RAM MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference at the instance of the assessee company. The assessment year involved is 1969 70. The Tribunal has referred to this Court the following question of law for opinion under s. 256(1) of the IT Act, 1961 :

(2.) THE assessee company carries on business in the manufacture of textile and engineering goods. Upto 15th Aug., 1965, it was being managed by the managing agents, M/s Bhogilal Menghraj & Co. Ltd. The interest in the managing agency firm was held by two groups known as Shri Bhogilal Laherchand group and Shri Lalchand Menghraj group. There developed a rift between the two groups in the year 1965 when the Government of India announced the policy of gradual abolition of the managing agency system. Shri Pratap Bhogilal was appointed managing director w.e.f. 16th Aug., 1965, with the approval of the Central Government as a result of which there were serious disturbances in the proper functioning of the day to day business of the company. There was litigation in this Court which ended in a consent decree dt. 4th Sept., 1968. In terms of the consent decree, the assessee company was required to purchase 30,975 equity shares of the face value of Rs. 100 each relating to the minority group at a price of Rs. 206.50 per share and effect suitable reduction in capital. The assessee company was, thus, required to pay a sum of Rs. 63,96,337 in instalments as per out Court's order dt. 4th Sept., 1968, to the minority group of shareholders. As a consequence, the assessee company's working funds were to be affected adversely.

(3.) THE assessee claimed the above expenditure as deduction on revenue account. The claim was rejected by the ITO who relied on the Supreme Court decision in India Cements Ltd. vs. CIT (1966) 60 ITR 52. The AAC agreed with the ITO. The Tribunal, inter alia, referred to the Bombay High Court decision in the case of Tata Iron & Steel Co. Ltd., In re (1921) 1 ITC125, and the Supreme Court decision in India Cements Ltd. vs. CIT (supra) and agreed with the Departmental authorities that the expenditure was incurred on the floating of capital by additional issue and was, therefore, capital in nature.