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Hindustan Lever Ltd. Versus The Commissioner of Income Tax Bombay City-II,

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 capital field. - Decided against assessee - Interest received .....

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e, 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 Cooperative Sugar Mills Ltd. [1999 (4) TMI 7 - SUPREME Court]. We ar .....

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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 was in the nature of capital expenditure? (b) Whether on the fa .....

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al 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 new share to every six shares reduce the shareholding of the .....

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n 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 expenditure for issue of additional share capital, would be in the c .....

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77; 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 failure to do so would have resulted in stopping its expansion / di .....

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erest 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 365 wherein it is held that expenditure incurred for changin .....

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on (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 object for issuing shares, was to enable the Applicant-Assess .....

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d 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 expenditure. (ii) We have considered the submissions made on b .....

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d 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 enable it to carry on business, and yet it would be in the capital .....

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on (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 related to expansion of the capital base of the company would be a .....

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urt 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 view of the Tribunal. (v) Mr. Pardiwalla, thereafter, relied .....

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ecision 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 submission of a Counsel which the Court did not deal with to a status .....

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on 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 when this Court refused to entertain the Revenue's Appea .....

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ding 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 purposes of the effective carrying on the business of the company .....

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so 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 that the amount paid in excess of the face value of shares was .....

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enue 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 the Assessee therein. It allowed deduction on account of payme .....

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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) of the Companies Act, 1956 till such time as the allotment .....

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t 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 following manner :" Whether the Tribunal erred in setting a .....

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aise 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) was apposite. In Bokaro Steel Ltd. (supra), the Apex Court held .....

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pen 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 the deposit of share application money is directly linked wit .....

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