2019 (3) TMI 2062 - AT - Income Tax

Professional consultancy charges for share capital enhancement ruled as capital expenditure following Supreme Court precedent

ITAT Cochin ruled on multiple deduction issues. Revenue's appeal succeeded on PF/ESI contributions, with tribunal holding that contributions paid after ... Deduction under Section 36(1)(va) read with the proviso in relation to employee contributions to PF/ESI - capital versus revenue character of expenditure in connection with issue of shares (Brooke Bond principle) - scope of preliminary/IPO expenditure and amortisation under Section 35D(2)(c)(iv) - remand for examination of applicability of Section 43B and nature of prior period expenditure - expenditure generating enduring benefit and expansion of capital base as determinative of capital expenditureDeduction under Section 36(1)(va) read with the proviso in relation to employee contributions to PF/ESI - Employees' contribution to PF/ESI paid after the due date under the respective PF/ESI Act is not allowable as a deduction under Section 36(1)(va) read with the definition in Section 2(24)(x). - HELD THAT: - The Tribunal applied the binding decision of the Jurisdictional High Court in CIT v. Merchem Ltd., holding that the relevant due date specified in the respective PF/ESI enactments governs entitlement to deduction under Section 36(1)(va). On that basis the CIT(A)'s allowance was set aside and the Assessing Officer's disallowance restored. [Paras 3]Revenue's ground allowed; employees' contributions paid after the statutory due date are not deductible under Section 36(1)(va).Capital versus revenue character of expenditure in connection with issue of shares (Brooke Bond principle) - scope of preliminary/IPO expenditure and amortisation under Section 35D(2)(c)(iv) - Expenditure incurred in connection with a public issue which is directly relatable to the issue is capital in nature and not allowable as revenue expenditure under Section 37(1); the Tribunal upheld the view that Brooke Bond applies and that such expenses are capital. - HELD THAT: - Having considered earlier pronouncements in the assessee's own case and the Supreme Court authority in Brooke Bond, the Tribunal held that expenses directly connected to the public issue (including advertisement, postage, travel and market-research when directly linked to the IPO) are part of the capital outlay for raising capital and therefore retain capital character. The Tribunal observed that the alternative contention under Section 35D (amortisation of specified preliminary expenses) was to be examined by the Assessing Officer as previously directed, but on the present facts the CIT(A)'s allowance was reversed in favour of the Revenue. [Paras 5]Revenue's appeal allowed on this issue; the CIT(A)'s deletion of disallowance is reversed and the expenditure is to be treated as capital in nature in accordance with Brooke Bond.Remand for examination of applicability of Section 43B and nature of prior period expenditure - The question whether certain prior period expenses (turnover fees, stamp balances, business incentives) claimed for AY 2008-09 had already been offered to tax in AY 2009-10 and the applicability of Section 43B required fresh examination; the matter was remitted to the Assessing Officer for reconsideration. - HELD THAT: - The Tribunal found that the Assessing Officer had not examined whether the amounts were allowable under Section 43B or whether they were capital or revenue in nature, nor fully considered the bookkeeping and audit position. Given these lacunae, the Tribunal remitted the issue to the AO with directions to re-examine the nature of the expenditure, applicability of Section 43B (where relevant), and to decide afresh after affording the assessee an opportunity of being heard. [Paras 7]Ground partly allowed for statistical purposes and remitted to the Assessing Officer for fresh examination and decision.Expenditure generating enduring benefit and expansion of capital base as determinative of capital expenditure - Professional/consultancy fees paid to identify and secure a strategic investor (private equity) that culminated in substantial increase in the company's share capital are capital in nature and not allowable as revenue expenditure. - HELD THAT: - The Tribunal accepted the CIT(A)'s analysis that the services provided by the consultant were integrally linked to a long-term strategic decision to invite investment, and that the fees formed part of the financial build-up which resulted in an expansion of the company's capital base. Relying on the Brooke Bond line of authority and related decisions, the Tribunal concluded