05 October 2013
This is for increase in capital and hence it is a capital expenditure therefore u/s 37 it is not allowable there are many case laws for this
Punjab State Industrial Development Corporation Ltd. v. CIT — 225 ITR 792 (SC) :
3.1 In the above case, the assessee had incurred an expenditure of Rs.1,50,000 by way of filing fees paid to Registrar of Companies for enhancing the capital of the company and had claimed the same as deduction while computing its total income. This was allowed by the Assessing Officer. However, the Commissioner of Income-tax (CIT), in exercise of his jurisdiction u/s.263, reviewed the order of the Assessing Officer and took the view that the said expenditure was wrongly treated as revenue expenditure and accordingly, directed that the assessment should be revised. The Appellate Tribunal also upheld the order of the CIT relying on the judgement of the Punjab & Haryana High Court reported in 160 ITR 743. On these facts, the Tribunal directly referred the question to the Apex Court since different views were expressed by the High Courts on this point. Accordingly, the issue came up before the Apex Court. After referring some of the judgements of the High Courts as well as the Apex Court, the Apex Court held as under (pages 797-798) :
“We do not consider it necessary to examine all the decisions in extenso because we are of the opinion that the fee paid to the Registrar for expansion of the capital base of the company was directly related to the capital expenditure incurred by the company and although incidentally that would certainly help in the business of the company and may also help in profit-making, it still retains the character of a capital expenditure since the expenditure was directly related to the expansion of the capital base of the company. We are, therefore, of the opinion that the view taken by the different High Courts in favour of the Revenue in this behalf is the preferable view as compared to the view based on the decision of the Madras High Court in Kisenchand Chellaram’s case, (1981) 130 ITR 385. We, therefore, answer the question raised for our determination in the affirmative, i.e., in favour of the Revenue and against the assessee.”
3.2 Applying the ratio of the above referred judgement of the Apex Court in the case of Punjab State Industrial Development Corpn. Ltd., the Apex Court, in the case of Brooke Bond India Ltd., (225 ITR 798), took the view that the expenditure incurred by the company in connection with the issue of shares with a view to increase its share capital is directly related to the increase in the capital base of the company and hence the same should be treated as capital expenditure notwithstanding the fact that it may incidentally help the company in its business and profit-making. However, this was not the case of issue of shares to comply with the Government requirements for diluting the shareholding of non-residents in the company. In this case, it was also submitted on behalf of the assessee that the object of the company in enhancing the capital was to acquire more working funds for the assessee to carry on its business and to earn more profit and hence in such a case, the expenditure should be treated as of revenue nature. It appears that this contention has also been negatived by the Apex Court relying on the above referred judgement in the case of Punjab State Industrial Development Corpn. Ltd. (supra).
CIT v. Kodak India Ltd. — 253 ITR 445 (SC) :
4.1 The issue referred to in para 1.2 above came up for consideration before the Apex Court in the above-referred case arising out of the judgement of the Bombay High Court (appears to be unreported) wherein the issue appears to have been decided in favour of the assessee by the High Court.
The facts of this case in detail are not available. But from the discussion in the judgement it appears that the assessee had incurred an expenditure of Rs.8,07,624 for the public issue of shares and the issue was made to reduce its non-residents’ holding to 40% as per the direction of the Reserve Bank of India (RBI).
4.2 On behalf of the assessee it was contended that the assessee had acted to increase its share capital because it has been directed by the RBI to do so. As per the direction of the RBI, it had to reduce its non-residents’ holding to 40%. It was also contended that the only way in which the assessee could do its business after the RBI’s directive, was to issue share capital to comply with the same and accordingly, the judgement of the Apex Court in the case of Punjab State Industrial Development Corporation Ltd. was distinguishable.
4.3 After considering the contention of the assessee, the Court finally held as under (page 446) :
“Whichever way we look at it, the object of the assessee was to increase its share capital; whether it did so to continue to do business after the Reserve Bank directive or otherwise, the case is covered by the judgement in the case of Punjab State Industrial Development Corporation Ltd., (1997) 225 ITR 792 (SC). The appeal is, therefore, allowed and the order under appeal set aside. The question is answered in the negative and in favour of the Revenue. In other words, the expenditure of Rs.8,07,624 incurred for the public issue of shares was capital expenditure.”
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