, it cannot be treated as the expenses incurred wholly and exclusively in connection with transfer of shares. Therefore, he did not allow deduction for payment of this amount u/s 48(i) of I.T.Act. The appellant disputed this disallowance contending that the AO has ignored the fact that acquisition of shares was strategy only to enhance the valuation of the companies. The payment has been made exclusively in connection with the transfer of the capital asset and the appellant prayed for deletion of this addition.
After taking into account all the facts of the case so far discussed in this order in para no. 5, 8 ,11 and from 12.1 to 12.9, I find that all the persons who helped the Agarwal Group to achieve their ultimate aim of selling the shares at best price remained involved in the whole process till the final order dated 01.11.2006 was passed by the Honb'le CLB ordering the Maheshwari Group to pay Rs. 155 crore as sale consideration of shares purchased by them from the Agarwal Group , out of total mutually agreed sale consideration of Rs. 160 crore because, Rs. 5 crore was already paid in advance. These persons who formed the strategy or helped the Agarwal Group in this strategy to achieve the ultimate aim were Shri S.R. Halbe, M/s Churu Trading Company Pvt. Ltd. and Shri Dayal Saran and therefore, final payments were made to them after the strategy formed by them was succeeded and shares of the Agarwal Group were sold as desired by them after receiving the enhanced sale proceeds and therefore payments made to them was found to be in connection with transfer of shares and allowed as deduction u/s 48(i) by me. Smt Bina Gupta also contributed partly in transfer of shares being appointed as escrow account agent and hence payment made to her in respect of this service was allowed as deduction u/s 48(i). It has also been found from the facts of the case that initially the aim of the Agarwal Group was to get the publication business of the family partitioned among all the family members of both Groups as per their agreement arrived on 02.12.2004 ( which was not honoured by the Maheshwari Group) and therefore, for protecting their right being minority shareholder, they went to CLB u/s 397 and 398 and only after series of hearing before the CLB when it became clear that such partition of publication business was not possible, they possibly made a strategy to get the value of shares enhanced before selling them. In this formulation of strategy, role of M/s Rabo India Securities Ltd., Smt. Bina Gupta (to the extent of preparation of CLB petition and appearing before the CLB for hearing till the date Agarwal group was contesting for partition of 108 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 publication business and acquisition of majority share holding) and Shri Sudipto Sarkar, advocate (for appearing before the CLB for hearing relating to acquisition of shares) was limited and they do not appear to be part of the strategy of the Agarwal Group and therefore, their payment with respect to their apparent services was settled much before the final order was passed by the Honb'le CLB because since they were not part of the strategy, they did not wait till its success and they only received the payment for the services for which they were engaged. On looking to the bill of the Sudipto Sarkar, it is clear that he was paid Rs. 1,50,000/- for appearing before the CLB on 17.01.2006, 24.01.2006 and 25.01.2006 in which he argued the case of the Agarwal Group for acquisition of majority share holding and since not being part of the strategy of the Agarwal Group (that they were not interested in acquisition of shares but ultimately wanted to sell the shares by enhancing their value by creating actions and drama to show that they are interested in acquiring the shares of the majority shareholders with the help of such concern which was front for Zee Group and hence trying to create a fear in the mind of the Maheshwari Group that company may go in the hand of Zee Group and compelling them to agree for purchasing their share holding at a higher sale consideration), he only received his fees on 02.04.2006 for his appearance before the CLB for proceedings relating to acquisition of shares and did not wait for the final outcome of the strategy formulated by the Agarwal Group. Therefore, I agree with the AO that such payments made to Shri Sudipto Sarkar are not distinctly related to and integrally connected with the transfer of shares and hence, it cannot be treated as the expenses incurred wholly and exclusively in connection with transfer of shares. As per the principle laid down by the Honb'le AAR in the case of Compagnie Finance Hamon(supra) also, such expenses are not allowable for deduction u/s 48(i) because this payment is in the nature of legal fees paid to a lawyer for making appearance before the Company Law Board prior to the passing of final order giving green signal for the transfer of shares. Therefore, I confirm the disallowance of deduction u/s 48(i) made by the AO for Rs. 1,50,000/- paid to Shri Sudipto Sarkar. Accordingly Ground no. 7 is dismissed.
12.10.5 Payment of Rs. 10,00,000/- to Mr. Dayal Saran, Advocate, Agra A consolidated payment of Rs. 10,00,000/- (Rs. 5,00,000/- each by Ajay Agarwal family and Kamlesh Agarwal family) has been shown as fee for consultation taken from time to time in respect of the transfer of shares.
109 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 The AO has discussed in the assessment order that there is no evidence which can corroborate that any legal services have been extended in the process of valuation of share or in the process of compromise concerning the transfer of shares. In his view such a legal expense does not find any place that they are intrinsically linked with the transfer of shares and therefore, he held that it cannot be allowed as deduction u/s 48(i). In ground no. 8, the appellant has disputed this disallowance contending that the AO has ignored that the bill of Shri Dayal Saran filed amply proves that the payment has been made wholly and exclusively in connection with the transfer of the capital asset and therefore the addition made is prayed to be deleted. I have gone through the bill of Shri Dayal Saran and find that in the bill, it is clearly written that this bill was raised for charging the fees for consultation in respect of the transfer of shares including travel and other out of pocket expenses for visiting Delhi from time to time. Case of the AO is not that this payment is not made. He also could not prove, if this payment is not made for the consultation in respect of the transfer of shares, then what were other possible services for which this payment could have been made by the appellant to him. From the facts of the case, it is very clear that Shri Dayal Saran being a Chartered Accountant was associated with the Agarwal Group since the beginning of the dispute and therefore, his contribution in settling the dispute till a compromise was reached between both Groups and final order was passed by the Honb'le CLB on 01.11.2006 for sale and transfer of shares of the Agarwal Group, cannot be denied and therefore, his payment was settled only after passing of final order by the Honb'le CLB giving green signal for the transfer of shares similar to Shri S.R. Halbe and therefore, in my considered opinion payment made to Shri Dayal Saran is also allowable for deduction u/s 48(i) on the basis of bill raised by him being for the services provided for consultation in respect of the transfer of shares unless any contrary finding is given by the AO , which he has failed to bring on record in the assessment order. Therefore, the AO is directed to allow deduction for Rs. 5,00,000/- u/s 48(i) being half portion of the payment made to Shri Dayal Saran and claimed by the appellant in the return of income. Accordingly Ground no. 8 is allowed.
12.11 In view of my decision for Ground no.4 to Ground no. 8 discussed in previous sub-paras, certain disallowance made by the AO are deleted and certain disallowances were confirmed/enhanced as presented below in a chart:
110 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 Sl. Name of Lawyer/ Amount Amount Amount No. Professional to whom disallowed by allowed in confirmed/enhanced payment was claimed the AO (Rs.) appeal (Rs.) in appeal (Rs.)
1. M/s Rabo India Securities 2,50,000/- - 2,50,000/- Pvt. Ltd.
2. M/s Churu Trading 3,00,00,000/- 3,00,00,000/- - Company Pvt. Ltd.
3 Shri S.R. Halbe 3,13,200/- 3,13,200/- -
4. Smt. Bina Gupta 6,25,000/- - 6,65,000/-
5. Shri Sudipto Sarkar 1,50,000/- - 1,50,000/-
6. Shri Dayal Saran 5,00,000/- 5,00,000/- -
TOTAL 3,18,38,200/- 3,08,13,200/- 10,65,000/-
In view of above details relating to allowance/disallowances of various expenses claimed as deduction by the appellant u/s 48(i), out of total disallowances of Rs. 3,18,38,000/0 made by the AO , the disallowance of Rs. 10,25,000/- ( 2,50,000/-+ 6,25,000/- + 1,50,000/-) is confirmed and further enhanced by Rs. 40,000/- as discussed in para 12.10.3 and therefore total disallowance of deduction u/s 48(i) comes to Rs. 10,65,000/- and therefore, the appellant gets a net relief of Rs. 3,07,73,200/-.
12.12 While deciding the grounds of this appeal relating to allowance of deduction u/s 48(i) in respect of payments made by the appellant to various lawyers and professional as discussed in previous sub-paras, I have considered all case laws cited by the AO as well as the appellant but the facts of none of the case laws was found in conformity with the facts of the case of the appellant except the case of Compagnie Finance Hamon (2009) 310 ITR 1(AAR) to some extent. Both the AO as well as the Ld. AR has relied upon this case law to support their arguments. After going through this decision, I have also decided the appeal of the appellant on the basis of the principles laid down by the Honb'le Authority for Advance Ruling in this case as discussed in para no. 12.10 of this order.
