Calcutta H.C : decision in the case of Azadi Bachao Andolan (supra) is not held to be per larger bench

High Court Of Calcutta

CIT, West Bengal-III Vs. Oberoi Hotels (P.) Ltd.

Assessment Year : 1996-97

Section : 2(42A)

Bhaskar Bhattacharya And Sambuddha Chakrabarti, JJ.

IT Appeal No. 13 Of 2001

March 17, 2011


Bhaskar Bhattacharya, J. – This appeal is at the instance of the revenue against an order dated 27-5-2000 passed by the Income-tax Appellate Tribunal, ‘E’ Bench, Calcutta, in ITA No. 1759/Cal./1999 for the assessment year 1996-97 thereby partly allowing the appeal.

2. Being dissatisfied, the Revenue has come up with the present appeal.

3. At the time of admission of this appeal, a Division Bench of this Court formulated the following substantial questions of law :

“(A)Whether, on the facts and in the circumstances of the case, short term capital loss of Rs. 8,59,77,748 attributable to colourable transaction could be set-off against the long term capital gains of Rs. 4,03,89,154 and whether such a conclusion arrived at by the ld. Tribunal is unreasonable and/or perverse?

(B)Whether, on the facts and in the circumstances of the case, the ld. Tribunal was justified in law deleting the disallowance of consultancy fees of Rs. 8,03,985 even though, the expenses was in connection with the future business prospects of the assessee?”

4. The facts giving rise to filing of this appeal may be summed up thus :

(a)M/s. Shri Krishna Bottlers (Vijayawada) Pvt. Ltd. (“SKB”) held a license from Pepsico Inc. USA, for use of the trademark Pepsicola, Lehar, Mirinda, etc., in conjunction with an Indian trademark in relation to beverage products to be bottled, sold distributed and marketed in the so-called Vijayawada territory consisting of several districts in the State of Andhra Pradesh under the licensing agreement dated 29-12-1990.

(b)The said licence agreement was initially for a period of ten years, renewable for an additional term of five years. The Assessing Officer pointed out that the Board of Directors of the assessee-company at its meeting held on 1-11-1995 considered the potentiality of the market for Pepsicola and other brands of the renowned Pepsico Inc., USA for their soft drinks in the aforesaid Vijayawada territory and decided to takeover the Company, viz., M/s. SKB with all of its assets and liabilities including the rights under the contract for using the trademark of Pepsico Inc., USA. The Assessing Officer further pointed out that this acquisition was decided to be made through the group Company, namely, M/s. Oberoi Plaza Pvt. Ltd. The Assessing Officer further held that at the time of the proposed acquisition of M/s. SKB, it had accumulated loss and as such, the assessing company could acquire the existing 47145 shares of the company at Rs. 100 each at the reduced price of Rs. 48.79 per share i.e., at the agreed consolidated price of Rs. 23 lakh. However, it was decided that in order to meet the requirements of working capital as well as the need for payment of outstanding creditors, the assessee-company would invest further fund to the extent of Rs. 8.55 crore against which M/s. SKB was to issue 45000 new equity shares of Rs. 100 each at a premium of Rs. 1,800 per equity share. Thus, the total investment in acquiring 92145 shares of SKB made by the assessee stood as below:


Price of 47145 existing Shares at the rate of 48.79 per share

Rs. 23,00,000 


Cost of stamp duty 

Rs. 11,500 


Cost of 4500 new shares at the rate of Rs. 100 plus premium of Rs. 1,800 each 

Rs. 8,55,00,000 


Total : 

Rs. 8,78,11,500 

(c)The payments in these regards were made through account payee cheque. The above arrangement ultimately did not suit the assessee-company and the assessee-company could not run the business of M/s. SKB for various reasons, for instance, during the relevant period the Pepsi having introduced in the market 300 ml. capacity bottles as against the earlier 250 ml bottles, further capital to the extent of Rs. 5 to 6 crore was considered to be necessary to replace the existing bottles and crates, that the market debtors were of doubtful nature and hence, it was felt by the assessee-company that further sale would have to be increased by introducing a large number of small debtors of the nature of shopkeepers as a result of which considerable amount of trade debt would remain outstanding and finally, that in order to make the new company competitive, the existing machinery needed to be modernized which itself required an additional cost of Rs. 3,00,000.

