Commissioner Of Income Tax-Iv v. Ballarpur Industries Ltd.

1. This appeal under Section 260A of the Income Tax Act, 1961 (“the Act”) challenges the Order dt.30.6.2003 passed by the Income Tax Appellate Tribunal (“the Tribunal”). This appeal relates to Assessment Year 1993-94.

2. On 17.10.2007, this appeal was admitted on the following substantial question of law:

1. Whether in the facts and circumstances of the case and in law the Income Tax Appellate Tribunal was legally justified in allowing the payment of Rs. 3,25,00,000/- to Mr. G.R. Hada, u/s.57(iii) of the I.T. Act when such payment was made for enlarging the control and management over M/s. Andhra Pradesh Rayon Ltd.?”

3. The respondent/assessee along with M/s. Andhra Pradesh Industrial Development Corporation (APIDC) and Mr. G.R. Hada had jointly promoted M/s. Andhra Pradesh Rayons Ltd. (A.P. Rayons Ltd.). The shareholding in M/s. A.P. Rayons Ltd. was distributed amongst the promoters in terms of Memorandum of Understanding dt.31.10.1977 (M.O.U.) as under:

Public : 49% APIDC : 10% Mr. G.R. Handa & its Associates : 10.25% Respondent/Assessee & its Associates : 30.75%

4. The M.O.U. further provided a right to Mr. G.R. Handa to acquire from Respondent/Assessee 1/3 of its total shareholding in M/s. A.P. Rayons Ltd. over the period of 15 years.

5. In 1991, Mr. G.R. Handa filed a suit in the Delhi High Court for Specific Performance of the M.O.U. so as to acquire further 10.25% i.e. 1/3 shareholding of the Respondent/Assessee in M/s. A.P. Rayons Ltd. The suit was compromised in the previous year relevant to the Assessment Year and the Respondent/Assessee paid an amount of Rs. 3.25 Crores to Mr. G.R. Handa so as to continue to retain its 30.75 % shares (including the 10.25% shares) in M/s. A.P. Rayons Ltd.

6. During the previous year relevant to the subject Assessment Year, the Respondent/Assessee for determining the taxable income, claimed before the Assessing Officer, the entire amount of Rs. 3.25 Crores as revenue expenditure. This on the ground that it was incurred for the purposes of carrying on its business. This was negatived by the Assessing Officer by his Order dated 29.3.1996 on the ground that the expenditure of Rs. 3.25 Crores had been incurred to acquire an interest and/or control over M/s. A.P. Rayons Ltd. Thus not a revenue expenditure incurred for carrying on respondent/assessee's business.

7. Being aggrieved with the Order dated 29.3.1996 of the Assessing Officer, the Respondent/Assessee filed an appeal to the Commissioner of Income Tax (Appeals) [CIT (A)]. The Respondent/Assessee before the CIT (A) had made an alternate claim for deduction of Rs. 3.25 Crores, u/s.57 of the Act. The CIT (A) by his Order dt.18.12.1998 held that the deduction as claimed of Rs. 3.25 Crores is a revenue expenditure inasmuch as he held that the same would be allowable u/s.57 of the Act provided the income by way of interest/dividend was earned on the expenditure incurred during the subject Assessment Year. However, on facts, the CIT (A) found that there was no income/interest earned during the subject Assessment Year. Therefore, the benefit of deduction u/s.57(iii) of the Act could not be extended to the Respondent/Assessee.

8. Being aggrieved with the Order dated 18.12.1998 of the CIT (A), the Respondent/Assessee filed an appeal to the Tribunal. Amongst others, the respondent/assessee urged the following grounds:

“4c) Without prejudice to the above the learned CIT (A) was wrong in to allowing deduction of Rs. 3,25,00,000/- u/s.57 of the IT as there is no requirement of linking the receipt of the interest and dividend income immediately i.e. in the year of payments of Rs. 3,25,00,000/-.”

9. The impugned Order of the Tribunal records the fact that the Revenue has filed no appeal from the Order of the CIT (A) to the extent it holds that the expenditure of Rs. 3.25 Crores is not capital in nature but is revenue in nature. The impugned Order further records that the only reason for disallowing the expenditure for subject Assessment Year by CIT (A), as deduction u/s.57(iii) of the Act was that the expense of Rs. 3.25 Crores has not yielded any income during the subject Assessment Year. This the impugned order holds is not necessary so long as the amount is expended wholly and exclusively for earning income, whether or not the income has in fact been earned. The impugned Order followed the decision of the Apex Court in CIT v. Rajendra Prasad Moody, 115 ITR 519, wherein the Apex Court has held that deduction u/s.57(iii) of the Act is not conditional upon earning of income in that very Assessment Year for allowing of deduction. On the above facts, the impugned order holds that the amount of Rs. 3.25 Crores was in the nature of investment by which it continued to retain 30.75 % shares in Andhra Pradesh Rayons Ltd. to earn dividend income. Therefore, the appeal of respondent/assessee was allowed.

