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TMI Blog2016 (11) TMI 287X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act as revenue expenditure. We find that under section 35D(1)(ii) of the Act expenditure incurred by the assessee after commencement of business in connection with expansion of his undertaking or in connection with setting up of a new unit are allowed subject to the fulfillment of the conditions laid down in the said section. The expenditure specified under the section include legal charges for drafting of agreement, expenses incurred by company in connection with issue for public subscription, or shares or debentures of the company etc. As this issue has not been examined by the lower authorities, we feel it appropriate to restore the issue to the Assessing Officer for examining the allowability of the bond issue expenses under section 35D of the Act and decide the issue in accordance to the law. The assessee is directed to produce all the details of the expenses alongwith other evidences. Accordingly, the ground of the appeal is allowed for statistical purposes - ITA No. 2416/Del/2014 - - - Dated:- 28-9-2016 - SH. H.S. SIDHU, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER Appellant by : Sh. Manoj Anand, CA Respondent by : Ms. Deepika Mittal, CIT(DR) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insofar as prejudicial to the interest of the Revenue vide his order under section 263 of the Act dated 12/03/2008. According to the learned Commissioner of Income-tax, the assessee company had incurred expenditure of ₹ 1,45,51,851/- on issuing of bond and debited the same in the profit and loss account as bond issue expenses and same were allowed by the Assessing Officer as revenue expenditure. Certain facts observed by the learned Commissioner of Income Tax in respect of bond issue expenses are reproduced as under: 3. Brief facts relevant to the issue as available in the record are as under:- i) 119 mills run by 9 subsidiaries of the assessee company were sick and non-viable. During the year under consideration, Government of India has sanctioned rehabilitation schemes for revival of some of these mills. ii) Substantial restructuring in form of capital restructuring as well as organizational restructuring was undertaken in view to economize the administrative overheads and to make the mills viable as a business iii) Various actions were taken by the assessee company in order to rehabilitate and revive the mills which included Voluntary Retirement Sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of above, notice u/s 143(2) was issued and duly served upon the assessee. Subsequently the case was transferred to undersigned on 6/11/2008. Again fresh notice fixing the case for 17/11/2008 was issued. In response to notice Sh. K.K. Kohli, Manager account of the company attended on 20/11/2008 and not filed any written submission, however, he has been asked to explain why the bond issue expenses may not be disallowed and treated as capital expenditure. Subsequently the Sh. Manoj Anand C.A. of the assessee company attended and filed their submission as under 1. These are revenue expenses being incurred for augmentation of working capital under the Ministry of Textile s rehabilitation scheme. 2. Tax auditor vide its report dated 27 th Nov. 2003 has also not treated these as capital expenses. 3. It has been decided in 'the following judicial pronouncement dial expenses of this nature are not capital expenditure (1) Premier Automobiles Ltd. Vs. CIT Bombay (1971) 80TTR (2) India Cement Ltd. Vs. CH (1966) 601 ITR (3) Himanchal Pradesh Financial Corp. Ltd. Vs. CPI(1998) 232 ITR The reply of the assessee company has been considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Vs. Deputy Commissioner of Income Tax, Circle-1, Kolkata. 4. The learned Commissioner of Income-tax (Departmental Representative), on the other hand, relied on the order of the lower authorities and submitted that the expenses under reference were mainly towards fee of arrangers etc. for the bonds having maturity of period of more than one year and, therefore, expenses were not of recurring nature and having enduring benefit or advantages over a period of maturity life of bonds. She also referred to the page 3 of the assessee s paper-book, which is a copy of the Tax Audit Report and submitted that in clause 8(a), the nature of business has been mentioned as manufacturing of cloths yarns and thus bond issue expenses were not for the purpose of business of the assessee. She, accordingly, submitted that bond issue expenses are capital in nature and not allowable under section 37(1) of the Act. In respect of the alternative ground, she submitted that issue may be restored to the Assessing Officer for examining the allowability of the expenses under section 35D of the Act. 5. We have heard the rival submissions and perused the material on record. The learned Authorized Repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e