ACIT, CIR.-6., PUNE vs. SAKAL PAPER LTD.,, PUNE

The cross appeals filed by Revenue and assessee were heard together and are being disposed of by this consolidated order for the sake of convenience.

The learned Authorized Representative for the assessee at the outset pointed out that tax effect in the appeal filed by the Revenue is low and in view of the CBDT’s Circular No.21 of 2015, dated 10.12.2015, the said appeal is not maintainable. The issue which is raised in the grounds of appeal is against repairs and maintenance expenses on the fort office of ₹ 28,43,744/-.

The learned Departmental Representative for the Revenue fairly accepted the contention of assessee. In view thereof, appeal of Revenue is dismissed for low tax effect.

Now, coming to the appeal of assessee, wherein the following grounds of appeal have been raised:- On the facts and the circumstances the learned Assessing Officer and Commissioner of Income Tax Appeal erred in 1. In treating the repairs and maintenance of Rs.94,96,845/- as capital expenditure. The same being in the nature of revenue expenditure incurred wholly and exclusively for the purpose of the business, it is prayed that the expenses be allowed in full.

The issue in ground of appeal No.1 is against disallowance of repairs and maintenance expenses of Jalgaon office.

Briefly, in the facts of the case, the assessee had purchased building at Jalgaon for its Jalgaon edition of Daily Sakal. A sum of ₹ 55,03,400/- was incurred on renovation of existing building to make it suitable for running printing press. The assessee claimed that major part of expenses were in the nature of repairs and renovation and were claimed as revenue expenditure. Further, sum of ₹ 39,93,445/- was incurred on modification of existing shed and allied works at Jalgaon. The assessee had carried out modification of generator room, electric panel room, washing and toilet, LG compressor room, plinth for paper unloading area, dispatch areas etc. The total payments were made time to time amounting to ₹ 39,39,445/-. The Assessing Officer held that the expenditure was incurred on improvisation of building and was capital in nature.

The CIT(A) upheld the disallowance made by the Assessing Officer, against which the assessee is in appeal.

The plea of assessee before us is that the expenditure does not bring into existence any new asset nor does it enhance capacity and is only to facilitate

The learned Departmental Representative for the Revenue on the other hand, placed reliance on the ratio laid down by the Hon’ble High Court of Delhi in Bigjo’s India Ltd. Vs. CIT (2007) 161 TAXMAN 135 (Del).

We have heard the rival contentions and perused the record. The assessee had taken land from MIDC on leasehold basis and had carried out repairs and renovation to make it suitable for running printing press. Note on the details of expenses are placed at page 1 of Paper Book. The assessee also submitted the Architect’s final certificate for payment to contractor, wherein it has been mentioned that the total amount of bill submitted by the contractor is ₹ 41,80,903/-. Further, the total amount which is certified is ₹ 39,93,445/-, less retention amount is ₹ 1,84,000/- and the amount which was certified and due for payment to the contractor is totaled to ₹ 38,09,445/-. The said amount is against final bill submitted by the contractor of ₹ 55,03,401/-. The assessee has debited sum of ₹ 55,03,401/- to its Profit and Loss Account, in view of the nature of expenditure, the said expenditure is to be allowed as revenue expenditure in the hands of assessee. However, the same is restricted to the amount of bill which is certified by the Architect as due for payment to the contractor i.e. ₹38,09,445/-. Accordingly, we direct the Assessing Officer to allow expenditure of ₹ 38,09,445/- and the balance expenses claimed by the assessee of ₹ 55,03,401/- is disallowed.

The second part of expenditure debited to repairs and maintenance of Jalgaon office is on account of modification of generator room, electric panel room, washing and toilet, LG compressor room, plinth for paper unloading area, dispatch areas etc. The said expenses are in the nature of repairs and maintenance and are to be allowed as revenue expenditure. Thus, the ground of appeal No.1 raised by the assessee is partly allowed.