(d)The assessee thus wanted to get rid of the company and could find out a buyer namely M/s. Pearl Drinks Ltd., owned by one Mr. Chandra Kant Jaipur. The entire shares of the company were thus sold by the assessee at the agreed price of Rs. 18,33,752 vide share purchase agreement dated 23-12-1995 after revaluation of the assets and liabilities as on 30-11-1995. This payment was also received by the assessee-company from M/s. Pearl Drinks Limited through account payee cheque and Demand Draft.

(e)The Assessing Officer pointed out that as a result of the above transaction, the assessee-company incurred a short-term capital loss of Rs. 8,59,77,725 (Rs.8,78,11,500 minus Rs. 18,33,752). The Assessing Officer further pointed out that the assessee-company had decided to take over the shares of M/s. SKB after considering the pros and cons of the business project of the company and after having made a detailed market survey. Thus, according to the Assessing Officer, at the time of acquiring the shares, the assessee-company must have been aware of the necessity of making further investment in the business and must have taken into account such future liability. According to the Assessing Officer, the period of one month was too short a time for taking such a major decision regarding disinvestment of the shares of M/s. SKB at a huge loss of Rs. 8.60 crore approximately.

(f)The Assessing Officer, therefore, was of the opinion that the reasons cited by the Authorized Representative of the assessee were not sufficient enough to prompt a company like the assessee to take such a hasty decision. According to the Assessing Officer, the assessee-company could have easily waited for a reasonable period of time for watching the market and could also have invested a further amount of Rs. 9 to 10 crore to revive the business of M/s. SKB. Consequently, the Assessing Officer observed that the entire transaction was of the nature of colourable one and the same should be considered as having been entered into with an intention of upsetting the long term capital gain of Rs. 4,03,89,154 which the assessee did actually earn during the relevant accounting period and thus, declined to allow the claim of the assessee towards short term capital loss under consideration.

(g)Being dissatisfied, the assessee preferred an appeal and the Commissioner of Income-tax (Appeals) disposed of the appeal by holding that the assessee had acquired the share under consideration long time back in 1991 and as such, the assessee-company was a party to overall decision taken by the Group regarding investment made in the shares of M/s. SKB in the year 1991 and later on its investment in the year 1995-96, and thus, the transaction should be treated to be genuine and not a colourable one and the loss arising to the assessee-company should be treated as long term capital loss and he directed the Assessing Officer to treat the loss accordingly.

(h)Being dissatisfied, the revenue preferred an appeal before the Tribunal below and by the order impugned herein, the Tribunal has affirmed the order of the Commissioner of Income-tax (Appeals) that the transaction was a genuine one but disagreed with the view of the Commissioner of Income-tax (Appeals) that the loss was of the nature of long term capital loss and modified the order by directing that the loss be treated as short-term capital loss.

5. Being dissatisfied, the revenue has come up with the present appeal.

6. Mr. Saraf, the learned Advocate appearing on behalf of the appellant, strongly relied upon the decision of the Five-Judge-Bench of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 22 Taxman 11 and contended before us that the aforesaid sale of shares was a device and thus, the Assessing Officer was quite justified in refusing the claim of the assessee and the Commissioner of Income-tax (Appeals) and the Tribunal below erroneously set aside such decision.

7. Mr. Saraf submits that the subsequent decision of the Supreme Court of Two-Judge-Bench in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 7061 , should not be followed by us because the said decision was given by a Bench consisting of two Judges whereas the earlier decision in McDowell & Co. Ltd.’s case (supra) was given by a Larger Bench.

