2015 (3) TMI 314 - AT - Income Tax

Tribunal permits deduction for share capital expenses under Income Tax Act

M/s. Navi Mumbai SEZ Pvt. Ltd. Versus The ACIT, Range 7(1), Mumbai

The Tribunal allowed the assessee's additional ground, permitting the claim of deduction under Section 35D of the Income Tax Act. It determined that the ... Claim of revenue expenditure - Registration fees paid Registrar of Companies to Registrar of Companies, Stamp duty, Filing fees of Form 5 for increase in share capital and Miscellaneous Expenses - these expenses were debited by the assessee under the head Miscellaneous expenditure in its profit & Loss A/c and on the same the assessee has claimed 1/5th deduction u/s. 35D - Held that:- In the present day scenario, the authorized/paid up capital is not static and can also be reduced as per provisions of the Companies Act. Considering the judicial analysis discussed elsewhere in the light of the factual matrix of the balance sheet, in our understanding of the law and the facts of the case in hand, we allow the additional plea raised by the assessee before us and direct the AO to treat the expenditure of ₹ 3,50,00,858/- as revenue expenditure. - Decided in favour of assessee. Issues Involved:1. Denial of the claim of deduction under Section 35D of the Income Tax Act.2. Classification of expenses as capital or revenue in nature.Detailed Analysis:Issue 1: Denial of the claim of deduction under Section 35D of the Income Tax ActThe assessee was aggrieved by the denial of the claim of deduction under Section 35D of the Income Tax Act. The appellant incurred expenses amounting to Rs. 3,50,00,858/- under various heads such as registration fees, stamp duty, filing fees for increase in share capital, and miscellaneous expenses. These expenses were initially debited under the head 'Miscellaneous expenditure' in the profit & loss account, and the assessee claimed a 1/5th deduction under Section 35D of the Act.The Tribunal allowed the assessee to raise an additional ground, stating that it raised purely a question of law and no new facts were required to be brought on record. The Tribunal cited the Hon'ble Supreme Court's decision in National Thermal Power Co. Ltd. Vs CIT, which held that the Tribunal has the discretion to allow or not allow a new ground to be raised if it involves a question of law arising from facts on record.Issue 2: Classification of expenses as capital or revenue in natureThe primary contention was whether the expenses incurred for increasing the share capital should be classified as capital or revenue expenditure. The assessee argued that these expenses should be allowed as revenue expenditure. The Tribunal examined several judicial precedents to address this issue.1. Supreme Court Precedents:- In the case of Brook Bond India Ltd, the Supreme Court held that 'expenditure incurred by a company in connection with the issue of shares, with a view to increase their capital, is directly related to the expansion of the capital base of the company, and is capital expenditure.'- This decision was consistent with the ruling in Punjab State Industrial Development Corpn. Ltd Vs CIT, where the Court applied the test laid down by Lord Cave L.C. in Atherton Vs British Insulated and Helsby Cables Ltd, stating that expenditure aimed at creating an asset or advantage of enduring benefit is capital expenditure.2. Further Analysis:- The Supreme Court in Bombay Steam Navigation Co. Pvt. Ltd. Vs CIT emphasized that whether an expenditure is capital or revenue must be determined based on the facts and circumstances of each case, considering the nature and ordinary course of business and the purpose of the expenditure.- The Madras High Court in Kisenchand Chellaram (India) (P) Ltd allowed similar expenses as revenue expenditure, stating that expenses for increasing capital were tied to the functioning and financing of the business.3. Tribunal's Observations:- The Tribunal noted that while the Supreme Court in Brooke Bond (India) Ltd held such expenses as capital in nature, it did not consider cases where the capital increase was for meeting working capital needs.- The Tribunal referenced its own decision in Laxmi Auto Ltd. Vs DCIT, which concluded that if the capital increase was for working funds, the expenditure could be treated as revenue expenditure.Balance Sheet Analysis:- The Tribunal examined the assessee's balance sheet and observed that the share capital increased from Rs. 477.77 crores to Rs. 722.35 crores, and the share application money increased significantly.- The entire incremental share capital was absorbed in inventories, indicating that the capital increase was for working funds.Conclusion:- The Tribunal concluded that special circumstances existed, leading to a contrary conclusion from the general rule that such expenses are capital in nature.- Considering the judicial precedents and the factual matrix, the Tribunal directed the Assessing Officer to treat the expenditure of Rs. 3,50,00,858/- as revenue expenditure.Result:- The additional ground raised by the assessee was allowed.- The grounds raised in Form No. 36 became otiose.- The appeal filed by the assessee was allowed.Order Pronouncement:- The order was pronounced in the open court on 22nd December 2014.