2025 (3) TMI 1211 - AT - Income Tax

Company's aborted IPO expenses for raising fresh equity capital allowed as deduction under section 37

ITAT Mumbai ruled that aborted IPO expenditure is deductible under section 37 where it relates to raising fresh equity capital for the assessee company. ... Disallowance of Aborted IPO Expenditure u/sec 37 - whether the expenditure incurred by the assessee for raising fresh capital of Rs. 1000/- crores pertained completely to the proposed equity share capital of Rs. 400 crores for the assessee or was partly related to offer for sale by promoters of Rs. 600 crores also? - HELD THAT:-Section 37 of the Act explicitly excludes capital expenditure from the ambit of deductible business expenditure. Therefore, as a general principle, share issue expenses, being in the nature of capital expenditure, are not admissible for deduction u/s 37 of the Act. The legislature has carved out a specific provision u/s 35D of the Act, permitting the deduction of share issue expenses in a proportionate manner over a period of five years, subject to the fulfillment of stipulated conditions. Similarly, in the case of expenditure incurred for raising loan capital, the statutory framework provides an express allowance under section 36(1)(iii). It is also pertinent to distinguish between capital expenditure incurred for creation of a capital asset or project of enduring benefit to the company and expenditure on an abandoned project. In the latter scenario, provided such expenditure is directly linked to the business of the assessee, it may qualify for deduction under section 37 of the Act. However, in the case of share issue expenses, which serve the primary purpose of capital augmentation, the statutory scheme expressly treats them as capital in nature, thereby precluding their deduction under section 37, save as permitted under section 35D. We find that in the instant case also the part of the expenses out of Rs. 10.22 crores pertains for raising share capital, although the plan of the assessee for raising such capital could not go through and the assessee aborted the entire process, still the intended application of the expenses was toward increase in share capital. Hon’ble Bombay High Court in the case of Nimbus Communication Ltd.[2011 (12) TMI 696 - BOMBAY HIGH COURT] has categorically held that expenses incurred towards aborted share issue expenditure falls u/s 37 of the Act. Thus, we set aside the finding of the CIT(A) on the issue in dispute and direct the AO to delete the addition, subject to quantum related to increase of equity base of assessee, other than expenses pertaining to ‘OFS’ related to promoters. Appeal of the assessee is stands allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the expenditure incurred by the assessee on an aborted Initial Public Offering (IPO) is capital or revenue in nature under Section 37 of the Income Tax Act.Whether the assessee is entitled to interest under Section 244A on the income tax refund.ISSUE-WISE DETAILED ANALYSIS1. Disallowance of Aborted IPO Expenditure under Section 37Relevant Legal Framework and PrecedentsThe primary legal question revolves around the classification of the IPO-related expenditure as capital or revenue. Section 37 of the Income Tax Act allows deduction of expenses that are not capital or personal in nature and are incurred wholly and exclusively for business purposes. The precedents considered include the Supreme Court's decisions in Brook Bond India Ltd. and Punjab State Industrial Development Corporation Ltd., which held that expenses related to the issuance of shares are capital in nature.Court's Interpretation and ReasoningThe Tribunal examined whether the aborted IPO expenses could be classified as revenue expenditure. The Tribunal noted that the IPO expenses were incurred for raising share capital, which is typically considered capital expenditure. However, the Tribunal also considered the decision of the Bombay High Court in Nimbus Communication Ltd., which allowed deduction of expenses related to an aborted share issue under Section 37, as no enduring benefit was derived.Key Evidence and FindingsThe Tribunal reviewed the facts that the IPO was aborted, and no new asset or enduring benefit was created. The expenditure included fees to merchant bankers, stock exchanges, SEBI filing fees, legal and professional fees, and advertisement fees.Application of Law to FactsThe Tribunal applied the legal principles from the aforementioned cases and determined that since the IPO was aborted, and no enduring benefit accrued to the assessee, the expenditure should be considered as revenue in nature, following the precedent set by Nimbus Communication Ltd.Treatment of Competing ArgumentsThe Tribunal balanced the arguments by considering the Supreme Court's stance on capital expenditure for share issuance against the Bombay High Court's view on aborted IPO expenses. The Tribunal favored the latter due to its direct applicability to the case at hand.ConclusionsThe Tribunal concluded that the expenditure related to the aborted IPO should be treated as revenue expenditure under Section 37, except for portions related to the increase of equity base of the assessee.2. No Interest Granted Under Section 244A on Tax RefundRelevant Legal Framework and PrecedentsSection 244A of the Income Tax Act provides for interest on refunds due to the assessee under certain conditions. The issue at hand was whether the assessee was entitled to such interest from the date of filing the income tax return.Court's Interpretation and ReasoningThe Tribunal did not provide a detailed analysis on this issue in the judgment text provided. However, it is implied that the Tribunal's focus was primarily on the disallowance of IPO expenditure.Key Evidence and FindingsThere is no specific mention of evidence or findings related to the interest on tax refund issue in the provided text.Application of Law to FactsThe application of Section 244A was not discussed in detail in the judgment text provided.Treatment of Competing ArgumentsThe judgment text does not provide details on how competing arguments regarding interest on tax refunds were treated.ConclusionsThe judgment text does not explicitly state the Tribunal's conclusion on the interest issue.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal ReasoningThe Tribunal, referencing the Bombay High Court in Nimbus Communication Ltd., stated: '...on account of the aborted public issue offer, no new asset has come into existence and consequently there is no question of the assessee getting any enduring benefit.'Core Principles EstablishedExpenditure related to an aborted IPO, where no enduring benefit or asset is created, can be treated as revenue expenditure under Section 37.The distinction between capital and revenue expenditure is crucial, especially in cases where the intended capital augmentation does not materialize.Final Determinations on Each IssueThe Tribunal allowed the appeal of the assessee, directing the deletion of the addition related to the aborted IPO expenses, except for portions related to the increase of equity base.The judgment does not provide a clear resolution on the issue of interest under Section 244A.