2022 (7) TMI 692 - AT - Income Tax

Allowance of Public issue expenses u/s 37(1) or allowing 1/5th of the same under section 35D - HELD THAT - While considering the contingency like where the object of enhancement of the capital was to have more working funds for the assessee to carry on its business and to earn more profit and that in such a case the expenditure that is incurred in connection with the issue of shares to increase the capital has to be treated as revenue expenditure, the Hon ble Apex Court held 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 profit making, the expenses incurred in that connection still remain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company. The observations of the Hon ble Apex Court in the case of Brooke Bond India Limited ( 1997 (2) TMI 11 - SUPREME COURT are applicable to the facts of the case on hand on all fours. Irrespective of the fact of assessee increasing the capital base, whether it is for working capital or for creating the capital asset, the expenditure incurred in that connection still retains the character of capital expenditure to reach section 37(1) of the Act has no application and is governed only by 35D of the Act. We have no hesitation to hold that the CIT(A) committed error in allowing the entire expenditure as revenue expenditure under section 37(1) of the Act, and the Assessing Officer was right in accepting the contention of the assessee before him that the 1/5th of the public issue expenses are allowable as deduction under section 35D of the Act. We, accordingly, set aside the orders of the Ld. CIT(A) on the aspect of applicability of section 37(1) of the Act to the public issue expenses, and restore the order of the learned Assessing Officer allowing such expenses in accordance with section 35D - Appeal of revenue allowed.

Summary

Issues:
Challenging deduction of revenue expense under section 37(1) of the Income Tax Act, 1961 instead of section 35D for assessment year 2009-10.

Analysis:
The appeal involved a challenge by the Revenue against the decision of the Ld. CIT(A) to allow the deduction of Rs. 50,58,08,417/- as a revenue expense under section 37(1) of the Income Tax Act, 1961 for the assessment year 2009-10. The assessee initially claimed a deduction of Rs. 10,11,61,683/- under section 35D of the Act, representing 1/5th of the total issue expense of Rs. 50,58,08,417/-. However, during subsequent assessment proceedings, the assessee realized it could claim the entire issue expenses under section 37(1) instead. The Ld. CIT(A) allowed the entire expense under section 37(1) based on the nexus between the expenditure and the business purpose, relying on legal precedents like the SA Builders Limited case. The Revenue challenged this decision citing other cases like Brooke Bond India Ltd vs. CIT, Punjab State Industrial Development Corporation Ltd vs. CIT, and CIT vs. Kodak India Limited.

The Ld. AR for the assessee argued that the courts are moving away from strict views on capital expenditure, favoring a more benevolent interpretation of revenue expenditure. The P&L Account of the assessee reflected administration and operating expenses related to the issue expense, which the Assessing Officer initially allowed. The assessee later claimed the entire issue expenses under section 37(1) instead of 1/5th under section 35D, based on the business model and legal interpretations. The Ld. CIT(A) considered the claim in light of legal precedents and allowed the full expense under section 37(1), emphasizing the decision in Brooke Bond India Ltd. The Revenue's challenge was based on the argument that the expenditure should be treated as capital expenditure, not revenue.

The Tribunal analyzed the legal position and held that the Ld. CIT(A) erred in allowing the entire expenditure as revenue under section 37(1) of the Act. The Tribunal agreed with the Revenue's contention that the 1/5th of the public issue expenses should be deductible under section 35D of the Act, as the expenditure retained the character of capital expenditure. The decision was based on the settled legal position established by binding precedents, notably the Brooke Bond India Ltd case. Therefore, the Tribunal set aside the Ld. CIT(A)'s order and restored the Assessing Officer's decision to allow the expenses in accordance with section 35D of the Act. Consequently, the Revenue's appeal was allowed.

In conclusion, the judgment revolved around the correct classification of expenditure as revenue or capital under the Income Tax Act, with the Tribunal ultimately deciding in favor of treating the expenses as capital expenditure deductible under section 35D rather than revenue expenditure under section 37(1).