Expenditure in respect of issue of Additional Share Capital is Capital in nature, says Bombay High Court.
The division bench of the Bombay High Court in a recent decision, disallowed the expenditure incurred by the assessee-company in respect of issue of additional share capital by observing that the said amount constitutes “capital expenditure.” Earlier, the Income Tax Appellate Tribunal has disallowed the same.
The Court further allowed deduction of the amount of interest received by the assessee company on deposit of share application money.
The grievance of the assessee-Company was that their claim for deduction in respect of expenditure for issue of additional share capital was disallowed by the Assessing Officer by holding that the said expenditure was capital in nature. The assessee maintained that the said expense was incurred with the object of increasing their profitability, in view of conditional licence granted to it. Alternatively, it was submitted that in any event, a sum of Rs.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 Commissioner of Income Tax (Appeals) allowed the expenditure on appeal preferred by the assessee by observing 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.
The above order was successfully appealed by the Revenue before the Income Tax Appellate Tribunal. The Tribunal, relying upon the decision of the Kerala High Court in Commissioner of Income Tax v/s. Common Wealth Trust Ltd. 167 ITR 365, held that the said amount cannot be allowed as revenue expenditure. In the above referred decision of the Kerala High Court, it was held that the expenditure incurred for changing the capital structure of the company was capital in nature and not revenue.
Being aggrieved, the assessee approached the High Court challenging the order of the ITAT. Before the High Court, the assessee contended that the assessee contended that the issue of share capital was primarily for doing business and increasing its profits. The change in capital structure was incidental and therefore, the expenditure is in the nature of revenue.
The division bench comprising of Justice M S Sanklecha and Justice S C Gupte, while analyzing the facts of the case arrived at a conclusion that the case of the assessee is squarely covered by the decision of the supreme Court in Commissioner of Income Tax v/s Kodak India, in which it was held that 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. Following the decision, the court concurred with the order of the ITAT 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.
The Court further verified the order of ITAT disallowing the amount of interest received by the assessee company on deposit of share application money on ground that it cannot be adjusted against the expenditure incurred in connection with the issue of such shares. It was submitted on behalf of the assessee 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 of shares is made. Therefore, this earning of interest is a part of an integrated transaction, namely, issue and allotment of shares.It was further submitted that that any income earned on the amount of share application money has to necessarily be adjusted against the share issue expenses and not separately taxed.The Court set aside the order of the ITAT in the light of various judicial pronouncements, held in favour of the assessee.
Read the full text of the Judgment below.