8. The other ground taken by the revenue in this appeal is as regards the deduction of consultancy fees of Rs. 8,03,985 paid to M/s. Norwath Hospital Consultancy, U.K., for conducting market/feasibility survey to explore the possibilities of setting up a hospital in Seychellois. According to the Assessing Officer, as the assessee was dealing with a different type of business, hence the project of setting up a hospital in a foreign country should not be considered to be an expansion of the existing business of the assessee and the consultancy fees paid for conducting market survey/feasibility studies for that purpose should not be considered as a revenue expense incurred in connection with the existing business. According to Mr. Saraf, the Tribunal erred in law in deleting the aforesaid amount as revenue expenditure.

9. Mr. Bajoria, the learned Senior Advocate appearing on behalf of the assessee, on the other hand, has opposed the aforesaid contentions of Mr. Saraf and submits that the subsequent decision of the Supreme Court in the case of Azadi Bachao Andolan (supra), having explained the real scope of the earlier decision in the case of McDowell & Co. Ltd. (supra), we should follow the decision in the case of Azadi Bachao Andolan (supra). As regards the other question regarding consultancy fees paid by his client for the survey of establishing a hospital, Mr. Bajoria supported the reasons assigned by the Tribunal.

10. Therefore, the first question that arises for determination in this appeal is whether we should follow the decision of the Supreme Court in the case of McDowell & Co. Ltd. (supra) and ignore the subsequent decision of the Supreme Court explaining the said decision on the ground that the latter ones were delivered by a Bench consisting of two Judges.

11. There is no dispute with the proposition of law that if there are conflict of opinions between the two Benches of the Supreme Court on a question of law, the one declared by the Larger Bench would prevail over the one pronounced by the other Bench. But if a Bench consisting of a smaller number of judges interprets a decision of a Larger Bench of the Supreme Court in a different way which may be apparently opposed to the one taken by the Larger Bench, a subsequent co-ordinate Bench of the Supreme Court may refuse to follow the interpretation of the latter one on the ground that it proposed to follow the earlier view expressed by a Larger Bench. But if the subsequent decision of the smaller Bench explaining the Larger Bench is placed before a High Court, the latter is bound to follow the subsequent one by the smaller one which interprets the decisions of the Larger Bench because that is the interpretation of the Larger Bench by a Bench of Supreme Court and the High Court cannot make a different interpretation than the one made by the subsequent decision of the Supreme Court which is binding upon it. The position, however, would be different if the subsequent smaller Bench of the Supreme Court in ignorance of the earlier Larger Bench takes a contrary view from the one taken by the earlier Larger Bench. In that situation, the High Court is entitled to reject the view of the latter smaller Bench of the Supreme Court as per incuriam.

12. In the case before us, the subsequent decision of a Smaller Bench in the case of Azadi Bachao Andolan (supra), has taken note of the earlier decision in the case of McDowell & Co. Ltd. (supra), and has interpreted the same and thus, it is not a case of passing decision in ignorance of a binding decision. Therefore, in this case, the view taken by the Tribunal cannot be said to be wrong and is consistent with the one taken in the case of Azadi Bachao Andolan (supra).

13. Mr. Saraf in this connection placed strong reliance upon a decision of Three-Judge-Bench in the case of Official Liquidator v. Dayanand [2008] 10 SCC 1 in support of his contention that we should totally ignore Azadi Bachao Andolan’ case (supra). In that case, the Supreme Court observed with anxiety that latest tendency of different Two-Judge-Bench not following the earlier view adopted by a co-ordinate Bench or even in some cases, in not following the view taken by even a Larger Bench. In that context, the said Three-Judge-Bench observed as follows :