13.1 In Ground no. 9, the appellant has taken another plea for allowaning deduction for expenses u/s 48(i) contending that the appellant falling under "Agarwal Group" had realized Rs. 22 Crores over and above the compromised amount of Rs. 138 Crores as per the order of the Hon'ble Company Law Board totaling to Rs. 160 Crores, the excess included the cost of the reimbursement of expenses and hence these expenses should be allowed. In support of this ground, in the written submission filed on 15.10.2010, it was submitted by the Ld. AR that final value of shares fixed by 111 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 the Company Law Board, Principal Bench, New Delhi for the minority group of shareholders was Rs. 138 Crores. To avoid dispute, purchase peace both the family groups finally agreed and settled value of shares at Rs.160 Crores considering that minority group actually incurred expenditure in relation to capital asset. Therefore, in the alternative, it is hereby claimed that net consideration accruing/finally received be considered as reduced by such expenditure wholly and exclusively incurred in connection with the transfer as envisaged in Explanation 5 to Section 54E of the Income Tax Act, 1961. Accordingly even otherwise the Ld. AR argued that the amount of expenses incurred and claimed against capital gain is allowable against the gross receipts on transfer of shares and the remaining amount left, attracts the capital gain tax liability. He also contended that it would also be appreciated that the major part has been assessed in the hands of the recipients. I have considered this plea of the appellant also. In Explanation 5 to section 54E for computation of net consideration also, only those expenditure are reduced from the value of sale consideration, which are incurred wholly and exclusively in connection with the transfer of a capital asset and this provision in respect of claim of deduction for expenses are similar to the provision of section 48(i) which have already been considered by me while deciding the Grounds from 4 to 8 in previous para and hence no separate decision is required on this Ground. Therefore, for statistical purposes, this Ground may also be treated as partly allowed.
13.2 While filing rejoinder to the remand report of the AO, the Ld. AR took alternative plea that there is no doubt that the expenditure incurred alternatively can be considered admissible under section 57(iii). In his view, there is in fact nothing in the language of section 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. He further contended that the plain natural construction of the language of section 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. As out of total disallowance of Rs.3,18,38,200/-, I have already allowed expenses of Rs. 3,07,73,200/- and only balance amount of Rs. 10,65,000/- is held to be disallowable u/s 48(i) and therefore, in view of above plea of the appellant, I have again examined whether the remaining expenses of Rs. 10,65,000/- can be allowed u/s 57(iii) or not. The only argument taken by the Ld. AR for allowing deduction u/s 57(iii) is that expense under this section should be allowed, whether any income has been earned or not. Irrespective of earning of any income, for claiming deduction u/s 57(iii), 112 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 there should be any source for earning income against which any expense is incurred. As per the details of expenses of Rs.10,65,000/- disallowable u/s 48(i) available in the chart in para no. 12.11, these expenses are incurred on the fees of lawyers for protecting right of minority share holders and for paying initiation fees to a consultant to arrange financier. By protecting the right of minority share holder and by paying initiation fees for arranging financier to buy shares, only source for earning income as dividend income is being protected and for earning of dividend income being exempted from the tax, no expense is allowable as per the provisions section 14A, therefore, the remaining expenses of Rs. 10,65,000/- cannot be allowed u/s 57(iii) in view of provisions of section 14A. Another plea of the Ld. AR to allow such expenses as short term capital loss is also not found to be tenable as discussed in para no. 11.2 (pg 67). Therefore, both pleas taken by the Ld. AR for allowing the balance expense of Rs. 10,65,000/- in other provisions of the Income-tax Act, 1961 is rejected.
14.1 In Ground no. 10, it is contended by appellant that the AO has erred on facts and in law in ignoring that the consideration received by him is in pursuance to family settlement towards an amicable settlement of the disputes and the same is not a transfer and taxable under the head 'Capital Gains'. Further in view of the appellant the definition of family given in the explanation to section 10(5) of the Income Tax Act'61 as taken by the AO in the assessment order is for a limited purpose only. In support of this ground in the written submission filed by the Ld. AR on 15.10.2010, he contended that the section 10(5) applies to leave travel concession or assistance received by a person and hence this definition of family is for a limited purpose only. He also referred to a decision of the Supreme Court in the case of M.N. Arumurthy vs. M.L. Suvvrayia Setty AIR 1972 SC 1279, narrating the salient features of a family settlement in the following words:
i) There must be an agreement amongst the various members of the family intended to be generally and reasonably for the benefit of the family.
ii) The agreement should be with the object, either of compromising doubtful or disputed rights, or for preserving the family property, or the peace and security of the family by avoiding litigation, or for saving its honour.113 ITA Nos.405,348,349,404,406,407&
466/Agr/2011 A.Ys. 2007-08
iii) Being an agreement, there is consideration for the same, the consideration being the expectation that such an agreement or settlement will result establishing or ensuring amity and goodwill amongst the relations.
By citing the above decision of the Honb'le Supreme Court, the Ld. AR argued that family is not to be understood in narrow sense; common tie of relations is enough. There should be a legal claim as member held in Krishna Biharilal vs. Gulabdas AIR 1971 SC 1041.
14.2 By citing the above decision of the Honb'le Supreme Court, it was submitted by the Ld. AR that if the consideration received by the assessee is taken in pursuance to family settlement then the same does not involve transfer as held in the case of Ram Charan Das vs. Girja Nandini Devi AIR 1965 SC 323, wherein it was held that the transaction of a family settlement entered into by the parties who are members of a family bona fide with the object to put an end to disputes among themselves is not a transfer, and that it is also not the creation of an interest. In a family settlement, each party would take a share in the property by virtue of the independent title which is admitted to the extent of the other party. Every party who takes benefit under it , need not necessarily be shown to have under the law, a claim to a share in the property. All that is necessary to show that the parties are related to each other in some way and have a possible claim to the property or even a semblance of a claim on some other ground, as affection. It is further argued that in the matter of taxation, the family arrangements have been held not to give rise to any liability to capital gains tax as held in CIT vs. R Ponnanmmal (1987) 164 ITR 706 (Mad), CIT vs. A.L. Ramanathan (2000) 245 ITR 494 (Mad) and CIT vs. Kay Aar Enterprises (2008) 299 ITR 348 (Mad) to hold that no liability to capital gains tax would be attracted on account of change in share holding and control as a result of family arrangement/settlements being implemented to effectuate the same. It is thereby claimed by the Ld. AR that gain of Rs. 50,85,60,103 which has been shown under the head "Income from Capital Gains" is not taxable, and prayed that the same be held accordingly.
In the end of the submission, it is submitted by the Ld. AR that the claim in respect of family settlement arose for the first time during the course of the assessment proceedings on the pretext of the learned Assessing officer and it was the assessee who himself had shown the amounts under the head long term capital gains and had paid tax there on.
114 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 14.3 It is not understood as to why this ground was raised in appeal when the appellant himself offered the capital gain arising on sale of shares for taxation and also paid the full tax considering that his case is not of family settlement. Even if the AO has raised this issue during the course of assessment proceeding, this issue was conclusively dealt by him in the assessment order and there was no need for raising this issue further in appeal to plead that income offered by the appellant under the head "Income from Capital Gains" is not taxable when this income was offered by him voluntarily for taxation. However, since the appellant has raised this issue during appeal, I have dealt with the Ground no. 10. In the assessment order, the AO has dealt with this issue in para no. 9 and finally he has also given finding in para no. 10 of the assessment order that the assessee himself by considering the applicability of provisions of section 45 have offered the gains under the head long term capital gain, there is no doubt that the consideration received on transfer of share holding by the assessee is taxable as capital gain.
14.4 In the Ground taken before me, the appellant has disputed the definition of family taken by the AO given in the provision of section 10(5) contending that this definition is for a limited purpose for claiming exemption from taxation of amount received on account of leave travel concession and further arguing that family settlement should be taken in wider sense in view of various Courts decision including Honb'le Supreme Court. Instead of going into the dispute of the definition of family applicable in this case, I have examined whether on the facts of this case, the compromise under which shares of the Agarwal Group was sold to the Maheshwari Group can be regarded as family settlement in view of case laws cited by the Ld. AR. While citing the case law of Ram Charan Das vs. Girja Devi AIR 1965 SC 323, the Ld. AR has discussed in the written submission that in a family settlement, each party would take share in the property by virtue of the independent title which is admitted to the extent of the other party. In the present case, the property being two companies, the appellant has not got any share in the company but he has to sell his shares in the company to exit from the company. Had there been any partition of the publication business being run by both companies as per the agreement dated 02.12.2004 between both Grous for which petition u/s 397 and 398 of the Companies Act was filed by the appellant along with other members of the Agarwal Group, such partition of business would have come under the purview of the term 'family settlement'. The directions of the Honb'le CLB contained in the order dated 01.11.2006 passed after a compromise was 115 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 reached between both groups for sale of shares by the Agarwal Group to the Maheshwari Group, it is very clear that the compromise arrived between two groups was not a family settlement but the Agarwal Group exited from both publication companies earlier being controlled by both Groups by selling their share holding and receiving the best price as per the strategy formulated by them. The following two directions clearly shows that after this order, both companies went into exclusive control of the Maheshwari Group and the Agarwal Group ceased to have any role in these two companies after they got price of their share on sale/transfer of these shares to the Maheshwari Group. They are:
"3. The respondents (Maheshwari Group) are at liberty to manage the affairs and shareholding of the company in any manner without any interference by the petitioners' group
4. The petitioner's group (Agarwal Group) shall cease to remain either as shareholder/s office bearer/s or director/s of the company and shall have no concern whatsoever with the company."
