2022 (11) TMI 617 - AT - Income Tax

Business expenditure u/s.37(1) - share issue expenses - assessee has abandoned the proposal to issue shares at later stage - AO rightly disallowed such expenses while processing return of income u/s.143(1)(a) - HELD THAT - As the assessee has not created any asset which gives enduring benefit and also it does not help in the business of the company and in profit making, because, there is no increase in capital employed in the business of the assessee. Therefore, under these facts and circumstances, it is very difficult to accept the arguments of the CIT(A) that expenditure incurred by the assessee is capital in nature which gives enduring benefit to the assessee. This legal principle is supported by the decision in the case of M/s.Adadyn Technologies Pvt. Ltd., 2020 (8) TMI 669 - ITAT BANGALORE where the Tribunal held that if expenditure incurred by the assessee for development new project is Revenue in nature, then if said project is abandoned and not put to use, the expenditure incurred by the assessee should be allowed as Revenue in nature. In this case, the assessee has incurred certain expenditure which are Revenue in nature. However, the proposal of share issue has been abandoned for the reasons best known to the assessee. Therefore, in our considered view when the nature of expenditure incurred by the assessee are Revenue in nature and further, said expenses has been incurred wholly and exclusively for the purpose of business, then said expenditure needs to be allowed as Revenue expenditure and deductible u/s.37(1) - CIT(A) without appreciating the above facts simply sustained the additions made by the AO - we set aside the order of the Ld.CIT(A) and direct the AO to delete the additions made towards disallowance of share issue expenses u/s.37(1) - Appeal filed by the assessee is allowed.

Issues Involved:
1. Correctness of the Commissioner of Income Tax (Appeals) order.
2. Allowability of Rs.3.10 Crores as business expenditure under Section 37(1).
3. Nature of share issue expenses and their classification as revenue or capital expenditure.
4. Relevance of judicial precedents cited by the appellant.
5. Scope of adjustments under Section 143(1)(a) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Correctness of the Commissioner of Income Tax (Appeals) order:
The appellant contended that the order of the Commissioner of Income Tax (Appeals) [CIT(A)] was incorrect and improper. The CIT(A) had upheld the adjustments made by the Assessing Officer (AO) under Section 143(1)(a) of the Income Tax Act, which disallowed Rs.3.10 Crores claimed as share issue expenses, treating them as capital expenditure.

2. Allowability of Rs.3.10 Crores as business expenditure under Section 37(1):
The appellant argued that the entire amount of Rs.3.10 Crores should be allowed as business expenditure under Section 37(1) of the Act because it was incurred wholly and exclusively for the purpose of business. The appellant emphasized that the share issue did not fructify, and thus, the expenses should be treated as revenue loss. The AO had disallowed the expenses, considering them as capital in nature, which was upheld by the CIT(A).

3. Nature of share issue expenses and their classification as revenue or capital expenditure:
The appellant cited the decision of the Hon'ble Supreme Court in the case of CIT v. General Insurance Corporation, which held that if there is no fresh inflow of funds or increase in the capital employed, the expenditure should be treated as revenue expenditure. The CIT(A) had relied on the Supreme Court's decision in Brooke Bond India Ltd. v. CIT, which classified share issue expenses as capital expenditure. However, the appellant argued that since the share issue was abandoned, the expenses did not result in an increase in the capital base and should be treated as revenue expenditure.

4. Relevance of judicial precedents cited by the appellant:
The appellant referred to various judicial precedents, including the decision of the jurisdictional Madras High Court in Tamilnadu Magnesite Ltd. v. ACIT and the Bangalore ITAT in Adadyn Technologies P. Ltd., to support their claim that the expenses should be treated as revenue expenditure. The CIT(A) did not consider these precedents favorably and upheld the AO's decision based on the Brooke Bond India Ltd. case.

5. Scope of adjustments under Section 143(1)(a) of the Income Tax Act:
The CIT(A) opined that after the amendment of Section 143(1)(a) effective from 01.04.2008, the AO could adjust any incorrect claim apparent from the return. The CIT(A) held that the claim of the assessee towards share issue expenses as revenue expenditure was incorrect and thus, the AO rightly disallowed the expenses. The appellant argued that the adjustment was incorrect as the issue of deduction towards share issue expenses was highly debatable and could only be decided after considering relevant details.

Conclusion:
The Tribunal considered the nature and purpose of the expenses incurred by the assessee, which were for legal fees, exchange filing fees, lead book running manager expenses, advertisement, and audit & certification charges. The Tribunal noted that the expenses were revenue in nature and that the share issue was abandoned, meaning there was no increase in the capital base or creation of an enduring benefit. The Tribunal referred to the Supreme Court's decision in General Insurance Corporation and other relevant precedents, concluding that the expenses should be allowed as revenue expenditure under Section 37(1). The Tribunal set aside the CIT(A)'s order and directed the AO to delete the disallowance of the share issue expenses. The appeal filed by the assessee was allowed.

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