“We are distressed to note that despite several pronouncements on the subject, there is substantial increase in the number of cases involving violation of the basics of judicial discipline. The learned Single Judges and Benches of the High Courts refuse to follow and accept the verdict and law laid down by coordinate and even Larger Benches by citing minor difference in the facts as the ground for doing so. Therefore, it has become necessary to reiterate that disrespect to the constitutional ethos and breach of discipline have grave impact on the credibility of judicial institution and encourages chance litigation. It must be remembered that predictability and certainty is an important hallmark of judicial jurisprudence developed in this country in the last six decades and increase in the frequency of conflicting judgments of the superior judiciary will do incalculable harm to the system inasmuch as the courts at the grass roots will not be able to decide as to which of the judgments lay down the correct law and which one should be followed.

91. We may add that in our constitutional set-up every citizen is under a duty to abide by the Constitution and respect its ideals and institutions. Those who have been entrusted with the task of administering the system and operating various constituents of the State and who take oath to act in accordance with the Constitution and uphold the same, have to set an example by exhibiting total commitment to the constitutional ideals. This principle is required to be observed with greater rigour by the members of judicial fraternity who have been bestowed with the power to adjudicate upon important constitutional and legal issues and protect and preserve rights of the individuals and society as a whole. Discipline is sine qua non for effective and efficient functioning of the judicial system. If the courts command others to act in accordance with the provisions of the Constitution and rule of law, it is not possible to countenance violation of the constitutional principle by those who are required to lay down the law.

92. In the light of what has been stated above, we deem it proper to clarify that the comments and observations made by the two-Judge Bench in U.P. SEB v. Pooran Chandra Pandey should be read as obiter and the same should neither be treated as binding by the High Courts, Tribunals and other judicial for as nor they should be relied upon or made basis for bypassing the principles laid down by the Constitution Bench.”

14. In our opinion, so long the decision in the case of Azadi Bachao Andolan (supra) is not held to be per incuriam by a Larger Bench decision of Supreme Court as done in the case of Dayanand (supra) relied upon by Mr. Saraf, the High Courts should be bound by the explanation of that Bench given to the decision in the case of McDowell & Co. Ltd. (supra).

15. Even on merit, we also do not appreciate the reason of the Assessing Officer that the assessee company could have easily waited for a reasonable period of time for watching the market and could also have invested a further amount of Rs. 9 to 10 crore to revive the business of M/s. SKB. It is not within the province of the Assessing Officer to ignore an otherwise genuine transaction and to brand it as a colourable one on the ground that it was the duty of the company to invest further amount or it should have waited for a reasonable period. We, therefore, find that the view of the Tribunal and the CIT (Appeals) as regards the nature of the transaction is quite in conformity with the law of the land.

16. As regards the second question involved as to whether the fees paid by the assessee for exploring the possibility of the hotel business should be treated to be of the nature of revenue expenditure, it appears that the CIT (Appeals) without discussing the matter has simply relied upon decision of this Court in the case of Keshoram Industries & Cotton Mills Ltd. v. CIT [1992] 196 ITR 845 (Cal.) and CIT v. Graphite India Ltd. [1996] 221 ITR 420 (Cal.) without considering the facts and arriving at the conclusion whether the said decision really applies to the facts of the present case. The Tribunal has also not gone in details and has adopted the view of the CIT (Appeals).

17. After hearing the learned counsel for the parties and after going through the materials on record we find that in the Income-tax Act itself there is specific provision dealing with the aforesaid nature of the expenditure but none of the authorities below cared to look into the said aspect. In that view of the matter, we set aside the order of the Tribunal below and direct the Assessing Officer to consider the matter in the context of the provisions of the Act including section 35D of the Act after taking into account the basic materials for arriving at a just consideration.

18. We, therefore, partly allow the appeal by answering both the questions in the negative and remanding the matter back to the Assessing Officer to decide the second question afresh in the light of our observations made in this order. The finding on the first question by the Tribunal is affirmed.

19. In the facts and circumstances, there will be, however, no order as to costs.

[Citation : 334 ITR 293]

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