All the members of the Agarwal Group (including the appellant) were conscious of this fact that there was no family settlement in the final order dated 01.11.2006 of the Honb'le CLB and as per their strategy, they have extracted best price of their shares by selling them to the Maheshwari Group and therefore, they consciously computed LTCG on sale of these shares and paid taxes and accordingly showed this LTCG in their return of income. Now it appears, the appellant is raking up this issue only because the AO during the assessment proceeding raised a query relating to family settlement. Despite this issue was settled by the AO in the assessment order, the appellant has still continued this dispute in appeal before me ignoring the fact that he himself has voluntarily declared the capital gain on sale of these shares and paid the tax. Such approach of the appellant is not acceptable considering the fact that the order of the CLB passed in this regard is not for family settlement but to resolve a dispute between two warring factions controlling two publishing companies and the same was settled by exit of one Group i.e. the Agarwal Group to whom the appellant belongs, by selling their shares on getting a decent price after negotiation. Therefore, the contention raised by the appellant in Ground no. 10 for exempting the capital gain declared by him from taxation terming it as 116 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 earned on account of family settlement is not found to be tenable at all and hence dismissed. Accrdingly Ground no. 10 is dismissed.
15. In Ground no. 11, the appellant has raised another issue that receipt of the consideration by virtue of loss of source of income and livelihood is a capital receipt and is not liable to be taxed under section 4 of the Income Tax Act'61 and by ignoring this fact, the AO has erred on facts and in law. This Ground also appears to have been taken by the appellant just to enter into unnecessary litigation as the previous ground was taken when he himself has voluntarily offered the capital gain earned by him on sale of shares and in the assessment order the AO has also clearly discussed that there is no loss of livelihood to the appellant after sale of shares of his previous company because he started another publishing company in Agra by using the money received by him on sale of shares of previous companies. At one place the appellant has argued that it formulated a strategy to realize the best price on sale of shares, which shows his intention to sell the shares of the company and at other place he is saying that by selling these shares, he lost his source of livelihood. Both the arguments cannot hold good together because shares held by him in the company was his long term capital asset and by selling this capital asset, a long term capital gain was earned by him and therefore, he declared this capital gain in his return of income and also paid the tax. Therefore, in my opinion after declaring this income and paying tax voluntarily, raising of such ground at appellate level that the receipt on sale of shares is capital receipt in view of loss of livelihood is a futile exercise. In support of this ground, the Ld. AR relied on a decision of Honb'le Supreme Court in the case of Oberoi Hotel P Ltd. vs. CIT (1999) 236 ITR 903 (SC) wherein it has been held that where certain amount was received because the assessee had given up its right to purchase and /or operate certain hotel and it was loss of source of income to the assessee, amount received by assessee would be capital receipt and therefore, it was argued by him that the transfer of shares pursuant to the settlement between the family groups is a capital receipt not liable to tax. In the case law cited by the Ld. AR, the assessee was running a hotel on contract, which was sold by its owner and on sale of the hotel, compensation was paid to the assessee. Since on sale of hotel, the assessee lost source of its income which it was receiving on running of hotel in form of fee, the Honb'le Supreme Court held the receipt of compensation as capital receipt because the amount received by the assessee was in form a compensation on losing its right to run the hotel. In the present case, what the appellant has received is not a compensation on leaving the company but he has received 117 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 the sale consideration on sale of shares held by him in the company and for receiving the best price, he also formulated a strategy compelling the other group to pay the best price. Therefore, the amount received by the appellant in this case is the sale consideration of shares and not a compensation for leaving the company and hence such amount received by the appellant cannot be said to be capital receipt but received on sale of a capital asset being in form of shares and hence for sale of this capital asset, he would be liable for capital gain and therefore, knowing all these facts of his case, he consciously declared capital gain earned by him and paid taxes. Now, raising the issue of considering this receipt as capital receipt in appeal is not found to be tenable when this issue has already been rejected in the assessment order on the ground that the appellant has voluntarily declared the capital gain and paid the tax and also looking to the nature of receipt as discussed above, the receipt on sale of shares cannot be said to be capital receipt. Therefore the Ground no. 11 is dismissed."
16.1 In ground no. 13, the appellant has disputed levy of interest u/s 234C amounting to Rs. 19,89,621/- contending that he was prevented by sufficient cause to deposit the second installment of the Advance Tax on or before 15.12.2006 on account of non availability of notified bonds specified as "Long term Capital Asset" in terms of section 54EC of the Income Tax Act'61 and hence the interest charged is to be liable to be deleted/reduced. In support of this ground in the written submission filed on 15.10.2010, it was argued by the Ld. AR that during the course of the assessment proceedings, it was submitted that when the long term capital gains arose, the assessee was under rightful obligation to save tax liability by investing the same in notified bonds for claiming exemption under section 54EC of the Income Tax Act'61. Vide CBDT Notification No. 142 of 2006 dated 29.06.2006, the bonds issued by NHAI were specified as 'Long Term Capital Asset' and vide CBDT Notification No. 143 of 2006 dated 29.06.2006, the bonds issued by REC were specified as 'Long Term Capital Asset' for the purposes of Section 54EC of the Income Tax Act, 1961. However, after the date of sale i.e., 03.11.2006, there were no such bonds available. The CBDT vide Notification No. 380 of 2006 dated 22.12.2006 provided a condition of capping such bonds to Rs. 50,00,000 and hence the assessee was precluded from making complete investment and save his tax liability as originally envisaged under section 54EC as will be evident with reference to the correspondence filed. Thus the assessee was prevented by sufficient cause from depositing the second instalment of the advance tax.
118 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 16.2 I have considered the above submission and I find that the appellant became aware of the capital gain accruing to him after the order of the Honb'le CLB was passed on 01.11.2006 well before the due date of the instalment of advance tax due on 15.12.2006. As far as the bonds to be specified for 54EC was concerned, it was notified well in advance on 29.06.2006 before the date of accruing of capital gain to the appellant on 01.11.2006 , the date on which the order of the CLB was passed. If by subsequent notification, investment in bonds was caped at Rs. 50,00,000/- , it cannot be said to be sufficient reason for paying short advance tax by the appellant. Had the appellant made the investment of full amount of capital gain in REC bond before 22.12.2006, thinking that the whole amount would be exempted without any knowledge of its capping subsequently, his case would have been on stronger footing for arguing that he was prevented by the reasonable cause to pay advance tax correctly in time but the appellant made the said investment on 17.03.2007 and accordingly paid the advance tax in the month of March 2007. Therefore, in my opinion there was no reasonable cause for the appellant for delaying payment of advance tax by him and hence he is liable for paying interest u/s 234C. It has also been held by the Honb'le Supreme Court in the case of CIT vs. Anjum M.H. Ghaswala & Ors 252 ITR 1 (2001)(SC) that word " shall" occurring in section 234A, 234 B and 234C indicate clear mandate of charging interest for defaults. The decision of the Honb'le Supreme Court in this case relating to charging of interest in these sections is reproduced as under:
" The expression 'shall' used in the sections 234A, 234B and 234C cannot by any stretch of imagination be construed as 'may'. There are sufficient indications in the scheme of the Act to show that the expression 'shall' used in sections 234A, 234B and 234C is used by the Legislature deliberately and it has not left any scope for interpreting the said expression as 'may'. This is clear from the fact that prior to the amendment brought about by the Finance Act, 1987, the Legislature in the corresponding section pertaining to imposition of interest used the expression 'may' thereby giving a discretion to the authorities concerned to either reduce or waive the interest. The change brought about by the Amending Act (Finance Act, 1987) is a clear indication of the fact that the intention of the legislature was to make the collection of statutory interest mandatory."119 ITA Nos.405,348,349,404,406,407&
466/Agr/2011 A.Ys. 2007-08 16.3 In view of above decision of the Honb'le Supreme Court, it is very clear that charging of interest u/s 234A, 234B and 234C is mandatory and no discretion is left to the assessing authorities to reduce or waive these interest considering any cause which prevented the assessee to pay the advance taxes correctly or file the return late. However, Chief Commissioners of Income-tax have been given power by the Central Board of Direct Taxes to reduce or waive such interest under certain condition. But the assessing authority under no condition can decide to waive or reduce charging of interest under these sections, if the assessee is at default in paying the advance taxes or filing the return late. It has already been discussed by me that the appellant was at default in not paying the advance tax on 15.12.2006 despite the capital gain has accrued to him well before this date. The interest u/s 234C would be computed by the AO after determining the final assessed income after giving effect to this appeal order However, as far as the ground no 13 challenging the levy of interest is concerned, it is dismissed."
8. We have heard the ld. Representatives of the parties. The assessee claimed expenditures under section 48(i) of the Act in calculation of long term capital gain.
The CIT(A) partly allowed assessee's claim, therefore, both assessee and Revenue are in appeal before us. The summary of disputed amount in case of Shri Ajay Agarwal through various grounds of appeal are as under:-
Particulars Claimed Disallowed by AO Disallowed by CIT(A) Revnue's Assessee's Ground Ground of of Appeal Appeal Para Page Para Page Ajay Agarwal Churu Trading 3,00,00,000 3,00,00,000 12.1 16 Nil 12.10.1 86-88 G No.1 -- Co. P. Ltd.
S.R. Halve, 78,56,800 Nil Nil 12.10.2 88-90 -- --
Advocate
S.R. Halve, 3,13,200 3,13,200 12.2 16 Nil G.No.2 --
Advocate - Exp.
