INVENTIA HEALTHCARE P. LTD( EARLIER KNOWN AS M/S. THEMIS LABORATORIES P.LTD), MUMBAI V. DCIT RG 9(2), MUMBAI

ITA 1613/MUM/2013

• Counselvise Citation: 161319914 RSA 2013
• Duration Of Justice: 1 year(s) 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-12-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 26-11-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 27-02-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SACCHIDANAND DUBEY
• Keywords: Capital asset; Business expenditure; Additional evidence; Difference of opinion; Revenue expenditure; Capital expenditure
• Section: 28

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,M UMBAI - I BENCH. , , BEFORE S/SH. RAJENDRA, ACCOUNTANT MEMB ER & VIVEK VARMA, JUDICIAL MEMBER /. ITA NO.1613/MUM/2013, ! ! ! ! ' ' ' ' / ASSESSMENT YEAR-2009-10 INVENTIA HEALTHCARE PVT. LTD., UNIT 703 & 704, 7TH FLOOR, HUBTOWN SOLARIS, N.S.PHADKE MARG, ANDHERI (E), MUMBAI-400069. # # # # . . . /PAN:AABCT5371R V/S. DCIT RANGE 9(2), MUMBAI. ( #$ / APPELLANT) ( %&#$ / RESPONDENT) ' ( / REVENUE BY : SHRI ANIL SATHE !)* !)* !)* !)* ( ( ( ( / ASSESSEE BY : SHRI SACCHIDANAND DUBEY ! ! ! ! ' '' ' *+ *+ *+ *+ / DATE OF HEARING : 26-11-2014 ,-' ' *+ / DATE OF PRONOUNCEMENT :26 -12-2014 ! ! ! ! , 1961 ' '' ' 254 )1 ( *.* *.* *.* *.* / / / / ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA,AM ! ! ! ! : CHALLENGING THE ORDER DATED 11.12.2012 OF THE CIT(A )-20,MUMBAI THE ASSESSEE HAS FILED FOLLOWING GROUNDS OF APPEAL: 1.THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE ACTION OF THE LEARNED ASSESSING OFFICER IN TREATING THE REVENUE E XPENSES INCURRED AMOUNTING TO 2,49,66,340/- IN CONNECTION WITH OBTAINING FUNDS BY WAY OF SHARE CAP ITAL AS CAPITAL EXPENDITURE. 2.THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE AND CONSIDER THE CONTENTION THAT EXPENDITURE INCURRED BY THE APPELLA NT DID NOT BRING INTO EXISTENCE ANY CAPITAL ASSET GIVING ENDURING BENEFIT TO THE APPELLANT AND THEREF ORE WAS NOT AS EXPENDITURE IN THE CAPITAL FIELD. 3.THE LEARNED CONUNISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.12,00,000 BEING ADVANCES IRRECOVERABLE WRITTEN O FF BY THE APPELLANT. 4.THE LEARNED CONMIISSIONER OF INCOME TAX (APPEALS) DID NOT APPRECIATE THE FACT THAT THE ADVANCES WRITTEN OFF BY THE APPELLANT WERE IRRECOVE RABLE AND THEREFORE ENTITLED FOR DEDUCTION U/SEC 28 OF THE INCOME TAX ACT AS BUSINESS LOSS. 5. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEN D ANY OF THE GROUNDS. OF APPEAL AT ANY LIME BEFORE OR AT THE TIME OF HEARING. ASSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF PHARMAC EUTICAL FROMULATION,FILED ITS RETURN OF INCOME ON 22.09.2009,DECLARING LOSS OF RS.6,77,65,3 78/-.ASSESSING OFFICER(AO) COMPLETED THE ASSESSMENT U/S.143(3) OF THE ACT,ON 31.10.2012,DETE RMINING THE TOTAL INCOME OF THE ASSESSEE AT RS.