First, we take up the issue in ground of appeal No.3. The issue raised in ground of appeal No.3 is against disallowance of ₹ 3 crores paid as compensation to one of the shareholders in line with the directions of the Hon'ble Supreme Court.

Briefly, in the facts relating to the issue, the assessee company claimed an amount of ₹ 3 crores as payment towards compensation to one of the shareholders in accordance with the directions of the Hon'ble Supreme Court. On verification, it was found by the Assessing Officer that these were incurred in connection with a dispute in the Hon'ble Supreme Court with the wife and daughter of the founder of the company Dr. N.B. Parulekar. The suit was filed by the legal heirs of Dr. N.B. Parulekar against allotment of shares to Pawar group. It was stated that the company was also made a respondent to the suit and therefore, it was necessary for the company to defend its decision taken in the normal course of business to protect its business. The assessee claimed the said expenditure to have been incurred wholly and exclusively for the purpose of business. The Assessing Officer however, did not accept this argument and quoting from the relevant paragraphs from the orders of the Hon'ble Supreme Court regarding the nature of dispute which pertained to the allotment of shares to Pawar group, held that the dispute was in fact between Parulekar family and

Before the CIT(A), the assessee claimed that in order to ensure smooth running of the business of the assessee was not hampered and business interests including those of employees, suppliers, creditors, etc. did not suffer, the assessee was bound to defend itself. The Hon'ble Supreme Court later in its judgment in the assessee’s case in March, 2006, while granting compensation of ₹ 3 crores to the legal heirs has recognized this fact vide its observations that “.. The situation cannot now be unscrambled. It is a course of action, which would make the company dysfunctional harming the interests of the whole body of shareholders, affect company’s employees, its creditors and customers….” “and in order to protect the business interests of the company ordered the assessee to pay compensation instead of disturbing the management and share holding pattern, thereby avoiding disturbance in the functioning of the company. It is argued that if, according to the H’ble Supreme Court, the compensation paid is business expediency, the legal expenses incurred in that connection would also have to be business expenditure. The CIT(A) after referring to the facts of the

The assessee is in appeal against the order of CIT(A).

The learned Authorized Representative for the assessee took us through the factual aspects of the case and also pointed out that on the death of founder of assessee, some shares were to be transferred to the trust. However, executors of Will, sold them to Pawar group, without offering to legal heirs. The sale of shares to Pawar group was challenged by legal heirs of Dr. Parulekar. He further pointed that legal heirs as per Articles of company were entitled to shares but they refused to the said shares. However, they were not offered as shareholders and hence, the litigation and the dispute which was challenged before the Hon'ble Supreme Court. The learned Authorized Representative for the assessee pointed out that where there is dispute between the shareholders what is important is how to preserve name of the company and not the nature of dispute. Where the company was getting dysfunctional and where the dispute

The learned Departmental Representative for the Revenue on the other hand, referred to the transaction and pointed out that proper procedure was not followed and the CIT(A) vide para 4.16 has come to a finding that the said payment was penal in nature. He further pointed out that the Tribunal in earlier year at page 13 of the order while deciding the issue of allowability of claim of legal charges paid in respect of aforesaid transaction held the transaction to be penal in nature. He further stressed that where a company does fraud and allots shares in haste; then the company had done wrongdoing and compounding such incident is not business expenditure. Further, the company had not driven any benefit. However, the Assessing Officer and CIT(A) has held the said expenditure to be not allowable as business expenditure under section 37(1) of the Act. Without prejudice to his arguments, the learned Departmental Representative for the Revenue further pointed out that in any case the expenditure incurred was for enduring benefit and at best could be capital expenditure in the hands of assessee company. Vis-à-vis reliance placed upon by the learned Authorized Representative for the assessee on different decisions, the learned Departmental Representative for the Revenue pointed out that the facts were at variance.

The learned Authorized Representative for the assessee in rejoinder pointed out that the arguments made by the learned Departmental Representative for the Revenue were mis-directed. He referred to the order of the Hon'ble Supreme Court and pointed out that there were two different parts. The dispute was not in respect of original shares i.e. 1766 which were transferred by the executors to Pawar group, wherein the role of assessee company was to see whose name was on record. He referred to pages 53 and 54 of the decision of the Hon'ble Supreme Court and pointed out that there was never question of transferring those shares to the assessee. He further pointed out that compensation also did not relate to 1766 shares, for which separate relief was given. He also stressed that there was no fraud as the transaction was between the executors and the Pawar group and the assessee had to record the transaction of transfer. Referring to the decision of the Hon'ble Supreme Court, he pointed out that the Apex Court laid down that the Article had two parts i.e. first offer was made to legal heir and after they refused, then the second offer of sale of shares should have been made to all shareholders of the company, which the executors failed to do. The Apex Court thus, observed that if rectification was to be done i.e. offer is to be made to the shareholders of the company, then it would go back to the first stage of transaction i.e. way back to 20 years and in order to save the working of assessee company, the Hon'ble Supreme Court directed the assessee to pay compensation.

We have heard the rival contentions and perused the record. Briefly, in the facts of the case, one Dr. N.B. Parulekar and his wife Mrs. Shanta Parulekar promoted the company known as Sakal Papers Pvt. Ltd. in 1948. Dr. N.B. Parulekar died in 1973. Dr. N.B. Parulekar in his Will had appointed four executors i.e. Mrs. Shanta, his wife and 3 others as executors and trustees of the

In spite of the said dictate of the Articles of Association, the three executors transferred the shares to a third party i.e. Pawar group without offering the same to Mrs. Shanta Parulekar and legal nominee Smt. Claude Lila

The Supreme Court held that entire transaction of shares transfer was riddled with illegalities. The CIT(A) in paras 4.9 to 4.13 at pages 17 to 22 has elaborately taken note of various facets of the decision of Hon’ble Supreme Court in holding the transaction of allotting additional shares to Pawar group to be carried out without following the Articles of Association of assessee company and even not giving notice as envisaged under the Companies Act for increase in share capital of any company. The Hon'ble Supreme Court thereafter, proceeded to decide the question as to what relief could be given to Parelukar especially in view of the fact that a period of 20 years had elapsed. The Hon'ble Supreme Court also took note of the submissions of Pawar group in the course of hearing that status quo may not be disturbed and relief be given by awarding compensation. The Hon'ble Supreme Court held as under:- “VI.3 Having effectively held on all issues in favour of the appellant the question remains as to whether we should, in exercise of our discretion under section 155, grant the appellant the relief of rectification of the shares as claimed. Although the logical conclusion of our findings would be to set aside the transfers and restore the status quo ante, the question is should the share register of the company be directed to be rectified now in respect of shares, the impugned transfer of which took place more than 20 years ago ? The respondents have submitted in the course of the hearing that this Court should not in any event disturb the status quo but should mould the relief by awarding compensation, if necessary as prayed for by the appellant. They have referred to the decision in Needle Industries (I) Pvt. Ltd. V. Needle Industries Newey (I) Holding Ltd. (1981) 3 SCC 33 in support of this submission. We agree. There has been a sea change in the factual scenario. Shantha has dies. The company has become a public limited company. The respondents have been at the helm of the company more than two decades during the legal struggle. Many decisions must of necessity have been taken and implemented. The situation cannot now be unscrambled. It is a course of action which would make the company dysfunctional harming the interests of the whole body of shareholders, affect company's employees, its creditors and customers. It is not as if we are able to grant any relief directly to the appellant except to the extent of setting aside the transfer. The appellant will still have to pursue her remedies for effective relief in the two pending suits in the District Court of

The Hon'ble Supreme Court first decided the issue of compensation to be paid by the assessee company to Parulekar at ₹ 3 crores for not offering 3417 shares and 93 shares first to Parulekar and violating the Articles of Association of the assessee company, by offering the same to the Pawar group. The second part of the decision of Hon'ble Supreme Court was in respect of issuance in allotment of 17,666 shares in the company which was said to have been validly done to the Pawar group. In this regard, Apex Court directed the assessee company to allot shares to Parulekar on proportionate basis out of 17,666 shares.

