High Court rules on capital expenditure vs. interest income treatment in share issuance.

Hindustan Lever Ltd. Versus The Commissioner of Income Tax Bombay City-II,

Hindustan Lever Ltd. Versus The Commissioner of Income Tax Bombay City-II, - [2016] 387 ITR 513 Issues Involved:
1. Nature of expenditure incurred by the assessee company in connection with the issue of share capital.
2. Treatment of interest received by the assessee company on deposit of share application money.

Issue-wise Detailed Analysis:

Issue 1: Nature of Expenditure Incurred by the Assessee Company in Connection with the Issue of Share Capital
- Facts and Arguments: The Applicant-Company incurred an expenditure of Rs. 33.74 lakhs for issuing shares to the Indian public to comply with a government directive to dilute foreign shareholding. The Applicant claimed this expenditure as revenue expenditure under Section 37 of the Income Tax Act, 1961, arguing that the primary objective was to enable the company to carry on its business and increase profitability, making the increase in capital incidental.
- Tribunal's Decision: The Tribunal held that the expenditure was in the capital field and not allowable as revenue expenditure, relying on the decision in Commissioner of Income Tax v/s. Common Wealth Trust Ltd., which stated that expenditure for changing the capital structure is capital in nature.
- High Court's Analysis: The High Court referred to the Supreme Court decision in Commissioner of Income Tax v/s Kodak India Ltd., where it was held that expenses incurred for issuing shares to comply with RBI directions were capital expenditure. The Court noted that the object of the assessee in Kodak India Ltd. was to increase share capital, and the fact that it was done at the instance of RBI was immaterial. The Court found that the present case was identical, as the issue of shares was to comply with a government directive for obtaining a manufacturing license.
- Conclusion: The High Court concluded that the expenditure incurred by the Applicant-Company was capital in nature, affirming the Tribunal's decision. The question was answered in the affirmative, in favor of the Revenue and against the Applicant-Assessee.

Issue 2: Treatment of Interest Received by the Assessee Company on Deposit of Share Application Money
- Facts and Arguments: The Applicant-Company earned interest on the share application money deposited in a specified account as required under Section 73(3) of the Companies Act, 1956, until the allotment of shares. The Applicant argued that this interest should be adjusted against the share issue expenses and not taxed separately.
- Tribunal's Decision: The Tribunal held that the interest earned on share application money should be taxed as income from other sources, rejecting the Applicant's cross-objection.
- High Court's Analysis: The High Court referred to the Gujarat High Court decision in Commissioner of Income Tax v/s. Shree Rama Multi Tech Ltd., which held that interest earned on share application money kept in a separate account as required by statute should be adjusted against the expenditure incurred for raising share capital. The Court also cited the Supreme Court decisions in Commissioner of Income Tax v/s. Bokaro Steel Ltd. and Commissioner of Income Tax v/s. Karnal Cooperative Sugar Mills Ltd., where similar interest income was held to reduce the cost of construction or acquisition of assets.
- Conclusion: The High Court agreed with the Gujarat High Court's reasoning and held that the interest earned on share application money should be adjusted against the share issue expenses. The question was answered in the negative, in favor of the Applicant-Assessee and against the Revenue.

Final Judgment:
- Question (A): Affirmative, in favor of the Revenue and against the Applicant-Assessee.
- Question (B): Negative, in favor of the Applicant-Assessee and against the Revenue.

Disposition: The Income Tax Reference was disposed of in the above terms with no order as to costs.