2006 (4) TMI 92 - HC - Income Tax

ESI contribution (interpretation to section 43B) - admittedly, the assessee has not paid the said amount to the ESI Department. In the accounts, a provision is made for payment of the said amount. Therefore without making the actual payment the assessee was not entitled to the aforesaid deduction - Amount paid for issue of shares - held that the 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 base of the company and is capital expenditure, even though it may incidentally help in the business of the company and in the profit-making. Therefore, it was held that the expenditure incurred with reference to issue of shares is not allowable deduction.

Summary

Issues:
1. Allowability of Rs. 30,000 paid for issue of shares as a business expenditure.
2. Treatment of ESI contribution of Rs. 4,50,000 under section 43B(b) of the Income-tax Act.

Analysis:

Issue 1:
The first issue pertains to the deductibility of Rs. 30,000 paid for the issue of shares as a business expenditure. The Tribunal initially allowed this deduction, but the High Court referred to the Supreme Court judgment in Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798. The Supreme Court held that expenses related to the issue of shares, aimed at increasing share capital, constitute capital expenditure. Despite potential benefits to the business, such expenses are not deductible. Therefore, the High Court ruled against the assessee, stating that the Tribunal's decision was legally unsustainable.

Issue 2:
Regarding the treatment of ESI contribution of Rs. 4,50,000 under section 43B(b) of the Income-tax Act, the High Court analyzed the relevant provision. Section 43B mandates that deductions for sums payable by the assessee, such as ESI contributions, are only allowed upon actual payment. The provision emphasizes that deductions are contingent upon the actual disbursement of funds. In this case, the assessee had not made the payment to the ESI Department but had only provisioned for it in the accounts. Consequently, the High Court held that without actual payment, the assessee could not claim the deduction. The Tribunal erred in overturning the Commissioner's decision to disallow the deduction. Therefore, the High Court ruled in favor of the Revenue, emphasizing the necessity of actual payment for claiming deductions under section 43B(b) of the Act.

In conclusion, the High Court disposed of the reference by addressing both issues comprehensively, emphasizing the legal principles governing the deductibility of expenses related to share issuance and the requirement of actual payment for claiming deductions under section 43B(b) of the Income-tax Act.