Hinduja Leyland Finance Limited, Tamil Nadu V. ACIT, Chennai

ITA 116/CHNY/2022

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 0813 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-10-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 25-09-2022
• Assessment Year: 2017-2018
• Appeal Filed On: 20-02-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: R.SATHYANARAYANAN
• Keywords: Business expenditure; Revenue expenditure; Capital expenditure; Set aside

Judgement Text

आयकर अपील सं./ITA No.116/Chny/2022 िनधा रण वष /Assessment Year: 2017-18 M/s.Hinduja Leyland Finance Ltd., No.1, Sardar Patel Road, Guindy, Chennai. v. The Dy. Commissioner- of Income Tax, CPC, Bangalore. [PAN: AACCH 1807 P] (अपीलाथ /Appellant) ( यथ /Respondent) अपीलाथ क ओर से/ Appellant by : Mr.R.Sathyanarayanan, CA यथ क ओर से /Respondent by : Mr.K.N.Dhandapani, Addl.CIT सुनवाई क तारीख/Date of Hearing : 26.09.2022 घोषणा क तारीख /Date of Pronouncement : 14.10.2022 आदेश / O R D E R PER G. MANJUNATHA, AM: This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, dated 23.12.2021, and pertains to assessment year 2017-18. 2. The assessee has raised the following grounds of appeal: 1.0 The order of commissioner of Income-Tax (Appeals) is not correct and proper. 2.0 The CIT(A) ought to have allowed the entire amount of Rs.3.10 Crores as business expenditure U/s.37(1) in Computation. 3.0 The Hon. CIT(A) ought to have appreciated that the very object of share issue for which the said amount of Rs.3.10 Crores was incurred to augment the working capital requirement of the appellant. 3.1 The Hon. CIT(A) Ought to have noted that the share issue in question did not fructify and therefore the entire amount of Rs.3 .10 crores spent thereon could par आयकर अपीलीय अिधकरण, ‘बी’ यायपीठ, चे ई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH: CHENNAI ी वी. दुगा राव, माननीय ाियक सद एवं ी जी. मंजूनाथा, माननीय लेखा सद के सम BEFORE SHRI V. DURGA RAO, HON’BLE JUDICIAL MEMBER AND SHRI G. MANJUNATHA, HON’BLE ACCOUNTANT MEMBER ITA No.116/Chny/2022 M/s.Hinduja Leyland Finance Ltd. :: 2 :: take the character of revenue loss only and therefore to be allowed only as a revenue expenditure on business exigencies. 4.0 The learned CIT(A)bought to have appreciated the relevance of the judicial precedents cited before him by the Appellant in regard to the Appellant's case in Appeal and in particular the decision of the jurisdictional Madras High Court in Tamilnadu Magnesite Ltd. V. ACIT (Appeal no. 907 and 908 of 2007). 4.1 The CIT(A) ought to have appreciated that when there is no new business which has been created and there is no creation of any new asset nor there being any enduring benefit accrued to the assesse, the expenditure should be treated as revenue and not as capital. 4.2 The CIT(A) ought to have noted the decision of Bangalore ITAT in Adadyn Technologies P. Ltd's case wherein it was held the expenditure incurred on development of a software platform, which was abandoned before being fully developed and put to use should be allowed as a revenue expenditure and not be treated as a capital expenditure. 5.0 The Appellant craves indulgence to attribute additional grounds before the Hon. Tribunal at the time of hearing. 3. The brief facts of the case are that M/s.Hinduja Leyland Finance Ltd., is a ‘Non-Banking Finance Company’ engaged in the business of ‘Asset Financing and related Finance Services’. The assessee has filed its return of income for the AY 2017-18 on 31.03.2018 declaring total income of Rs.293,29,39,230/-. The return of income filed by the assessee has been processed by the DCIT, CPC, u/s.143(1)(a) of the Act, and determined total income of Rs.296,39,39,230/- after making adjustment of Rs.3.10 Crs. u/s.37 of the Act, towards share issue expenses. The assessee challenged the assessment order passed u/s.143(1)(a) of the Act, before the First Appellate Authority and contended that adjustment made by the AO towards total income while processing return of income u/s.143(1)(a) of the Act, is incorrect, because, the issue of deduction towards share issue expenses is highly debatable which can be decided after considering relevant details. The assessee had also challenged the additions made ITA No.116/Chny/2022 M/s.Hinduja