that the expenditure produced an enduring benefit through the modified capital structure and therefore must be characterized as capital expenditure. [Paras 9]Assessee's appeal dismissed; the CIT(A)'s disallowance of the consultancy fees as capital expenditure is confirmed.Final Conclusion: For AY 2008-09 the Tribunal: disallowed deduction for PF/ESI contributions paid after the statutory due date; upheld that expenditure directly connected with raising share capital (IPO-related expenses and consultancy fees that produced enduring benefit) is capital in nature and not allowable as revenue expenditure; and remitted the question of certain prior period expenses (also involving AY 2009-10) to the Assessing Officer for fresh examination including applicability of Section 43B. Issues Involved:1. Deletion of addition made under Section 36(1)(va) read with Section 2(24)(x) concerning employees' contribution to PF/ESI.2. Allowance of non-IPO expenses under Section 37(1) for the assessment year 2008-09.3. Allowance of prior period expenses amounting to Rs. 1,78,48,292/- already offered to tax in AY 2009-10.4. Treatment of professional and consultancy charges as capital expenditure.Issue-Wise Detailed Analysis:1. Deletion of Addition under Section 36(1)(va) read with Section 2(24)(x):The first issue raised by the Revenue concerns the deletion of an addition of Rs. 6,74,707/- made under Section 36(1)(va) read with Section 2(24)(x) regarding employees' contribution to PF/ESI. The Tribunal found that this issue is squarely covered against the assessee by the judgment of the Jurisdictional High Court in the case of CIT vs. Merchem Ltd. (378 ITR 443). According to this judgment, the due date in the respective ESI/PF Act is the date to be considered for allowing deduction under Section 36(1)(va). Therefore, the Tribunal reversed the order of the CIT(A) and restored that of the Assessing Officer, disallowing the deduction of employees' contribution to PF/ESI after the due date. This ground of appeal by the Revenue was allowed.2. Allowance of Non-IPO Expenses under Section 37(1):The second issue pertains to the allowance of purported non-IPO expenses amounting to Rs. 1,17,77,496/- in AY 2008-09. The CIT(A) had allowed this expenditure under Section 37(1), which was incurred in the earlier financial year 2006-07. The Tribunal noted that the Assessing Officer had disallowed Rs. 29,57,136/- as it was considered capital expenditure. On appeal, the CIT(A) deleted Rs. 23,55,449/- of this disallowance, stating that the expenses were operational and intended for the furtherance of the assessee's business. The Revenue argued that these expenses should be capitalized under Section 35D(2)(c)(iv). The Tribunal, referencing its earlier decision in the assessee's own case, agreed that these expenses should be treated as capital in nature. Therefore, this ground of appeal by the Revenue was allowed.3. Allowance of Prior Period Expenses:The third issue involves the allowance of prior period expenses amounting to Rs. 1,78,48,292/-. The assessee had disallowed this amount in AY 2009-10 and claimed it as an allowable expenditure for AY 2008-09 through a revised computation of income. The CIT(A) deleted the disallowance, stating that taxing the same amount in both years would result in double taxation, which is impermissible. The Revenue argued that these expenses should be disallowed. The Tribunal found that the CIT(A) had not examined whether the provisions of Section 43B would apply or whether the expenses were capital or revenue in nature. Consequently, the Tribunal remitted the issue back to the Assessing Officer for re-examination. This ground of appeal by the Revenue was partly allowed for statistical purposes.4. Treatment of Professional and Consultancy Charges:The fourth issue raised by the assessee concerns the treatment of professional and consultancy charges amounting to Rs. 1,85,70,000/- as capital expenditure. The CIT(A) had confirmed the disallowance, stating that these charges were capital in nature as they were incurred to identify suitable investors, resulting in long-term enduring benefits for the company. The Tribunal upheld this view, referencing the judgment of the Supreme Court in the case of Brooke Bond India Ltd. vs. CIT (225 ITR 798), which held that expenses incurred in connection with the issue of shares to increase share capital are capital in nature. Therefore, this ground of appeal by the assessee was dismissed.Conclusion:- The appeal of the Revenue was partly allowed for statistical purposes.- The appeal of the assessee was dismissed.- The Cross Objection of the assessee was dismissed as infructuous.