TMI Blog2002 (4) TMI 893X X X X Extracts X X X X X X X X Extracts X X X X ..... utta High Court in the case of CIT v. Vidyut Metallics Ltd. [1993] 203 ITR 779. We have considered the rival submissions and have gone through the material available on record. We find that the Commissioner of Income-tax (Appeals), in his elaborate discussions in paragraphs 5 and 6 of his order, has mentioned that the issue of disallowance under rule 6D of the Income-tax Rules has been considered by the Calcutta High Court in the case of Vidyut Metallics Ltd. [1993] 203 ITR 779, wherein it was held that the restriction under rule 6D should be confined only to expenses on stay and would not cover other expenses provided they are not personal in nature, and following that decision he deleted the addition. The learned Departmental Representative could not place any material to take a difference view in the matter. We, therefore, agree with the view taken by the Commissioner of Income-tax (Appeals) on this issue. This ground of the Revenue is accordingly rejected. The second ground raised by the Revenue reads as under : On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in holding that the allocation of electricity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the material available on record, as also the submissions made by the assessee before the Commissioner of Income-tax (Appeals). In our considered view, the Commissioner of Income-tax (Appeals) was justified in restricting the allocation of electricity expenses to Rs. 2,00,000. We, therefore, find no reason to take a different view in the matter. Accordingly, the order of the Commissioner of Income-tax (Appeals) on this issue is upheld and the Revenue s ground is rejected. The last ground in the Revenue s appeal reads as under : On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in deleting the addition to the closing stock amounting to Rs. 33,79,025 made by the Assessing Officer on account of modvat credit. Having heard both the parties, we find that this issue stands covered in favour of the assessee by the decision of the Bombay High Court in the case of CIT v. Indo Nippon Chemical Co. Ltd. [2000] 245 ITR 384. Respectfully following the said decision of the jurisdictional High Court, we do not find any justification to interfere with the order of the Commissioner of Income-tax (Appeals) on this issue. Accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal as well as the latest decisions on the issue, the Tribunal has confirmed the disallowance made under section 37(4) of the Act. We have considered the rival submissions and have gone through the material available on record. We find that this issue was discussed by the Tribunal elaborately in the latest order in the case of Murply (India) Ltd., in which all the earlier decisions of the Tribunal as well as the High Courts were considered at length and for the reasons stated therein came to the conclusion that the expenditure incurred for the maintenance of a guest house was not allowable under the provisions of section 37(4) of the Act. Respectfully following the said decision, to which one of us was a party, we do not find any justification to interfere with the order of the Commissioner of Income-tax (Appeals) on this issue. Accordingly, the order of the Commissioner of Income-tax (Appeals) on this issue is upheld and the assessee s ground is rejected. The next grievance of the assessee in its appeal relates to the disallowance of sundry expenses of Rs. 2,90,000. An amount of Rs. 2,90,400 was paid by the assessee-company to various employees, leaders and trade unions in and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined any details of such expenditure. In the absence of these details, it is difficult to believe that the payments were made to employees or union in order to maintain peace and tranquility in the factory premises. In the assessment year 1989-90, on similar facts, the Tribunal had confirmed the addition. There is no additional material before us to take a different view in the matter. Therefore, we agree with the view taken by the Revenue authorities on this issue. The next grievance of the assessee in its appeal is as under : On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of Rs. 1,28,496 made under section 43B of the Act. He ought to have appreciated that in view of the fact that the payments in respect of the same being made before the due date for furnishing the return, the same was not disallowable under section 43B. At the time of hearing, learned counsel for the assessee did not press the above ground. Therefore, the same is rejected. Ground No. 5 in the assessee s appeal relates to deduction under section 80HHC of the Act. The assessee while claiming deduction under section 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. They were not part of sales turnover. Reliance was placed on the decision of the Bombay High Court in the case of CIT v. Pink Star [2000] 245 ITR 757. He clarified that the receipt and expenses incurred under these heads were separately shown in the accounts. He relied on the observations of the Bombay High Court in the case of CIT v. