2013 (10) TMI 112 - HC - Income Tax

Court Upholds Capital Expenditure Classification for Share Issue Expenses

The court dismissed the Tax Case Appeal, upholding the classification of share issue expenses as capital expenditure due to their direct link to capital ... Share issue expenses paid to be treated as capital expenditure or revenue expenditure - Assessee admittedly took steps to go for public issue and after incurring expenditure, just before the public issue, by reason of the orders from the SEBI, the assessee could not go in for public issue – Held that:- Reliance has been placed upon the judgment in the case of BROOKE BOND INDIA LIMITED v. CIT [1997 (2) TMI 11 - SUPREME Court] - Considering the purposes for which the company incurred this expenditure, the fact that the efforts had got frustrated later on, would not alter the nature of the expenditure and it remains the capital expenditure – In the present case, admittedly the expenses were incurred by the assessee for the purpose of putting up publication. This was done for the purpose of widening its capital base. Even though the assessee stated that this expenditure was incurred so as to improve the cash availability, yet, the fact remains that the expenditure incurred was only for the purpose of expansion of the capital base – Decided against the Assessee. Issues:1. Deduction of share issue expenses as revenue expenditure.2. Determining the nature of expenditure incurred for expansion of capital.3. Relevance of purpose vs. end result in classifying expenditure as capital or revenue.Issue 1: Deduction of share issue expenses as revenue expenditure:The appellant claimed deduction for share issue expenses, arguing that the expenses were revenue in nature due to the failure to augment working capital as intended. The Commissioner of Income Tax and Income Tax Appellate Tribunal rejected the claim, citing precedents. The appellant contended that the expenses were solely for improving cash availability and working capital, relying on case law. The Tribunal upheld the Assessing Officer's view that the purpose of the expenditure determined its nature, not the eventual outcome. The appellant sought relief based on specific judgments, emphasizing the lack of benefit due to external factors. However, the court dismissed the appeal, holding that the expenses were capital in nature, emphasizing the direct link to capital base expansion.Issue 2: Determining the nature of expenditure for capital expansion:The court analyzed various precedents to establish the nature of the expenditure incurred by the appellant. It differentiated cases where expenses were incurred for specific projects that did not materialize, emphasizing the distinction between capital and revenue expenditure. The court highlighted the direct relationship between expenses and capital base expansion, regardless of the outcome, as observed in previous judgments. It rejected the appellant's argument that the failed share issue affected the character of the expenditure, affirming that the purpose of capital enhancement governed the classification.Issue 3: Relevance of purpose vs. end result in expenditure classification:The appellant argued that the failure to achieve the intended benefit should impact the classification of the expenditure. However, the court disagreed, emphasizing the consistent application of legal principles in distinguishing capital and revenue expenditure. It referenced specific cases where the purpose of expenditure for capital projects remained paramount, irrespective of project success. The court rejected the appellant's plea to consider the outcome of the expenses, maintaining that the primary purpose of capital enhancement guided the classification as capital expenditure.In conclusion, the court dismissed the Tax Case Appeal, upholding the classification of share issue expenses as capital expenditure due to their direct link to capital base expansion, regardless of the unsuccessful outcome. The judgment reiterated the precedence of purpose over end result in determining the nature of expenditure and emphasized the consistent application of legal principles in distinguishing between capital and revenue expenditure.