Bina Gupta, 15,40,000 6,25,000 12.3 17 6,65,000 12.10.3 90-93 -- G. No.2&3
120 ITA Nos.405,348,349,404,406,407&
466/Agr/2011
A.Ys. 2007-08
Advocate
Sudipto Sarkar, 1,50,000 1,50,000 12.4 17 1,50,000 12.10.4 94.95 -- G.No.4
Advocate
Rabo India 2,50,000 2,50,000 12.1 15 2,50,000 12.10.1 82-83 -- G.No.1
Securities (P)
Ltd.
Dayal Saran, 5,00,000 5,00,000 12.5 17 Nil 12.10.5 96 G. No.3
Advocate
Total 4,06,10,000 3,18,38,200
9. The issue under consideration whether such expenses are allowable under section 48(i) of the Act for computing long term capital gain. To appreciate the issue, we would like to go through section 48(i) and relevant scheme of the Act.
For the purpose of ready reference, the section 48 is reproduced as under :-
"48. The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :--
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto:
Provided that in the case of an assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so 121 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 computed in such foreign currency shall be reconverted into Indian currency, so, however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company :
Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted:
[Provided also that nothing contained in the second proviso shall apply to the long-term capital gain arising from the transfer of a long- term capital asset being bond or debenture other than capital indexed bonds issued by the Government :] [Provided also that where shares, debentures or warrants referred to in the proviso to clause (iii) of section 47 are transferred under a gift or an irrevocable trust, the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer for the purposes of this section :] [Provided also that no deduction shall be allowed in computing the income chargeable under the head "Capital gains" in respect of any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004.] Explanation.--For the purposes of this section,--
(i) "foreign currency" and "Indian currency" shall have the meanings respectively assigned to them in section 2 of the Foreign Exchange Regulation Act, 1973 (46 of 1973);
(ii) the conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at the rate of exchange prescribed in this behalf;122 ITA Nos.405,348,349,404,406,407&
466/Agr/2011 A.Ys. 2007-08
(iii) "indexed cost of acquisition" means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later;
(iv) "indexed cost of any improvement" means an amount which bears to the cost of improvement the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place;
[(v) "Cost Inflation Index", in relation to a previous year, means such Index as the Central Government may, having regard to seventy-five per cent of average rise in the Consumer Price Index for urban non- manual employees for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf.]]
10. What can be deducted under section 48(i) of the Act is expenditure incurred wholly and exclusively in connection with the transfer contemplated by section 45.
In computing capital gains, expenditure incurred wholly and exclusively in connection with the transfer of a capital asset has to be deducted under section 48(i) of the Act. The words "in connection with such transfer" occurring in that section means intrinsically related to the transfer. These words are very wide in their ambit. There is no warrant for importing a restriction that, to qualify for deduction, the expenditure must necessarily have been incurred prior to the passing of title. It is immaterial whether the eligible expenditure was incurred prior or subsequent to the passing of title.
123 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08
11. It is clear from above legal provisions of the Act, one should keep in mind certain principles for working out capital gain or loss alongwith accounting principles. The principles that have to be applied are those which are a part of the commercial practice or which can an ordinary man of business will resort to when making computation for his business purposes. The accounting principles are that if expenditures are incurred in connection with acquiring of assets, the same are capital expenditures and are to take as part of the cost of the assets. The reverse position is that expenditures incurred wholly and exclusively in connection with transfer of asset, such expenditure is allowable under section 48(i) of the Act for the purpose of calculation of capital gain. To further appreciate this aspect, we would like to refer certain judicial pronouncements which are as under:-
(i) Commissioner of Income-tax vs. Dr. P. Rajendran, 127 ITR 810 (Ker.) -
The brief facts of this case are that the State Government acquired in March 1967, the assessee's immovable property and awarded a compensation of Rs.47,000/-. The assessee claimed before the Civil Court an enhanced compensation of Rs.2,58,233/-. While this claim was still pending before the Sub-judge, the ITO treated the said amount of Rs.2,58,233/- as the full value of the consideration for the transfer of the property and determined the capital gains at Rs.2,35,233/- after deducting Rs.23,000/- as 124 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 its cost of acquisition and improvement. On appeal, the AAC negated the assessee's contention that the capital gain computation should not have been made by the ITO on the basis of his claim for enhanced compensation as the court's decision was unpredictable. He, however, reduced the capital gains of Rs.1,06,773/- (comprising Rs.1,19,773/- as the transfer consideration less Rs.10,000/- as cost of its improvement). The Revenue appealed to the Tribunal. However, by the time the Tribunal heard the Revenue's appeal, the High Court had rendered the final decision. The Tribunal, accordingly, set aside the assessment and remanded the case to the ITO directing him (a) to adopt the final figure of compensation and solatium settled by the High Court as the full value of the transfer of the property, and (b) to allow a further deduction of the aggregate cost certified for the assessee by the civil court and the High Court, subject to the condition that the capital gains should not be allowed to go below the figure fixed by the AAC. On reference, the Revenue contended, inter alia, (i) that the Tribunal had acted illegally in permitting the assessee to put forward before it for the first time the claim for deduction of the expenditure incurred in prosecuting the claim for enhancement of the compensation before the civil courts, and (ii) that the aforesaid expenditure was incurred only subsequent to the transfer which should be taken as having become complete when the title passed to the 125 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 State Government on its taking possession of the property under section 18 of the Land Acquisition Act, 1864.
The court held as under:-
"The further question to be considered is whether the Tribunal was right in its view that the expenditure incurred by the assessee in prosecuting the land acquisition reference case before the civil court is an expenditure incurred wholly and exclusively in connection with the transfer of the land. It is strongly argued by counsel for the revenue that the said expenditure was incurred only subsequent to the transfer which should be taken as having become complete when possession of the land was taken by the State under section 18 of the Act and title thereto became vested in the State Govt. The words "in connection with" used in clause (1) of section 48 are very wide in their ambit and hence there is no warrant for importing a restriction that to qualify for deduction the expenditure must necessarily have been incurred prior to the passing of title. The crucial test to be applied is whether the expenditure was incurred wholly and exclusively in connection with the transfer and it is immaterial whether it was incurred prior or subsequent to the passing of title. It cannot admit of doubt that in an ordinary transaction of transfer of property inter parties the fixation of the consideration or the price is an integral part of that transaction. By virtue of the definition contained in section 2(47) of the Act the expression " transfer " will include the compulsory acquisition of a capital asset under any law. Hence, the compulsory acquisition of property under the Land Acquisition Act has to be treated as a transfer for the purposes of computation of capital gains under the Act. Under the scheme of the Kerala Land Acquisition Act, the consideration for such a transfer is to be fixed in the first instance by the Land Acquisition Officer by the award to be made by him under section 11 of the said Act and in case the owner of the property is dissatisfied with the award the quantum of compensation is to be finally fixed by the civil court to which a reference is to be made under section 20 of the Act. In a case where the matter is so taken to the civil court by way of reference under section 20 of the Land Acquisition Act, the fixation of the quantum of consideration for the transfer is finally effected only by the decision rendered by the civil court. Such fixation forms an integral part of the 126 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 process of transfer by way of compulsory acquisition provided by the Land Acquisition Act. The expenditure incurred by the assessee in conducting the land acquisition reference proceedings before the civil court cannot, therefore, but be regarded as expenditure wholly and exclusively incurred in connection with the transfer. Our attention has been drawn to a recent decision of a learned single judge of this court wherein an identical view has been expressed--Vasumathy v. CIT [1980] 123 ITR 94. We are in complete agreement with the dictum laid down in the said decision. We accordingly hold that the Tribunal was perfectly right in incorporating in its decision a direction to the ITO that while computing the capital gains on the basis of the compensation awarded to the assessee by the High Court the costs certified for the assessee by the sub-court and the High Court should be allowed as a deduction subject to the condition that by such deduction the capital gains should not go below the figure fixed by the AAC against whose order no appeal has been filed."
(ii) V.A. Vasumathi vs. Commissioner of Income-tax, 123 ITR 94 (Ker) -
The brief facts of this case are that certain expenditure was incurred by the assessee for the purpose of prosecuting in a civil court his claim for enhancement of the compensation under the Land Acquisition Act. The Commissioner disallowed such expenditure in computing capital gains tax liability on the ground that it was not incurred in connection with the transfer of capital asset. On reference, the revenue pleaded that the impugned expenditure was incurred subsequent to transfer and was, thus, not allowable. The court held as under:-
"1. The words "in connection with such transfer", used under section 48(i), mean intrinsically related to the transfer. Only such 127 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 expenditure, as is wholly and exclusively related in an intrinsic manner to the transfer, is a deductible expenditure.
2. The process of transfer by compulsory acquisition is completed only upon the final determination of the compensation by the competent authority. The litigation emanating from a reference under section 20 of the Land Acquisition Act was a proceeding intimately and intrinsically connected with the acquisition.
3. For the purpose of section 48, it is immaterial that the expenditure was incurred subsequent to the award so long as it was incurred wholly and exclusively in connection with the compulsory acquisition.
