Decided on March 31,2008



Rajendra Singh, Accountant Member - (1.) THIS appeal by the assessee is directed against the order dated 19.7.2006 of CIT(A) for the A.Y. 2003-04. The assessee in this appeal has raised disputes on two different grounds, which have been dealt with in the succeeding paras.
(2.) The dispute raised in ground No. 1 is regarding disallowance of deduction of Rs. 2114000/- claimed by the assessee on account of compensation paid to Ex-shareholders as per the direction of the Company Law Board. Briefly stated, the facts of the case are that minority shareholders who held 56100 equity shares of face value of Rs. 5.61 lacs had filed petition under Section 397/398 of the Companies Act alleging oppression and mismanagement by the majority shareholders. The Company Law Board vide order dated 31.1.2001 held that in case the minority shareholders were interested in selling the shares and the company decided to purchase the shares and would paid interest @ 21% from the date money was remitted into the shares of the company till date of purchase. In view of this order, the Company Law Board, the company had purchased 56100 shares of the minority shareholders and paid additional compensation of Rs. 2114000/- in addition to the face value of Rs. 5.61 lacs. The company as per the direction of the Company Law Board had reduced the authorised share capital by Rs. 5.61 lacs and the additional compensation of Rs. 2114000/- was claimed as deduction in the profit and loss account. To the query raised by the assessing officer, the assessee explained that the compensation had been paid to get rid off minority shareholders who were creating obstacles in the smooth functioning of the company and the compensation paid was thus to facilitate the management and conduct of the business more efficiently and profitably and therefore, it was allowable as deduction. The assessing officer was not satisfied. It was held by him that the amount paid by the assessee for purchase of its own equity shares couldn't be allowed as revenue expenditure and accordingly, he disallowed the claim, which was disputed by the assessee. In appeal, the assessee submitted before CIT(A) that by paying the compensation, no tangible or intangible asset had come into existence nor any enduring advantage had accrued to the assessee. The compensation had been paid not for acquiring any asset but for protecting the company's asset and for improving the profitability of the company by ousting the erring group of shareholders. The compensation was, therefore, operational expenditure allowable as deduction. CIT(A) however was not satisfied and it was observed by him that the payment had been made for purchase of shares and therefore, any expenditure incurred for purchase of share, would be capital expenditure.
(3.) HE referred to the judgement of Hon'ble Supreme Court in case of Brook Bond India Ltd. 225 ITR 798 in which it was held that fee paid to Registrar of Companies for expansion of capital base of the company was capital expenditure. CIT(A) accordingly upheld the order of the assessing officer that the compensation was of the nature of capital expenditure and thus upheld the disallowance against which the assessee is in appeal before the tribunal.;

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