HBLNife Power Systems Ltd.,Presently HBL Power Systems Ltd., Hyderabad V. DCIT, Hyderabad

ITA 1555/HYD/2008

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 5832 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-03-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 09-02-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 16-10-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: NIVEDITA BISWAS DR
• Assessee Lawyers: DR M V R PRASAD
• Keywords: Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI G.C.GUPTA, VICE PRESIDENT AND SHRI AKBER BASHA , ACCOUNTANT MEMBER ITA NO.1555/HYD/2008 : ASSTT. YEAR : 2006- 07 HBL NIFE POWER SYSTEMS LTD. (PRESENTLY HBL POWER SYSTEMS LTD.) HYDERABAD. (PAN - AACCH 8421 K) VS DY. COMMISSIONER OF INCOME- TAX, CIRCLE 2(2), HYDERABAD. (APPELLANT) (RESPONDENT) APPELLANT BY : DR. M.V.R.PRASAD, ADVOCATE RESPONDENT BY : SMT.NIVEDITA BISWAS,DR O R D E R PER AKBER BASHA, ACCOUNTANT MEMBER: THIS APPEAL BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2006- 07 IS DIRECTED AGAINST THE ORDER OF THE CIT(A) III, HYD ERABAD DATED 11TH AUGUST, 2008. 2. FOLLOWING ARE THE GROUNDS OF APPEAL TAKEN BY THE ASSESSEE IN THE PRESENT APPEAL- '1. THE ORDER OF THE LEARNED CIT(A) III, HYDERABAD DT.11-8-2008 IN ITA NO.0281/DCIT CIR.2(2)/CIT(A)-III/07-08 IS CONTRARY TO THE LAW AND FACTS OF THE CASE. 2. THE LEARNED CIT(A) III ERRED IN NOT GIVING DEDUC TION UNDER THE PROVISIONS OF SEC.35D(2)(C)(IV) OF THE INCOME TAX A CT, 1961 FOR THE EXPENDITURE OF RS.54.22 LAKHS PAID AS BROKERAGE FOR THE PURPOSE OF RAISING THE CAPITAL AND SHARE PREMIUM OF ABOUT RS.5 1 CRORES. I) THE LEARNED CIT(A) III OUGHT TO HAVE NOTICED THAT T HE ISSUE OF ABOUT RS.51 CRORES TO FINANCIAL INSTITUTIONS WAS EF FECTED IN ITA NO.1555/HYD/2008 HBL NIFE POWER SYSTEMS LTD. (PRESENTLY HBL POWER SYSTEMS LTD.) HYDERABAD. 7 TERMS OF SEC. 81(1A) OF THE COMPANIES ACT, 1956 ONL Y TO COMPLY WITH THE SEBI GUIDELINES REQUIRING THE PROMO TERS HOLDING TO BE REDUCED TO BELOW 75% OF THE SHARE CAP ITAL AND THE SAID ISSUE QUALIFIES UNDER THE COMPANIES ACT, 1 956 AND SEBI GUIDELINES, AS ISSUE TO THE PUBLIC. II) THE LEARNED CIT(A) III OUGHT TO HAVE NOTICED THAT I N TERMS OF SEC. 35D(2)(C)(IV) THE ISSUE HAS TO BE FOR PUBLIC SUBSCRIPTION AND AS THE ISSUE OF ABOUT RS.51 CRORES QUALIFIES AS ALLOTMENT TO THE PUBLIC IN CONTRADISTINCTION TO THE PROMOTERS , THE SAID EXPENDITURE OF RS.54.22 LAKHS QUALIFIES FOR DEDUCTI ON UNDER SECTION 35D OF THE ACT. 3. IN THE ALTERNATIVE, THE LEARNED CIT(A) III OUGHT TO HAVE ALLOWED DEDUCTION FOR THE SAID EXPENDITURE OF RS.54.22 LAKH S AS REVENUE EXPENDITURE.' 