Fees paid to the ROC are revenue expenditure

INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH ‘C’: NEW DELHI

BEFORE SHRI S. V MEHROTRA, ACCOUNTANT MEMBER

AND

SHRI A. D. JAIN, JUDICIAL MEMBER

ITA No. 2919/Del/2012 -Assessment Year: 2005-06

ITA No. 2920/Del/2012-Assessment Year: 2008-09

Deputy Commissioner of Income Tax (LTU)

NBCC Plaza, Pushp Vihar,

Sector-III, New Delhi 110017

(Appellant)

Vs.

M/s. Hero Motors Ltd, 601,

International Trade Tower,

Nehru Place, New Delhi 100014

(Respondent)

Appellant by: Shri SatpalSingh, Sr. DR

Respondents by: Sri Sumit Bansal, CA

O R D E R

PER S. V MEHROTRA, A. M.

The department has filed these two appeals against the two separate orders of Ld. CIT(A)-XV, New Delhi dated 24.04.2012 and 30.04.2012 for the assessment year 2005-06 and 2008-09 respectively.

2. First we take up the appeal for assessment year 2005-06 vide ITA No. 2919/Del/2012.

3. Brief facts of the case are that the assessee company, in the relevant year, was engaged in manufacturing of motorized two wheelers and auto components/spare parts for auto industries. It had filed its return of income declaring loss of Rs. 37,11,83,633/-. The assessment was completed at a total loss of Rs. 34,94,41,949/, inter alia, after making following addition/disallowance: Disallowance of Rs. 37,50,5000/- being fees paid to ROC for increase in authorized share capital.

4. Ld. CIT(A) upheld the disallowance to the extent of Rs. 30,18,293/- and allowed a relief of Rs. 7,31,707/-. Before ld. CIT(A) the assessee had also taken following ground of appeal: “That the Ld. DCIT has failed to allow the amount at Rs. 3,17,016/- disallowed in the computation of taxable income in respect of provident fund u/s 36(1) being deposited on 21.02.2005, (i.e. after due date) which happened to be a Sunday, for which the claim was made vide letter dated 17.12.2007.”

5. Ld. CIT directed the assessing officer to allow the deduction, inter alia, taking note of the fact that the payment was made after due date as the last date for payment felled on Sunday. Being aggrieved with the order of ld. CIT(A), the department has preferred this appeal before us on the following grounds of appeals:

“1. On the facts and the circumstances of the case and in law, the ld CIT(Appeals) has erred in deleting the disallowance of Rs. 7,31,707/- out of the fees paid to ROC and other expenses relating to increase of authorized capital by relying on the Hon’ble Supreme Court’s judgement in the case CIT vs. General Insurance Corporation, expenses held as revenue expenditure were incurred in connection with the issue of bonus shares effected by capitalizing the reserves, not resulting in any increase of authorized share capital, whereas in the present case the entire expenses were incurred in relation to increase of authorized capital, and issue of shares was partly effected through conversion of ICD (Inter Corporate Deposits), which did not form part of the capital base of the company.”

2. On the facts and in the circumstances of the case, the Ld. CIT(Appeals) has erred in directing the AO to allow deduction of Rs. 3,17,016/- being employee’s contribution to provident fund, without appreciating the fact that the claim for such deduction was not made in the return filed by the assessee, nor the same was made through any revised return filed by the assessee, and, therefore, the deduction was not allowable in terms of the Hon’ble Supreme Court’s judgement in the case of Goetze India Ltd. vs CIT (284 ITR 323).”

6. Brief facts apropos ground No. 1 are that assessee had deposited a sum of Rs. 37,50,5000/- on account of fees paid to ROC for increase in authorized share capital. After considering the assessee’s reply, the assessing officer held that the expenses were capital in nature. He relied on the decision of the Hon’ble Supreme Court in the case of Punjab State Industrial Development Corporation Ltd. vs. CIT 225 ITR 792 (SC) and Brooke Bond India Ltd. vs. CIT 225 ITR 798 (SC)

7. He, accordingly, made an addition of Rs. 3,75,05,000/-

8. Before Ld. CIT(A) the assessee submitted that M/s. Majestic Auto Ltd. was having two units- one in Ludhiana for manufacture of mopeds and the other one at Ghaziabad for manufacturing of Hero Puch and auto components/spare parts for auto industries. The Ghaziabad unit of M/s. Majestic Auto Ltd got separated under the Scheme of Arrangement approved by the Hon’ble Punjab & Haryana High Court vide order dated 22.07.2004. The demerger was effective from 01.04.2003 onwards relevant to assessment year 2004-05. Subsequently, the demerged entity was merged into M/s. Hero Auto Ltd (now called Hero Motors Ltd.) vide Hon’ble Delhi High Court’s order dated 30.07.2004. The authorized capital of this company, after the scheme of arrangement was approved by the High Court, increased from 2,70,00,000/- shares to 6,20,00,000 shares i.e. 3,50,00,000/- additional equity shares of Rs. 10 each. Simultaneously, the authorized preference capital was increased by Rs. 26.50 crores by issuing 2,65,00,000 preference shares of Rs. 10 each. It was further clarified that both the company had issued 3.50 crores equity amounting to Rs. 35 crores to the preferential shareholders/ ICD shareholders as per the “Scheme of Arrangement”, no fresh money had been received. To give effect to the verdict of High Court, the assessee was required to increase its authorized capital for which a sum of Rs. 37,50,500/- was paid to ROC as fee for increase in authorized share capital. Thus, in sum and substance, the assessee made the following submissions:-

1. There was no flow of additional funds to the company on account of increase in Equity capital.

2. The above exercise had not resulted in availability of any additional funds in the hands of the company.

3. It was a mere re-allocation of existing funds.

9. The assessee relied on the decision of Hon’ble Supreme Court in the case of CIT v/s. General Insurance Corporation 286 ITR 232 (SC), wherein it had been held that expenses by way of stamp duty and registration for issue of bonus share was revenue in expenditure.

