Contact us   Feedback   Annual Subscription   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2016 (11) TMI 969 - BOMBAY HIGH COURT

2016 (11) TMI 969 - BOMBAY HIGH COURT - [2016] 387 ITR 513 - Expenditure incurred in connection with the issue of share capital - revenue or capital expenditure - Held that:- We find that the Apex Court in Kodak India Ltd. (2001 (10) TMI 7 - SUPREME Court ), has held that expenses incurred in connection with issue of public shares to Indian public even when the issue of shares was done to comply with the directions of the Reserve Bank of India (RBI), would be an expenditure incurred in the capit .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

account, till the allotment of shares is completed. Therefore, interest earned on such separately kept amount was adjustable towards the expenditure incurred for raising share capital. This is so as the earning of interest was inextricably linked with the requirement to raise share capital. In support, reliance was placed upon the decisions of the Apex Court in Commissioner of Income Tax v/s. Bokaro Steel Ltd. [1998 (12) TMI 4 - SUPREME Court ] and Commissioner of Income Tax v/s. Karnal Coopera .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

56(1) of the Income Tax Act, 1961 (the Act) by the Income Tax Appellate Tribunal (the Tribunal), seeks our opinion on the following two substantial questions of law: (A) Whether on the facts and circumstances of the case and in law, the Tribunal was right in holding that the expenditure incurred by the assessee company in connection with the issue of share capital with a dominant objective to dilute its foreign shareholding under Government directive to enable it to carry on business in India wa .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

cation programme for which it had obtained necessary industrial licence for manufacture of Sodium Tri Poly Phosphate (STPP). However, the industrial licence was conditional upon the Applicant-Company diluting foreign equity shareholding in it. The condition in the industrial licence reads as under: The company should issue fresh shares to the Indian public to the exclusion of the foreign shareholders, to the extent of which will, after the proposed issue of bonus shares in the proportion of one .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

for the purpose of issuing shares to Indian Public incurred an expenditure of ₹ 33.74 lakhs. In the assessment proceedings, the Applicant claimed that the expenses of ₹ 33.74 lakhs on account of issue of additional shares to the Indian public were in the revenue field and sought deduction of the same while computing its income chargeable to tax. However, the Assessing Officer by an order dated 27th February, 1981 did not accept the Applicant's contention, holding that any expendi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ernatively, it was submitted that in any event, a sum of ₹ 4.88 lakhs being the interest earned on the amounts received on issue of shares and deposited in the bank, subject to the allotment of shares, should be excluded while computing the total income. The CIT(A) by his order dated 20th April, 1983, allowed the Appeal of the Applicant by inter alia holding that the issue of shares for diluting the foreign share holding was issued as per the Government of India's directions and failur .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

d its crosso-bjection before the Tribunal on the issue of interest earned on the share application money till allotment of shares not to be included in computing its income. The Tribunal by an order dated 30th March, 1999 allowed the Revenue's Appeal by holding that raising additional capital, being in the capital field, cannot be allowed as a revenue expenditure. It placed reliance upon the decision of the Kerala High Court in Commissioner of Income Tax v/s. Common Wealth Trust Ltd. 167 ITR .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

questions for our opinion / consideration: 5 Regarding Question (A): (i) Mr. Pardiwalla, learned Senior Counsel appearing for the Applicant urges that the entire expenditure of ₹ 33.74 lakhs has to be allowed as revenue expenditure under Section 37 of the Act to compute its income. In support, he submits that the test to determine whether expenses incurred on issue of shares is capital or revenue in nature, would be to ascertain the purpose / object for issue of shares. If the purpose and .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

itted that although, apparently, the issue seems to be covered against the Applicant-Assessee by the decision of the Apex Court in Commissioner of Income Tax v/s Kodak India Ltd., 253 ITR 445, yet, on its closer scrutiny and when read along with the other decisions, it will support the Applicant's submission, viz: where the main object is to improve the profitability of the business and increase in capital is incidental, as in this case, the expenditure incurred is to be allowed as revenue e .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