4. The action of the Commissioner in disallowing the impugned expenditure was quashed and the revenue was directed to determine the nature of the amount and pass appropriate order". (See also CITV Smt M Subaida Beevi (1986) 160 ITR 557 (Ker) and CIT V R. Ranga Setty (1986) 159 ITR 797(Ker)-legal expenses allowable)"
(iii) Commissioner of Income-tax vs. R. Ramanathan Chettiar (Mad) 152 ITR 489 (Mad.) -
The brief facts of the case decided by the Madras High Court are that the assessee sold certain lands after converting them as house sites and for this purpose, maintained an office for preparing lay-out plans and for locating prospective purchasers. In the computation of capital gains, the assessee claimed deduction of expenditure incurred on travelling, stationery, salary and repairs to office premises. The ITO held that the deduction was not allowable, either as cost of improvement or as expenses incurred solely in connection with the transfer of the land. Though the Commissioner 128 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 (Appeals) held that the assessee will be entitled to deduction of fifty per cent of the expenses incurred, the Tribunal allowed the claim in full. It also rejected the revenue's reference application under section 250(1). The court held that it was not the dispute that the assessee had in fact prepared lay-outs and got them approved from the requisite authority and sold the lands as house plots. The sale of the lands as it would not have fetched such a price which the assessee actually got now after converting the lands into house sites. Therefore, all the expenses incurred in connection with the preparing of the lay-outs and getting them sanctioned should be taken to be expenses solely incurred for the transfer of the land for a better price. The other expenses such as salary paid to the clerk who was attending to the preparation of the lay-outs and also for finding suitable purchasers should also be taken to be expenses incurred exclusively for the transfer of the land.
The maintenance of an office which had to be located in a building situated in the land itself by making some improvement should also be taken to be exclusively for the purposes of the transfer of land. Therefore, the Court held that the Tribunal was right in allowing the assessee's claim and no referable question of law arose from its order.
(iv) Aruna Mills Limited vs Commissioner of Income Tax, 31 ITR 153 (Bomb).
129 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08 The Court held as under:-
"He has drawn our attention to an observation of the Tribunal in the statement of the case that the so-called ordinary principles of commercial accounting are not found to be defined in any code and the Tribunal is unable to understand as to what are those principles. Now, we have had occasion to point out in several decisions that what the Income-tax Act purports to tax is business profits, and business profits are the true profits of a business as ascertained according to commercial principles. There may be an expenditure or there may be a loss which may not be an admissible loss under any of the provisions of section 10(2) and yet such an expenditure or loss would have to be allowed in order to determine what were the true profits of a business, and it is the duty of everyone who has anything to do with taxing business-people to understand what are the principles of commercial expediency. Unless one understands these principles it is difficult to make a proper assessment on a business or on a businessman. But this question does not arise here because, as already pointed out, no further aspect of the case has to be considered under this head different from what we have already considered under section 10(2)(xv)".
(v) CIT V Dhanarajgirji Narasingirgi, 91 ITR 544 (SC).--
The Court held as under:-
"All that the court has to see is whether the legal expenses were incurred by the assessee in his character as a trader, in other words, whether the transaction in respect of which proceedings are taken arose out of and was incidental to the assessee's business. Further, we have to see whether the expenditure in question was bona fide incurred wholly and exclusively for the purpose of business-It was the duty of the assessee to see the prosecution was properly conducted. He was interested in successfully prosecuting the case. The fact that he did not leave the carriage of the case in the hands of the prosecuting agency of the Government is no ground for disallowing the expenditure. It is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he 130 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 should incur that expenditure. Every businessman knows his interest best"
(vi) Siddho Mal & Sons vs. ITO (Delhi), 122 ITR 839 (Delhi) -
The Hon'ble Delhi High Court has held as under :- (Head note) "Held, on the facts that there was enough material for the conclusion that the payment of commission to the minors was not exclusively for the purposes of the assessee's business; nor was there any misdirection in arriving at that conclusion and, therefore, in disallowing the commission as a deduction under s.10(2)(xv) of the Indian I.T. Act,1922.
The word "wholly" in s.10(2)(xv) refers to the quantum of expenditure but the word "exclusively" refers to the motive, objective and purpose of the expenditure.
An expenditure is to be allowed if it satisfied the test of commercial expediency and commercial expediency has to be judged from the point of view of assessee who knows best how his business has to be run but such a point of view has to be a prudent and reasonable point of view which is free from an apparent taint of excessiveness, collusiveness or colorable discretion. Thus, on the one hand, it is not for the ITO to judge whether the assessee could have avoided to reduce a particular expenditure but on the other, an unreasonably high or excessive expenditure would normally and correctly caution the ITO to examine it more carefully and, if combined with other circumstances, it leads to the conclusion that the motive behind the expenditure is to unduly benefit someone, the ITO is well within his rights to come to a finding that the expenditure is not exclusively for the purposes of business.
Relationship by itself, without more, cannot lead to the inference of excluding the possibility of a payment being wholly and exclusively for the purpose of business. Dealing with relatives in contrast with or in preference to strangers is neither prohibited by law nor can be tabooed. Indeed, it is natural to do so but this does not give a licence to cover up dishonest transactions or impermissible transfers. The courts and authoritarians are not to wear blinkers to overlook or 131 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 condone the passing off of public revenue to one's own kith and kin by subterfuge or clandestine or clever devices clothed in legalistic jargon. Instead it is their duty to lift the veil of apparent legality and get to the truth or substance of a transaction to deal with it in accordance with law. It is only appropriate, indeed normal, that dealings involving transfer of funds to near and dear ones need to be looked into with care and caution and necessary inferences drawn if there are abnormalities attaching to such transactions.
It is not for the court to go into appreciation of evidence of circumstances attaching to a transfer to determine whether the Tribunal was justified in arriving at the finding that a certain payment was not exclusively for the purpose of the business of the assessee as this is wholly a question of fact and not of law."
(vii) Commissioner of Income Tax Vs. Shakuntala Kantilal [(1991) 190 ITR 56](Bomb).
In this case, it is held by the Bombay High Court that the expression used in Section 48 of the Act, viz., "expenditure incurred wholly and exclusively in connection with such transfer" has wider connotation than the expression, "for the transfer". Similar view has been taken by the Madras High Court in the case of Commissioner of Income Tax vs. Bradford Trading Co. P. Ltd. [261 ITR 222].
12. From the above discussions, we find that what is allowable expenditure under section 48(i) depends upon the facts of each case. When a case is to be decided on its facts, then the entire facts, circumstances including surrounding 132 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 circumstances and commercial expediencies all are required to be considered together. In the case under consideration, what is important point to be considered is whether under the facts and circumstances expenditure incurred was wholly and exclusively in connection with transfer of shares.
13. In the light of above discussion, if we consider the facts of the case under consideration, we notice that there is no dispute regarding the fact that the expenditures were incurred by the assessee. That the Agarwal Group went to CLB under a strategy to get the value of shares of both the companies enhanced and frozen for which first they showed that they are interested in buying the shares knowing very well that they had no capacity to buy the shares held by the majority share holders (64.67%) and therefore, they made such financial arrangements which was in contravention of the conditions fixed by CLB in its order dated 25.01.2006 to arrange finance in which M/s. Churu Trading Co. Pvt. Ltd. helped them through Media West and other Merchant Bankers. That because of this arrangement, the other party i.e. the Maheshwari Group got alarmed and they further moved to CLB to restrain the Agarwal Group to buy majority share holding and even agreed to pay Rs.22 Crores extra amount over and above the 35.33% of valuation of shares of Rs.390 Crores which comes to Rs.138 Crores and finally in view of their strategy, the Agarwal Group got Rs.160 crores by selling their 133 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 35.33% of share holding in both the Companies. The excess realization of Rs.22 Crores could be made possible primarily with the intervention of the arranger i.e. M/s. Churu Trading Co. Pvt. Ltd. That Maheshwari Group agreed to pay Rs.22 Crores extra so that the shares which were pledged as security with M/s. Media West could be lifted and shares are sold to the Maheshwari Group. For this purpose, the arranger M/s. Churu Trading Co. Pvt. Ltd. demanded for 50% of the extra amount realized by the Agarwal Group but ultimately as per the initial agreement only Rs.8.5 Crores was paid. The case of the A.O. is that CLB gave option to the Agarwal group, either to buy majority shares holding (64.67%) or to sell their share holding (35.33%) but they first chose to buy majority share holding and hence whatever expenditure was incurred for arranging the finance should not be considered to have been incurred in connection with the transfer of shares.
Therefore, in the view of A.O., since M/s. Churu Trading Co. Pvt. Ltd. was engaged to arrange the fund, payment made to them are for arranging the fund and not in connection with the transfer of shares and hence payment of Rs.8.5 Crores made to M/s. Churu Trading Co. Pvt. Ltd. should not be allowed as deduction under section 48(i) of the Act. The A.O. also pointed out that the intention of the Agarwal Group was initially not to sell the shares; otherwise they would have not pledged the 35.33% of their share holding as security for obtaining the fund.
Therefore, in his opinion, initially the intention of the assessee was to buy the 134 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 majority share holding and hence the expenditure incurred for arranging the fund for buying the majority share holding should not be allowed and hence he contended that the payment made to M/s. Churu Trading Co. Pvt. Ltd. and other consultants for arranging the fund and preparation of CLB petition and appearing before the CLB for arguing the case of the assessee was not allowed u/s 48(i).