3. BRIEFLY STATED, FACTS OF THE CASE ARE THAT THE ASSE SSEE IS A LIMITED COMPANY IN THE BUSINESS OF MANUFACTURE AND SALE O F BATTERIES AND POWER SYSTEMS, RAILWAY WORKS CONTACTS. RETURN OF INCOM E FOR THE ASSESSMENT YEAR 2006-07 WAS FILED ON 27-11-2006 DECLARING A TOTAL INCOME OF RS.32,69,20,077. THE CASE WAS SELECTED FOR SCRUTI NY AND NOTICE U/S 143(2) WAS ISSUED ON 22-9-2007. THE ASSESSING OF FICER AFTER VERIFYING THE BOOKS OF ACCOUNT AND THE SUBMISSIONS MADE B Y THE ASSESSEE, COMPLETED THE ASSESSMENT AT A TAXABLE FIGURE OF RS.33,00,39,376 MAKING VARIOUS DISALLOWANCES AND ADDITIO NS TO THE RETURNED INCOME. AGGRIEVED BY THIS ORDER OF THE ASSESSI NG OFFICER THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A) III, HYDERABAD . THE LEARNED CIT(A) AFTER EXAMINING THE RECORDS BEFORE HIM AND THE VARIOUS SUBMISSIONS MADE BY THE ASSESSEE GAVE PART RELIEF. STILL A GGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT FOR THE PURPOSE OF ISSUING SHARE CAPITAL, THE COMPANY INCURRED EX PENDITURE OF RS.54.22 LAKHS AND 1/5TH OF THE SAME IS CLAIMED AS DEDUCTI ON UNDER S.35D OF THE ACT IN THE YEAR UNDER APPEAL. THE EXPE NDITURE IS IN THE ITA NO.1555/HYD/2008 HBL NIFE POWER SYSTEMS LTD. (PRESENTLY HBL POWER SYSTEMS LTD.) HYDERABAD. 7 NATURE OF PRELIMINARY EXPENDITURE ELIGIBLE FOR AMOR TIZATION UNDER S.35D AND THE SAME IS NOT IN THE NATURE OF CAPITAL EXPENDIT URE. THE ASSESSEE COMPANY IS A LISTED COMPANY AND TO COMPLY WITH THE SEB I GUIDELINES, ACCORDING TO WHICH THE COMPANY WAS SUPPOSED TO BRING DOWN THE PROMOTERS' HOLDING TO LESS THAN 75% OF THE PAID UP CAPI TAL, THE ISSUE IN QUESTION WAS MADE. THE PURPOSE OF THE ISSUE WAS FOR BACKWARD AND FORWARD EXPANSION AND FOR WORKING CAPITAL. AS THE EXP ENDITURE WAS INCURRED FOR RAISING CAPITAL, S.35D ALLOWS AMORTIZATION OF PRELIMINARY EXPENSES OVER A PERIOD OF FIVE YEARS IN RESPECT OF EXPE NDITURE INCURRED AFTER 31.3.1998. EVEN IN CASE EXPENDITURE IS INCUR4RED AFTER THE COMMENCEMENT OF THE BUSINESS, THE ASSESSEE IS ELIGIBLE TO CLA IM THE SAME UNDER S.35D IF THE CAPITAL IS USED FOR EXPANSION OF THE INDUSTRIAL UNDERTAKING. IN THE CASE UNDER CONSIDERATION, THE VERY PURPOSE OF THE ISSUE OF CAPITAL IS FOR EXPANSION AND THUS THE COMPANY IS ELIGIBLE FOR DEDUCTION. IN SUPPORT OF HIS CONTENTIONS, LEARNED COUN SEL FOR THE ASSESSEE FILED A COPY OF THE LETTER FROM SEBI AS WELL AS A