Ita/5021/2011 Of The Commissioner Of Income Tax v. M/S H. R. Doddannavar

IN THER HIGH COURT OF KARNATAKDHARWAD BENCH ON THE 23 DAY OF JULY, 2015 BEEBEO THE HON’BLE MR.JUSTICE RAVI MALIMATH AND THE HON’BLE MR.JUSTICE P.S. DINESH KUMAR LT.A.NO.5021/2011 INCOME TAX) BETWEEN 1. THRE COMMISSIONER OF INCOME TABELGAUM 2? THER ACIRANGE-2, BELGAUM ... APPELLANTS (By Sri. Y V RAVIRAJ, ADV.., AND M/s H. R. DODDANNAVARDODDANNAVAR TRADE CENTREP.B. ROAD, FORT ROADBELGAUM .. RESPONDENT (By Sri MALHARAO & Sri H.R. KAMBIYAVAR, ADVs., FOR Sri 8.PARTHASARATHI, ADV.., THIS ITA FILED U/SEC.260A OF THE INCOME TAX ACT,1961 AGAINST ORDER PASSED IN ITA.NO.28/PNJ/2010 DTD:12-04-2011 ON THER FILE OF THER INCOME TAX APPELLATRIBUNAL, PANAJI BENCH, PANAJI, ALLOWING THE APPEALFILED BY AN ASSESSEE. RESERVED ON|2906.201 51PRONOUNCED ON 23.07.2015 THIS APPEAL COMING ON THIS DAY, P.S.DINESH KUMAR J.,DELIVERED THE FOLLOWING: JUDGMENT The revenue is in appeal challenging the order dated12.4.2011 in ITA No.28/PNJ/2010 passed by the Income TaxAppellate Tribunal, Panaji Bench, Panaji. This appeal was|admitted on 21.2.2012 to examine the following questions of law raised by the appellants:- 7,Whether the ILAI has not erred in law and on the facts ofthe case in not considering that the payment ofRs.1,80,76,676/- as compensation was on account ofprivatedispute between partners of a dissolvedfirm not in existenceana relating to an earneryear and therefore, payment 1s not anallowable expenditure in the hands of the assessee underSection 37 ofthe Income Lax Act, 1961¢ ?.Whether the Lribunal ts correct in hotaing that thepayment ofcompensation was made by the assessee to protect its businessand as such inciaental to the business even thought he assesseewas not ttable to discharge lability arising between thepartners ofthe dissolvedfirm with regara to low grade iron orestock, not maketable and also which was not taken over by thnewlyformed assesseefirme? 3Whether the Iribunal was right in law in holding that thepayment of compensation was in the nature of revenueexpenditure when the main olyect of compensation wasunrelated to trading activity of the assessee but was to make200d ofloss to the source ofincome which was damaging due todispute between the old partners and as such the sataexpenditure 1s capital in nature?payment of compensation was in the nature of revenueexpenditure when the main olyect of compensation wasunrelated to trading activity of the assessee but was to make200d ofloss to the source ofincome which was damaging due todispute between the old partners and as such the sataexpenditure 1s capital in nature? 4.Whether on the facts and circumstances of the case, theLribunal is justified in coming to the conclusion that thecompensation was paid voluntarily under “commercialexpediency” without considering the material fact that theassessee has sustained loss in this year and subsequentyearand as such no profit has been earned so as to considercommercial expediency? —Lribunal is justified in coming to the conclusion that thecompensation was paid voluntarily under “commercialexpediency” without considering the material fact that theassessee has sustained loss in this year and subsequentyearand as such no profit has been earned so as to considercommercial expediency? — ? Briefly stated the facts of the case are, the assesseefiled a return of Income on 30.10.2006 declaring a loss ofRs.45,99,763/- along with tax audit report under Section 44AB ofthe Income Jax Act, 1961 |’Act tor short]. The assessee’s casewas taken up for scrutiny and notices under Sections 143(2) and142(1) were issued along with a questionnaire calling upon theassessee to furnish various information sought for. /Assessee’Chartered Accountant appeared before the authority with the Books otf Accounts and other documents and furnished certaidetails. It was noticed by the authorities that a sum ofRs.1,80,76,676/- was shown as compensation paid in terms of aCourt order in the profit and loss account and a legal expenses ofRs.6,74,362/- was debited towards the legal fees to the Advocate. ? Briefly stated the facts of the case are, the assesseefiled a return of Income on 30.10.2006 declaring a loss ofRs.45,99,763/- along with tax audit report under Section 44AB ofthe Income Jax Act, 1961 |’Act tor short]. The assessee’s casewas taken up for scrutiny and notices under Sections 143(2) and142(1) were issued along with a questionnaire calling upon theassessee to furnish various information sought for. /Assessee’Chartered