Income Tax Appellate Tribunal - Hyderabad
Deccan Chronicle Holdings Ltd.,, ... vs Assessee on 16 September, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A" : HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND
SHRI SAKTIJIT DEY, JUDICAL MEMBER
ITA.No.219/Hyd/2014
Assessment Year 2010-2011
M/s. Deccan Chronicle vs. The DCIT, Circle 16(2)
Holdings Ltd., Hyderabad. Hyderabad
PAN AABCD6737D
(Appellant) (Respondent)
ITA.No.517/Hyd/2014
Assessment Year 2010-2011
The DCIT, Circle 16(2) vs. M/s. Deccan Chronicle
Hyderabad Holdings Ltd., Hyderabad.
PAN AABCD6737D
(Appellant) (Respondent)
For Assessee : Mr. S. Rama Rao
For Revenue : Mr. P. Somasekhar Reddy
Date of Hearing : 10.09.2014
Date of Pronouncement : 16.09.2014
ORDER
PER B. RAMAKOTAIAH, A.M.
These are cross-appeals by Assessee and Revenue against the order of Ld. CIT(A)-V, Hyderabad dated 11.11.2013.
2. We have heard Ld. Counsel and Ld. D.R. in this regard. The one common issue raised by the assessee in Ground No.2 and Revenue in its appeal ground no 2 is about allowance of expenditure under section 35D.
2ITA.No.219 & 517/Hyd/2014 M/s. Deccan Chronicle Holdings Ltd., Hyderabad 2.1. At the outset, it was submitted that the issue was restored to the file of Ld. CIT(A) in earlier years for determining afresh on the basis of the record for A.Y. 2006-07 being the first year of the claim. Since this is a consequential claim and matters are pending before the Ld. CIT(A) in earlier years, we restore the issue to the file of Ld. CIT(A) to consider it afresh in the light of findings given for A.Y. 2006-07. The Ld. CIT(A) is directed to follow the directions given in ITA.No.1844/Hyd/2011 for A.Y. 2008-09 and other appeals vide order dated 29.04.2013 and also in ITA.No.14/Hyd/2013 for A.Y. 2009-2010 dated 30.04.2013. Accordingly, these grounds are considered allowed for statistical purposes.
3. Another ground raised in Revenue appeal being ground No.3 is on the direction of Ld. CIT(A) to allow the expenditure on buy back of equity shares. A.O. considered the amount of Rs.77,07,600 spent by the assessee on buy back of equity shares, set off in the share premium account, but claimed as deduction under section 37(1) of the Act. Ld. CIT(A) on the submissions of the assessee, deleted the disallowance stating as under :
"7.2.1. I have carefully considered the submissions of the appellant and the assessment order. I find force in the contentions and the case-laws cited by the appellant that the buy back of shares was effected by utilizing free reserves and the expenditure incurred on buy back of shares was not capital expenditure as there was neither permanent change in capital structure of the company nor benefit of enduring nature was received by the appellant.
7.3 In the case of ACIT Vs. Britannia Industries Limited, Circle-7, Kolkata, ITAT No.1789/KOL/2008 dated 31-8-2010, the important portions of the order are reproduced hereunder :
6. We have heard the rival submissions and perused the material available on record. We find that the Ld. CIT(A) while deleting the addition of Rs.28,21,3211 had passed a very well reasoned order and 3 ITA.No.219 & 517/Hyd/2014 M/s. Deccan Chronicle Holdings Ltd., Hyderabad for the sake of brevity, we reproduce the relevant portion of his order as under:
"13. I have considered the submissions of the AR, perused the relevant provisions of the Companies Act and the decision on which the reliance was placed. In the impugned order the A.O. disallowed share buyback expenses because in his opinion buyback of shares resulted in permanent reduction in share capital.
According to A.O. the same considerations should be applied in deciding the character of expenditure in case of increase and reduction in the share capital. In my opinion the A.O.'s proposition is not supported by the decision of the Supreme Court in the case of Punjab State Industrial Development Corporation Ltd (225 ITR 792). In this judgment the Supreme Court admitted that increase of share capital may certainly help the company in increasing its profit earning but because the benefit derived is of long term and enduring nature and there being permanent expansion of the capital base which results in capital in flow; the expenditure is capital in nature.
In the case of buyback of Shares however there is no permanent change in the capital structure of the company. The company buys back its outstanding stock from the existing share holders and such purchase is effected out of company's free reserves which are otherwise capable of being freely distributable to the shareholders by way of dividend or can be used for declaration of bonus shares .
14. On comparing provisions of Sec 77A and Sec 81 of the Act it is found that many conditions for issue of bonus share are parameteria with provisions relating to buyback of shares. In both the cases i.e. buyback of shares and issue of bonus shares, the company can use its free reserves and share premium. In both the cases the company utilizes its existing reserves for enhancing the share holder's investment value. The decisions regarding issue of bonus share or buyback of shares are taken by the directors on business consideration. No benefit of enduring nature is derived by the company. In buyback of shares there is temporary reduction in the capital base because prohibition on issue of shares of that kind is for temporary period of 24 months. The Supreme Court in the case of CIT Vs. General Insurance Corporation (286 ITR 232) has held that expenditure on bonus share is not a capital expenditure as there is no increase in the capital base of the company because existing free reserves of the company are utilized for issue of bonus shares.