(-)4.02 CRORES. 2. FIRST GROUND OF APPEAL PERTAINS TO EXPENSES,AMOUNT ING TO 2,49,66,340/-,INCURRED IN CONNECTION SHARE CAPITAL.DURING THE ASSESSMENT PROCEEDINGS AO FOUND THAT DURING THE YEAR UNDER CONSIDERA - TION,THE ASSESSEE HAD INCREASED SHARE CAPITAL THROU GH PRIVATE EQUITY TO THE EXTENT OF RS.58.78 CRORES FOR WHICH IT HAD INCURRED THE EXPENSES OF RS. 2.49 CRORES THE BREAK-UP OF THE EXPENDITURE WAS AS UNDER: SR. PARTY'S NAME AMOUNT (RS.) NATURE OF EXPENSES 1 ARA LAW 22,17,000 LEGAL DUE DILIGENCE 2 CATALYST PHARMA CONSULTING 7,30,340 TECHNICAL DUE DILIGENCE 3 ERNEST & YOUNG PVT. LTD. 1,86,97,098 FINANCIAL D UE DILIGENCE 4 WADIA GHANDY & CO. 18,21,900 LEGAL FEES 2 ITA NO. 1613/M/2013 INVENTIA HEALTHCARE PVT. LTD 5 WADIA GHANDY & CO. 9,00,000 STAMP DUTY ON SHARE H OLDING AGREEMENT 6 BANK OF INDIA 6,00,002 STAMP DUTY FOR ISSUE OF S HARE CAPITAL 2,49,66,340 IT WAS CLAIMED BEFORE THE AO THAT EXPENSES IN THE N ATURE OF STAMP DUTY AND REGISTRAR OF COMPANY FEES WERE NOT REVENUE IN NATURE.WITH REGARD TO ALLO WABILITY OF FEES PAID TO E & Y PVT. LTD. (SERIAL NO. 3, IT WAS CLAIMED THE ASSESSEE HAD PAID PROFESS IONAL FEES TO E & Y PVT. LTD.AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE THE AO HELD THAT TH E EXPENSES WERE INCURRED FOR THE PURPOSE OF EXPANSION OF BUSINESS AND COULD NOT BE CONSIDERED A S REVENUE IN NATURE,THAT ANY EXPENDITURE INCURRED BY A COMPANY IN CONNECTION WITH ISSUE OF S HARES WITH A VIEW TO INCREASE ITS CAPITAL WAS A CAPITAL EXPENDITURE,THAT IN VARIOUS COURT PRONOUNCE MENT IT WAS HELD THAT EVEN IF THE EXPANSION OF THE CAPITAL WAS UNDERTAKEN IN ORDER TO MEET THE NEE D FOR MORE WORKING FUNDS THE EXPENDITURE FOR EXPANSION OF CAPITAL WOULD RETAIN THE CHARACTER OF CAPITAL EXPENDITURE ,THAT THE ASSESSEE HAS EXPANDED ITS BUSINESS,THAT THE EXPENSES INCURRED BY IT WERE CAPITAL IN NATURE. 2.1. AGAINST THE ORDER OF THE AO THE ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPEAL AUTHORITY (FAA).CERTAIN ADDITIONAL EVIDENCES WERE SUBMITTED B EFORE HIM DURING THE COURSE OF APPELLATE PROCEEDINGS.AFTER CONSIDERING THE AVAILABLE MATERIA L,HE HELD THAT THE ASSESSEE WAS A PRIVATE LIMITED COMPANY AND HAD INCREASED SHARE CAPITAL THR OUGH PRIVATE EQUITY,THAT FOR WHICH IT HAD INCURRED CERTAIN EXPENDITURE,THAT ALL THE EXPENSES WERE TO BE CONSIDERED WITH REGARD TO INCREASE OF SHARE CAPITAL AND NOT IN ISOLATION,THAT SUCH EXPENS ES HAD BEEN INCURRED TO INCREASE THE SHARE CAPITAL,THAT THOSE WERE NOT REVENUE IN NATURE,THAT SAME WERE INCURRED WITH A VIEW TO IN CREASE THE CAPITAL BASE GIVING ENDURING BENEFIT TO THE BUSINES S,THAT THE FINDING GIVEN BY THE AO WAS PERFECTLY RIGHT,THAT SUCH EXPENSES WERE INCURRED FOR RAISING SUBSTANTIAL SHARE CAPITAL.FAA REFERRED TO THE JUDGMENT OF HON'BLE APEX COURT DELIVERED IN THE CAS E OF EMPIRE JUTE COMPANY.LTD.