Accountant appeared before the authority with the Books otf Accounts and other documents and furnished certaidetails. It was noticed by the authorities that a sum ofRs.1,80,76,676/- was shown as compensation paid in terms of aCourt order in the profit and loss account and a legal expenses ofRs.6,74,362/- was debited towards the legal fees to the Advocate. onThe assessee in its communication dated 27.11.2008 contended as follows:- ‘We have paid compensation ofRs.1,50,76,676/ - toDeshbhushan Atrachand Doddanavar asper the decree oftheCourt. Lhe copy ofthe Court Decree 1s enclosed. Lhe paymentmade to Shri. Deshbhushan Doddannavar ts in the course ofbusiness and the IDS provisions are not applicable. Lhepayment 1s neither out ofpart profits of the business of thejirm, nor it is interest or payment by way of brokerage,commission ett.” 4.The assessee also filed opinions of two experts insupport of its defence. By a communication dated 27.11.2008,a detailed questionnaire was issued to the assessee by theDepartment to furnish further information. 5]A reply dated 1.12.2008 was filed by the assesseestatingmnter algthat Sri Deshbhushan Doddannavar s/oHirachand Doddannavar (Deshbhushan for short) was a partnerin a firm called M/s. H.R.Doddanavar. The said firm was in thebusiness of mining and the mining lease was in the name of Sti.Hirachand R. Doddanavar. On 13.10.2003, the firm wasdissolved. As per Dissolution Deed, entire assets and liabilities ofthe firm came to the partner who was holding the mining lease1.e., sti. Hirachand R. Doddanavar. Subsequently, on 19.1.2004 afirm again in the name and style M/s. H.R. Doddanavar wasconstituted. Sri Hirachand R. Doddanavar, the owner of themining lease, allowed the assessee, the new firm as per clause 4(e)of the partnership deed to undertake mining operations. ‘Thus,the partnership got rights of mining. Subsequently, Deshbhushanclaiming to be a partner in M/s. H R Doddanavar(Old) startedquestioning the disssolution of the old firm and commenced somelitigation in that behalf. In order to settle the said disputes,Deshbhushan was paid a sum of Rs.1.80 crores. The assessingauthority called upon the assessee to substantiate its claim of expenditure in the nature of revenue expenses incidental to itsbusiness and as it was noticed from the records that Deshbhushanhad nothing to do with the assessee — firm and he was having adebit balance in the partnership firm. Therefore, question ofmaking payment of compensation, which is in the nature ofcapital expenditure, would not have arisen at all. The assesseeputforth a defence that the said compensation was paid toDeshbhushan as per a decree of the Court which was incurred inthe course of the business. The assessing authority came to theconclusion that the compensation was not a liability of theassessee firm. With regard to the payment, the assessingauthority came to the conclusion that there was no direction byany Court to pay the amount of compensation and thus held thatliability did not arise out of any decree of the Court, but 1t was 1nterms of a compromise artived between Sri Hirachand R.Doddanavar and his son Deshbhushan. The assessing authorityon verification of deed of dissolution came to the conclusion thatthe assessee was not liable to pay any compensation and theliability arose on account of a dispute related with the dissolution of erstwhile partnership firm and not to the business of theassessee. Thus, the Assessing Authority held that payment wasnot made within the course of business for the profit of the firmand it could not be allowed under Section 37(1) of the Act.Agerieved by the order of the Assessing Authority, assesee filedan appeal before the Commissioner (Appeals) who dismissed thesame vide order dated 13.11.2009 which was challenged inNo.ITA No.28/PNJ/2010 before the Income Tax AppellateTribunal, Panaji Bench, Panaji [‘TTAT’ for short]. ITAT by itsorder dated 12.4.2011 allowed the same. Hence, this Appeal. 6,We have heard Sri Y.V. Raviraj, learned standingCounsel for Income Tax Department and Sr Malharao forsti S. Parthasarathi, learned Counsel for the respondent. TYLearned Counsel for the Revenue contends that theamount of Rs.1,80,79,676/- was paid by the partnership firmM/s.H.R.DoddanavarTODeshbhushanSonof|SriH.R.Doddanavar Deshbhushan, who was a partner in theerstwhile firm dissolved on 13.10.2003. He submits that collusive suits were instituted by the son and a compromise petition wasfiled in a writ appeal, wherein, it is stated that a sum ofRs.1,80,00,000/- has been paid to Deshbhushan. In sum andsubstance, it is the case of the revenue that there was absolutelyno reason for the assessee to pay any money to Deshbhushan aswas tightly held by the Assessing Authority and first AppellateAuthority and therefore the order of ITAT is unsustainable in lawgiving rise to questions of law framed hereinabove. 