S.H. Kelkar And Co. P.Ltd , vs Assessee

The present miscellaneous application has been moved by the assessee pleading that a mistake has crept in the order dated 07.11.14 of this Tribunal passed in ITA No.678/M/2012 relevant to assessment year 2008-09.

2. It has been pleaded that the relevant contentions and the case laws have not been considered by the Tribunal while adjudicating grounds No.10 to 12 of the appeal which were relating to disallowance of Rs.1,32,74,005/- on account of consultation and legal charges. The said grounds No.10 to 12 of the appeal for the sake of convenience are reproduced as under:

"D) Sustaining the disallowance of Rs.1,32,74,005/- being the consultation and legal charges incurred during the year MA No.434/M/2014 2 (Arising out of ITA No.678/M/2012) M/s. S.H. Kelkar and Co. Pvt. Ltd.

10. The lea rned CIT(A ) e rre d on fa cts a nd in law in sust aining t he disallowance of Rs.1,32,74,005/- being the consultation and legal charges incurred by the appellant during the year under consideration.

11. The learned CIT(A) failed to appreciate that the expenses were wholly and exclusively incurred for the purposes of business and hence, were allowable in nature.

12.The appellant prays to your honour to delete the disallowance of Rs.1,32,74,005/- being the consultation and legal charges incurred during the year."

3. In this case, it has been claimed by the assessee that the legal expenditure had been incurred by it in connection with company law board proceedings in the case filed by the group of shareholders of one faction against the other faction of the shareholders. The Assessing Officer (hereinafter referred to as the AO) observed that the said expenses were not incurred wholly and exclusively for the purpose of the business of the assessee company rather the same was the expenditure in relation to interse dispute between the directors of the assessee company. Further that the expenditure in relation to consultation fees was incurred for operation of a new unit at Vaishali and hence the same was capital in nature. It has been contended by the Ld. A.R that though the assessee had given the bifurcation between the consultation charges and legal charges and further that separate details of the said charges were also given, but, in appeal the Ld. CIT(A) did not give a finding regarding the claim of party-wise or individual allowability of each of the expenses. The Tribunal, while upholding the order of the Ld. CIT(A), did not consider the individual/separate bifurcation given by the assessee and has not decided the claim regarding the allowability of the each of the expenses separately. It has been further pleaded that the Tribunal did not consider the decision of the co-ordinate Benches of the Tribunal in the case of "Echjay Industry Ltd. vs. DCIT" (2009) 88 TTJ 1089 (Mum.) (Trib.) and USV Ltd. vs JCIT (2007) 106 TTJ 535 (Mum.) (Trib.), wherein, Tribunal in similar circumstances has treated the expenses incurred in relation to interse dispute MA No.434/M/2014 3 (Arising out of ITA No.678/M/2012) M/s. S.H. Kelkar and Co. Pvt. Ltd.

between the shareholders of the company under somewhat similar circumstances as revenue in nature. The Ld. counsel for the assessee has further relied upon the decision of the Hon'ble Bombay High Court dated 11.02.15 in the case of "CIT vs. M/s. Chemosyn Ltd., Mumbai" in ITA No.361 of 2013 wherein the Hon'ble Bombay High Court vide paragraphs 9, 10 & 11 of the said order has discussed the issue and held that the expenditure incurred for settlement of dispute between the shareholders of the company was incurred only to enable smooth running of business of the assessee company and therefore was deductable as revenue expenditure.

3.1 The Ld. counsel has further contended that so far as the expenses relating to consultation charges are concerned, the same were not incurred for setting up of the new unit but the unit was already under operation. The expenses were incurred in the normal course of business in already functional unit. However, the Ld. CIT(A) had observed that the expenses were incurred for operation of the new unit and that the bifurcation of the expenses given by the assessee in this respect had not been considered by the Ld. CIT(A) and this bifurcation skipped the attention of the Tribunal also.

The Ld. D.R., however, has submitted that there is no error in the finding of the Tribunal in relation to issues taken vide grounds No.10 to 12 of the assessee's appeal.

4. We have considered the rival submissions of both the parties. We find that while adjudicating grounds No.10 to 12 of the appeal, the Tribunal had concluded as under:

"21. The Ld. CIT(A) decided the issue against the assessee observing as under:

"5.4 I have considered the submissions made by the Ld. A.R. of the appellant and I am in agreement with the observation made by the A.O. in his order. Further the appellant himself has contended in his letter dated 08/08/2011 that "to meet the twin challenges of forthcoming competition MA No.434/M/2014 4 (Arising out of ITA No.678/M/2012) M/s. S.H. Kelkar and Co. Pvt. Ltd.

from the "to be separated" family members and giant MNCs such as Givanudan, IFF etc, and to meet the working capital requirements for the newly established manufacturing facility at Vashivali your appellant company had to carry out in the field of finance, Taxation, Business due diligence etc. from various agencies."