Leyland Finance Ltd. :: 3 :: towards disallowance of share issue expenses on the ground that the share issue expenses incurred by the assessee is Revenue in nature, which has been incurred wholly and exclusively for the purpose of business. The assessee further claimed that although the share issue expenses are not allowable deduction by virtue of ratio laid down by the Hon’ble Supreme Court in the case of Brooke Bond India Ltd. v. CIT reported in [1983] 140 ITR 272 (Cal.), but facts of present case are entirely different and are covered by subsequent decision of the Hon’ble Supreme Court in the case of CIT v. General Insurance Corporation in Civil Appeal No.4422 of 2001, judgment dated 25.09.2006, where the Hon’ble Supreme Court held that if there is no fresh inflow of funds to the company, which expands or adds to its capital employed in the company resulting in the expansion of profit making apparatus, then expenditure incurred towards rising fresh capital is capital in nature, which cannot be allowed as deduction u/s.37 of the Act, whereas, in the present case, the assessee has abandoned the proposal of rising fresh capital by going into IPO and thus, once the project is abandoned, then the question of expanding capital base of the assessee company, does not arise and hence, consequent expenditure incurred towards share issue expenses, cannot be treated as capital in nature. 4. The Ld.CIT(A) after considering relevant submissions of the assessee and also taken note of relevant provisions of the Act, opined that after amendment of sec.143(1)(a) of the Act, w.e.f. 01.04.2008, the scope of adjustment u/s.143(1)(a) of the Act, is enlarged in as much as the AO can ITA No.116/Chny/2022 M/s.Hinduja Leyland Finance Ltd. :: 4 :: adjust an incorrect claim, if such incorrect claim is apparent from any information in the return. Since, claim of the assessee towards share issue expenses is Revenue in nature, is an incorrect claim and thus, the AO has rightly disallowed such expenses while processing return of income u/s.143(1)(a) of the Act. The Ld.CIT(A) had also rejected the arguments of the assessee on deduction towards share issue expenses and held that the expenditure incurred by the assessee towards share issue expenses is capital in nature, which gives enduring benefit, because, the assessee has incurred said expenses for raising additional capital which goes to increase capital base of the assessee. Therefore, he opined that there is no error in the reasons given by the AO to disallow share issue expenses, because said decision is squarely covered in favour of the Revenue by the decision of the Hon’ble Supreme Court in the case of Brooke Bond India Ltd. v. CIT (supra). Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before us. 5. The Ld.AR for the assessee submitted that the Ld.CIT(A) erred in not allowing deduction towards share issue expenses amounting to Rs.3.10 Crs. u/s.37(1) of the Act, even though, expenditure incurred by the assessee is Revenue in nature and incurred wholly and exclusively for the purpose of business of the assessee. The Ld.AR further submitted that the sole basis for the Ld.CIT(A) to uphold additions made by the AO is ratio laid down by the Hon’ble Supreme Court in the case of Brooke Bond India Ltd. (supra), where the Hon’ble Supreme Court held that share issue expenses cannot ITA No.116/Chny/2022 M/s.Hinduja Leyland Finance Ltd. :: 5 :: be allowed as deduction u/s.37(1) of the Act, because, it goes to expand capital base of the assessee. But in the present case, although the assessee has incurred expenditure towards rising fresh capital through IPO, but the assessee has abandoned the proposal and thus, the ratio laid down by the Hon’ble Supreme Court in the case of Brooke Bond India Ltd. v. CIT (supra), has no application. Further, the case of the assessee is squarely covered by the decision of the Hon’ble Supreme Court in the case of CIT v. General Insurance Corporation in Civil Appeal No.4422 of 2001, where the Hon’ble Supreme Court after considering its earlier decision in the case of Brooke Bond India Ltd. v. CIT (supra) held that in case, there is no inflow of fresh funds or increase in the capital employed, expenditure incurred towards share issue