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TMI Blog2019 (3) TMI 2062X X X X Extracts X X X X X X X X Extracts X X X X ..... at year itself - HELD THAT:- We find that this issue came up for consideration in assessee s own case in [ 2014 (3) TMI 1228 - ITAT COCHIN] wherein it was held Advertisement has to be carried on for the purpose of drawing interest of the general public for the subscription to the shares. Similarly market research expenses, as well as postal expenses for dispatch of various documents related to IPO are also directly linked to the public issue of shares. Similarly, journeys undertaken by the promoters and employees for the purpose of IPO are also related to IPO. Thus all the activities are directly and intricately linked with the initial public offer of shares, and, therefore, they are part and parcel of expenses pertaining to public issue of shares. The reliance place by the appellant on various case laws are distinguishable on fact as because none of the cases cited by the appellant deal with public issue of shares. Accordingly hold that the AO was justified in treating the entire expenditure as capital expenditure. Allowance of Prior Period Expenses already offered to tax in AY 2009-10 - HELD THAT:- These expenses were not debited to the P L account in the assessment year under co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue is with regard to deletion of addition of Rs. 6,74,707/- made u/s. 36(1)(va) r.w.s. 2(24)(x) in respect of employees' contribution to PF/ESI. 3. After hearing both the parties, we find that this issue is squarely covered against the assessee by the judgment of Jurisdictional High Court in the case of CIT vs. Merchem Ltd. (378 ITR 443) wherein it was held that due date in the respective ESI/PF Act is the date to be considered for allowing deduction u/s. 36(1)(va). 3.1 In view of the above judgment of the Jurisdictional High Court, we are inclined to reverse the order of the CIT(A) and restore that of the Assessing Officer. Hence, employees' contribution to PF/ESI after due date under the relevant PF/ESI Act is not eligible for deduction u/s. 36(1)(va) of the Act r.w.s 2(24)(x) of the Act. This ground of appeal of the Revenue is allowed. 4. The next ground, Ground No. 3 raised by the Revenue is with regard to allowance of purported non-IPO expenses to the tune of Rs. 1,17,77,496/- in AY 2008-09. The CIT(A) erred in allowing the aforesaid expenditure u/s. 37(1) in AY 2008-09 which was incurred in earlier F.Y. 2006-07 and liability discharged in that year itself.. 4.1 The facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged in that year itself. 4.5 The Ld. AR submitted that section 35D(2)(c)(iv) of the Act provides for amortization of expenditure in connection with the issue, for public subscription of shares in or debentures of the assessee-Company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus over a period of 5 years. 4.6 The Ld. AR relied on the judgment of the Madras High Court in the case of Commissioner of Income-tax v Ashok Leyland Ltd [2012] 23 taxmann.com 50 9) while evaluating the meaning the phrase, 'being' used in Section 35D(2)(c)(iv) held that, "we have no hesitation in holding that the expenditure that qualified for consideration under Section 35D is restricted by reason of use of the phrase "being". Thus expenditure incurred in connection with the issue of shares and debentures of the company to public subscription, which qualify for consideration under Section 35D are underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus and nothing more." Thus, according to the Ld. AR, section 35D(2)(c)(iv) of the Act defines the expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration fees, listing fees, stationery expenses, travelling expenses, meeting expenses, bank charges, commission and professional certification charges were revenue in nature as these expenses are incurred to meet out the day to today transactions of the business of the assessee and accordingly allowable as revenue expenditure. Thus, emphasis was placed on the nature and purpose for which the expenses were incurred to classify the same as revenue expenditure. The Ld. DR relied on the judgment of the Karnataka High Court in the case of Commissioner of Income-tax vs. Indo Nissin Foods Ltd [2013] 35 taxmann.com 637 wherein in the context of analyzing whether expenditure incurred for television advertisement film production was in the nature of a revenue expenditure or not held that, "The expenditure incurred is dominantly for advertisement to promote the sales. If the contention of the Revenue is upheld, any expenditure incurred for marketing and promoting sales should have to be held as 'capital expenditure' and in no case, the deduction can be allowed. Such a contention is illogical and untenable." 5. We have heard the rival submissions and perused the record. We f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on behalf of the appellant that only direct expenses such as payment to Registrar of Companies, etc. are to be treated as capital expenditure. It has been further stated that expenses such as advertisement for public issue, traveling expenses for the purpose of IPO and other related expenses such as market research and postage expenses cannot be held to be capital in nature. The appellant also place reliance on a number of judicial pronouncements, which ahs been cited supra. 15.3 I Have gone through the judgment of the Hon'ble Supreme Court in the case of M/s. Brooke Bond India Ltd. The Hon'ble Apex Court in the said judgment has held as under: "It is no doubt true that before the AAC as well as before the Tribunal it was submitted on behalf of the assessee that increase in the capital was to meet the need for working funds for the assessee company. But the statement of case sent by the Tribunal does not indicate that a finding was recorded to the effect that the expansion of the capital was undertaken by the assessee for the purpose of meeting the need for working funds for the assessee to carry on its business. Though the increase in the capital results in expansion of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Brooke Bond (India) Ltd (supra). Accordingly, we agree with the view expressed by Ld CIT(A). 