8.Learned Counsel for the appellants has producedcopies of various documents such as Partnership Deed dated20.5.1976; Deed of Dissolution dated 13.10.2003; Judgment andOrder.dated29O QIODOS(4WA No.2669/2005 c/w 2671/2005 (GM-MMS); CompromisePetition;JudgementandOrder.dated1.4.2005|(4W.P.No.45966/2004; Memo dated 9.11.2004 issued by theDirector, Department of Mines & Geology and Judgment andOrder dated 15.4.2005 in W.P.No.52860/2003 for perusal of thisCourt. Q In reply, learned Counsel for the assessestrenuously contends that the iron — ore produced in the mineowned by Sri H.R. Doddanavar was of very inferior quality.The erstwhile firm came to be dissolved on 13.10.2003.Subsequently, assessee — partnership firm commenced itsbusiness. Looking into the prospects of the new partnershipfirm, Deshbhushan started litigations in various forums. He alsomanaged to obtain Mineral Despatch Permit from the office ofthe Senior Geologist, Dharwad on 26.10.2004 representinghimself as partner of M/s. H.R. Doddanavar(old). The said ordercame to be withdrawn and Deshbhushan challenged the order ofwithdrawal in W.P.No.45966/2004 (GM-MMS), in which, thisCourt quashed the order impugend therein and directed theDirector of Mines & Geology to pass appropriate orders inaccotdance with law after hearing all the parties concerned.Agerieved by the said order, H.R. Doddannavar in his capacity asProprietor challenged the order of the learned Single Judge inW.A.No.2669/2005 c/w. 2671/2005 (GM-MMS), which came tobe disposed of by order dated 29.9.2005 in terms of compromise arrived at between the parties. He submits that to give quietus tolthe litigation, it was agreed to pay Rs.1,80,00,000/- towards fulland final settlement of all claims raised by Deshbhushan.Therefore, the payment made as per the said compromise was dueto commercial expediency. He submits that the AssessingAuthority and the first Appellate Authority had passed erroneousorders, which has been rightly set aside by the ITAT. In thecircumstances, he prays for dismissal of the appeal, 10,We have given our anxious consideration to thesubmissions of the learned Counsel for the parties and examinedthe records. 11,The facts are not in dispute and in a very narrowcompass. Initially a partnership firm 1n the name and style ofM/s. Hirachand Ramchandra Doddanavar was founded on20.5.1976. One of the Partners Sri H.R. Doddanavar was holdinga mining lease to extract iron — ore. The partnership was at willOn 13.10.2003, the partnership was dissolved. Clause 4 of theDissolution Deed reads as tollows:- 10,We have given our anxious consideration to thesubmissions of the learned Counsel for the parties and examinedthe records. 11,The facts are not in dispute and in a very narrowcompass. Initially a partnership firm 1n the name and style ofM/s. Hirachand Ramchandra Doddanavar was founded on20.5.1976. One of the Partners Sri H.R. Doddanavar was holdinga mining lease to extract iron — ore. The partnership was at willOn 13.10.2003, the partnership was dissolved. Clause 4 of theDissolution Deed reads as tollows:- eAThat 1. SHRI ASHOK HIRACHANDDODDANAVAR, 2. SHRI DESHBHUSHANHIRACHAN])DODDANAVAR,orSHRIRAMESH HIRACHAND DODDANAVAR, 4.SHRI VINOD SURENDRA DODDANAVAR, 5.SOU. SHUBHADA RAJIV DODDANAVARhereby declare that they do not have any right ofinterest in the assets of the firm and they shall not beresponsible for payment of liabilities recorded in thebooks of accounts of the firm after 13[;1]October,2003.7 12.It is thus clear that after dissolution of thepartnership, Deshbhushan did not have any right in the assets ofthe firm. Simultaneously with dissolution of the firm, Sri H.R.Doddannavar started acting in his capacity as a Proprietor.Subsequently, a new partnership firm was formed on 19.1.2004 tnthe name and style of M/s. H.R. Doddannavar, converting theproprietary concern into a partnership firm by taking newpartners. Records reveal that H.R.Doddanavar in his capacity asProprietor filed a writ petition in W.P.No.52680/2003 praying fora direction to the Mines Department and others, for renewal of his application 1n respect of his mine. The said writ petitioncame to be dismissed vide order dated 15.4.2005. 