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769 to submit that the receipts on these heads do not give rise to any profit and such items not generating profit, should not form part of turnover under the provisions of section 80HHC of the Act. Alternatively, he submitted that if those receipts are considered as part of turnover, the expenses incurred by the assessee under the same heads should be reduced from such receipts. Learned counsel for the assessee submitted that the observations of their Lordships in the case of Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769 (Bom) were in different context. The activities performed against which the assessee has received payments are part and parcel of the sales activities. On the other hand, the learned Departmental Representative pointed out that here is a case of a company in which the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortunity of being heard to the assessee to decide the issue afresh in accordance with law and also in the light of the latest decisions on the issue. We direct accordingly. Ground No. 6 in the assessee s appeal reads as under : On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in confirming the reduction in the amount of deduction under section 80-I made by the Assessing Officer by attributing certain unrelated expenses (i) being a part of interest on unsecured loan allocated on turnover basis and (ii) estimated electricity expenses aggregating to Rs. 7,45,976 to the new unit. We have discussed the factual position while dealing with ground No. 2 in the Departmental appeal. Regarding the allocation of interest, the Assessing Officer was of the opinion that a portion of the interest paid by the assesseecompany should be allocated to the unit qualifying for deduction under section 80-I of the Act. On the basis of sale ratio, he allocated Rs. 7,45,976 out of the total interest on unsecured loans of Rs. 78,55,479. Before the Commissioner of Income-tax (Appeals), it was pointed out that for setting up of section 80-I unit, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition of the balance of gear cutting unit. Except for these three machines, the assessee did not avail of any loan and did not incur any interest. Reliance was placed on the decision of the Tribunal in the case of Usha Rectifier Corporation (I.) Ltd. v. IAC in I. T. A. No. 2194/Delhi of 1986. On the other hand, the learned Departmental Representative relied on the orders of the Revenue authorities. We have considered the rival submissions and have gone through the material available on record. It is an admitted position that the assessee is maintaining separate books of account, which have been audited by an authorised chartered accountant. These books have also been accepted by the Department. Thus the assessee could correctly work out the capital employed by taking the figure recorded in the books. Under these circumstances, unless there is evidence to indicate that borrowings were intended or were taken for the purpose of installation of plant and machinery in the new industrial unit, there is no reason on the basis of which the capital employed could be reduced. The assessee has pointed out that except for three machineries installed in the new industrial unit, no other inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeking court s intervention for winding up of the company or passing such order as it may deem fit in the interests of the company. The company s management apprehensive of winding up of the company by the court order started working under scare. After a period of over six years, good sense prevailed between the two warring groups and consent terms were drawn by the shareholders and the Bombay High Court in its orders passed on May 2, 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 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 as by way of premia. The total payment accordingly came to Rs. 1,02,35,900 by way of repayment of the capital sum and an amount of Rs. 9,21,23,100 by way of premia. The consequential reduction in share capital was approved by the High Court. The assessee-company debited the premia amount paid to the profit and loss account for the year and has claimed the same as dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company an uninhibited mind at work for the better and efficient working. Our attention was invited to the court decree appearing at pages 57 to 69 of the paper book and the relevant clauses, viz., 1, 2 3, 4 and 5, were brought to our notice to contend that the court passed this compromise decree between these two warring groups keeping in view the interests of the company as supermost. In this connection, our attention was invited to the commentary of Ramaiya s on Company Law, Part VI, Management and Administration, page 2292, given on section 402, wherein it is mentioned that where a compromise or settlement is shown to have been arrived at between the parties to a proceedings under sections 397 and 398 of the Companies Act, 1956, the court has to consider whether the said settlement was in the interests of the company as well as in public interest and if it is not so, the court is not bound to accept and record the same. It was also mentioned that the proceedings under sections 397 and 398 are of representative nature. No individual rights can be ascertained nor can a personal relief granted to any member. The reliefs contemplated under both the sections