The learned Authorized Representative for the assessee pointed out that the case of Revenue is that there is violation of provisions of the Companies Act and hence, compensation paid by the assessee cannot be allowed as expenditure. It was clarified by him that violation, if any pertained to allotment of 17,666 shares to Pawar group, against which the direction of the Hon'ble Supreme Court was to allot proportionate shares to Parulekar. Further, the assessee had been directed to pay compensation of ₹ 3 crores to Parulekar on account of 3417 shares and 93 shares, which in the first instance were not offered to Parulekar but were transferred to Pawar group. The Hon'ble Supreme Court while deciding the question of awarding compensation had taken note of the fact that the aforesaid transaction was nearly 20 years before the decision in the case and during that period the company had been carrying on its business. The Hon'ble Supreme Court observed that Many decisions must of necessity have been taken and implemented. The situation cannot now be unscrambled. It is a course of action which would make the company dysfunctional harming the interests of the whole body of shareholders, affect company's employees, its creditors and customers. It is not as if we are able to grant any relief directly to the appellant except to the extent of setting aside the transfer. The Hon'ble Supreme Court also took note of the role of Parulekar in contributing to the situation since they had ultimately accepted the Chartered Accountant’s report and also that Single Judge had given them an opportunity of paying share price into the Court within period of six weeks which was not done and if they had done so, then they would have been in a stronger position vis-à-vis Pawars. The Apex Court awarded compensation in view of section 155 of the Companies Act, wherein appellants before the Apex Court had put in an alternate prayer for such payment of compensation. The said compensation was directed to be paid by the assessee to Parulekar. In such circumstances, the question which arises is

The first decision is in the case of CIT Chemosyn Ltd. (supra). In the facts of the said case, consequent to difference between the two groups, the dispute reached the Company Law Board as well as the Supreme Court of India. Thereafter, a settlement was arrived at between the two warring groups of shareholders and as per directions of the Company Law Board the assessee- company was directed to buy 34% shareholding of one of the warring group and cancel the same. The respondent-assessee had claimed before the Assessing Officer that the amount of Rs.6.81 crores (being the difference between consideration paid and face value of the shares acquired for cancellation) was revenue expenditure. The Hon’ble High Court took note of the order of Tribunal, wherein it was held that the expenditure incurred by the assessee company to purchase its shares was deductible as revenue expenditure, in view of the dispute between the two warring groups of shareholders the business of respondent assessee had suffered. The Hon’ble High Court held as under:-

The issue raised in ground of appeal No.2 is against disallowance of legal expenses of ₹ 37,10,056/-.

The learned Authorized Representative for the assessee fairly pointed out that the said issue stands covered against the assessee by the order of Tribunal in earlier years i.e. assessment years 2003-04 and 2004-05.

The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below.

The issue raised in the present appeal is identical to the issue before the Tribunal. Further, the Hon'ble Supreme Court dismissed the Special Leave Petition filed in the case of CIT Vs. Best Corporation Ltd. (supra), wherein the High Court held that since it had consistently followed decision in case of Velayudhaswamy Spinning Mills (P.) Ltd. Vs. ACIT (2012) 340 ITR 477 (Mad) and on the basis of said decision CBDT had issued Circular No.1 of 2016, dated 15.02.2016 clarifying term ‘initial assessment year’ in section 80IA(5) of the Act, order of Tribunal holding that assessee was entitled to deduction under section 80IA of the Act without setting off losses/unabsorbed depreciation pertaining to windmill, which were set off in earlier year against other business income was deserved to be upheld.

The CBDT vide Circular No.1/2016, dated 15.02.2016 has also clarified situation of claim of deduction under section 80IA(4) of the Act by any concern by adopting initial assessment year as the first year of claim, irrespective of the fact

In the result, appeal of Revenue is dismissed and appeal of assessee is partly allowed.