7. The Ld A.R alternatively contended that the Initial Public Offer expenses are considered as "Preliminary expenses" under sec. 35D of the Act. He further submitted that the provisions of sec. 35D was extended to the service sector also by the Finance Act, 2008 by omitting the word "industrial" from sec. 35D of the Act. The Ld Counsel submitted that the expenses incurred in connection with issue, for public subscription, of shares of the Company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of prospectus are covered under sec. 35D(2) of the Act. He further submitted that the preliminary expenses are allowed as deduction in five annual instalments u/s 35D of the Act. Accordingly he submitted that the deduction claimed by the assessee is in terms of sec. 35D of the Act. 8. However, we notice that the alternative contention of the assessee for deduction u/s 35D of the Act was not examined by the AO. Accordingly, in our view, the same requires to be considered at the end of the assessing officer. Accordingly, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies Act as well as the Income tax Act for both Assessment years 2008-09 and 2009-10, which were not rejected by the Assessing Officer. Therefore, by relying on the ratio laid down by the Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT (82 ITR 363) as well as the principle that the consistent system followed by the assessee should not be disturbed without legally valid and plausible reasons and the fact that the assessee had filed a revised return of income, the CIT(A) deleted the enhancement and the assessment made by the AO of Rs. 1,78,46,292/-. 6.3 Against this, the Revenue is in appeal before us. The Ld. DR relied on the order of the Assessing Officer. The Ld. DR also relied on the decision of the ITAT Mumbai Bench in the case of ITO vs. Suresh Chand Jain (100 ITD 435) wherein it was held that SEBI turnover fee being a statutory liability was allowable u/s. 43B of the Act. 6.4 On the other hand, the Ld. AR submitted that as per section 139(5) of the Act, if any person, having furnished a return under sub-section (1), or in pursuance of a notice issued under sub-section (1) of 142, discovers any omission or any wrong statement therein, he may furn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The same was disallowed suo moto for the assessment year 2009-10 on the reason that it was relating to the assessment year 2008-09. In our opinion, the incurring of expenses was not at all examined by the CIT(A) and he has also not examined whether provisions of section 43B would be applicable or not. In our opinion, the Assessing Officer has to examine the applicability of section 43B towards any fee payable to SEBI and also he is required to examine the nature of the expenditure whether capital or revenue. In view of this, we are inclined to remit the entire issue to the file of the Assessing Officer to re-examine and decide afresh. This ground of appeal of the Revenue is partly allowed for statistical purposes. 8. The Cross Objection filed by the assessee in C.O. No. 03/Coch/2018 is in support of the CIT(A) order. In view of our findings in Revenue's appeal, the Cross Objection has become infructuous and is dismissed as infructuous ITA No. 357/Coch/ 2017: Assessee's Appeal : AY 2008-09 9. The only ground raised in the assessee's appeal reads as follows: On the facts and circumstances of the case, the CIT(A) has erred in treating the amount incurred towards professional and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iligence with audit firms; f) Signing of the final definitive shareholder agreements. It is clear from the nature of these that the incurrence of these expenses follow or flow alongside the long-term and strategic decision taken to invite investment, and although the expenses themselves do not form part of the capital introduced, these were expended as part of the financial build up that culminated in the investments. The facts of the case do not show that the impugned expenses were to meet the day-to-day transactions of the business of the assessee. These expenses therefore need to be examined to determine whether or not they have any role to play in generating any long-term benefit. (b) Any investment is based on capital budgeting exercises undertaken by the investor using financial models [such as Net Present Value (NPV), Discounted Cash Flow (DCF), Internal Rate of Return (IRRJ, etc.]. Increasing the professional and/or consulting charges may not necessarily trigger or increase the quantum of investment made, but undoubtedly add to and participate in the successful culmination of the investment-seeking and sourcing exercise. The charges themselves have been paid to the consul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of CIT vs. J.K. Chemicals Limited (1994) 207 ITR 985 (Bom.), while consultation charges paid by in connection with the expansion of an existing project were held to be allowable as revenue expenditure [Ref: The Hon'ble Gujarat High Court in the case of Jyotilal vs. CIT (2009) 24 DTR 177 (Guj.)]. Likewise, travelling and incidental expenditure in finalization of project for existing business was allowable as revenue expenditure [Ref: the decision of the ITAT, Mumbai Bench in the case of Jt. CIT vs. Rallis India Lid. 3 ITR 1 (Mum.) (Trib.). The key difference in the two kinds of decisions appears to be the creation of a new asset and therefore the expansion of the asset base of the assessee along with such new dimension. The Delhi High Court held in the case of CIT vs. DLF Commercial Developers Limited [2010] 323 ITR 321 (Del.) that when no new asset was created, then the expenses would be revenue expenditure. (e) Any expenditure incurred by a company in connection with the issue of shares with a view towards increase its share capital is directly related to the expansion of the capital base of the company, and is capital expenditure, even though it may incident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han Meakin Breweries Ltd vs. CIT (No. 2) [1979] 117 ITR 505 (HP), the Hon'ble Himachal Pradesh High Court took the same view that increase of share capital and fees paid to Registrar of Companies for increasing authorized capital will result in an advantage of enduring nature and is, therefore, capital expenditure and is not allowable as revenue expenditure. Therefore, the majority of the High Courts have taken the view that whenever there is an increase of the capital by increasing of the shares and it adds advantage to the capital asset of the company then such expenditure shall be treated to be capital expenditure and not revenue expenditure and not allowable under Section 37 of the Act. (i) However, in the case of Warner Hindustan Ltd. vs. CIT [1988] 171 ITR 224 (AP) - which has been cited by the assessee, the Andhra Pradesh dissented from the views above and agreed with the view of the Madras High Court in the case of CIT vs. Kisenchand Chellram (India) P. Ltd (supra) and held that an increase in the authorised capital does not by itself result in expending the capital base or the fixed capital company. This expenditure is more in the nature of expenditure laid out for f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ept of enduring benefit is a paramount factor in settling the Revenue versus Capital debate as upheld by the Supreme Court. As already stated earlier, there appears to be nothing on record to show that the impugned expenditure was incurred for the running of the business or for "necessitating the business operations for enabling the assessee to do business for earning some profit without having impact on fixed capital" [as extracted from the Order of the ITAT, Mumbai Bench in the case of Agrani Telecom Ltd vs ACIT (supra)]. The facts of that case are clearly distinguished. The impugned expenses being professional and consultancy fees/charges are held to be directly related to expansion of the capital base of the assessee and hence to be treated as capital expenditure. Other than rhetoric flourished by the assessee [viz. "purely operational in nature and intended for the furtherance of the company's business and were incurred in the revenue field to identify suitable investors" (sic) and "do not result in securing a tangible or intangible property, corporeal or incorporeal rights, so that they could be of a lasting or enduring benefit to the enterprise&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year in question. On the above facts, the Hon'ble High Court has held that such expenditure was not allowable in the year in question. Thus, we find that the facts of the above case are clearly distinguishable from the facts of the instant case. In the instant case, it is not in dispute that the expenditure was incurred during the previous year relevant to the assessment year under appeal and no material has been brought on record to show that the expenditure was for a different new project. 22. Similarly, the decision of J.K. Chemicals Ltd. (supra), we find it to be distinguishable on facts. In that case, the assessee was engaged in the manufacturing of fertilizers and the assessee incurred expenditure to obtain project report and market survey to set up new fertilizer unit for manufacturing more refined fertilizers, whereas, in the instant case, the Ld. AR made a statement at bar that the expenditures, in question was not for any new project. In the case of Commonwealth Trust Ltd. (supra), the Hon'ble Kerala High Court in respect of expenditure incurred for valuation of business assets held that "........ We agree with the Tribunal that the claim falls under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s confirmed and the ground of appeal of the Revenue is dismissed." 9.5 The Ld. AR also relied on the decision of the ITAT, Mumbai Bench in the case of Trigyn Technologies Ltd. vs. ACIT in ITA No. 1986/Mum/2012 dated 20/04/2016 wherein it was held as under: 8. We have carefully considered the rival submissions. Insofar as the fact- situation is concerned, the invoice raised by Quartet Financial Services Pvt. Ltd., a copy of which is placed at pg. of the Paper Book, reveals that fee of Rs. 50,50,800/- was paid for services in connection with advice on the restructuring of bank debts, identification of investor, raising equity capital in the company and structuring of such transactions. At pages 14 to 17 of the Paper Book is placed a copy of the mandate letter of the said consultant, which reveals the scope and methodology of the sen-ices provided to the assessee. The aforesaid material brings out that the fee has been paid to the said consultant primarily for rendering advice to reduce the interest burden of the assessee-company by, inter alia, exploring the possibility of identifying a strategic investor/lender. It is a settled proposition that payments made to consultants for o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's capital was enhanced from Rs. 24 crores to Rs. 80.50 crores. The claim of the assessee that the entire expenditure incurred towards consultancy charges which resulted in enhancement of share capital is of revenue nature, is devoid of merit. In our considered opinion, expenses which are incurred in connection with increase in share capital base of the company, are obviously capital in nature. This view of ours is fortified by the judgment of the Supreme Court in the case of Brooke Bond India Ltd. vs. CIT (225 ITR 798) (SC) wherein it was held that any expenditure incurred by a company in connection with the issue of shares with a view to increase in share capital is directly related to the expansion of the capital base of the company, and in profit making. The order of the CIT(A) is in conformity with the judgment of the Supreme Court in the case of Brooke Bond India Ltd. cited supra. Hence, we do not find any infirmity in the order of the CIT(A) and the same is confirmed. This ground of appeal of the assessee is dismissed. The appeal of the assessee in ITA No. 357/Coch/2017 is dismissed. 10. In the result the appeal of the Revenue is partly allowed for statistical purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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