10. Mr. Bhattad, learned Counsel for the appellant/revenue in support of the appeal submits that the impugned order could not allow the Respondent/Assessee's appeal as the amount of Rs. 3.25 Crores paid to Mr. G.R. Hada was in the nature of capital expenditure so as to acquire control of M/s. A.P. Rayons Ltd. In support, reliance is placed upon the decision of Gujarat High Court in Sarabhai Sons (P.) Ltd. v. Commissioner Of Income-Tax., (1993) 201 ITR 0464. According to the Revenue, the decision of the Apex Court in Rajendra Prasad Moody (supra) would have no application to the present facts.

11. In response, Mr. Dewani, learned Counsel for the respondent/assessee points out that there was no question of acquiring any control over M/s. A.P. Rayons Ltd. as the shareholding of respondent/assessee continued to be at 30.75% even after making the aforesaid payment. It is submitted that the aforesaid payment was a payment made to safeguard its investment to earn dividend/interest income from M/s. A.P. Rayons Ltd. Therefore, the expenditure was in the nature of revenue expenditure. In any event, it submitted that the question as framed does not arise from the Order of the Tribunal, as the Revenue has not disputed before the Tribunal that the payment of Rs. 3.25 Crores made to Mr. G.R. Hada was in the nature of revenue expenditure. Thus, according to him, no interference with the impugned Order is warranted.

12. We have considered the rival submissions. We note that the Revenue has accepted the finding of CIT (A) to the effect that the expenditure of Rs. 3.25 Crores paid to Mr. G.R. Handa would be allowable as a deduction under Section 57 (iii) of the Act. This itself can be allowed provided it is not capital expenditure. In the present case, the Respondent/Assessee has been denied the deduction under Section 57(iii) of the Act by the CIT (A) only because of absence of income by way of dividend/interest in the subject Assessment Year. This connection/nexus between allowing of deduction u/s. 57(iii) of the Act only upon earning of income in the subject Assessment Year has been negatived by the Apex Court in Rajendra Prasad Moody (Supra). In fact, the only requirement is that the expenditure is with the object of earning income and not dependent upon actual earning of income in fact. In this case, the impugned Order of the Tribunal has recorded a finding that the amount of Rs. 3.25 Crores were paid to Mr. G.R. Handa by the Respondent/Assessee only with a view to safeguard its investment in M/s. A.P. Rayons Ltd. so as to earn dividend/interest income.

13. The decision of Gujarat High Court in Sarabhai Sons (P) Ltd. (supra) relied upon by the Revenue would have no application to the present facts, as it found on facts in the above case that the shares were acquired from other shareholders so as to have 100% control over Swastic Oil Mills Ltd. and not for earning income. This was so as the High Court records the fact that as the Assessee therein was not able to acquire 100% shareholding in Swastic Oil Mills Ltd., it again sold some of the shares. Thus, the acquisition of shares was found as a matter of fact not for earning income (although that may be ultimate motive) but the dominant purpose was for the purpose of acquiring full control over Swastic Oil Mills Ltd.

14. Thus, on the present facts, no interference with the impugned Order is called for as it merely follows the Apex Court decision in Rajendra Prasad Moody (supra).

15. Moreover, it may be pointed out that the question as framed on behalf of the Revenue seeks to deny the respondent/assessee the benefit of Section 57(iii) of the Act on the ground that it is in the nature of capital expenditure as it was expended for enlarging control and management of M/s. A.P. Rayons Ltd. This finding of capital expenditure by the Assessing Officer was negatived by the CIT (A), who held it was allowable as a deduction under Section 57(iii) of the Act, only subject to earning of income. Section 57 (iii) of the Act itself excludes expenditure of capital nature. However, the Revenue accepted the above finding of the CIT (A), as no appeal on this aspect was filed to the Tribunal. Therefore, the question, as formulated, does not arise from the impugned Order of the Tribunal.

16. Nevertheless, we have also considered the issue on merits as discussed hereinabove and have held that the impugned Order of the Tribunal calls for no interference.

17. Accordingly, the appeal is dismissed. No order as to costs.