The division bench of the Bombay High Court, in a recent decision, held that the amount spent on issue of shares to Indian public is “capital expenditure” and therefore, deduction in respect of the same cannot be allowed under the provisions of the Income Tax Act, 1961.
The division bench comprising of Justice M S Sanklecha and Justice S C Gupte further observed that the interest earned on share application money is liable to be adjusted towards the expenditure incurred for raising share capital.
The Assessee-Company, in the instant case, had expanded their business for which they obtained the industrial licence for manufacture of Sodium Tri Poly Phosphate. The license was granted to the assessee on a condition of diluting foreign equity shares on it. In order fulfill the condition, the assessee issued its shares to the Indian public. While filing returns, the assessee claimed an expenditure of Rs.33.74 lakhs which was incurred by them while issuing shares. However, the AO completed the assessment by disallowing the said expenses by treating the same as capital expenditure since the expenditure was for issue of additional share capital.
The assessee maintained that expenditure should be allowed as it is an expense incurred with the object of carrying on its business to increase its profitability, in view of conditional license granted to it.While accepting these contentions, the CIT(A) allowed the appeal by pointing out 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 / diversification programme affecting its business. However, the Tribunal on appeal preferred by the assessee held that the said expenditure amounts to capital in nature. Further, it was held that the interest earned on share application money is taxable under the head “income from other sources.”
Thereafter, the Tribunal posed two substantial questions of law before the High Court on Reference. Firstly, whether the said expenditure is revenue in nature? Secondly,whether the interest earned on share application money is taxable under the head “income from other sources”?
Regarding the first issue, the Court noticed that in the case Kodak India Ltd., the Supreme Court held that the 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) was in the nature of capital. Applying the above ratio to the facts of the present case, the Court confirmed the findings of the Tribunal.
While deciding the taxability of whether the interest earned on share application money, the Court referred the decision of the Gujarat High Court in Commissioner of Income Tax v/s. Shree Rama Multi Tech Ltd, in which it was held that the Assessee was statutorily required to keep the share application money in a separate 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.Accordingly, the issue was decided in favour of the assessee.
Read the full text of the Judgment below.
