2019 (12) TMI 24 - AT - Income Tax

Tribunal decision: Share listing expenses are revenue, community development expenses allowed.

DCIT, Circle-10 (2), New Delhi Versus Great Eastern Energy Corporation Ltd. And (Vice-Versa)

The Tribunal dismissed the revenue's appeal regarding the capitalization of share listing expenses, upholding that such expenses were revenue ... Addition on account of capitalization of share listing expenses - HELD THAT:- The status of the company is one in which public is substantially interested and for that purpose listing of shares in the stock exchange would assume importance so far as the public limited company is concerned. The business of the company also carries better prestige and better status when its shares are listed in the stock exchange. Such listing adds several advantages to the business carried on by the company, particularly in the matter of confidence of customers and loyalty of employees, which generate value. The expenditure on account of listing fees paid to the stock exchange could not be said to be capital expenditure, and that it shall have to be regarded as expenditure of revenue nature. Therefore, for the reasons we do not find any infirmity in the order of the learned CIT – A in deleting the above disallowance noting that there is no increase in the capital base of the assessee company. In view of this, we dismiss ground number 1 of the appeal of the learned AO. Disallowance of 50 % of the expenditure on account of the community development donation expenses under section 37 (1) - HELD THAT:- Following the decision of the honourable Karnataka High Court in case of CIT vs. Infosys Ltd [2013 (7) TMI 451 - KARNATAKA HIGH COURT], we do not find any reason to sustain the order of the learned CIT – A upholding the above disallowance. Further the reasons given by the learned CIT – A that as the PSU are directed by Government Of India to incur certain expenditure in the form of corporate social responsibility, if such expenditure are allowed to them as deduction, then in case of private corporate assessee also the above expenditure is to be allowed. We do not find this “just‟ reason for confirming the disallowance. Express provision of disallowance of the corporate social responsibility expenditure is provided under explanation – 2 of the provisions of section 37 (1) of the income tax act with effect from 1/4/2014 by The Finance (Number 2) Act, 2014. Thus, prior to that it is clear that no such disallowance was provided in the law. As the honourable Karnataka High Court has held that such expenditure is allowable to the assessee u/s 37 (1) of the income tax act as it is wholly and exclusively incurred for the purposes of the business, we are of the view that such disallowance can only be made after 1/4/2015, if at all. - Decided in favour of assessee. Issues Involved:1. Capitalization of share listing expenses.2. Disallowance of community development (donation) expenses under section 37(1) of the Income Tax Act, 1961.Analysis of Judgment:1. Capitalization of Share Listing Expenses:- Issue: The revenue challenged the deletion of an addition of Rs. 1,78,30,516 made on account of capitalization of share listing expenses by the CIT(A).- Revenue's Argument: The department argued that the listing expenses provided an enduring benefit to the assessee and were related to the expansion of the capital base, thus should be treated as capital expenditure.- Assessee's Argument: The assessee contended that the expenses incurred were for shifting its Global Depository Receipts (GDR) from AIM London Stock Exchange to the main market of the London Stock Exchange without increasing the capital base. The expenses did not provide any enduring benefit but merely facilitated better marketability of the shares.- Tribunal's Decision: The Tribunal upheld the CIT(A)’s decision, stating that the listing fees did not increase the capital base and were necessary for providing a bigger trading platform for the GDR holders. The Tribunal referenced the Gujarat High Court decision in CIT vs. Alembic Chemical Works Co Ltd and CBDT Circular No. F. 10/67-65/IT (A1) dated 26-8-1965, which supported the view that listing fees are revenue expenditure. Thus, the Tribunal dismissed the revenue's appeal on this ground.2. Disallowance of Community Development (Donation) Expenses:- Issue: Both the revenue and the assessee contested the CIT(A)’s partial allowance (50%) of community development expenses amounting to Rs. 12,21,402 out of Rs. 24,42,804 for the assessment year 2011-12.- Revenue's Argument: The department maintained that the expenses, booked on self-made vouchers and in the form of donations, were not wholly and exclusively for business purposes and should be entirely disallowed.- Assessee's Argument: The assessee argued that the expenses were incurred to maintain good relations with villagers in remote areas where drilling operations were conducted, which was essential for business operations. The expenses were thus commercially expedient and should be fully allowed.- Tribunal's Decision: The Tribunal referred to the Karnataka High Court decision in CIT vs. Infosys Technologies Ltd, which held that expenses incurred for corporate social responsibility (CSR) that facilitate business operations are allowable under section 37(1). The Tribunal found that the expenses were indeed for business purposes and should not be disallowed. Consequently, the Tribunal allowed the assessee's appeal and dismissed the revenue's appeal on this ground.Assessment Year 2012-13:- Issue: The assessee appealed against the CIT(A)’s upholding of a disallowance of Rs. 19,28,747 for community development expenses.- Tribunal's Decision: Consistent with its reasoning for the assessment year 2011-12, the Tribunal allowed the assessee's appeal, holding that such expenses were wholly and exclusively for business purposes and should be allowed under section 37(1).Conclusion:- The Tribunal dismissed the revenue's appeal concerning the capitalization of share listing expenses and upheld the CIT(A)’s decision that these were revenue expenditures.- The Tribunal allowed the assessee’s appeal regarding the disallowance of community development expenses for both assessment years 2011-12 and 2012-13, stating that these were incurred wholly and exclusively for business purposes.