2020 (3) TMI 286 - HC - Income Tax

Payment of interest on share application money - Nature of expenditure - Revenue or capital expenditure - HELD THAT - The Supreme Court in BROOKE BOND INDIA LTD. 1997 (2) TMI 11 - SUPREME COURT has held that all the expenses incurred for expansion of capital base of the company was directly related to the capital incidentally, that would help in profit making. When the object of the Assessee is to increase share capital, the expenses incurred in expanding share capital would be in capital field. In the instant case also the assessee with an object to increase share capital has incurred expenses in the form of payment of interest on account of delay in allotment of shares, yet the increase in capital results in expansion of the capital base of the company and may also help in profit making. Therefore, it retains it s character as capital expenditure as the expenditure is directly relatable to expansion of the capital base of the company. For the aforementioned reasons the first substantial question of law is answered in the affirmative and in favour of revenue. MAT - Addition made on account of prior period expenditure while computing book profits under Section 115JB - HELD THAT - The Supreme Court in APOLLO TYRES 2002 (5) TMI 5 - SUPREME COURT has held that there cannot be two incomes one for the purpose of Companies Act and another for the purpose of Income Tax Act. It has further been held that Assessing Officer while computing the income under Section 115J has power to examine whether books of accounts are certified by the authorities under the Companies Act and the Assessing Officer has limited power of making increase and deductions as provided in the explanation to Section 115J. It is pertinent to note that provisions of Section 115J or Section 115JB of the Act are pari-materia. It has further been held that Section 115J (1A) of the Act empowers the authority under the Income Tax Act, 1961 to probe into the accounts accepted by the authorities under the companies Act. In the instant case, deletion as sought for by the assessee does not fall within the purview of Section 115 JB of the Act. Therefore, the Commissioner of Income Tax (Appeals) and the tribunal were not justified in deducting the addition made on account of prior period expenditure while computing book profits under Section 115 JB of the Act. The second substantial question of law is therefore, answered in the negative and in favour of the revenue.

Summary

Issues:
- Whether interest paid for delay in allotment of shares is an expenditure like brokerage/commission connected with raising share capital or can be treated as revenue expenditure?
- Whether the addition made on account of prior period expenditure while computing book profits under Section 115JB of the Income Tax Act is sustainable?

Analysis:

1. Interest on Share Application Money:
The appellant debited interest on share application money pending allotment of preference shares for the assessment year 2003-2004. The Assessing Officer disallowed the claim, stating that interest paid for delay in allotment of shares is akin to brokerage/commission connected with raising share capital, hence cannot be treated as revenue expenditure. The Commissioner of Income Tax (Appeals) reversed this decision, allowing interest on share application money as revenue expenditure, citing precedent. The Tribunal upheld this decision. The High Court observed that the expenses incurred for expanding the capital base, such as interest on share application money, are directly related to capital and help in profit-making, thus retaining their character as capital expenditure. Consequently, the first substantial question of law was answered in favor of the revenue.

2. Prior Period Expenditure in Book Profits:
Regarding the addition made on account of prior period expenditure while computing book profits under Section 115JB of the Act, the appellant argued that such expenses should not be deducted from the profit of the year for book profit purposes. The revenue contended that the expenses charged to profit and loss account cannot be deducted for book profit calculation. The High Court referred to relevant case law and held that the Assessing Officer has limited power to make deductions as provided in the explanation to Section 115JB of the Act. The deletion of prior period expenditure from book profits was deemed unjustified, and the second substantial question of law was answered in favor of the revenue.

In conclusion, the High Court quashed the orders of the Income Tax Appellate Tribunal and Commissioner of Income Tax (Appeals), affirming the decision of the Assessing Officer. As a result, the appeal filed by the revenue was allowed.