5.5 It is very clear from the above that the whole exercise of Consultancy and other Legal Expenses was carried out as there were to fractions in the management of the company who were fighting with each other and the entire company was to be divided with each other. For this very purpose the exercise of due diligence and valuation of various assets was carried out and fees were paid for the same. Therefore, in my opinion these expenses were certainly not wholly and exclusively for the purpose of the appellant's business and as observed by the A.O. the element of Capital Expenditure can also not be denied. Therefore, the disallowance made by the A.O. is confirmed. This ground of appeal is, therefore, dismissed."

22. Before us, the Ld. A.R. of the assessee has submitted that the legal expenditure was paid for representing and defending the company in the legal matters before the Company Law Board. It has been further contended that there was a dispute between the shareholders regarding the royalty encashed by Shri G.D. Kelkar, Managing Director of Rs.4,86,69,596/-. Shri R. Vaze family filed a petition for operation and mismanagement before the Company Law Board. Due to the above disputes, company was not functioning efficiently with a view to bring settlement between the brothers/directors' consultancy and legal fees were incurred for valuation purposes. The fee was also incurred for operation of new manufacturing facilities at Vashivali near Panvel, Raigad district.

23. From the above arguments it is clear that most of the legal and consultancy charges were incurred were related to inter-se dispute between two factions of the directors of the company. Even the other expenses as observed by the AO are of capital nature and are not allowable as revenue in nature.

24. We do not find any infirmity in the orders of the lower authorities while disallowing the said expenditure. This issue is accordingly decided against the assessee. Hence, the findings of the lower authorities are hereby confirmed on this issue."

5. From the above, we find that the Tribunal had disallowed the legal and consultation charges observing that the legal expenditure was related to interse dispute between the two factions of the directors of the assessee company and that the expenses in relation to consultancy were incurred for operation of new manufacturing facility at Vaishali. So far as the disallowance of legal MA No.434/M/2014 5 (Arising out of ITA No.678/M/2012) M/s. S.H. Kelkar and Co. Pvt. Ltd.

expenditure in relation to dispute between the directors of the company is concerned, in view of the law laid down by the Hon'ble Bombay High Court in the case of "CIT vs. M/s. Chemosyn Ltd., Mumbai" (supra) the issue, in our view, requires reexamination because of the binding precedential value of the decision of the jurisdictional High Court. We also notice that the CIT had given a consolidated finding about the nature of different expenses incurred in relation to Vaishali unit and the detail of each of the expenses has not been examined by him separately and the Tribunal thereafter also observed that since the expenditure was incurred for operation of new unit, hence the same was capital in nature. However, since the assessee has pointed out that the unit was already under operation and that the details of each of the expenses have been given separately and that the said details have escaped the attention of this Tribunal, hence we find that, in view of the above contention of the assessee, the issue relating to consultation charges also needs reexamination. Moreover, the issues relating to legal and consultation charges have been taken together and decided by a composite finding. In view of the law laid down by the jurisdictional High Court, we are of the view that the issue relating to legal expenses is required to be re-adjudicated. Hence, the issue relating to the consultation charges being part of the composite finding/adjudication given vide para Nos.19 to 24 in relation to ground Nos.10 to 12 of the assessee's appeal is also required to be re-adjudicated. We accordingly recall our findings given vide our order dated 07.11.14 in relation to ground Nos.10 to 12 of the assessee's appeal bearing ITA No.678/M/2012 for A.Y. 2008-09. Let these issues be reheard and decided by way of a fresh hearing. However, our finding in respect of the remaining grounds of appeal and also in relation to ITA No.7256 & 7257/M/2010 will remain as such.

MA No.434/M/2014 6 (Arising out of ITA No.678/M/2012) M/s. S.H. Kelkar and Co. Pvt. Ltd.

6. In view of above, the order dated 07.11.2014 passed in ITA No.678/M/2012 for A.Y. 2008-09 is recalled to the limited extent in relation to findings given in respect of grounds No.10 to 12 and the registry is directed to fix the appeal for a hearing on ground Nos.10 to 12 of ITA No.678/M/2012 for 11.05.2015. Parties are informed about the said date in open court and no separate notice will be issued.

7. In the result, the miscellaneous application of the assessee is hereby allowed.

Order pronounced in the open court on 13.03.2015.

Sd/- Sd/- (N.K. Billaiya) (Sanjay Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 13.03.2015. * Kishore, Sr. P.S.

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.