(2012) 77 DTR 89 (Mum) Chemosyn Ltd. vs. Asst. CIT A.Y.: 2007-08. Dated: 07-09-2012

Facts:

The assessee, a pharmaceutical company had two groups holding shares of a company i.e. one owning 66% and other 34%. Owing to differences between two groups which were headed by two brothers. The disputes between them reached the Company Law Board which directed assessee to buy 34% shareholding. The assessee purchased 34% shareholding and paid Rs. 6.81 crores as premium on purchase and cancellation of own shares. As per Assessing Officer, the said expenditure was incurred as a part of family dispute settlement and the same could not be attributed to the business of the company. The Assessing Officer disallowed the expenditure stating that even otherwise, the same was a capital expenditure since incurred for acquisition of a capital asset. The action of the Assessing Officer in disallowance was upheld by the learned CIT(A) stating that the purchase of shares was a result of mutual settlement amongst family members and hence was of personal nature.

Held:

In the given case, the warring group of shareholders were creating problems in the smooth functioning of the business. The total sales of the assessee which were in the range of Rs. 20 to 25 crore p.a. during the pre-dispute period had come down in the range of Rs. 10 to 14 crore during litigation period. After the settlement period there was substantial increase in sales. Similarly, negative profits during the period of disputes became positive after the settlement. Very few new products were launched by the assessee company during the period of disputes, while many new products were launched during the post-settlement period giving boost to assessee’s business.

Documentary evidence showed that demand notices were issued by the Debt Recovery Tribunal to the assessee for recovery of debts during the period of disputes, whereas a fresh loan was sanctioned by bank to the assessee for the purpose of working capital as well as for the purpose of acquiring new assets after the settlement. All these facts are sufficient to show that the dispute among the shareholders had affected the day-to-day business of the assessee and that the settlement of the said dispute certainly helped the assessee to run its business smoothly and effectively. Therefore, expenditure incurred by the assessee company on payment of premium for purchase of its own shares from warring group of shareholders and cancellation thereof is revenue expenditure and is allowable as business expenditure.