13. M/s Hirachand Ramachandra Doddanavar (firmbearing registration No.1143/76-77) represented by Deshbhushanfiled a writ petition in W.P.45966/2004 contending that the Minesand Geology Department had initially directed for issuance ofdispatch permit on 1.10.2004, in the name of the petitioner.Subsequently, on 26.10.2004, the Director of Mines and Geologyhad directed issuance of Mineral Dispatch Permits toDeshbhushan and withdrew the said directions. “The order ofwithdrawal was subject matter of W.P.No.45966/2004. ThisCourt vide order dated 1.4.2005 quashed the order impugnedtherein and directed the Mines Department to pass fresh orders inaccordance with law, These two oftders namely order dated 1.4.2005 1W.P.No.45966 /2004and.orderdated15.42005(4W.P.No.52860/2003 were challenged in W.A.No.2669/2005 andW.A.No.2671/2005. 14.Both writ appeals were disposed of vide order dated29.9.2005 in terms of a compromise in which a sum ofRs.1,80,00,000/- was paid to Deshbhushan towards full and finalsettlement for his claims. In paragraph No.9 of the CompromisePetition, details of litigation are furnished and it reads as follows:- “9|Sv Deshbhushan Huirachand Doddannavarhasfiled thefollowing sutts:- zt) O.S.No.240/ 2004, 77) O.S.No.359/ 2004, zO.S.No.476/ 2005,O.S.No.103/2005,#5O.S.No.572/ 2004 ¢ vi) M.A.No.52/2004 and viiM.A.No.53/2004 pending before Civil Courts at Belgaumand Gadag. Shri. Deshbhushan Huirachand Doddanavaundertakes to withdraw the above said suits and appealswithin one week from today and further undertakes towithdraw all objections, applications, Complaints andPetitions filed before various authorities such as Registrar ofFirms, Durector of Mines and Geology, Karnataka ForestDepartments and other authoritiesforthwith.” 15)Deshbhushan undertook to withdraw the suits andappeals within one week from the date of the compromisepetition and also to withdraw all objections, applications,complaints and petitions filed before various authorities. It 1s relevant to note that Deshbhushan had filed the writ petition 1nW.P.No.52860/2003 in his capacity as a partner of erstwhile firmwhich stood dissolved as on 13.10.2003. Therefore, litigationsinstituted by Deshbhushan had no nexus with the assessee firmwarranting payment of Rs.1,80,00,000/-. The prayers containedin the suit filed by Deshbhushan in O.S.No.240/2004 read asC<88<B).% 15)Deshbhushan undertook to withdraw the suits andappeals within one week from the date of the compromisepetition and also to withdraw all objections, applications,complaints and petitions filed before various authorities. It 1s relevant to note that Deshbhushan had filed the writ petition 1nW.P.No.52860/2003 in his capacity as a partner of erstwhile firmwhich stood dissolved as on 13.10.2003. Therefore, litigationsinstituted by Deshbhushan had no nexus with the assessee firmwarranting payment of Rs.1,80,00,000/-. The prayers containedin the suit filed by Deshbhushan in O.S.No.240/2004 read asC<88<B).% a)Restraining the partners of the defendantfrom takingany vital decisions in connection with the businessactivities of the satafirm without the valid consent ojthe plaintiff in writing ti the firm is not legallydissolved.any vital decisions in connection with the businessactivities of the satafirm without the valid consent ojthe plaintiff in writing ti the firm is not legallydissolved. $5Permitting theplaintiff toparticipate in the business ofoperations of the saidfirm including the legal right tocheck, and inspect the books of accounts of the satjirm and to scrutinize all the material documents anapermitting the plaintiff to enter any office of the satafirm and operate all the business activities till thefirm1s not legally aissolved ana other reliefs. (sic)operations of the saidfirm including the legal right tocheck, and inspect the books of accounts of the satjirm and to scrutinize all the material documents anapermitting the plaintiff to enter any office of the satafirm and operate all the business activities till thefirm1s not legally aissolved ana other reliefs. (sic) 16,Another suit inO.S.No.359/2004WasC(82=praying for an injunction to restrain the defendant namely, H.R. Doddannavar, registered Partnership Firm from shifting thestock of iron — ore stored at the Mines at Doni Village. 