COPY OF LISTING AGREEMENT WITH REGARD TO 25% NON-PROMOTER SHARE-HOLD ING, ETC. IN THE PAPER BOOK FILED. PLACING RELIANCE ON THE SEBI BULL ETIN OF FEBRUARY, 2003, RELEVANT PAGES OF WHICH ARE FILED BEFORE US, IT IS SUBMITTED THAT 'PUBLIC SHARE HOLDING' MEANS 'THE SHARE-HOLDING IN A COMPANY HELD BY PERSONS OTHER THAN THE PROMOTERS..' HE ALSO CITED A NUMBER OF DECISIONS IN SUPPORT OF THE ABOVE CONTENTIONS, FILING COP IES THEREOF IN THE PAPER-BOOK. IN THE ALTERNATIVE, THE LEARNED COUNSEL SUBMITTED THA T THE EXPENDITURE IS IN THE NATURE OF REVENUE EXPENDITURE SINCE IT IS INCURRED FOR THE PURPOSES OF BUSINESS AND AS SUCH IT CAN BE ALLOWED A S REVENUE EXPENDITURE. 5. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REP RESENTATIVE SUBMITTED THAT THE EXPENDITURE CLAIMED BY THE ASSESSEE IS IN CONNECTION ITA NO.1555/HYD/2008 HBL NIFE POWER SYSTEMS LTD. (PRESENTLY HBL POWER SYSTEMS LTD.) HYDERABAD. 7 WITH THE ISSUE OF SHARES THROUGH PRIVATE PLACEMENT AND AS SUCH THE ISSUE IS NOT MEANT FOR PUBLIC SUBSCRIPTION, WHICH ALONE QUA LIFIES THE ASSESSEE FOR RELIEF IN TERMS OF S.35D. IT IS ALSO SUBMIT TED THAT SUCH EXPENDITURE SHOULD BE IN THE NATURE OF UNDER-WRITING COMMISSION, BROKERAGE, CHARGES FOR DRAFTING, TYPING, PRINTING AND ADVERTISING OF THE PROSPECTUS. THE ASSESSEE COMPANY DID NOT COMPLY WITH ANY O NE OF THE CONDITIONS LAID DOWN UNDER CLAUSE (IV) OF S.35D(2) OF THE INCOME-TAX ACT. THE ASSESSEE COMPANY RAISED THE EQUITY BY ISSUE OF PRE FERENTIAL SHARES AND THE EXPENDITURE INCURRED WAS IN THE NATURE O F FEES PAID TO THE CONCERNS FOR THE ISSUE OF PREFERENTIAL SHARES. HENCE THE LOWER AUTHORITIES ARE RIGHT IN DISALLOWING THE CLAIM OF THE ASSESSEE. AS FOR THE ALTERNATIVE CONTENTION OF THE ASSESSEE, IT IS SUBMITT ED THAT THE ASSESSEE'S PLEA FOR ALLOWANCE OF THE EXPENDITURE IN QUESTI ON AS REVENUE EXPENDITURE CANNOT BE ACCEPTED SINCE THE EXPENSES WERE INCU RRED IN CONNECTION WITH ISSUE OF SHARES AND THUS TO INCREASE THE CA PITAL BASE OF THE COMPANY AND THAT BEING SO, SUCH EXPENDITURE IS ALWAY S IN THE NATURE OF CAPITAL NATURE. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. AS PER SEC.35D OF THE IN COME TAX ACT, 1961 (THE ACT), EXPENDITURE CAN BE ALLOWED FOR AMORTI ZATION IN THE CASE OF ISSUE OF SHARES FOR PUBLIC SUBSCRIPTION. AS PER THOSE PROVISIONS, SUCH EXPENSES SHOULD ALSO BE IN THE NATURE OF UNDERWRITING CO MMISSION, BROKERAGE AND CHARGES FOR DRAFTING, TYPING, PRINTING AND ADVERTISEMENT OF THE PROSPECTUS, ETC. IN CASE OF ANY ISSUE OF SHARE CAPI TAL AFTER THE COMMENCEMENT OF BUSINESS, THE PURPOSE OF RAISING SUCH SHARE CAPITAL SHOULD BE FOR EXPANSION OF THE UNDERTAKING. AS PER TH E NOTIFICATION ISSUED BY THE SEBI DATED 26-8-2009, THE PUBLIC OFFER H AS BEEN DEFINED 'AS AN OFFER OF SPECIFIED SECURITIES BY A LISTED ISSUER TO THE PUBLIC FOR ITA NO.1555/HYD/2008 HBL NIFE POWER SYSTEMS LTD. (PRESENTLY HBL POWER SYSTEMS LTD.) HYDERABAD. 7 SUBSCRIPTION AND INCLUDE AN OFFER FOR SALE OF SPECIFIED SE CURITIES'. IN THE SAME NOTIFICATION EVEN THE PREFERENTIAL ISSUE HAS BEEN DEFINED AS 'AN ISSUE OF SPECIFIED SECURITIES BY A LISTED ISSUER TO ANY SELECT ED PERSON OR GROUP OF PERSONS ON PRIVATE PLACEMENT BASIS AND DOES NOT INCLUDE AN OFFER OF SPECIFIED SECURITIES MADE THROUGH A PUBLIC ISSUE, RIGHT ISSUE, BONUS ISSUE, EMPLOYEES STOCK OPTION SCHEME, EMPLOYEES STOCK P URCHASE SCHEME OR QUALIFIED INSTITUTIONS PLACEMENT OR AN ISSUE OF SWEAT EQUITY SHARES OR DEPOSITORY RECEIPTS ISSUED IN A COUNTRY OUTSIDE I NDIA OR FOREIGN SECURITIES'. FURTHER, THE SO CALLED PUBLIC ISSUE IN THE IN STANT CASE HAS ALSO BEEN MADE ONLY TO FOUR SHAREHOLDERS ON PREFERENTI AL BASIS. EVEN AS PER S.67(3) OF THE COMPANIES ACT, NO OFFER OR INVITA TION SHALL BE TREATED AS MADE TO THE PUBLIC, IF THE OFFER OR INVITATION CAN PROPERLY BE RECORDED AS NOT BEING CALCULATED TO RESULT, DIRECTLY OR INDIRECTL Y IN THE SHARES OR DEBENTURES BECOMING AVAILABLE FOR SUBSCRIPTION OR PURCHASE BY PERSONS OTHER THAN THOSE RECEIVING THE OFFER OR INVITATION. THAT BEING SO, EITHER IN TERMS OF THE SEBI GUIDELINES NOTED ABOVE OR IN TER MS OF THE PROVISIONS OF THE COMPANIES ACT, IT CANNOT BE SAID THAT THE ISSUE OF SHARE CAPITAL IN THE PRESENT CASE IS FOR PUBLIC SUBSCRIPTION. 7. ANOTHER CONDITION PRECEDENT TO CLAIM DEDUCTION UND ER SECTION 35D OF THE ACT IS THAT EXPENDITURE INCURRED SHOU LD BE IN CONNECTION WITH THE EXTENSION OF ITS UNDERTAKING OR IN CONNECTION WITH THE SETTING UP OF A NEW UNIT IN CASE THE SHARES WERE ISSUE D AFTER THE COMMENCEMENT OF THE BUSINESS. IT IS AN UNDISPUTED FACT TH AT THE SHARE CAPITAL IN QUESTION, WAS ISSUED BY THE ASSESSEE IN THE INSTANT CASE AFTER THE COMMENCEMENT OF BUSINESS, AND IT IS MEANT FOR COMPLYING WITH THE SEBI GUIDELINES WITH REGARD TO PROPORTION OF PR OMOTERS' HOLDING AS AGAINST TOTAL CAPITAL BASE. AS SUCH, IT CANNOT BE SAID THAT THE ISSUE OF SHARE CAPITAL IN THE INSTANT CASE IS FOR EXPANSION OF THE UNDERTAKING. ITA NO.1555/HYD/2008 HBL NIFE POWER SYSTEMS LTD. (PRESENTLY HBL POWER SYSTEMS LTD.) HYDERABAD. 