2021 (9) TMI 980 - AT - Income Tax

Nature of expenditure - Expenditure incurred in respect of documents and stamp charges - increase in authorized capital and treated the same as capital expenditure - whether the expenditure on conversion of debenture bond into equity share capital is revenue or capital expenditure? - alternate claim of deduction of impugned expenditure otherwise may be allowed u/s 35D - whether the expenditure on conversion of debenture bond into equity share capital is revenue or capital expenditure? - HELD THAT - As observed by the ld. CIT(A), facts of the case of the assessee clearly indicate that portion of convertible debenture was converted into equity shares and assessee company had got enduring benefits therefrom and therefore, the expenditure incurred by the assessee on conversion of convertible debentures into equity shares has to be treated as capital expenditure. For which, the ld. CIT(A) relied upon the judgment of Brooke Bond India Ltd. 1997 (2) TMI 11 - SUPREME COURT . Thus, we are of the view that the ld. Revenue authorities have taken a correct view of the matter while disallowing claim of the assessee. Alternate claim under section 35D - Section 35D of the Act does not contemplates allowance of expenditure incurred after the commencement of business that too for the expenditure incurred for conversion of debenture into equity share capital. As per Section 35D, any capital expenditure incurred before the commencement of operation of specified business then such expenditure is allowable as a deduction under the income tax in 5 equal annual installments subject to the fulfilment of different conditions given under the Income Tax Act. That was not the case on our hand for the reasons narrated above. The ld. Revenue authorities is, therefore rightly rejected this alternative claim of the assessee.

Summary

Issues Involved:
Disallowance of expenditure incurred in respect of "documents and stamp charges" on account of increase in authorized capital and treatment as capital expenditure.

Detailed Analysis:

Issue 1: Disallowance of Expenditure as Capital Expenditure
The assessee appealed against the order of the ld. CIT(A) confirming the AO's action in disallowing the expenditure incurred for "documents and stamp charges" related to an increase in authorized capital, treating it as capital expenditure. The AO contended that the expenditure for converting debentures into equity share capital resulted in an increase in the company's capital base, thus qualifying as capital expenditure. The assessee argued that the expenditure should be considered revenue expenditure as it was incurred to meet the working capital needs. The Tribunal agreed with the Revenue authorities, emphasizing that the enduring benefits derived from the conversion indicated that the expenditure was capital in nature. The Tribunal cited the decision in the case of Brooke Bond India Ltd. to support this view.

Issue 2: Alternative Claim under Section 35D
The assessee alternatively pleaded that a portion of the expenses should be allowed under Section 35D of the Income Tax Act. However, the Tribunal noted that Section 35D does not allow for the deduction of expenditure incurred after the commencement of business, specifically for converting debentures into equity share capital. Since the conditions under Section 35D were not met in this case, the Tribunal upheld the rejection of this alternative claim by the Revenue authorities.

In conclusion, the Tribunal dismissed the appeal of the assessee, upholding the disallowance of the expenditure as capital expenditure and rejecting the alternative claim under Section 35D. The judgment was pronounced on 17th September 2021 by the Appellate Tribunal ITAT Ahmedabad, with detailed reasoning provided for each issue raised in the appeal.