14. We have considered the payment-wise facts of the case under consideration as under:-
Payment of Rs.2,24,24,000/- + Rs.3,13,200/- to M/s S.R. Halbe & Associates, Mumbai:
15. The payment of Rs.2,24,24,000/- is a lump-sum payment for the services rendered by M/s. S.R. Halbe and Associates. The payment of Rs.2,24,24,000/- has been accepted by the A.O. as incurred in connection with the transfer of shares and deduction of Rs.78,56,800/- has been allowed under section 48(i) being share of the assessee in the total payment of Rs.2,24,24,000/- made to Shri Halbe because he found that major portion of fee was attributable to the proceedings before CLB in connection with the transfer of shares.
16. After having accepted that the payment of fees made to Shri Halbe was attributable to the proceedings before the CLB in connection with transfer of 135 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 shares, The A.O. disallowed the claim of the assessee for deduction of Rs.3,13,200/- paid to Shri Halbe towards the reimbursement of traveling, lodging and boarding expenses which he claimed on account of incurring expenditure while visiting Delhi in connection with proceeding before the CLB. When the fees paid is held to have been incurred in connection with the transfer of shares, other incidental expenses reimbursed to him in connection with proceeding before the CLB is also allowable. We, therefore, are of the considered opinion that once the A.O. has found that the services rendered by Shri Halbe was mainly related to the proceedings before the CLB in connection with transfer of shares and allowed the full fees paid to him for deduction under section 48(i), there is no logic to deny the deduction for the reimbursement of incidental expenses on travelling, lodging, boarding etc., which he incurred while visiting Delhi in connection with the proceeding before the CLB that was seized with the matter of settling the dispute between the Agarwal Group and the Maheshwari Group to decide as to how shares of one group is sold to other group so that both he companies under dispute remain in control of one Group only and the other Group gets best price on sale of their shares and ultimately it was decided that the Agarwal Group was to sell its shares to the Maheshwari Group at mutually agreed price. Considering this background of the proceedings before the CLB, the A.O. has already accepted the active role of Shri Halbe in these proceedings before the CLB and allowed the fees paid to him 136 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 considering that the fees paid to him was in connection with the transfer of shares and therefore, if any expenditure was incurred by him while visiting Delhi to attend these proceedings and the Agarwal Group reimbursed those expenses, they should also be allowed as being incurred in connection with the transfer of shares.
As the full amount of these expenses being Rs.3,13,200/ has been claimed by the assessee is allowable. We, therefore, find that the CIT(A) has rightly directed the A.O. to allow deduction for Rs.3,13,200/- also under section 48(i) of the Act.
Payment of Rs. 8,50,00,000/- to Churu Trading Co. Pvt. Ltd. Mumbai & Rs.2,50,000/- to Rabo India Securities Pvt. Ltd., Mumbai-
17. Both these parties were engaged by the Agarwal Group for providing financial advisory services and assisting them to arrange funds to acquire shares of Majority Group in both companies. In this process, the Agarwal Group first approached M/s. Rabo India Securities Pvt. Ltd. that acted as strategic and financial advisor to Agarwal Group for acquisition of shares and through this party they were introduced to the second party i.e. M/s. Churu Trading Company Pvt.
Ltd. that later played important role till the shares held by the Agarwal Group were sold instead of purchasing the shares of Majority share holder as per their strategy.
As after M/s. Churu Trading Company Pvt. Ltd. came into picture and were got involved in the formulation of the strategy of the Agarwal Group, role of M/s.
Rabo India Securities Pvt. Ltd. ended very soon and therefore, they were paid a 137 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 nominal amount of Rs.2,50,000/- on 01.02.2006 instead of a consideration of Rs.5,00,000/- payable as initiation fees and 1% of Gross Transaction Value subject to a minimum of Rs.3,00,00,000/- as success fees as per the agreement dated 10.01.2006 entered with them. This payment was made much before the date of the order of CLB i.e. 10.07.2006, when the Maheshwari Group was ordered to purchase the share holding of the Agarwal Group. In view of the above facts and looking to starting role played by this party in arranging financiers for the Agarwal Group in acquisition of shares, the payment to M/s. Rabo India Securities Pvt. Ltd.
is part of the strategy. Merely on the basis of the fact that this party was original party to strategy and did not continue does not effect in allowing as expenditures under section 48(i) of the Act. Similarly, during the process of acquisition of majority share holding of Maheshwari Group, the Agarwal Group also entered into another agreement with M/s. Churu Trading Pvt. Ltd. that acted as arranger for arranging Rs.252 Crores to acquire majority shareholding in the companies. As per the terms of agreement dated 01.02.2006 with M/s. Churu Trading Co. Pvt.
Ltd, the Agarwal Group was to pay Rs.8.5 Crores as arranger fee to it for arranging the funds. The arranger fee was to become due on achieving the financial closure of Rs.252 Crores notwithstanding whether the Agarwal Group shall be able to draw down the arranged funds or not. That the Agarwal Group went to the CLB under a strategy to get the value of shares of both the companies enhanced and 138 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 frozen for which first they showed that they are interested in buying the shares knowing very well that they had no capacity to buy the shares held by the majority share holders (64.67%) and therefore, they made such financial arrangements which was in contravention of the conditions fixed by the CLB in its order dated 25.01.2006 to arrange finance in which M/s. Churu Trading Co. Pvt. Ltd. helped them through M/s. Media West and other Merchant Bankers. That because of this arrangement, the other party i.e. the Maheshwari Group got alarmed and they further moved to CLB to restrain the Agarwal Group to buy majority share holding and even agreed to pay Rs.22 Crores extra amount over and above the 35.33% of valuation of shares of Rs.390 Crores which comes to Rs.138 Crores and finally as per their strategy as explained earlier, the Agarwal Group got Rs.160 Crores by selling their 35.33% of share holding. That the excess realization of Rs.22 Crores could be made possible primarily with the intervention of the arranger i.e. M/s.
Churu Trading Co. Pvt. Ltd. That the Maheshwari Group agreed to pay Rs.22 Crores extra so that the shares which were pledged as security with M/s. Media West could be lifted and shares are sold to the Maheshwari Group. For this purpose , the arranger M/s. Churu Trading Co. Pvt. Ltd. demanded for 50% of the extra amount realized by the Agarwal Group but ultimately as per the initial agreement only Rs.8.5 Crores was paid. As per the agreement, arranger fees of Rs.8.5 Crores was to become due on achieving the financial closure of Rs.252 139 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 Crores, not withstanding whether the Agarwal Group draws down the arranged fund or not and only after arranging the full fund of Rs.252 Crores, the arranger fees was to be paid within 30 days from the date of the acquisition of 64.67% shares held by Maheshwari Group by way of the transfer in the name of Agarwal Group or 31st December, 2006, whichever is earlier. Thus, it is clear from the agreement that condition for payment of arranger fees was for making of arrangement of full amount of Rs.252 Crores by M/s. Churu Trading Co. Pvt. Ltd.
and its payment was to be made irrespective of acquisition of 64.67% shares, if shares had been acquired, it should have been paid within 30 days from the date of the acquisition of these shares otherwise payment was to be made by 31st December 2006. With such terms in the agreement, the question of payment of such arranger fees would have arisen only when the fund of Rs.252 Crores was arranged. In the present case, liability to pay the arranger fees by the Agarwal Group to the M/s. Churu Trading Co. Pvt. Ltd. would have arisen only in case of the event of arranging the fund of Rs.252 Crores had happened. But by the time M/s. Churu Trading Co. Pvt. Ltd could arrange fund of Rs.12.5 Crores, the CLB on the petition of the Maheshwari Group, passed an order dated 04.04.2006 deferring the payments of further installments and thereafter, vide order dated 10.07.2006 cancelled its earlier order of giving option to the Agarwal Group to purchase 64.67% shares and ordered the Maheshwari Group to purchase 35.33% shares of 140 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 the Agarwal Group. Rs.8.5 Crores was paid to M/s. Churu Trading Co. Pvt. Ltd.
and therefore, the question is as to for what services this payment was made. The A.O. has already accepted the formulation of strategy and allowed the payment of fees to Shri S.R. Halbe for this purpose and as per the facts of the case, it is clear that M/s. Churu Trading Co. played an important role in this strategy by which the Agarwal Group were ultimately able to sell their share holding at enhanced value.
That since because of intervention of M/s. Churu Trading Co. Pvt. Ltd., the share value was further got enhanced by Rs.22 Crores, the payment of Rs.8.5 Crores was made to M/s. Churu Trading Co. Pvt. Ltd. on 15.11.2006 as agreed earlier, though they demanded 50% of such extra amount realized by the Agarwal Group and therefore, payment of Rs.8.5 Crores is allowable as deduction under section 48(i) of the Act to have been paid for transfer of shares.