17. The third suit in O.S.No.476/2006 was filed againstShri Rayu Surendra Doddannavar and H.R. Doddannavar with aprayer to declare the General Power of Attorney dated 14.10.2003executed by H.R. Doddannavar in favour of Shri Raju SurendraDoddannavar as null and void and other incidental reliefs, 18,It is relevant to note that Deshbhushan had got anIA for impleadment in W.P.No.52860/2003. Vide order dated3.9,.2004, the learned Single Judge of this Court has held that he 1not a necessary party to the writ petition and rejected the IA. 19.We have perused following ruling relied upon by thelearned Counsel for the respondent, 1) In the case of SASSOON J. DAVID & CO. P. LTD,V. COMMISSIONER OF INCOME TAX reported in(1979) 118 ITR 261 (SC©)], the Hon’ble Supreme Court wasconsidering a case in which the Company was neitherdissolved nor its business undertaking sold; 2)In the case of COMMISSIONER OF INCOME TAX vyMANDOVI HOTEL (P) LTD, reported in [(2006)284ITR 0129 (BOM))| , the Hon’ble Bombay High Court wasconsidering a case in which certain sum was paid by theassessee to the retiring partner;MANDOVI HOTEL (P) LTD, reported in [(2006)284ITR 0129 (BOM))| , the Hon’ble Bombay High Court wasconsidering a case in which certain sum was paid by theassessee to the retiring partner; 3)In the case of COMMISSIONER OF INCOME TAX v.RAJARAM BANDEKAR reported in [(1994) 208 ITR 503(Bom)], the Hon’ble Bombay High Court was consideringa case in which the terms of settlement had required one ofthe patties to supply certain specific quantities of iron ore,and the assessee firm had agreed to fulfill certainconditions.RAJARAM BANDEKAR reported in [(1994) 208 ITR 503(Bom)], the Hon’ble Bombay High Court was consideringa case in which the terms of settlement had required one ofthe patties to supply certain specific quantities of iron ore,and the assessee firm had agreed to fulfill certainconditions. /$In ITA No.5021/2009 decided on 6.1.2012 this Court wasconsidering a case of payment made towards contributionfor compensatory afforestation, Thus, the above rulings are not applicable to the facts of this case. /$In ITA No.5021/2009 decided on 6.1.2012 this Court wasconsidering a case of payment made towards contributionfor compensatory afforestation, Thus, the above rulings are not applicable to the facts of this case. 2()In the instant case, compromise was arftived atbetween father and son. Records do not disclose any compellingcircumstances to enter into such compromise. The recipient ofmoney was the partner of a dissolved firm. Even afterdissolution, he had misrepresented himself as the partner of a firmwhich was not in existence. Therefore, he was not a party to theproceedings in writ appeal in his individual capacity. Hisapplication for impleadment as an individual was rejected inW.P.No.52860/2003 vide order dated 3.9.2004. Therefore, inlaw, recipient of money was a non-party to the proceedings. Thisis nothing but abuse of process of law. 1.Therefore, in our considered view, the AssessingAuthority by its detailed order dated 29.12.2008 has disallowedthe sum of Rs.1,80,79,676/- paid to | Deshbhushan anRs.6,74,362/- paid to the Advocates in the profit and loss Account. The amount paid to Deshbhushan as per thecompromise is Rs.1,80,00,000/- and what is claimed beforeIncome Tax Authorities and the deduction claimed under Section37(1) is Rs.1,80,79,676/-. Thus, an excess deduction ofRs.79,676/- was claimed by the assessee. The ITAT has come toan erroneous conclusion that the payment was made toDeshbhushan on account of various disputes raised by him to putan end to the litigation and to give way to smooth operation ofthe business. It has also erroneously held that the payment wasmade as per“ivections’“of this Court, which is factually incorrect.There.existedNNO“commercialexpediency”TO|76&Rs.1,80,00,000/- much less was there any direction by this Courtto pay any money to Deshbhushan. 2?)In the circumstances, the substantial questions oflaw raised by the revenue richly merit consideration andaccordingly answered in favour of the revenue. weyIn the result, we pass the following:- ORDER "($The appeal ts|allowed, "(($Orderdated1242011in|ITANo.28/PNJ/2010 passed by the Income taxAppellate Tribunal, Panaji Bench, Panaji forthe assessment year 2006-2007, is set aside;64=No.28/PNJ/2010 passed by the Income taxAppellate Tribunal, Panaji Bench, Panaji forthe assessment year 2006-2007, is set aside;64= "((($Consequently, the assessment order dated29.12.2008 passed by the Addl. Commissionerof Income Jax, Range — 2, Belgaum, 1s9<4C('?2=J29.12.2008 passed by the Addl. Commissionerof Income Jax, Range — 2, Belgaum, 1s9<4C('?2=J Ordered accordingly. No costs. Sd/-JUDGE Sd/-JUDGE