10. Ld. CIT(A) noted that pursuant to the Scheme of Arrangement approved by the High Courts of Delhi & Punjab & Haryana, the authorized share capital of the assessee company had gone up during the year as follows:

11. Ld. CIT(A) after considering the modus operandi of conversion of preference capital and ICD has noted in Para 2.8 of his order that the total increase in the authorized share capital during the year was 61.5 crores out of which 35 crores was on account of increase in authorized capital of equity shares. The balance 26.50 crores related to increase in authorized capital of preference shares. For both, increase in the authorized equity capital as well as preference capital, an amount of Rs. 37,50,000 had been incurred by way of ROC fee, stamp duty and other related expenses. In the back drop of these fact Ld. CIT(A) concluded that since there was no fresh inflow of fund to the extent of Rs. 35 crores, the ratio of Hon’ble Supreme Court’s decision in the case of CIT vs. General Insurance Corporation 286 ITR 232 (SC) was applicable. However, as regards the balance of Rs. 26.50 crores he found the same had actually been received in cash through actual inflow of funds pursuant to increase in the preference capital. He, therefore, relying on the Supreme Court’s decision in the case of Punjab State Industrial Development Corporation Ltd. vs. CIT 225 ITR 793 (SC) (supra) and Brooke Bond India Ltd vs. CIT 225 ITR 798 (SC) (Supra) held that proportionate ROC fees and other related expenses on account of increase of share capital by way of fresh infusion of share capital to the extent of Rs. 49.50 is to be treated as capital.

He, accordingly, upheld the disallowance to the extent of Rs. 30,18,293/-. We have considered the submissions of both the parties and have perused the record of the case. There is no dispute that there was no fresh inflow of funds to the extent of Rs. 35 crores in regard to increase in equity shares capital of the company and, therefore, ROC fees and other related expenses on this account of increase in authorized share capital was revenue in nature, in view of the decision of the Hon’ble Supreme Court in the case of General Insurance Corporation Ltd.

12. As regards the fresh cash infusion during the year towards preference share, the ld. CIT(A) has treated the expenditure incurred towards ROC fees etc. as capital in nature.

13. We, therefore, do not find any reason to interfere with the findings of Ld. CIT(A) on this ground and, accordingly, dismiss the same.

14. Apropos ground No. 2, we find that it is not disputed that the contribution to the employees provident fund of Rs. 3,17,016/- was required to be deposited on 20.02.2005 which was deposited on 21.02.2005 as 20.02.2005 was Sunday.

15. We have gone through the order of the ld. CIT(A) and do not find any reason to interfere with his order because, as rightly observed by him, even otherwise the deduction was allowable to assessee by the decision of the Delhi High Court in the case of CIT vs. Aimil Ltd, 321 ITR 508 (Delhi). The grievance of the department that since assessee had not claimed in the return of income this deduction, the same was not allowable in view of the decision of the Hon’ble Supreme Court in the case of the Goetze India Ltd (Supra) is misplaced because this decision does not put any embargo on the powers of appellate authority to allow a legally admissible claim.

16. In the result this ground is dismissed.

17. In the result the departmental appeal is dismissed.

18. Now we will take the appeal for the assessment year 2008-09 vide ITA No. 2920/Del/2012.

19. The assessing officer observed that the assessee company was incurring heavy losses for past several years. He noted that assessee had been borrowing huge amounts of funds steadily for purpose of its business. At the same time it had advanced an amount of Rs. 5,06,12,209/-to one of its related concern M/s. Hero Global Design Ltd. He further noticed that the assessee had also advanced an amount of Rs. 3,21,59,062/- to its concern as ICD in addition to above amount. He noted that in respect of ICD , interest had been charged but no interest had been charged in respect of amount of Rs. 5,06,12,209/- advanced to M/s. Hero Global Design.

20. After considering the assessee’s submission he made an addition of Rs. 30,36,732/- computed at the rate of 6% towards interest. Ld. CIT (A) deleted the addition following the order of assessment year 2007-08. At the time hearing ld counsel for the assessee filed before a copy of Tribunal Order for assessment year 2007-08 vide ITA No. 1847/Del/2012 dated 06.07.2012 wherein in para 6 Tribunal has observed as under:

“with the assistance of learned departmental representative, we have gone through the record carefully. On perusal of the findings of the Learned CIT(Appeals), extracted supra, we are convinced that no case is made out for disallowance of interest expenses. Learned first appellate authority had recorded the findings of fact pointing out specific circumstance as to why no disallowance deserves to be made in this case. According to the Learned CIT(appeals), there is no nexus between the borrowings made by the assessee company and advance given to M/s. Hero Global Design Ltd. Similarly, the outstanding sums extracted supra, represents the sales consideration of assets, technical know-how, rent etc. which are not the advance given by the assessee out of the borrowed funds. In such circumstances, no disallowance can be made. Learned first appellate authority had appreciated the controversy in right perspective and no interference is called for in her order.”

21. Department has not brought on record for distinguishing features from the earlier year to persuade us to take a different view and, therefore, respectfully following the decision for assessment year 2007-08, this ground is dismissed.

22. In the result the departmental appeal is dismissed.

23. In the result both the appeals are dismissed.

24. Order pronounced in the open court on 17.05.2013.

-Sd- -Sd-

(A. D. JAIN) (S. V MEHROTRA)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated 17 /05/2013

A K Keot

Copy forwarded to:

1. Applicant

2. Respondent

3. CIT

4. CIT (A)

5. DR: ITAT

ASSISTANT REGISTRAR