Payment of Rs.44,22,400/- to Mrs. Bina Gupta, Advocate, New Delhi
18. That the payment of Rs.44,22,400/- was claimed to have been made to Smt. Bina Gupta as fee for preparation of petition, appearance before the CLB and fee for appearance before Hon'ble Allahabad High Court and Hon'ble Supreme Court including consultation from time to time in respect of transfer of shares. Out of total payment of Rs.44,22,400/- made to Smt. Bina Gupta by all the members of Agarwal Group's share of payment made to her is Rs.15,40,000/-. Out of the 141 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 amount of Rs.6,25,000/- claimed by the assessee as deduction under section 48(i) of the Act on account of payments made to Smt. Bina Gupta. It was noticed by the A.O. that certain expenses were incurred in cash on vouchers which are basically reimbursement of expenses related to traveling, lodging and boarding etc. totaling to an amount of Rs.6,25,000/-. Looking at the supporting bills, the A.O. concluded that such payments fell under the category of various miscellaneous accounts of logistic expenses which are not distinctly related and integrally connected with the transfer of shares. Therefore, he held that Rs.6,25,000/- is not admissible for deduction under section 48(i) of the Act. The CIT(A) has confirmed the order of the A.O. In the light of detailed discussions made in paragraph nos.8 to 18 of this order, the claim of the assessee is allowable as expenditures incurred was part of the strategy in respect of transfer of shares.
Payment of Rs.1,50,000/- to Shri Sudipto Sarkar, Advocate
19. The assessee has claimed to have made payment of Rs.1,50,000/- to Shri Sudipto Sarkar, Advocate on account of appearance fees before the CLB. The 142 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 CIT(A) confirmed the order of the A.O. In the light of detailed discussion made in Paragraph nos.8 to 18 of this order, the claim of the assessee is allowable.
Payment of Rs.10,00,000/- to Shri Dayal Saran, Advocate, Agra
20. A consolidated payment of Rs.10,00,000/- (Rs.5,00,000/- each by Ajay Agarwal family and Kamlesh Agarwal family) has been shown as fee for consultation taken from time to time in respect of the transfer of shares. The A.O. has discussed in the assessment order that there is no evidence which can corroborate that any legal services have been extended in the process of valuation of share or in the process of compromise concerning the transfer of shares. In his view such a legal expense does not find any place that they are intrinsically linked with the transfer of shares and therefore, he held that it cannot be allowed as deduction under section 48(i) of the Act. The CIT(A) has gone through the bill of Shri Dayal Saran and found that in the bill, it is clearly written that this bill was raised for charging the fees for consultation in respect of the transfer of shares including travel and others out of pocket expenses for visiting Delhi from time to time. The case of the A.O. is not that this payment is not made. The CIT(A) held that Shri Dayal Saran being a Chartered Accountant was associated with the Agarwal Group since the beginning of the dispute and therefore, his contribution in 143 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 settling the dispute till a compromise was reached between both Groups and final order was passed by the CLB on 01.11.2006 for sale and transfer of shares of the Agarwal Group, cannot be denied and therefore, his payment was settled only after passing of final order by the CLB giving green signal for the transfer of shares similar to Shri S.R. Halbe and therefore, payment made to Shri Dayal Saran is also allowable for deduction under section 48(i) of the Act on the basis of bill raised by him being for the services provided for consultation in respect of the transfer of shares unless any contrary finding is given by the A.O., which he has failed to bring on record in the assessment order. Therefore, the CIT(A) directed the A.O. to allow deduction for Rs.5,00,000/- under section 48(i) of the Act being half portion of the payment made to Shri Dayal Saran and claimed by the assessee in the return of income. In the light of detailed discussion made in Paragrpah nos.8 to 18, we do not find any infirmity in the order of the CIT(A).
21. After examining item-wise payments of expenditures, we find that in principle, the A.O. and CIT(A) both agreed with the assessee that the claim of expenditures are allowable while computing capital gain under section 48(i) of the Act. But the A.O. has demarcated a line on presumption that part of the expenditures were incurred for acquisition of shares of majority holders. The CIT(A) also partly disallowed following an order of Authority for Advance Ruling 144 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 in the case of Compagnie Financiere Hamon (2009) 310 ITR 1 (AAR) on the ground that the services for which payment made did not extend to the process of valuation of shares or participation in deliberation to that lead to settlement concerning the transfer of shares.
22. In the case under consideration, it is admitted fact that the assessee is a minority share holding in his group i.e. 35.33% and majority share holders were Maheshwari group 64.67%. The division and distribution of business could not be settled mutually by both the groups. The assessee was in minority share holding, therefore, in their interest they approached to the CLB. The CLB passed an order dated 25.01.2006 of which a detailed discussion has been made by CIT(A) in his order in para no.5.14. As per the provisions of CLB, the total value of shares froze at Rs.390 Crores by Maheshwari group, accordingly Rs.252 Crores (64.67%) share to Maheshwari group and Rs.138 Crores (35.33 %) to Agarwal group. The Agarwal group formulated strategy to show that they are going to purchase the shares held by Maheshwari group and made arrangement accordingly. When this strategy came to the notice of Maheshwari group they filed application before the CLB for direction to the Agarwal group to deposit their shares in Escrow account alleging that Agarwal group has violated the terms of the concerned order dated 25.01.2006. The Agarwal group did not deposit their shares in the Escrow account 145 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 as that is also part of strategy to create pressure against Maheshwari group so that the Agarwal group gets more consideration of their shares. After a prolonged litigation carried before the CLB, the sale consideration of share holding of Agarwal group increased at 116 crores and accordingly Maheshwari group purchased the share of Agarwal group. The case of the A.O. is that the expenditures incurred were not distinctly related to and integrally connected with the transfer of shares. Therefore, the same is not admissible deduction under 48(i) of the Act. However, part of the expenditure has been accepted by the A.O. on the ground that fee paid to M/s.S.R. Halbe & Associates were incurred for formulation of strategy for filing petition before CLB for protection of interest of minority share holders. The case of the assessee is that the expenditures were incurred in formulating a strategy to get the maximum sale consideration of the minority share holdings. Under the facts and circumstances, whether the expenditure incurred by the assessee is covered by section 48(i) of the Act, expenditures incurred are wholly and exclusively in connection with such transfer. The Hon'ble Kerala High Court in the case of Dr. P. Rajendran (Supra) held that the words "in connection with" used in clause (i) of section 48 are very wide in their ambit and hence there is no warrant for importing a restriction that to qualify for deduction the expenditure must necessarily have been incurred prior to the passing of title. The crucial test to be applied is whether the expenditure was incurred wholly and 146 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 exclusively in connection with the transfer and it is immaterial whether it was incurred prior or subsequent to the passing of title. As stated above, that the assessee was minor share holding in the company and was having no capacity to buy the majority share holding. That is the reason the minority share holder i.e. the assessee merely made the arrangement and such strategy can be said to be a part of strategy which an ordinary man of business can resort to in getting maximum consideration of minority share holding. In the case of CIT vs. Dr. P. Rajendran (Supra), the Hon'ble Kerala High Court held that the expenditure incurred by the assessee in conducting land acquisition proceeding before the Civil Court are expenditures wholly and exclusively incurred in confection with the transfer. In the case under consideration, when the assessee was able to get enhanced his share holding from Rs.138 Crores to Rs.160 Crores the expenditures incurred for formulating strategy is certainly expenditure wholly and exclusively incurred in connection with transfer. The Hon'ble Madras High Court in the case of CIT vs. R. Ramanathan Chettiar (Supra) held that such expenditures are allowable expenditures under section 48(i) of the Act, otherwise in that case the sale of the land, as it was, would not have fetched such a price which the assessee actually got now after converting the land into house sites. Similar situation is in the case under consideration. If the assessee did formulate such strategy and incurred expenditure, the assessee could not have got consideration of Rs.160 147 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 Crores in their minority share holding. In the light of the ratio laid down by the Hon'ble Bombay High Court in the case of Aruna Mills Limited vs. CIT (Supra) the claim of the assessee is allowable, considering the principle of commercial expediency. For calculating the correct profit on sale of shares, the expenditure incurred in respect of transfer of share holding is allowable expenditure under section 48(i) of the Act. The Apex Court in the case of CIT vs. Dhanarajgirji Narasingirgi (Supra) held that it is not open to the Department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best. In the case under consideration, the assessee knew his interest best; therefore, he formulated a strategy so that he can get more consideration for his minority share holdings. The expenditures incurred were wholly and exclusively for the purpose of transfer of the shares, therefore, in the light of ratio laid down by the Hon'ble Delhi High Court in the case of Siddho Mal & Sons vs. ITO (Supra) the claim of the assessee is allowable. If we judge the test of commercial expediency from the point of view of the assessee, the expenditure claimed by the assessee is allowable under section 48(i) of the Act. The A.O. has himself accepted the part claim of the assessee in respect of payment made to M/s S.R. Halve & Associates on account of payment of fee which was paid for attending the proceedings before the CLB. It is important to note that case before CLB was for business settlement between two 148 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 groups. However, the A.O. did not accept reimbursement claim of expenses to M/s. S.R. Halbe & Associates whereas the nature of expenditures were same. How one can bifurcate such fee and its related expenditures separately first one fee is to allow and other part of reimbursement of expenses on the ground that these were not in connection with transfer of shares. This finding of the A.O. is on presumption basis and not on facts. Once it is found that fee paid to S.R. Halve & Associates for appealing before CLB is in connection with transfer of share then on the same reason and basis reimbursement of expenses are also carried same nature of expenditure. It can not be bifurcated artificially on presumption basis. Similar is the position of expenditure paid to M/s. Churu Trading Co. Pvt. Limited, Rabo India Securities Limited & others. For disallowing this expenditure the A.O. said that these expenditures were related to purchases of shares of Maheshwari Group whereas finally that was not the case. The final result of all these efforts was that the assessee was able to get Rs.160 Crores of sale consideration of their shares.
