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TMI Blog2016 (11) TMI 969X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company on deposit of share application money cannot be adjusted against the expenditure incurred in connection with the issue of such shares? 2 The Assessment Year relates to A. Y. 1978-79. 3 Briefly, the facts leading to this Reference are as under: (a) The Applicant-Company had embarked on major expansion/ diversification programme for which it had obtained necessary industrial licence for manufacture of Sodium Tri Poly Phosphate (STPP). However, the industrial licence was conditional upon the Applicant-Company diluting foreign equity shareholding in it. The condition in the industrial licence reads as under:" The company should issue fresh shares to the Indian public to the exclusion of the foreign shareholders, to the extent of which will, after the proposed issue of bonus shares in the proportion of one new share to every six shares reduce the shareholding of the nonresident shareholders from the present figure of 85% at the most to 70% during the course of implementation of this project only which is for the manufacture of STPP by 31.3.1977. This condition will not operate as a precedent for any other future projects of the company." Consequent to the above, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t raising additional capital, being in the capital field, cannot be allowed as a revenue expenditure. It placed reliance upon the decision of the Kerala High Court in Commissioner of Income Tax v/s. Common Wealth Trust Ltd. 167 ITR 365 wherein it is held that expenditure incurred for changing the capital structure of the company was capital in nature and not revenue. So far as the alternative contention raised by the Applicant in its crossobjection is concerned, the Tribunal held that the interest earned on share application money, has to be taxed as income from other sources. Accordingly, the cross-objection filed by the Applicant-Assessee, was rejected. 4 On the aforesaid facts, the Tribunal has posed the two aforesaid questions for our opinion / consideration: 5 Regarding Question (A): (i) Mr. Pardiwalla, learned Senior Counsel appearing for the Applicant urges that the entire expenditure of Rs. 33.74 lakhs has to be allowed as revenue expenditure under Section 37 of the Act to compute its income. In support, he submits that the test to determine whether expenses incurred on issue of shares is capital or revenue in nature, would be to ascertain the purpose / object for issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as it relied upon its earlier decision in Punjab State Development Corporation (supra). It is urged by the Applicant-Assessee that if the principle laid down in Punjab State Development Corporation (supra), is applied to the present facts, then the expenditure incurred on account of issue of shares would be a revenue expenditure. The Apex Court in Punjab State Development Corporation (supra) was concerned with the issue whether the filing fees paid to the Registrar of Company for enhancement of capital by issue of shares is to be considered as a capital or revenue expenditure. The Court held that any expenditure directly related to expansion of the capital base of the company would be a capital expenditure although incidental benefit may be for running of its business and making of profit. Thus, in the aforesaid facts, the filing fee was held to be on capital account. Taking a cue from the words 'directly related' and 'incidental benefit' as used by the Apex Court, Mr. Pardiwalla, urges that in this case, the issue of share capital was primarily for doing business and increasing its profits. The change in capital structure was incidental. (iv) Thus, the Apex Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra) was passed at the admission stage when this Court refused to entertain the Revenue's Appeal from the order of the Tribunal on the ground that no substantial question of law arises. The decision was rendered on the following facts: (a) There was a dispute between brothers, who together owned the Assessee-Company. As a consequence of the differences between the two groups, the dispute reached to the Company Law Board. The two warring groups of shareholders arrived at a settlement and as per the direction of the Company Law Board, the Assessee-Company was directed to buy 34% of shareholding of one of the warring group and cancel the same. The Respondent-Assessee had claimed before the Assessing Officer, the amount of Rs. 6.81 Crores (being difference between the consideration paid and the face value of the shares acquired for cancellation) as revenue expenditure. This was on the basis that the dispute between the shareholders had adversely affected the business of the company and the payment was made for the purposes of the effective carrying on the business of the company. (b) On aforesaid facts, the Tribunal upheld the contention of the Assessee-Company by placing reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rising in this case, would cover the controversy herein. (viii) In the above view, question (A) is answered in the affirmative i.e. in favour of the Revenue and against the Applicant-Assessee. 6. Regarding Question (B) : (i) Mr. Pardiwalla, learned Senior Counsel appearing in support of the appeal, stated that the interest was earned on receipt of share application money deposited in a specified account as required under Section 73(3) of the Companies Act, 1956 till such time as the allotment of shares is made. Therefore, this earning of interest is a part of an integrated transaction, namely, issue and allotment of shares. Thus, it is submitted that any income earned on the amount of share application money has to necessarily be adjusted against the share issue expenses and not separately taxed. It is submitted that the Tribunal did not consider the statutory obligation of the Assessee to keep the share application amounts received from the prospective shareholders till its allotment in a separate account under Section 73(3) Companies Act, 1953. It was not a case of earning of interest on call deposits with the bank made out of the share application money. (ii) We find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me but has to be taken into account to reduce the expenditure incurred on issue of shares. (iii) Mr. Pardiwalla, learned Senior Counsel for the Applicant Assessee, very fairly brought to our notice a decision of a single Judge of the Karnataka High Court in Southern Herbals Ltd. v/s. Settlement Commission and Anr. 261 ITR 681. In the above case, the Court, while dismissing a petition under Article 226 of the Constitution of India, upheld the order of the Settlement Commission that interest earned by an assessee on investment of share investor's money is to be classified under 'income from other sources' and not as 'business income'. It applied the principle laid down in the decision of the Apex Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v/s. Commissioner of Income Tax, 227 ITR 172, where interest was earned on loans taken before the commencement of business and such interest was held to be chargeable to tax. However, the Apex Court in Karnal Cooperative Sugar Mills Ltd. (supra) on identical facts, as arising herein, had occasion to consider both the decisions of the Apex Court in Bokaro Steel Ltd., (supra) and Tuticorin (supra). On consideration o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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