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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 ..... e towards the expenditure incurred for raising share capital. This is so as the earning of interest was inextricably linked with the requirement to raise share capital. In support, reliance was placed upon the decisions of the Apex Court in Commissioner of Income Tax v/s. Bokaro Steel Ltd. [1998 (12) TMI 4 - SUPREME Court ] and Commissioner of Income Tax v/s. Karnal Cooperative Sugar Mills Ltd. [1999 (4) TMI 7 - SUPREME Court]. We are in respectful agreement with this decision of the Gujarat High Court. - Decided in favour of assessee - INCOME TAX REFERENCE NO. 185 OF 1999 - - - Dated:- 8-9-2016 - M.S. SANKLECHA, S.C. GUPTE, JJ. Mr. Percy Pardiwalla, Senior Counsel a/w Mr. Nishant Thakkar and Mr. Rajesh Poojary i/b Mulla Mulla C.B. L. for the Applicant. None for the Respondent. JUDGMENT (Per M. S. Sanklecha, J.): 1 This Reference under Section 256(1) of the Income Tax Act, 1961 (the Act) by the Income Tax Appellate Tribunal (the Tribunal), seeks our opinion on the following two substantial questions of law: (A) Whether on the facts and circumstances of the case and in law, the Tribunal was right in holding that the expenditure incurred by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t filed an appeal to the Commissioner of Income Tax (Appeals) [CIT(A)]. Before the CIT(A), the Applicant urged that the entire expenses of ₹ 33.74 lakhs should be allowed as it is an expense incurred with the object of carrying on its business to increase its profitability, in view of conditional licence granted to it. Alternatively, it was submitted that in any event, a sum of ₹ 4.88 lakhs being the interest earned on the amounts received on issue of shares and deposited in the bank, subject to the allotment of shares, should be excluded while computing the total income. The CIT(A) by his order dated 20th April, 1983, allowed the Appeal of the Applicant by inter alia holding that the issue of shares for diluting the foreign share holding was issued as per the Government of India's directions and failure to do so would have resulted in stopping its expansion / diversification programme affecting its business. Thus, the expenses incurred on issue of shares to Indian public have to be allowed as a deduction while computing the total income. In the above view, the alternative submission urged for excluding the interest earned on the amounts received on allotment of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e other decisions, it will support the Applicant's submission, viz: where the main object is to improve the profitability of the business and increase in capital is incidental, as in this case, the expenditure incurred is to be allowed as revenue expenditure. (ii) We have considered the submissions made on behalf of the Applicant-Assessee. We find that the Apex Court in Kodak India Ltd. (supra), has held that expenses incurred in connection with issue of public shares to Indian public even when the issue of shares was done to comply with the directions of the Reserve Bank of India (RBI), would be an expenditure incurred in the capital field. The facts before the Apex Court in Kodak India Ltd., (supra) were that Kodak had to increase its share capital amongst the Indian public as it had been directed by RBI to reduce the foreign shareholding, if it wanted to continue to do business in India. On the aforesaid facts, the Court held that the object of the Assessee therein was to increase share capital and at whose instance, it was done, was not material. In the present facts also, the issue of fresh shares, was to comply with the condition imposed by Government of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection with issue of shares related to expanding its capital base, should be considered to be revenue or capital in nature. The Court held that expenditure incurred for change in capital base, is capital in nature. It held that the issue is covered by its decision in Punjab State Development Corporation (supra). However, thereafter in response to submissions of Counsel that increase in capital base by issue of additional shares was done only in order to meet the working fund requirements, it observed that the statement of case does not so indicate. Mr. Pardiwalla, suggested that this implies that it would be another matter if the statement of case had indicated so. To extend the submission of a Counsel which the Court did not deal with to a status of a ratio of a decision is not permissible. These observations of a Court being relied upon by Mr. Pardiwalla, will not even qualify as obiter dicta. In fact, if anything, the ratio of the Apex Court in Brooke-bond India (supra) that any expenditure incurred for issue of additional issue of shares which relates to expansion of capital base would be on capital account, would cover the question raised herein in favour of the Respond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Again, post settlement, the sales had increased to nearly ₹ 18 Crores per annum. On the aforesaid facts, the Tribunal held that the amount paid in excess of the face value of shares was an expenditure incurred only for the smooth running of the business and thus allowable as a revenue expenditure. (d) It was not disputed by the Revenue that the facts and circumstances in the case of H.J. Industries Ltd. (supra) were identical to the case under consideration and the appeal filed by the Revenue in H.J. Industries Ltd. (supra)was dismissed by this Court. In the above facts, the change / reduction in the capital base by purchase of shares at its face value was never claimed as revenue expenses. What was claimed as revenue expense was the amount paid by the Assessee to a warring shareholder, to let it carry on its business. The warring shareholder, on facts was found to be an impediment in the Assessee doing business and therefore, expenditure incurred to get rid of the obstacle was allowable as revenue expenditure. Thus, the above decision was not concerned with expenditure incurred on reduction of capital of the Assessee therein. It allowed deduction on account of pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure incurred for raising share capital. This is so as the earning of interest was inextricably linked with the requirement to raise share capital. In support, reliance was placed upon the decisions of the Apex Court in Commissioner of Income Tax v/s. Bokaro Steel Ltd. 236 ITR 315 and Commissioner of Income Tax v/s. Karnal Cooperative Sugar Mills Ltd. 243 ITR 2. We are in respectful agreement with this decision of the Gujarat High Court. (b) The reliance placed by Gujarat High Court on Bokaro Steel Ltd. (supra) and Karnal Cooperative Sugar Mills Ltd. (supra) was apposite. In Bokaro Steel Ltd. (supra), the Apex Court held that during the construction of the steel plant, M/s. Bokaro had charged rent, hire charges and interest on advances from its contractors. The Revenue sought to tax the above as revenue receipts. The Apex Court held the above income went to reduce the cost of construction and were capital receipts. In Karnal Cooperative Sugar Mills Ltd. (supra) the amount had been deposited in a bank to open a letter of credit for purchase of a machinery required for setting up a plant. The deposit so made to open the letter of credit earned interest. This int ..... X X X X Extracts X X X X X X X X Extracts X X X X
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