TaxTMI 
TaxTMI 
2018 (2) TMI 2104
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....ital, which is the subject matter of impugned penalty order u/s 271(1)(c) of the Act. 3. During the course of assessment proceedings, the AO observed that assessee has claimed at Rs. 3,08,818/- under the head 'Rate and Taxes' debited in the profit and loss account. The assessee was asked to furnish the details and the details so submitted by the assessee shows that Rs. 1.5 lac was paid for increase in share capital and another Rs. 1.5 lac was paid towards ROC fees for increase in the share capital. The assessee submitted that the said amount of Rs. 3 lac was paid to Registrar of companies towards increase in authorized share capital of the company. The Assessing Officer however did not agree to the said claim made by the assessee company and disallowed the same holding it to be nature of capital nature and relied on the decision of Hon'ble Supreme Court in case of Brooke Bond India Ltd. vs. CIT 225 ITR 798 and Punjab State Industrial Development Corporation vs. CIT 225 ITR 792 (SC) among others. Separately, penalty proceedings u/s 271(1)(c) were initiated for furnishing inaccurate particulars of income of Rs. 3 lac. The said addition has since been confirmed by the ld. CIT(A), K....
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....enalty proceedings, assessee vide letter dated 12.01.2016 (reproduced at pages 102 of the penalty order) has categorically stated that the increase in the authorized share capital was with a view to expand the capital base of the company for availing more credit facility from the bank for its working capital requirement. This is also evidenced by the loan sanction letter dated 31.05.2010 for working capital requirement wherein the assessee was required to increase the share capital from Rs. 9 crores to Rs. 11 crores. 7. It was further submitted by the ld AR that the Hon'ble Supreme Court in case of General Insurance Corporation vs. CIT 286 ITR 232; Hon'ble ITAT, Chennai Bench (TM) in case of Lakshmi Auto Components Ltd. vs. DCIT 101 ITD 209; and Hon'ble ITAT, Mumbai Bench in case of Mumbai SEZ (P.) Ltd. vs. ACIT 152 ITD 828 have held that when the share capital is increased to meet the working capital requirement of the business, the expenditure incurred in connection with the increase in the authorized capital is a revenue expenditure. In these cases, the decision of the Hon'ble Supreme Court referred by the AO in the penalty order has been distinguished. Thus, the claim of the....
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....view favourable to the assessee should be adopted as held by the Hon'ble Supreme Court CIT vs. Vatika Township Pvt. Ltd. (2014) 367 ITR 466. In view of above, it was submitted that the penalty confirmed by the ld. CIT(A) be directed to be deleted. 10. The ld DR has vehemently argued the matter and relied upon the order of the lower authorities. 11. We have heard the rival contentions and perused the material available on record. In order to appreciate the contentions so advanced by the ld AR that there is a cleavage of opinion as to whether the fees paid for increasing the authorized capital, particularly when the same is to meet the working capital requirement is a capital expenditure or not, we refer to the legal proposition so laid down by the Hon'ble Supreme Court, the Jurisdictional High Court and which has been subsequently followed/analysed by the Coordinate Benches of the Tribunal. 12. In case of Punjab State Industrial Development Corporation vs CIT reported in 225 ITR 792 which has been relied by the Revenue, the question referred for decision of the Hon'ble Supreme Court was "whether the amount of Rs. 1,50,000 paid to the Registrar of Companies, as filing fee fo....
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....itmaking, it still retains the character of a capital expenditure since the expenditure was directly related to the expansion of the capital base of the company. We are, therefore, of the opinion that the view taken by the different High Courts in favour of the revenue in this behalf is the preferable view as compared to the view based on the decision of the Madras High Court in Kisenchand Chellaram (India) (P.) Ltd.'s case (supra). We, therefore, answer the question raised for our determination in the affirmative, i.e., in favour of the revenue and against the assessee." 13. In above referred decision, the Hon'ble Supreme Court has affirmed the decision of the jurisdictional High Court in case of CIT v. Aditya Mills [1990] 181 ITR 195 / 50 Taxman 120 (Raj.) and CIT v. Multi Metals Ltd. [1991] 188 ITR 151 (Raj.). It would therefore be relevant to refer to these decisions, being the decisions of the jurisdictional High Court, even though not brought to our notices by either of the parties. 14. In case of CIT v. Aditya Mills (supra), the question for consideration before the Hon'ble Rajasthan High Court was whether the amount of Rs. 7,500 paid as fees to the Registrar of Co....
