VAIPA PHARMACEUTICALS P.LTD,MUMBAI vs. ASST CIT 8(3), MUMBAI

06/01/2016 सुनवाई क� तार�ख / Date of Hearing : 20/01/2016 आदेश क� तार�ख /Date of Order: आदेश / O R D E R Per Ashwani Taneja (Accountant Member): This appeal has been filed by the Assessee against the order of Ld. Commissioner of Income Tax (Appeals)-18, Mumbai {(in short ‘CIT(A)’}, dated 11.06.2012 for the assessment year 2009-10, passed against the assessment

2 Vaipa Pharmaceuticals order passed by the Assessing Officer (in short ‘AO’) u/s 143(3) of the Act, on the following grounds:

“1.Commissioner of Income Tax (A) has erred in conforming the disallowing of Rs.1,85,10,887/- made by the Assessing Officer u/s 14A read with rule 8 though the company has not spent the said amount to earn exempt income. 2.Commissioner of Income Tax (A) has erred in concurring with the Assessing , Officer in treating the legal expenses of Rs.1,85,10,887/- as of capital nature/ and not allowing as business expenses u/s.37(1) of the Income Tax Act 1961. ' 3. Without prejudice to Grounds of Appeal No.1 and No.2 the legal expenses as incurred by assessee company should have allowed as expenses to earn capital gain and Commissioner of Income Tax (A) earned in not treating said expenses be allowable as expenses incurred wholly and exclusively to earn Capital Gain from transfer of shares.”

3 Vaipa Pharmaceuticals 3.1. The brief facts noted from the records brought before us are that during the year under consideration the assessee company was engaged in the manufacture and processing of Ayurvedic medicines. The assessee company had a substantial stake in M/s Zandu Pharmaceutical Works Ltd. (in short Zandu). During the year under consideration, one Emami Group acquired substantial holding of Zandu, and as required under SEBI Law, it was required to acquire further 20% stake from open market by way of open offer. It made open offer of Rs.7,315/- per share in June 2008. The assessee company, with a view to safeguard its investment and its business relationship with Zandu, approached various top lawyers as well as financial advisors to evaluate the maximum value that it could get and also to initiate legal methodology to prevent ‘Emami’ to buy shares at such low price of Rs.7,315/- per shares. In this manner, actual take over price was increased to Rs.16,500/- per share, thereby leading to a significant increase in capital gains income of the assessee company for Rs.17.05 Crores, approximately. For fighting this legal battle, the assessee company availed the benefit of professional services of M/s AZB & Partners and paid fee for the leagal services availed by it. The fee so paid was claimed as legal expenses. But AO disallowed these expenses by invoking the provisions of section 14A on the ground that expenses were incurred to safeguard the investment-interest of the assessee and that investment would yield an exempt income in the form of dividend income.

4 Vaipa Pharmaceuticals 3.2. Being aggrieved, the assessee filed an appeal before Ld. CIT(A), where no relief was given and disallowance made by the AO was confirmed.

3.3. Still being aggrieved, the assessee filed an appeal before the Tribunal.

3.4. During the course of hearing, it has been submitted on behalf of the assessee that AO’s allegation is totally irrational, as no person would incur such huge expenses to merely safeguard their dividend income. The legal fees were paid to safeguard the investment made by the assessee. It was further submitted that the assessee wanted to protect its business with Zandu. Thus, the impugned expenses have been incurred to maintain the business and to protect the investment. It should be allowed as revenue expenditure. Alternatively, it can be allowed to be added to the cost of shares towards cost of improvement. On the other hand, Ld. DR supported the orders of the lower authorities.

3.5. We have gone through the orders of the lower authorities and submissions made before us by both the sides. At the very outset, it is noted by us that Ld. CIT(A) has given a finding in last para of his order that the impugned expenses relates to the assessee company. The said para is reproduced below for the sake of ready reference: “The challenge of the appellant to the fact that AO has erred in assuming expenditure incurred by the appellant in 5 Vaipa Pharmaceuticals relation to their interest in Zandu Pharmaceuticals Works Ltd. (ZPWL)- is liability of ZPWL-borne by the appellant-is correct because the expenditure of Rs.1,85,10,887/- has been shown by the appellant to have been incurred by him-since, M/s. ABZ & Partners have in letter dated 31.03.2009 required the appellant to make payment of this bill- which clearly show that this expenditure relates to the appellant. Hence, to this extent only- the plea of the appellant is accepted.”

3.6. From the perusal of the above, it is clear that genuineness of the expenses is no more in doubt. It is also not in doubt that impugned expenses relate to the assessee. The aforesaid findings have not been challenged by the Revenue by way of appeal or Cross Objections. Thus, admitted position is that the expenses pertain to the assessee and these are genuine. Under these facts and circumstances, limited question that remains to be decided by us is that whether the assessee can claim benefit of these expenses in any manner. The undisputed facts brought before us are that legal fees has been paid to M/s AZB & Partners (advocates and solicitors) for protecting the investment of the assessee with Zandu. Further, an admitted fact is that as a result of the aforesaid legal exercise, the assessee earned larger amount of capital gains as initial open offer of Rs.7,315/- per share was eventually enhanced to Rs.16,500/- per share. The totality of facts and circumstances of the case and documentary evidences brought before us clearly suggest that undoubtedly, there was improvement in 6 Vaipa Pharmaceuticals the value of the asset being shares of Zandu held by the assessee company. During the course of hearing, both the parties fairly agreed that even if impugned expenses may not be allowable as revenue expenses but these were, for sure, aimed for providing enhancement to the value of the shares. Under these circumstances, we do not find any hesitation in holding that these expenses should be added to the cost of shares as cost of improvement. The AO is directed to recompute the amount of capital gain earned by the assessee. Accordingly, ground number 3 is allowed and ground no.1 and 2 are dismissed.

Order pronounced in the open court on 20th January, 2016.

Sd/- Sd/- (Sanjay Garg ) (Ashwani Taneja) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER मुंबई Mumbai; �दनांक Dated :20 /01/2016 ctàxÄ? P.S/.�न.स. आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT, Mumbai. 4. आयकर आयु�त / CIT(A)- , Mumbai 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai