Calcutta H.C : Whether the expenses incurred by a company for public issue of equity shares in order to raise funds for increased working capital requirements are revenue or capital expenditure ?

High Court Of Calcutta

B.S.L. Ltd. vs. CIT

Section 37(1)

Asst. Year 1987-88

Aloke Chakrabarti & S.K. Gupta, JJ.

IT Ref. No. 387 of 2000

20th November, 2003

Counsel Appeared

J.P. Khaitan, for the Assessee : P.K. Mallick, for the Revenue

JUDGMENT

Aloke Chakrabarti, J. :

The assessee, a public limited company being in need of funds for its increased working capital requirements, made a public issue of its equity shares for raising working capital. In this connection, the assessee incurred expenses of Rs. 9,25,624 which was claimed by it as revenue expenditure as it was incurred for the purpose of its business for the asst. yr. 1987-88.

2. The AO, by his order dt. 29th June, 1990, disallowed the said expenditure holding the same to be capital expenditure. The assessee preferred an appeal before the CIT(A), who by order dt. 30th Dec., 1991, remanded the matter with a direction to examine the order of the Controller of Capital Issues in respect of the said public issue. The AO by his fresh order dt. 30th July, 1992, again held that the expenses were capital in nature.

3. Further appeal was preferred by the assessee before the CIT(A) and therein it was held that the expenses so incurred were revenue expenditure and, therefore, addition made by the AO to the extent of Rs. 9,25,624 treating the same as capital expenditure was directed to be deleted and the appeal was thus allowed.

4. The Revenue preferred an appeal against the said order before the Tribunal which by its order dt. 1st June, 2000, held that the said expenditure was capital in nature and, therefore, allowed the appeal setting aside the order of the CIT(A) and restoring the addition made by the AO.

5. Being aggrieved, the assessee filed the present appeal under s. 260A of the IT Act, 1961, which was admitted on 22nd Jan., 2001, on the following question : “Whether the expenses incurred by a company for public issue of equity shares in order to raise funds for increased working capital requirements are revenue or capital expenditure ?”

6. Heard Mr. J.P. Khaitan, learned counsel for the appellant, and Mr. P.K. Mallick, learned counsel for the Revenue-respondent.

7. Mr. Khaitan, learned counsel for the assessee-appellant, relied on the judgments in the case of Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC), decided by the apex Court for the purpose of explaining the law as regards capital expenditure. On the specific question on which the present appeal was admitted, reliance was placed on the judgments in the cases of Punjab State Industrial Development Corporation Ltd. vs. CIT (1997) 140 CTR (SC) 594 : (1997) 225 ITR 792 (SC) and Brooke Bond India Ltd. vs. CIT (1997) 140 CTR (SC) 598 : (1997) 225 ITR 798 (SC).

8. Strong reliance was placed by learned counsel for the appellant on the observation made by the apex Court in the case of Brooke Bond India Ltd. (supra) particularly on the following finding : “It is no doubt true that before the AAC as well as before the Tribunal it was submitted on behalf of the assessee that the 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 in order to meet the need for more working funds for the assessee. We, therefore, cannot proceed on the basis 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. In any event, the above quoted observations of this Court in Punjab State Industrial Development Corporation Ltd. vs. CIT (1997) 140 CTR (SC) 594 : (1997) 225 ITR 792 (SC) clearly indicate that though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit-making, the expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company.”

9. It has been argued on behalf of the appellant that the explanatory statement enclosed to the notice dt. 28th Feb., 1986, shows that to meet the increased demand of working capital in view of the expanding activity of the company, the board of directors recommended issue and allotment of 58,975 equity shares of Rs. 10 each for cash at par through public issue. The object of the issue as noted in the prospectus has also been referred to for showing that the issue was being made with the object of augmenting the long-term working capital resources of the company to meet the increasing turnover. It is stated that in the present case, it being available that the said expenditure was incurred for augmenting the working capital resources of the company to meet the increasing turnover and in view of the observation of the apex Court quoted hereinabove in the case of Brooke Bond India Ltd. (supra), the said expenditure has to be treated as capital (sic– revenue) expenditure holding the assessee entitled to deletion of the said amount as decided by the CIT(A).

10. Mr. Mallick, learned counsel for the Revenue, contended that the expenditure for public issue of shares to increase capital, is capital expenditure and has been so held consistently by Courts of law. The case of Brooke Bond India Ltd. vs. CIT (supra) which was decided by the Calcutta High Court and reported as Brooke Bond India Ltd. vs. CIT (1982) 28 CTR (Cal) 345 : (1983) 140 ITR 272 (Cal), the said aspect was clearly decided by observing as follows : “In our opinion, where the object of incurring the expenditure, as in the instant case, was to affect the capital structure, as a result of which certain incidental advantage flows, it will be of a capital nature. We are also unable to accept the contention that it is only the acquisition of a right of a permanent character, the creation of which was a condition for the carrying on of the business, which could be rightly treated as an expenditure on the capital account. Capital expenditure can be incurred after the company was floated or it started business, if it resulted in bringing in a capital advantage. It would also be difficult to lay down any test, that is only in the case of fixed asset or that is not easily convertible into money. If an assessee acquired a capital asset, namely, to construct a house or a building, in particular cases, having capital acquired, the expenditure would be on the capital account. It may be that by acquiring capital he is increasing his earning of his income or earning of the profit. That is the physical test in determining this question. It is the resultant advantage obtained by incurring the expenditure along with the purpose and object of incurring the expenditure, which would be the guide to determine the question.”

11. Mr. Mallick, learned counsel for the Revenue, further referred to the observation made in the cases of Punjab State Industrial Development Corporation Ltd. (supra) and Brooke Bond India Ltd. (supra) by the apex Court. It is contended that in such circumstances, the question is no more open for any contrary finding by the High Court.

12. Considering the aforesaid contentions, we find that as regards expenditure for issue of shares for increase in capital, it has been decided in the cases of Punjab State Industrial Development Corporation Ltd. (supra) and Brooke Bond India Ltd. (supra) that the same is capital expenditure and is not allowable. The contention of the assessee is that in the case of Brooke Bond India Ltd. (supra), the apex Court considered the aspect that if the expansion of capital was undertaken by the assessee in order to meet the need for more working funds, then the position would be otherwise, requires consideration as in the said judgment it was recorded that the statement of case sent by the Tribunal did not indicate that a finding was recorded to the effect that the expansion of the capital was undertaken by the assessee in order to meet the need for more working funds for the assessee. Therefore, the question is when such materials are available whether such expenditure is to be treated as revenue expenditure. It is argued by learned counsel for the assessee that in the present case when the materials on record show that expansion of the capital was undertaken in this case in order to meet the need for more working funds, then the expenditure in the present case has to be treated as revenue expenditure making the amount allowable.

13. We are unable to accept the said contention as we find even in the said judgment by the apex Court in the case of Brooke Bond India Ltd. (supra), it is held that though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit-making, still the expenses incurred in that connection will retain the character of a capital expenditure since the expenditure is directly related to the expenses of the expansion of the capital base of the company. In view of such clear finding, we are of the opinion, the question does not remain open any further as to whether the expenditure of expansion for capital requires to be considered on the basis as to whether the capital is needed as working capital or not. In such circumstances, we being unable to accept the said contention of the appellant, the appeal is dismissed.

S.K. Gupta, J. : I agree.

[Citation : 267 ITR 754]

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