hare capital amongst the Indian public as it had been directed by RBI to reduce the foreign shareholding, if it wanted to continue to do business in India. On the aforesaid facts, the Court held that the object of the Assessee therein was to increase share capital and at whose instance, it was done, was not material. In the present facts also, the issue of fresh shares, was to comply with the condition imposed by Government of India for obtaining a manufacturing licence. This licence would enabl .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the principle laid down in Punjab State Development Corporation (supra), is applied to the present facts, then the expenditure incurred on account of issue of shares would be a revenue expenditure. The Apex Court in Punjab State Development Corporation (supra) was concerned with the issue whether the filing fees paid to the Registrar of Company for enhancement of capital by issue of shares is to be considered as a capital or revenue expenditure. The Court held that any expenditure directly relat .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e in capital structure was incidental. (iv) Thus, the Apex Court in Kodak India Ltd., (supra) on an identical fact situation applied the ratio of the Punjab State Development Corporation (supra) to conclude that it would apply to cover expenditure incurred for issue shares even if done to comply with the RBI directions for the purpose of carrying on business. Thus, the decision of the Apex Court in Kodak India Ltd. (supra) would apply to the facts of the present case and no fault can be found in .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

capital in nature. It held that the issue is covered by its decision in Punjab State Development Corporation (supra). However, thereafter in response to submissions of Counsel that increase in capital base by issue of additional shares was done only in order to meet the working fund requirements, it observed that the statement of case does not so indicate. Mr. Pardiwalla, suggested that this implies that it would be another matter if the statement of case had indicated so. To extend the submissi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

-Revenue. (vi) The Applicant-Assesses then placed reliance upon the decision of this Court in Commissioner of Income Tax Vs. Chemosyn Ltd. 371 ITR 427 (wherein one of us, M.S. Sanklecha, J. was a member) to contend that this Court has allowed amounts paid for reduction of capital base of the company as revenue expenditure. Therefore, it is submitted that in this case also, the expenditure incurred on issue of shares be allowed. The order in Chemosyn Ltd. (supra) was passed at the admission stage .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ard, the Assessee-Company was directed to buy 34% of shareholding of one of the warring group and cancel the same. The Respondent-Assessee had claimed before the Assessing Officer, the amount of ₹ 6.81 Crores (being difference between the consideration paid and the face value of the shares acquired for cancellation) as revenue expenditure. This was on the basis that the dispute between the shareholders had adversely affected the business of the company and the payment was made for the purp .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

expenditure. An appeal from the order of the Tribunal was also dismissed by this Court. (c) Further, the Tribunal recorded a finding of fact that the dispute between the brothers had affected the business of the company and its sales had come down from ₹ 25 Crores per annum in the pre-dispute period to about ₹ 9 to 14 Crores during the litigation period. Again, post settlement, the sales had increased to nearly ₹ 18 Crores per annum. On the aforesaid facts, the Tribunal held t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

purchase of shares at its face value was never claimed as revenue expenses. What was claimed as revenue expense was the amount paid by the Assessee to a warring shareholder, to let it carry on its business. The warring shareholder, on facts was found to be an impediment in the Assessee doing business and therefore, expenditure incurred to get rid of the obstacle was allowable as revenue expenditure. Thus, the above decision was not concerned with expenditure incurred on reduction of capital of t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

td. (supra) which was rendered on identical fact situation as arising in this case, would cover the controversy herein. (viii) In the above view, question (A) is answered in the affirmative i.e. in favour of the Revenue and against the Applicant-Assessee. 6. Regarding Question (B) : (i) Mr. Pardiwalla, learned Senior Counsel appearing in support of the appeal, stated that the interest was earned on receipt of share application money deposited in a specified account as required under Section 73(3 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

received from the prospective shareholders till its allotment in a separate account under Section 73(3) Companies Act, 1953. It was not a case of earning of interest on call deposits with the bank made out of the share application money. (ii) We find that this issue has been held in favour of the Applicant-Assessee by the decision of Gujarat High Court in Commissioner of Income Tax v/s. Shree Rama Multi Tech Ltd. 214 Taxman 650, wherein an identical issue as arising herein was raised in the fol .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of interest was inextricably linked with the requirement to raise share capital. In support, reliance was placed upon the decisions of the Apex Court in Commissioner of Income Tax v/s. Bokaro Steel Ltd. 236 ITR 315 and Commissioner of Income Tax v/s. Karnal Cooperative Sugar Mills Ltd. 243 ITR 2. We are in respectful agreement with this decision of the Gujarat High Court. (b) The reliance placed by Gujarat High Court on Bokaro Steel Ltd. (supra) and Karnal Cooperative Sugar Mills Ltd. (supra) wa .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ery required for setting up a plant. The deposit so made to open the letter of credit earned interest. This interest is inextricably linked with the purchase of the machinery and such interest income has necessarily to be taken into account to reduce the cost of acquisition of asset, being income incidental to the purchase of the asset. In this case also, the share application money has been kept in the separate account as statutorily required till allotment of shares and any interest earned on .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version