2016 (12) TMI 1489 - AT - Income Tax

Expenditure for reduction of authorized share of the company - Held that - Procedure for reduction in share capital (section 100-104 of the Companies Act, 1956) and for amalgamation (section 390-394 of the Companies Act, 1956) are similar as they both require application to and sanction of the High Court and requirement with respect to disclosures are similar. Even the powers of the High Court with respect to the two procedures are similar. Ld.AR also submitted a copy of the ITAT Kolkata in ACIT Vs. Britannia Industries Ltd. 2010 (8) TMI 635 - ITAT KOLKATA it has been held that expenses incurred for buy back of shares are revenue expenses because there is no permanent change in the capital structure of the company, nor a benefit of enduring nature and the purchases are effected for company s free reserves which are otherwise capable of being freely distributed to the shareholders. It was further submitted that reduction in share capital and buy back are essentially the same and neither result in a benefit of enduring nature as well as Section 77 of the Companies Act, 1956 prescribes the same procedure for buy back and reduction in the case of limited companies. For these reasons, the decision of the ITAT Kolkata would be applicable to the assessee s case as there is no permanent change in capital expenditure. - Decided in favour of assessee for statistical purpose.

Summary

Issues Involved:
1. Addition of expenses incurred in connection with reduction of authorized share capital treated as capital expenses.
2. Levying interest u/s 234A/B/C of the Act.
3. Initiating penalty u/s 271(1)(c) of the Act.

Issue 1: Addition of Expenses for Reduction of Authorized Share Capital

The appellant challenged the addition of expenses amounting to ?1,47,153 incurred in connection with the reduction of authorized share capital, contending that it was wrongly treated as capital expenses. The AO disallowed the expenditure, asserting that any increase or decrease in share capital has an enduring benefit to the assessee, thus classifying it as capital expenditure. The appellant argued against this classification, emphasizing that the reduction in share capital did not provide an enduring benefit. The CIT(A) upheld the disallowance, stating that the change in share capital only affects the company's capital and not its revenue. However, the appellant presented case law supporting their argument that expenses related to reduction in share capital should be treated as revenue expenses. They also highlighted the similarity in procedures between reduction in share capital and amalgamation, citing a judgment that expenses for buyback of shares were considered revenue expenses. Ultimately, the Tribunal set aside the CIT(A)'s order, allowing the appeal for statistical purposes.

Issue 2: Levying Interest u/s 234A/B/C of the Act

The appellant contested the action of the CIT(A) in confirming the levy of interest under sections 234A/B/C of the Act. The grounds for this challenge were not explicitly detailed in the summary provided. However, it can be inferred that the appellant argued against the imposition of interest under these sections, possibly citing procedural errors or lack of justification for the interest levy.

Issue 3: Initiating Penalty u/s 271(1)(c) of the Act

The appellant also challenged the initiation of penalty proceedings under section 271(1)(c) of the Act by the AO. The specific reasons for contesting the penalty imposition were not explicitly outlined in the summary. However, it can be assumed that the appellant disputed the penalty on the grounds of inaccurate particulars or procedural irregularities.

In conclusion, the appellate tribunal ruled in favor of the appellant regarding the addition of expenses for reduction of authorized share capital, setting aside the CIT(A)'s decision. The outcome of the challenges against the levying of interest under sections 234A/B/C and the initiation of penalty proceedings under section 271(1)(c) was not explicitly mentioned in the summary provided.