expenses, cannot be treated as capital in nature. The Ld.AR for the assessee further referring to the decision of ITAT Bangalore Bench in the case of M/s.Adadyn Technologies Pvt. Ltd., in ITA Nos.994 & 995/Bang/2019 submitted that if assessee incurred expenditure for development of a product and said product is abandoned and not put to use, then expenditure incurred for development of said product cannot be considered as capital in nature, because there is no creation of new asset which gives enduring benefit to the assessee. He further referring to the decision of the ITAT Hyderabad Bench in the case of M/s.Spandana Sphoorty Financial Ltd. v. DCIT in ITA No.28/Hyd/2019 dated 13.05.2022, submitted that the ITAT has considered judgment of the Hon’ble Supreme Court in the case of Brooke Bond India Ltd. v. CIT (supra) and also in the ITA No.116/Chny/2022 M/s.Hinduja Leyland Finance Ltd. :: 6 :: case of General Insurance Corporation v. CIT (supra) and held that if there is no fresh inflow of funds and there is no increase in capital employed, the expenditure incurred towards share issue expenses should be allowable as Revenue expenditure. The Ld.CIT(A) without appreciating the above facts simply sustained the additions made by the AO. 6. The Ld.DR, on the other hand, supporting the order of the Ld.CIT(A), submitted that after amendment to sec. u/s.143(1) of the Act, the AO can made adjustment in case of any incorrect claim, if such claim is ascertainable from return of income filed by the assessee. Therefore, there is no merit in the arguments of the assessee that adjustment cannot be made towards disallowance of share issue expenses. As regards deduction towards share issue expenses u/s.37(1) of the Act, the Ld.CIT(A) has brought out clear facts to the effect that the case of the assessee is squarely covered by the decision of the Hon’ble Supreme Court in the case of Brooke Bond India Ltd. v. CIT (supra) and therefore, the AO has rightly disallowed share issue expenses and their orders should be upheld. 7. We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The assessee is engaged in the business of ‘Asset Financing and related Finance Services’ had incurred a sum of Rs.3.10 Crs. towards share issue expenses like Legal Fees, Exchange Filing Fee, Lead Book Running Manager Expenses, Advertisement and Audit & Certification charges. The assessee planned to ITA No.116/Chny/2022 M/s.Hinduja Leyland Finance Ltd. :: 7 :: raise fresh capital through Initial Public Offering (IPO) and for this purpose, has incurred certain preliminary expenses to go for public issue. However, the assessee could not go for public issue to raise capital and thus, abandoned the proposal due to various reasons best known to the assessee, but the assessee has incurred various expenses to prepare its case for public issue to raise fresh capital and claimed said expenses as Revenue in nature. The AO disallowed share issue expenses u/s.37(1) of the Act, while processing return of income u/s.143(1)(a) of the Act, on the ground that said expenditure is capital in nature and which is squarely covered by the decision of the Hon’ble Supreme Court in the case of Brooke Bond India Ltd. v. CIT (supra), where it has been clearly held that share issue expenses is capital in nature which cannot be allowed as deduction u/s.37(1) of the Act. 8. The assessee has filed details of expenses incurred towards share issue and as per the details filed by the assessee, the assessee has incurred expenditure towards Legal Fees, Exchange Filing Fee, Lead Book Running Manager Expenses, Advertisement and Audit & Certification charges. The expenditure incurred by the assessee are definitely in nature of Revenue expenditure and none of the expenditure can be classified as capital expenditure. Therefore, deductibility of said expenditure needs to be examined in light of the decision of the Hon’ble Supreme Court in the case of Brooke Bond India Ltd. v. CIT (supra) and also in the case of General Insurance Corporation v. CIT (supra). The Hon’ble Supreme Court in the ITA No.116/Chny/2022 M/s.Hinduja Leyland Finance Ltd. :: 8 :: case of Brooke Bond India Ltd. v. CIT (supra) had taken a view that if expenditure incurred towards fresh issue of capital, which