concern the affairs of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee stands on a better footing. The position will not affect merely because a reference application is pending before the High Court. Reliance was also placed on the decision of the Allahabad High Court in the case of CIT v. Muir Mills Co. Ltd. [1984] 148 ITR 418. It was also submitted that the decision relied upon by the Commissioner of Income-tax (Appeals) in the case of Albert David Ltd. v. CIT [1981] 131 ITR 192 (Cal) is distinguishable on facts. In that case, the personal rights and title of certain shareholders in third party was the subject-matter of appeal, which is not the case here. Therefore, this decision is not applicable to the facts of the present case. On the other hand, the learned Departmental Representative heavily relied on the order of the Commissioner of Income-tax (Appeals) and pointed out that the two warring groups of the shareholders desired to hold the administration of the assessee-company and accordingly they filed the petition before the High Court. In this way they have distributed the assets of the company by a compromise decree. So the decision of the Tribunal in the case of Atul Chemicals Industries Ltd. (supra) is not applicable to the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sense prevailed between the two warring groups and a consent term was drawn by the shareholders, which was approved by the Bombay High Court by way of decree dated May 2, 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was in the interests of the company as well as in public interest and if it is not so, the court is not bound to accept and record the same (Shanti Prasad Jain v. Union of India [1973] 75 Bom LR 778, 789 and Syed Mohamed Ali v. R. Sundaramurthy [1958] 28 Comp Cas 554 (Mad)). While considering such compromise it was held in the case of Syed Mohamed Ali v. R. Sundaramurthy [1958] 28 Comp Cas 554 (Mad) that proceedings under sections 397 and 398 of the Companies Act are not like a suit between private parties which may be compromised in any manner they choose. The interests of the company are of paramount importance and the proceedings should not be conceived as a mere dispute between individuals. The commentary further mentions that the court may accept a compromise which is in the larger interest of the company or in public interest even though it may not be in the interest of the majority shareholders. It is further observed that a notice had to be issued to the Government to ensure the prime interest of the company and public. Therefore, the Rajasthan High Court in the case of Sadul Textiles Ltd. v. Raja Textiles Ltd. [1978] Tax LR 2119, held that the court will not accept any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... armony and smooth management of the company, the interest of business would serve and that is the whole purpose of such payment. Therefore, the amount paid for this purpose was on revenue account. Applying those principles, the position to our mind is clear that by getting rid of the minority shareholders, the company could not be said to have acquired any enduring benefit. Secondly, even if it is assumed that an during benefit has been obtained, even then such enduring benefit is not relatable to fixed capital structure of the company because it has neither increased the assessee assets nor the company could be said to have acquired any right of income yielding nature. The act of writing off of share capital by way of reduction, may on the first blush suggest that the capital structure of the company has been affected, but it is not so if the facts are examined a little more closely. The reduction of the share capital was merely a consequence of the agreement which has to be given effect to, that too by an order of the court where the interest of the company as well as of the public has to be necessarily kept in mind. Thus writing off of the share capital by way of reduction as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the capital expenditure incurred by the company. In the cases of Brooke Bond India Ltd. [1997] 225 ITR 798 (SC) and Kodak India Ltd. [2002] 253 ITR 445 (SC), similar expenditure incurred in connection with the issue of shares with a view to increase the share capital relating to the expansion of the capital base, was the issue before the Supreme Court and in that connection the apex court has held that the expenditure incurred was capital in nature. However, the facts of the present case are distinguishable. Here there is no such question. Similarly in the case of Premier Construction Co. Ltd. [1966] 62 ITR 176 (Bom), there was a litigation between the share holders and the board of directors of the company in which the assessee had incurred an expenditure for litigation. In those circumstances the Bombay High Court has held that where the expenditure incurred by the company was for defending the suit in trial court that was allowable under section 10(2)(xv) of the 1922 Act. However, it was held that where the expenditure was incurred to defend the appeal relating to a matter concerning the shareholders and the board it was not allowable. The facts of the present case are also n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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