4ITA.No.219 & 517/Hyd/2014 M/s. Deccan Chronicle Holdings Ltd., Hyderabad
15. Applying the ratio laid down in this decision I find that existing free reserves and share premium account are used for buyback of shares which does not result in permanent reduction of the share capital and no benefit of enduring nature is derived. In the appellant's case the buyback of shares was effected by utilizing its free reserves. In my considered opinion therefore the expenditure incurred on buyback of shares was not a capital expenditure as there was neither permanent change in the capital structure of the company nor benefit of enduring nature was received by the appellant. The A.O. is therefore directed to deleted the disallowance of Rs.28,21,321/-
"
7.3.1 The Supreme Court in the case of CIT Vs. General Insurance Corporation (2008-TMI-6547- Supreme Court) has held that expenditure on bonus share is not a capital expenditure as there is no increase in the capital base of the company because existing free reserves of the company are utilized for issue of bonus shares.
7.4. In the case of Echjay Industries Limited vs. Den 88 TT) 1089 dated 24-4-2002, the important portions of the order are reproduced hereunder :
.... We have considered the rival submissions and have gone through the material available on record. The main question which arises for determination is whether the impugned expenditure is allowable on revenue account being expenditure of business in nature or whether the said item of expenditure was rightly disallowed by the revenue authorities on capital account. In this context, we are of the opinion that the purpose of the expenditure for which it was incurred is determinative of the issue. The second limb of the issue is how the said expenditure was incurred. However, the first limb of the controversy, viz. whether the expenditure was incurred for the purpose of the business, is determinative and secondly if the said expenditure was incurred for the purpose of the business, whether such expenditure brought into existence any benefit or advantage which could be treated as an advantage on capital account. The facts in this case are not in dispute, viz. there were serious disputes between the two warring groups of the shareholders with the result that the functioning of the company and its growth was impeded so much so that the matter was carried to the Court. Therefore, naturally there was diversion of directors from the business of the company to the litigation. Naturally the company's functioning in such circumstances could not be smooth and the management had to pass through a great deal of hardships. After a period of over Six years, good 5 ITA.No.219 & 517/Hyd/2014 M/s. Deccan Chronicle Holdings Ltd., Hyderabad sense prevailed between the two warring groups and a consent term was drawn by the shareholders, which was approved by the Hon'ble Bombay High Court by way of decree dated 2.5.1991, inter alia, giving the direction that the company would purchase the shares of the family members of Shri Maganlal H. Doshi, Shri Hasmukhlal H. Doshi and Shri Manharlal H. Doshi who were the shareholders of the company and to pay a sum of Rs. 1,000 per share of which Rs. 100 per share was return of its capital value and the balance of Rs. 900 per share was by way of premia. This resulted into reduction in the share capital of the company which was approved by the High Court. The reduction in the share capital as a result of the settlement, according to the revenue authorities, has affected the capital structure of the assessee-company and, therefore, the impugned expenditure was to be disallowed on capital account. It was also emphasised by the department that the company got enduring benefit. So far as the question of enduring benefit is concerned, the Hon'ble Supreme Court, in the case of Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC) has observed that "There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none-the-less, be an revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital filed that the expenditure would be disallowable on the application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue accounts ......."
28. If we go through the facts of the present case, it will be clear that the assessee-company incurred the impugned expenditure in the larger interest of the business necessity or expediency ........
29. ........The Supreme Court had occasion to consider similar controversy in the case of CIT v. Ashok Leyland Ltd. (1972) 86 ITR 549 (SC) in which the Apex Court has held that the principles which flow from the above cited decisions clearly suggest firstly that the enduring benefit in itself is not a conclusive test. Secondly, it is necessary to consider whether the enduring advantage consisted merely in facilitating the assessee's operation or enabling the management and conduct 6 ITA.No.219 & 517/Hyd/2014 M/s. Deccan Chronicle Holdings Ltd., Hyderabad of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, then such expenditure would be on revenue account. Thirdly, the question must be viewed in a larger context or business necessity or expediency ....
31. ......Therefore, we agree that the assessee company had incurred the impugned expenditure out of business expediency and for its smooth functioning, which was wholly and exclusively incurred in the course of carrying on of its business. Hence, it is an allowable revenue expenditure ....
7.5 Respectfully following the above decisions which are squarely applicable to the facts of the case of the appellant, I hold that in the appellant's case, the expenditure incurred on buy back of shares was not capital expenditure as it was only incurred wholly and exclusively for the purpose of carrying on its business as enunciated u/s 37 (1) of the Act and has to be treated as business expenditure. Hence, I delete the addition of Rs.77,07,600.".
4. We do not see any reason to interfere with the order of Ld. CIT(A) which is based on the Coordinate Bench decisions on similar issue. Therefore, there is no merit in Revenue ground. Accordingly, this ground is dismissed.
5. In the result, appeal of the Assessee is allowed for statistical purposes and appeal of Revenue is partly allowed for statistical purposes.
Order pronounced in the open Court on 16.09.2014.
Sd/- Sd/-
(SAKTIJIT DEY) (B.RAMAKOTAIAH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated 16th September, 2014
VBP/-
7
ITA.No.219 & 517/Hyd/2014
M/s. Deccan Chronicle Holdings Ltd., Hyderabad Copy to
1. M/s. Deccan Chronicle Holdings Ltd., 36-Sarojini Devi Road, Secunderabad - 500 003.
2. The DCIT, Circle 16 (2), Room No.611, 6th Floor, Aayakar Bhavan, Hyderabad.
3. CIT(A)-V, Hyderabad + 1 copy
4. CIT-IV, Hyderabad
5. D.R. "A" Bench, ITAT, Hyderabad.