SHAW WALLACE AND COMPANY LIMITED Vs. DY CIT

JUDGEMENT

(1.) These cross-appeals are directed against the order, dated 10-12-1995, passed by the learned Commissioner (Appeals)-II, Calcutta, in the matter of assessment order under section 143(3) for the assessment year 1978-89.

(2.) The assessee has taken up as many as five main grounds of appeal, and several sub-grounds under these five main grounds, but there are only two grievances which have been pressed before us-(i) first, against addition as income from other sources to the tune of Rs. 1,27,78,112, on account of receipt of 8,50,000 from Sime Derbing Holdings Limited, being compensation following companys claim in the matter of shares in RG Shaw & Co. Ltd. sold by assessee-company in 1971; and (ii) second, against disallowance of Rs. 50,000 under rule 6D of the Income Tax Rules, on estimated basis, out of travelling expenses of Rs. 69,11,307. We will first take up assessees main grievance which is against addition of Rs. 1,27,78,112 as income from other sources.

(3.) In order to properly appreciate the legal controversy requiring our adjudication, it is necessary to take a careful look at the developments leading to this appeal before us, The facts culled out from documents before us are that the assessee-company held 1,22,869 shares of face value of 1 each in M/s R.G. Shaw & Co. Ltd. (hereinafter referred to as RGS)a company incorporated under the laws of United Kingdom. RGS and the assessee-company had some common directors and there were cross-holdings in the sense that RGS also held about 38 per cent of shares in the assessee-company. In the accounting year 1971, relevant to the assessment year 1972-73, assessee-company was induced by some common directors in RGS to sell its entire holdings in the RGS. Apparently persuaded by this advice and after obtaining necessary approval of the Reserve Bank of India, the assessee-company sold its entire holding in RGS which, through a series of transactions, ultimately found their way of Sime Derby Holdings Limited (hereinafter referred to as the SDHL) which had some common directors with RGS. Shortly after sale of these shares, a news item appeared in British newspapers to the effect that RGS was being taken over by Sime Derby Holdings Limiteda multi divisional, was rich and high profile company incorporated in Malaysia. As a result of this news about take over, prices of RGS shares shot up to almost double the price. In the meantime, Chief Accountant of SDHL at Singapore died in unnatural circumstances leaving behind some notes accusing Mr. Pinder and Mr. Scott, common directors of SDHL and RGS, of a large number of financial malpractices. The media glare that the company was then subjected to brought to light these financial malpractices in the company and as a consequence of malpractices coming to light, these two common directors were prosecuted inter alia for what is now commonly termed as "insider trading". Most of the allegations were established and Mr. Pinder was sentenced to imprisonment of eighteen months, besides being asked to pay 7,50,000 to SDHL. Similarly, Mr. Scott also had to pay 3,50,000 to SI)HL, It was during trial of these persons that the assessee-company engaged a lawyer to keep watch over assessees interest involved therein and the said lawyer later reported to the assessee that the assessee could make a definite claim for compensation from SDHL, for being wrongfully induced to sell its RGS holdings at a much lower price than the price which emerged on amalgamation. The assessee then had a review of sales of RGS shares made earlier, from the point of view of disclosure obligations of the common directors who were aware of the amalgamation scheme of RGS and SDHL, as also from the point of view of claiming damages from the beneficiaries of sale of RGS shares at a low price. The assessee also obtained legal advice from Indian and British law firms and, based on such legal advice, assessee initiated legal proceedings against the SDHL, for loss of benefit which would have otherwise accrued to the assessee, as shareholder of RGS, due to takeover and merger with SDHL. A legal notice was, accordingly, served on the SDHL in November, 1976. Although initially SDHL, repudiated claim of the assessee, a settlement was reached between lawyers representing two sides in 1977 whereunder the SDHL paid a sum of 8,50,000 in view of the claim of the assessee against SDHL that the two common directors at the time of sale transactions in question were guilty of breach of fiduciary duty towards the assessee-company. It is this amount of 8,50,000 which has been taxed by the revenue authorities in the present year as income from other sources and aggrieved by which the assessee is in appeal before us. However, before we come to the core issue about taxability of this amount, it is necessary to complete narration of material facts.