goes to increase capital base of the assessee, then said expenditure would be in the nature of capital expenditure, which cannot be allowed as Revenue expenditure u/s.37(1) of the Act. There is no dispute with regard to ratio laid down by the Hon’ble Supreme Court, because, once expenditure incurred by the assessee creates a new asset which gives enduring benefit to the assessee, then the same partakes the nature of capital in nature. But, the Hon’ble Supreme Court in the subsequent judgment in the case of General Insurance Corporation v. CIT (supra) has taken a different view and held that if expenditure incurred by the assessee towards share issue expenses does not increase the capital base of the assessee, then said expenditure cannot be treated as capital in nature. The ITAT Hyderabad Bench in the case of M/s.Spandana Sphoorty Financial Ltd. (supra) has considered both the judgments and held that if expenditure incurred by the assessee goes to increase the capital base of the assessee, then said expenditure needs to be classified as capital in nature and if expenditure incurred by the assessee does not goes to increase the capital base of the assessee, then the said expenditure needs to be treated as Revenue in nature. 9. In this case, there is no dispute with regard to the fact that the expenditure incurred by the assessee is Revenue in nature. If you go by nature and type of expenditure, said expenditure is in the nature of Revenue expenditure. However, the issue needs to be resolved in the given ITA No.116/Chny/2022 M/s.Hinduja Leyland Finance Ltd. :: 9 :: facts and circumstances of the assessee’s case is when the assessee has incurred expenditure for rising fresh capital, said expenditure can be treated as Revenue in nature or capital in nature. Admittedly, the assessee has abandoned the plan of rising fresh capital through IPO for the reasons best known to the assessee and this fact is not disputed by the AO as well as the Ld.CIT(A). Once, the assessee has abandoned the proposal of rising fresh capital through IPO, then the question of increasing capital base of the assessee does not arise. In other words, the assessee has not created any asset which gives enduring benefit and also it does not help in the business of the company and in profit making, because, there is no increase in capital employed in the business of the assessee. Therefore, under these facts and circumstances, it is very difficult to accept the arguments of the Ld.CIT(A) that expenditure incurred by the assessee is capital in nature which gives enduring benefit to the assessee. This legal principle is supported by the decision of the ITAT Bangalore Benches in the case of M/s.Adadyn Technologies Pvt. Ltd., (supra) where the Tribunal held that if expenditure incurred by the assessee for development new project is Revenue in nature, then if said project is abandoned and not put to use, the expenditure incurred by the assessee should be allowed as Revenue in nature. In this case, the assessee has incurred certain expenditure which are Revenue in nature. However, the proposal of share issue has been abandoned for the reasons best known to the assessee. Therefore, in our considered view when the nature of expenditure incurred by the assessee ITA No.116/Chny/2022 M/s.Hinduja Leyland Finance Ltd. :: 10 :: are Revenue in nature and further, said expenses has been incurred wholly and exclusively for the purpose of business, then said expenditure needs to be allowed as Revenue expenditure and deductible u/s.37(1) of the Act. The Ld.CIT(A) without appreciating the above facts simply sustained the additions made by the AO. Hence, we set aside the order of the Ld.CIT(A) and direct the AO to delete the additions made towards disallowance of share issue expenses u/s.37(1) of the Act. 8. In the result, appeal filed by the assessee is allowed. Order pronounced on the 14 th day of October, 2022, in Chennai. Sd/- (वी. दुगा राव) (V. DURGA RAO) याियक सद य/JUDICIAL MEMBER Sd/- (जी. मंजूनाथा) (G. MANJUNATHA) लेखा सद य/ACCOUNTANT MEMBER चे ई/Chennai, दनांक/Dated: 14 th October, 2022. TLN आदेश क ितिलिप अ ेिषत/Copy to: 1. अपीलाथ /Appellant 4. आयकर आयु"/CIT 2. यथ /Respondent 5. िवभागीय ितिनिध/DR 3. आयकर आयु" (अपील)/CIT(A) 6. गाड फाईल/GF