lower authorities, the assessee has relied on the decision of the Hon ble Bombay High Court in the case of Premier Automobiles Ltd. Vs. Commissioner of Income Tax reported in 80 ITR 415 and decision of the Hon ble Apex Court in the case of India Cements Ltd. Vs. Commissioner of Income Tax reported in 60 ITR 52. Both these decisions are with reference to the Income Tax Act, 1922. In both the decision the expenditure in the nature of stamp duty, registration fee, lawyers fee etc. incurred in respect of issue of debentures by a company to secure a loan has been held to be not in the nature of capital expenditure and the criterias for arriving the conclusion are that the loan obtained were for business purpose and for advantage of an enduring nature. But in the case of the assessee, the expenses are found to be of enduring nature as incurred once for a period over the maturity period of bonds and also not found towards day-to-day requirement of business and thus the cases cited supports the view point of the Revenue. Further, the Hon ble Gujarat High Court in the case of Commissioner of Income Tax Vs. Official Liquidator of the Ahmedabad Manufacturing and Calico Printing Company Limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it is capital expenditure . 6 . In the context distinction between capital and revenue expenditure can broadly be stated thus expenditure on establishing, replacing, or enlarging the profit-yielding subject or income-earning apparatus is ordinarily of capital nature. On the other hand expenses incurred in the process of operating such profits-yielding subject or income-earning apparatus in the form of earning of profits it is of revenue nature. Amalgamation of companies results in substance acquisition of transferor company by the transferee company resulting in alteration of its capital structure as well as framework of business that is to say amalgamation is a event which concerns the corpus and in carrying on of business. Though it is decision for better and profitable running of the business. 7. In 19 Tax Cases Lord Mc Millan has opined on construction of contracts in question, that there was an agreement which calls for consideration wherein the contractors were not dismissed of their contracts or failed to conduct of their business but they merely amalgamated the company to share the profits and earning as between the contracting parties. Vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f fact. But the decision is not founded on the basis whether expenses were incurred prior to or after amalgamation became effective. It would not make any difference for the present purpose inasmuch as the substance of the issue is whether the expenses are in fact part of the amalgamation process. The expenses necessary for bringing into existence amalgamation being one relating to the structure of business are capital in nature. The fact that the liability has been discharged actually after amalgamation would not make any difference. 8. This Court in an unreported decision in New Commercial Co. Ltd. vs. Addl. CIT (IT Ref. No. 40 of 1972) has considered the question whether a sum of ₹ 10,000 paid by the assessee-company to the chartered accountant in relation to the scheme of amalgamation which was ultimately approved by this Court was an admissible expenses under s. 37 of the IT Act or not. The Court took notice of the fact that the main object of this arrangement is to effect internal economies with a view to bring down the cost of production and to utilise the capital equipments to the maximum advantage of both the units so as to obtain the optimum production and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We find that under section 35D(1)(ii) of the Act expenditure incurred by the assessee after commencement of business in connection with expansion of his undertaking or in connection with setting up of a new unit are allowed subject to the fulfillment of the conditions laid down in the said section. The expenditure specified under the section include legal charges for drafting of agreement, expenses incurred by company in connection with issue for public subscription, or shares or debentures of the company etc. As this issue has not been examined by the lower authorities, we feel it appropriate to restore the issue to the Assessing Officer for examining the allowability of the bond issue expenses under section 35D of the Act and decide the issue in accordance to the law. The assessee is directed to produce all the details of the expenses alongwith other evidences. Accordingly, the ground No. 3 of the appeal is allowed for statistical purposes. 9. The Grounds No. 1 and 4 of the appeal are general in nature and, therefore, not required to be adjudicated upon by us. 10. In the result, the appeal of the assessee is allowed partly for statistical purpose. The decision is pronounce ..... X X X X Extracts X X X X X X X X Extracts X X X X
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