7 IN ANY EVENT, THE ASSESSEE COULD NOT BRING ANYTHING ON R ECORD TO SHOW THAT THE ASSESSEE HAS EXTENDED ITS UNDERTAKING BY GOING I N FOR THE SHARE ISSUE IN QUESTION. WE FIND FROM THE DIRECTORS REPORT FILED IN THE PAPER BOOK THAT AS AGAINST RS.51 CRORES RECEIVED ON ACCOUNT OF SHARE-CAPITAL, UTILIZATION HAS BEEN REPORTED AS FOLLOWS- '.. PARTICULARS RS. IN CRORES CAPITAL EXPENDITURE 9.32 WORKING CAPITAL 5.16 TEMPORARY REDUCTION OF WCDL ON PENDING UTILIZATION 20.00 TEMPORARY INVESTMENT IN SBI MUTUAL FUNDS PENDING UTILIZATION 16.50 CURRENT ACCOUNT BANK BALANCE 0.02 TOTAL 51.00 ' 8. HENCE, WE DO NOT SEE ANY MERIT ON THE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SHARES WERE ISSUED ONLY FOR THE EXPANSION OF ITS BUSINESS WITHOUT ANY COGENT EVIDENCE TO SUPPORT HIS CONTENTIONS. 9. IN VIEW OF ABOVE DISCUSSION, WE ARE OF THE OPINION THAT THE ASSESSEE HAS NOT COMPLIED WITH ANY ONE OF THE CONDITIONS LA ID DOWN UNDER SECTION 35D OF THE ACT. WE ALSO FIND NO MERIT I N THE CONTENTION OF THE ASSESSEE THAT FEE PAID IS THE NATURE OF BROKERAGE OR OTHER ISSUE EXPENSES, AS FEE, BROKERAGE AND OTHER EXPENSES ARE DISTIN CT IN NATURE. HENCE, THE FEE PAYMENT MADE BY THE ASSESSEE COMPANY IN CONN ECTION WITH THE ISSUE OF SHARES IS NOT ELIGIBLE FOR DEDUCTION U NDER SECTION 35D OF THE ACT. WE ARE ALSO OF THE VIEW THAT THE ALTERNATIV E CONTENTION OF THE ASSESSEE FOR ALLOWING THE ENTIRE EXPENSES AS OF REVENUE NA TURE, IS ITA NO.1555/HYD/2008 HBL NIFE POWER SYSTEMS LTD. (PRESENTLY HBL POWER SYSTEMS LTD.) HYDERABAD. 7 DEVOID OF MERIT, SINCE THE EXPENSES, WHICH ARE INCURRED I N CONNECTION WITH THE ISSUE OF SHARES TO INCREASE THE CAPITAL BASE OF TH E COMPANY, ARE OBVIOUSLY OF CAPITAL NATURE. THE CASE LAW RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE IS DISTINGUISHABLE ON FACTS AND IS NO T APPLICABLE TO THE CASE UNDER CONSIDERATION. 10. FOR THE DETAILED REASONS DISCUSSED ABOVE, WE FIND NO MERIT IN THE GROUNDS OF THE ASSESSEE IN THIS APPEAL, WHICH ARE A CCORDINGLY REJECTED. 11. IN THE RESULT, ASSESSEE'S APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 03-03-2010. SD/- G.C.GUPTA SD/- AKBER BASHA VICE PRESIDENT ACCOUNTANT MEMBER. DT/- 3RD MARCH, 2010 COPY FORWARDED TO: 1. DCIT, CIRCLE 2(2), HYDERABAD. 2 M/S. HBL NIFE POWER SYSTEMS LTD., (PRESENTLY HBL PO WER SYSTEMS LTD., 8-2-601, ROAD NO.10, BANJARA HILLS, HYDERABAD 500 034. 3. 4 CIT(A)-III, HYDERABAD-1 CIT-II, HYDERABAD. 5. THE DEPARTMENTAL REPRESENTATIVE, ITAT, HYDERABAD. B.V.S .