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i) Echjay Industries Ltd. vs. DCIT 88 TTJ (Mumbai) 1089..

ii) Atul Chemicals Industries Ltd. vs. ITO (ITA No.1395/Mum/1980 dt. 5th Sept., 1981)

iii) IRC vs. Carron Co. 45 TC 18 (HL).

20. The submissions made on behalf of the assessee on this issue did not find favour with the learned CIT(Appeals). As regards the emphasis laid by the assessee on the order of Company Law Board, he held that the consent terms in the case of the assessee were agreed by the family as a part of the family settlement and the Company Law Board had simply observed in its order that the parties were prepared to abide by the said settlement. According to the learned CIT(Appeals), the purchase of shares was a result of mutual settlement amongst the family members and the expenditure incurred for this purpose was of personal nature. He held that the said expenditure was incurred for the purpose of acquiring shares by a group of persons and not by the assessee company. He also held that the assessee company could not produce any evidence to show that the group of minority shareholders was actually causing any disturbance in the conduct of the business. He held that the expenditure incurred by the assessee company on purchase of shares thus was a capital expenditure of personal in nature which could not be allowed as deduction. Accordingly, the disallowance made by the AO on this issue was confirmed by the learned CIT(Appeals).

21. The learned counsel for the assessee submitted that there was a dispute between two groups of Directors of the shareholders which had created various problems in the smooth functioning of the business of the assessee company. He submitted that in order to get over the said problems and to carry on its business smoothly and efficiently, the assessee company purchased the shares of one group as per the Company Law Board's order. He submitted that in the similar facts and circumstances involved in the case of Echjay Industries Ltd. (supra) the Tribunal has held that the expenditure incurred on purchase of shares is deductible as business expenditure being revenue in nature. He submitted that the said decision of the Tribunal which is directly applicable to the facts of the present case has been upheld by the Hon'ble Bombay High Court by dismissing the appeal filed by the Revenue against the said decision by its order dated30th July, 2008 passed in ITA No. 337 of 2004. He has contended that a similar issue thus has been decided in favour of the assessee by the Hon'ble jurisdictional High Court which is binding on this Tribunal.

22. The learned DR, on the other hand, strongly supported the impugned order of the learned CIT(Appeals) on this issue. He submitted that as rightly held by the learned CIT(Appeals) on appreciation of the facts of the assessee's case, the shares were purchased as a result of mutual settlement amongst the family members and the expenditure incurred for this purpose was personal in nature. He contended that no evidence whatsoever has been brought on record by the assessee to show that any serious disturbance was created by the minority shareholders affecting its day to day business. He submitted that in the case of Echjay Industries Ltd. 257 ITR 1 (AT) there was serious dispute amongst the shareholders affecting growth of the assessee company and in the facts and circumstances of that case, the expenditure incurred on purchase of shares by the assessee company was held to be allowable expenditure by the Tribunal. He submitted that similarly in the other cases cited by the learned counsel for the assessee there was a specific finding regarding obstacles created by the minority shareholders and, therefore, the expenditure incurred to get over the said difficulties by purchase of shares was held to be an allowable business expenditure. He relied on the decision of Hon'ble Gujarat High Court in the case of Vikram Mills Ltd. vs. CIT 242 ITR 290 (Guj.) wherein it was held that betterment charges paid by the assessee are not deductible. He contended that the payment made by the assessee in the present case for purchase of shares is like betterment charges only and the same, therefore, are not deductible. He also relied on the decisions of Hon'ble Delhi High Court in the case of Buland Sugar Co. Ltd. Vs CIT 130 ITR 434 and in the case of Mehra Khanna and Co. Vs CIT 250 ITR 436 and submitted that the expenses of similar nature claimed by the assesses in the said cases were disallowed holding the same as not incidental to the business or capital in nature.

23. We have heard the rival submissions and also perused the relevant material on record. It is observed that shares of a warring group of shareholders, who were creating problems in the smooth functioning of the business, were purchased by the assessee company at premium as per the order of the Company Law Board and the said premium has been claimed as deductible expenditure being wholly and exclusively incurred for the purpose of business. In support of this claim, reliance has been mainly placed on behalf of the assessee before the authorities below as well as before us on the decision of coordinate bench of this Tribunal in the case of Echjay Industries Ltd. vs. DCIT 88 TTJ (Mumbai) 1089. As mentioned by the learned CIT(Appeals) in his impugned order as well as by the learned DR in the course of his arguments raised before us, the facts involved in the present case, however, are different from the facts involved in the case of Echjay Industries Ltd. (supra). According to the learned CIT(Appeals), the purchase of shares by the assessee company was a result of mutual settlement amongst the family members and the expenditure incurred for this purpose on payment of premium was of personal nature. He held that the Company Law Board had simply accepted this family settlement keeping in view that both the sides were prepared to abide by the said settlement. It is observed from the perusal of the order passed by the coordinate bench of this Tribunal in the case of Echjay Industries Ltd. (supra) that similar fact situation was involved in that case also. As mentioned in paragraph No. 22 of the order of the Tribunal passed in the case of Echjy Industries Ltd. (supra), the assessee company was a private limited company with four brothers and their family members as Directors/Shareholders. Serious disputes broke out between them 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. Two shareholders, namely, Hasmukhdas H. Doshi and Shri Manharlal H. Doshi filed petitions before the Hon'ble Bombay High Court under the provisions of sections 397 and 398 of the Companies Act, 1956 alleging mis-management and oppression of minority and seeking Court's intervention. After a period of over 6 years good sense prevailed between two warring groups and consent terms were drawn by the shareholders. Hon'ble Bombay High court in its order passed on 2nd May, 1991 decreed approving the consent terms, inter alia, giving the direction that the company would purchase the shares of the family members of Shri Maganlal H. Doshi, Shri Hasmukhdas H. Doshi and Shri Manharlal H. Doshi at a premium of Rs.900/- per share. The facts involved in the present case on this aspect of the matter are similar inasmuch as after prolonged dispute, settlement was reached between the warring groups of shareholders which were belonging to one family and taking note thereof, the Company Law Board directed the assessee company to buy 34% shareholding of Umesh shah group at premium