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....mpany should continue to function in accordance with law. The expenditure incurred for the purposes of amending the memorandum and articles of association so as to increase the capital, however, stands on different footing as mentioned in the decisions mentioned above because, as a result of the said amendment, additional amount of capital is available for carrying on the business of the company and, as such, the expenditure is an expenditure of a capital nature and not a revenue expenditure. We are, therefore, of the view that the Tribunal was not justified in allowing the deduction of Rs. 7,500 paid as fees to the Registrar of Companies, Jaipur, for bringing about a change in the memorandum and articles of association of the company in relation to increase in its authorised capital as revenue expenditure. In our view, the said expenditure should have been treated as a capital expenditure." 15. In the case of CIT v. Multi Metals Ltd.(supra), the question for consideration before the Hon'ble Rajasthan High Court was whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the fees paid to the Registrar of Companies for raising the author....
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....ecision in the case of Aditya Mills [1990] 181 ITR 195 is clear and explicit on the point and we are bound by the same. We, consequently, answer the first question in the negative by saying that the fee paid to the Registrar of Companies for raising the authorised capital was not allowable as revenue expenditure." 16. We now refer to the subsequent decision of the Hon'ble Supreme Court in case of Brooke Bond India Ltd vs CIT reported in 225 ITR 798 which has been relied upon by the Revenue where the question referred for decision of the Hon'ble Supreme Court was "Whether, the Tribunal was right in sustaining the disallowance of Rs. 13,99,305 being expenses incurred in connection with the issue of fresh lot of shares in 1967." While adjudicating the same, the Hon'ble Supreme Court held as under: "4. We find that this matter has come up for consideration before this Court in Punjab State Industrial Development Corpn. Ltd v. CIT [Tax Reference No. 1 of 1990, dated 4-12-1996]. In that case, the question under consideration was whether an amount of Rs. 1,50,000 paid to the Registrar of Companies as filing fee for enhancement of capital was not the revenue expenditure. The Co....
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....taken by the assessee in order to meet the need for more working funds for the assessee. We, therefore, cannot proceed on the basis that the expansion of the capital was undertaken by the assessee for the purpose of meeting the need for working funds for the assessee to carry on its business. In any event, the above quoted observations of this Court in Punjab State Industrial Development Corpn. Ltd. 's case (supra)clearly indicate that though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit making, the expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company. 7. In these circumstances, we do not find any merit in the appeal and it is accordingly dismissed. No order as to costs." 17. The above decision of the Hon'ble Supreme Court in case of Brooke Bond (India) (supra) came up for consideration before the Tribunal in case of Lakshmi Auto Components Ltd vs DCIT reported in 101 ITD 209 where, on account of difference....
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....llaram (India) (P.) Ltd. [1981]30 ITR 3852 (Mad.). In that case assessee had paid fees to the ROC for raising capital. The amount was claimed as revenue expenditure. Hon'ble Madras High Court has held that without capital a company cannot carry on its business and hence the expenses incurred for increasing the capital were bound up with the functioning and financing of the business. On that basis, the assessee's claim for deduction was allowed. Hon'ble Apex Court has held that the fees paid to Registrar for expansion of capital base of the company was directly related to the capital expenditure incurred by the company. The decision of Hon'ble Madras High Court was reversed. 9. Having heard both the parties on the point and after perusing the various precedents relied upon, I find that the issue in question is a debatable issue. It is not directly covered by the decision of the Apex Court rendered in the case of Brooke Bond (India) Ltd. v. CIT [1997] 225 ITR 7983 . In this case Hon'ble Supreme Court has held that expenditure incurred by a company in connection with issue of shares, with a view to increase its share capital is directly related to the expansion of the capital....
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....s for working capital. The object of gearing up of the capital was not looked into. Total amount was disallowed without examining the details. Even applicability of section 35D was not considered. In my opinion, this is not correct. I have gone through the reasoning adduced by the ld. Judicial Member. In my opinion he took a correct view in the matter. I concur with his decision on this issue. 13. The matter will now go back to the regular Bench for deciding the appeal in accordance with the majority." 18. Following the above decision in case of Lakshmi Auto Components Ltd (supra), the Coordinate Bench in case of Mumbai SEZ (P) ltd vs ACIT reported in 152 ITD 828 has held as under: "11.1 A perusal and understanding of the above judicial analysis shows that the Hon'ble Supreme Court in the case of Brooke Bond India Ltd. (supra) has held that such expenditure are of capital in nature. The Co ordinate Bench of the Tribunal in the case of Laxmi Auto Component Ltd. v. Dy. CIT [1975] 101 ITD 209/(Chennai) (TM) has observed that the Hon'ble Apex Court in the case of Brooke Bond (India) (supra) has not decided the issue as regards expenditure incurred by the as....