2009 (12) TMI 531 - HC - Income Tax

Assessee went for public issue for raising capital - expenditure incurred for raising capital was claimed as deduction - short-term deposit of the application money and share allotment money which earned interest - assessed as income from other sources - Assessing Officer accepted this as expenditure incurred in relation to the shares allotted to the appellant from the subsidiary company - assessee contended that expenditure incurred for investment in another company in the way of purchase of shares is not a capital expenditure and even the Assessing Officer allowed part of the claim which according to him is attributable to the actual number of shares allotted to the assessee during the previous year - According to him the entire expenditure claimed should have been allowed as this is not hit by the decision of the Supreme Court in Brooke Bond s case - Held that - No difference between the share capital raised for the capital expansion of the company and the share capital raised and utilized for acquiring shares of a subsidiary company because in either case expenditure is for raising capital - appellant is not entitled to deduction for the expenditure incurred for investment in the shares of a subsidiary company - Appeal is dismissed

Summary

Issues:
1. Deductibility of expenditure for raising capital
2. Tax treatment of interest on short-term deposit
3. Allowability of expenditure for investment in another company

Analysis:

Issue 1: Deductibility of expenditure for raising capital
The appellant claimed deduction for the expenditure incurred in raising capital during the assessment years 1993-94. The Assessing Officer accepted part of the expenditure as incurred in relation to shares allotted from a subsidiary company. However, disallowance on a significant amount towards expenditure claimed for raising share capital was confirmed by the Tribunal, citing the decision in Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798 by the Supreme Court. The High Court, following the Supreme Court's decision, held that expenditure for raising share capital cannot be allowed as it is considered a capital expenditure. Consequently, this question was answered against the assessee.

Issue 2: Tax treatment of interest on short-term deposit
The second question revolved around the tax treatment of interest earned on short-term deposits made during the relevant period. The High Court noted that interest on short-term deposits is rightly assessed as income from other sources, as long as the assessee is not engaged in financing activities. The Tribunal's decision confirming the assessment of interest as income from other sources was upheld, and this question was answered in favor of the Revenue and against the assessee.

Issue 3: Allowability of expenditure for investment in another company
Regarding the last question, the appellant argued that expenditure incurred for investment in another company through the purchase of shares should not be considered a capital expenditure. The appellant contended that the entire expenditure for acquiring shares should have been allowed, despite shares allotted during the relevant period being of a lesser value. The High Court, however, held that the expenditure for investment in shares of a subsidiary company is akin to raising capital and cannot be allowed as a deduction. The Court observed that there is no distinction between raising capital for the company's expansion and for acquiring shares of a subsidiary company, as the purpose in both cases is capital raising. Consequently, the High Court upheld the Tribunal's order and dismissed the appeal.

In conclusion, the High Court upheld the Tribunal's decision on all three issues, emphasizing the capital nature of the expenditure for raising share capital and investment in shares of a subsidiary company, and the tax treatment of interest on short-term deposits.