2011 (2) TMI 1120 - AT - Income Tax

Capital or revenue expenditure - expense paid by the assessee to M/s. Yes Bank against rendering of strategic and financial advisory services - alternative claim for deduction under section 35D - Held that - In the present case the payment was made by the assessee-company to M/s. Yes Bank for rendering of services in connection with issue of shares - Raising of capital block in the case a company is essentially an activity of enduring benefit and therefore the expenses incurred in connection with raising of capital block is also a capital expenditure and this position has been confirmed in Brooke Bond India Limited Versus CIT 1997 (2) TMI 11 - SUPREME Court Payment made for services rendered in connection with the issue of shares to raise the capital block of the assessee-company - Held that - Once shares are issued for cash the assessee-company gets the funds in its hands and once the funds have come into the hands of the assessee-company the process of issue of share capital is complete - Application of funds does not decide the character of the money collected against the issue of shares. Money collected against the issue of shares always remains capital - hence expenditure incurred is capital in nature. Regarding amortization - Held that - The expenses incurred after commencement of the business should be incurred in connection with extension of the undertaking or in connection with setting up of a new unit - An undertaking is always having an area of physical structure which produces goods and services by utilising the necessary factors of production - The expansion in the present case is in the business prospects of the existing undertaking - thus the expenditure incurred by the assessee-company in connection with the issue of shares do not qualify to be amortised under section 35D - Appeal is dismissed

Summary

Issues Involved:
1. Deduction of Rs. 1,56,87,500 as revenue expenditure under section 37(1).
2. Alternative claim for deduction under section 35D for Rs. 3,93,78,491.
3. Levy of interest under section 234B.

Issue-wise Detailed Analysis:

1. Deduction of Rs. 1,56,87,500 as Revenue Expenditure under Section 37(1):

The assessee, a domestic company engaged in the business of pharmaceutical sales, claimed a deduction of Rs. 1,56,87,500 paid to M/s. Yes Bank for strategic and financial advisory services. The Assessing Officer (AO) disallowed the claim, treating it as capital expenditure. The Commissioner of Income-tax (Appeals) upheld the AO's decision, noting that the payment was made for services related to issuing shares to increase the company's share capital. The assessee argued that the expenditure was for working capital needs, which should be treated as revenue in nature. However, the Commissioner rejected this contention, aligning with the AO's view.

The Tribunal reviewed the assessee's arguments, including reliance on the Third Member decision in Lakshmi Auto Components Ltd. and other case law. The Tribunal noted that the payment to Yes Bank was indeed for services in connection with issuing shares, thus increasing the company's capital base. Citing the Supreme Court's decision in Brooke Bond (India) Ltd., the Tribunal concluded that such expenditures are capital in nature. The Tribunal dismissed the assessee's argument that the expenditure should be considered revenue because it was for working capital needs, emphasizing that raising capital and utilizing funds are distinct activities. Therefore, the Tribunal upheld the lower authorities' decision, disallowing the deduction.

2. Alternative Claim for Deduction under Section 35D for Rs. 3,93,78,491:

The assessee alternatively claimed amortization of Rs. 3,93,78,491 under section 35D, which included payments for stamp duty, filing fee, registration fee, documentation, and term sheet fees related to raising the capital block. The AO and the Commissioner of Income-tax (Appeals) rejected this claim, stating that the expenses were incurred for raising capital, not for the expansion of the undertaking or setting up a new unit.

The Tribunal examined the conditions under section 35D, which allows amortization for specified expenditures incurred before the commencement of business or for the extension of the business or setting up a new unit. The Tribunal found that the expenses were not incurred before the commencement of the business, nor were they for setting up a new unit. The Tribunal emphasized that "extension of the undertaking" implies a physical expansion of the manufacturing or production facilities, not merely business or market expansion. Since the assessee's expenses were related to business prospects rather than physical expansion, the Tribunal concluded that the expenditures did not qualify for amortization under section 35D. Thus, the Tribunal upheld the rejection of the alternative claim.

3. Levy of Interest under Section 234B:

The issue of interest under section 234B was deemed incidental or consequential and did not require specific adjudication by the Tribunal.

Conclusion:

The Tribunal dismissed the appeal filed by the assessee, upholding the decisions of the lower authorities. The payment of Rs. 1,56,87,500 to M/s. Yes Bank was treated as capital expenditure, and the alternative claim for amortization under section 35D was also rejected. The issue of interest under section 234B did not warrant separate adjudication.