This fact established by various circumstances including the fact that CLB was to decide the issue two times and finally the assessee achieved the object in realizing with sale consideration of their shares. Even for the sake of argument, if we accept the A.O.'s view that only fee paid to M/s. S.R. Halbe & Associates is only expenses in connection with transfer of shares, this is not correct to say so because without other part of strategy this alone thing to appearing before CLB will not 149 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 serve the purpose. The assessee gets success because of the consolidated efforts.
The case under consideration is not a simple case of filing petition before the CLB but filing of petition before CLB by the assessee is part of strategy. On consideration of entire aspect of strategy, we find that expenses incurred by the assessee were integrally connected with transfer of shares. Therefore, on consideration of entirety of facts, we are of the view that these expenditures are allowable.
23. As regards finding of the CIT(A) following an order of Authority for Advance Ruling in the case of Compagnie Financiere Hamon (2009) 310 ITR 1 (AAR) we find that the CIT(A) without appreciating the facts of that case and facts of the case under consideration followed the said judgement. In the said case, expenditures were not related to transfer of shares but related to initial period of the dispute. In the case under consideration, the sole object of the expenditures incurred are legal fee in connection with transfer as those expenditures were part and parcel to strategy. Rather this judgement relied upon by the CIT(A) supports the case of the assessee. If we see this judgement from another angle, for that purpose, we would like to reiterate the law laid down by the Apex Court in the case of CIT vs. Dhanarajgirji Narasingirgi (Supra) wherein it was held that it is not open to the Department to prescribe what expenditure an assessee should incur and in 150 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 what circumstances he should incur that expenditure. Every businessman knows his interest best. When in principle it has been accepted that the expenditures were incurred for strategy in connection with getting more consideration for the purpose of transfer of shares, all such expenditures are allowable may be in respect of legal services or others. Otherwise also, as stated above, that in such circumstances, each case is to decide on its facts, therefore, the order relied upon by the CIT(A) is distinguishable on facts.
24. If we consider the entire principles laid down in above judgments including accounting and principle of commercial expediency in the light of the provisions of the Act including section 48(i) of the Act, we find that the expenditures were incurred in commercial expediency which resulted into higher sale consideration.
The settlement of business dispute and incurring expenditure related to settlement amounts to commercial expediency. Even otherwise also, on acceptance of Revenue's view the accounting principle suggest that the expenditures incurred for purchasing shares of Maheshwari group by the Agarwal group therefore such expenditures are allowable under section 48(i) of the Act because final outcome of expenditures incurred was for selling shares by Agarwal group and realization of higher sale consideration of holding of Agarwal group. We accordingly allow the claim of the assessee. We set aside the order of the A.O. and modify the order of 151 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 the CIT(A) allowing assessee's claim where he sustained the additions. The order of the CIT(A) to the extent of claim allowed is confirmed.
ITA No.405/Agr/2011 by the Revenue in the case of Shri Ajay Agarwal25. In the light of detailed discussions made above in paragraph nos.8 to 24 of this order, appeal of the Revenue is dismissed.
ITA No.404/Agr/2011 by the Revenue in the case of Smt. Renu Agarwal26. In this appeal the sole ground raised by the Revenue is in respect of deletion of addition of Rs.1,00,00,000/- made by the CIT(A) on account of payment made to M/s. Churu Trading Co. Pvt. Ltd. under section 48(i) of the Act.
27. In the light of detailed discussions made above in paragraph nos.8 to 24 of this order, appeal of the Revenue is dismissed.
ITA No.406/Agr/2011 by the Revenue in the case of Smt. KamleshAgarwal 152 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08
28. In this appeal the Revenue has raised ground in respect of deletion of addition of Rs.85,00,000/- made by the CIT(A). The payment was made to M/s.
Churu Trading Co. Pvt. Ltd.
29. In the light of detailed discussions made above in paragraph nos.8 to 24 of this order, appeal of the Revenue is dismissed.
ITA No.466/Agr/2011 by the Revenue in the case of Shri Hemant Anand30. In this appeal the Revenue has raised ground in respect of deletion of addition of Rs.25,00,000/- made by the CIT(A). The A.O. made the addition disallowing payment made to M/s. Churu Trading Co. Pvt. Ltd. under section 48(i) of the Act.
31. In the light of the detailed discussions made above in paragraph nos.8 to 24 of this order, appeal of the Revenue is dismissed.
ITA No.407/Agr/2011 by the Revenue in the case of Shri Sagar Anand 153 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08
32. In this appeal the Revenue has raised ground in respect of deletion of addition of Rs.1,70,00,000/- made by the CIT(A) being the amount paid to M/s.
Churu Trading Co. Pvt. Ltd. under section 48(i) of the Act.
33. In the light of the detailed discussions made above in paragraph nos.8 to 24 of this order, appeal of the Revenue is dismissed.
ITA No.348/Agr/2011 by the assessee Shri Ajay Agarwal34. Ground Nos.1 & 2 are in respect of addition of Rs.2,50,000/- being payment made to Rabo India Securities (P) Ltd. & Rs.6,65,000/- being payment made to Mrs. Bina Gupta confirmed by the CIT(A). The A.O. made these disallowances under section 48(i) of the Act and the CIT(A) has confirmed the action of the A.O. in respect of above amounts paid to Rabo India Securities (P) Ltd. & Mrs. Bina Gupta. Ground no.3 is in respect of enhanced disallowance of Rs.40,000/- being payment made to Mrs. Bina Gupta. Ground no.4 is in respect of disallowance of Rs.1,50,000/- being payment made to Shri Sudipto Sarkar, Advocate.
35. As per the detailed discussions made in paragraph nos.8 to 24 of this order, we find force in the ground of appeal of the assessee and in the light of above 154 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08 discussions, addition sustained by the CIT(A) are deleted including the enhanced addition of Rs.40,000/- in respect of disallowance of amount paid to Mrs. Bina Gupta, Shri Sudipto Sarkar and M/s. Rabo India Securities (P) Ltd.
36. In ground no.5 the assessee has raised the issue pertaining to charging of interest under section 234C of the Act. The main contention of the assessee is that there was sufficient cause for not depositing the second installment of advance tax on or before 15.12.2006 as no capital gain was payable as the assessee intended to deposit the same in notified bonds in terms of section 54EC of the Act, but the same were not available timely.
37. Ld. Authorised Representative submitted that there was sufficient cause for not depositing the advance tax before the due date. Ld. Authorised Representative with reference to various C.B.D.T. Circulars and others submitted that during the period the notified bonds were not available or were enhanced the capping of the bound to the extent of Rs.50,00,000/-. Ld. Authorised Representative in support of his contention relied upon various decisions detailed as under :-
ACIT vs. Jindal Irrigation Systems Ltd. (1996) 56 ITD (Hyd.) 164 Star India (P) Ltd. vs. CCE (2006) 280 ITR 321 (SC) CIT vs. Revathi Equipment Ltd. (2008) 298 ITR 67 (Mad.) CIT vs. Anand Prakash (2009) 316 ITR 141 (Del.) CIT vs. Smt. Premlata Jalani (2003) 264 ITR 744 (Raj.) 155 ITA Nos.405,348,349,404,406,407& 466/Agr/2011 A.Ys. 2007-08
38. Ld. Departmental Representative, on the other hand, relied upon the order of CIT(A) and submitted that it is settled legal position that interest is mandatory. He relied upon the judgement of Hon'ble Supreme Court in the case of Karanvir Singh Gossal vs. CIT, 349 ITR 692 (SC).
39. We have heard the ld. Representatives of the parties and records perused. In the light of law laid down by the Apex Court in the case of Karanvir Singh Gossal vs. CIT, 349 ITR 692 (SC) wherein it has been held that charging of interest under section 234B/234C is mandatory. Following the law laid down by the Apex Court in the case of Karanvir Singh Gossal (supra), we do not find any substance in this ground of appeal of the assessee, therefore, the same is dismissed. Thus, appeal of the assessee is partly allowed.
ITA No.349/Agr/2011 by the assessee Smt. Renu Agarwal40. Ground no.1 is in respect of sustenance of addition of Rs.7,37,000/- by the CIT(A) being payment made to Mrs. Bina Gupta.
41. In the light of the detailed discussion made in this order vide paragraph nos.8 to 24, we delete the addition and ground of appeal of the assessee is allowed.
156 ITA Nos.405,348,349,404,406,407&466/Agr/2011 A.Ys. 2007-08
42. The second ground of appeal is in respect of charging of interest under section 234C of the Act.
43. In the light of the detailed discussions made in paragraph nos.36 to 39 of this order, this ground of appeal of the assessee is dismissed. Thus, appeal of the assessee is partly allowed.
44. In the result, ITA Nos.405, 404, 406, 407 & 466/Agr/2011 filed by the Revenue are dismissed and ITA Nos.348 & 349/Agr/2011 filed by the assessee are partly allowed.
(Order pronounced in the open Court)
Sd/- Sd/-
(BHAVNESH SAINI) (A.L. GEHLOT)
Judicial Member Accountant Member
PBN/*
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