(124ITR1) AND HELD THAT THE EXPENDITURE INCURRED BY THE ASSES SEE WAS RELATING TO THE CAPITAL FIELD.HE FURTHER REFERRED TO THE CASES OF BALA SUNDARAM AND COMPANY (124 ITR 24),UPPER DOAB SUGAR MILLS LTD.(116 ITR 928), AVARY INDIA LTD.(199ITR&45)KODAC INDIA LTD.(253ITR445)DELIVERED BY THE HONBLE MADRAS,ALLAHABAD, CALCUTTA HIGH COURTS AND SUPREME COURT RESPECTIVELY AND HELD THAT EXPENSES INCURRED FOR FRESH CAPITAL INCLUDING THE B ROKERAGE PAID ON SALE OF SHARES WAS CAPITAL NATURE. 2.2. BEFORE US,AUTHORISED REPRESENTATIVE(AR)STATED THAT THE ASSESSEE HAD AVAILED SERVICES OF THE PROFESSIONALS,THAT EXPENDITURE INCURRED WAS OF REVE NUE NATURE,THAT DISALLOWANCE OF PAYMENT OF STAMP DUTY ON SHARE HOLDING AGREEMENT AND ISSUE OF SHARE CAPITAL WAS JUSTIFIED,THAT REST OF THE EXPENSES WERE NOT CAPITAL EXPENSES AS SAME WERE PAR T FOR DUE DILIGENCE,THAT THE CASES RELIED UPON BY THE FAA DID NOT DEAL WITH DUE DILIGENCE OR RENDE RING OF SERVICES.HE RELIED UPON THE CASES OF GALAXO LABORATORIES INDIA LTD.(181 ITR 59),BOMBAY B URMAH TRADING CORPORATION LTD.(145 ITR 793), WARNER HINDUSTAN LTD.(171 ITR 224).HE ALSO RE FERRED TO THE MATTER OF LAKSHMI AUTO COMPONENTS LTD. DELIVERED BY THE CHENNAI TRIBUNAL.D EPARTMENTAL REPRESENTATIVE (DR) ARGUED THAT THE EXPENDITURE WAS CAPITAL IN NATURE.HE SUPPO RTED THE ORDER OF THE FAA. 2.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD INCRE ASED ITS SHARE CAPITAL TO THE EXTENT OF RS.58.78 CRORES , THAT IT HAD INCURRED EXPENDITURE OF RS.2.4 9 CRORES AND HAD CLAIMED THAT SAME WAS ALLOWABLE AS REVENUE EXPENDITURE,THAT THE AO AND TH E FAA REJECTED THE CLAIM MADE BY THE ASSESSEE,THAT THE AR OF THE ASSESSEE ADMITTED THAT OUT OF THE TOTAL EXPENDITURE ONLY TWO ITEMS I.E.COULD BE HELD TO BE CAPITAL EXPENDITURE,THAT RE ST OF THE ITEMS WERE REVENUE IN NATURE,THAT THE MAIN ARGUMENT OF THE ASSESSEE WAS THAT IT HAD AVAIL ED THE SERVICES OF PROFESSIONALS AND EXPENDITURE INCURRED FOR AVAILING SERVICES CANNOT B E COMPARED WITH THE FEES PAID TO REGISTRAR OF COMPANIES. BEFORE PROCEEDING FURTHER,WE WOULD LIKE TO DISCUSS A FEW CASES THAT DEAL WITH SHARE CAPITAL AND EXPENSES INCURRED WITH REGARD TO SHARE CAPITAL.THE ISSUE OF EXPENDITURE TOWARDS FEE TO THE 3 ITA NO. 1613/M/2013 INVENTIA HEALTHCARE PVT. LTD REGISTRAR OF COMPANIES FOR ENHANCEMENT OF CAPITAL T RAVELLED UP TO THE HON'BLE SUPREME COURT AS THERE WAS DIFFERENCE OF OPINION AMONG VARIOUS HIGH COURTS.SETTING REST THE CONTROVERSY IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORA TION LTD.(225 ITR 792) HON'BLE APEX COURT HELD THAT EXPENDITURE INCURRED TOWARDS FEE TO THE R OC WAS CAPITAL IN NATURE. IN THE MATTER OF BROOKE BOND INDIA LTD. (225 ITR 798)THE HON'BLE APE X COURT REITERATED THE DECISION OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD.(SUPRA ).WE WOULD LIKE TO REPRODUCE THE JUDGMENT OF BROOKE BOND INDIA LTD.(SUPRA) AND THAT READS AS UNDER: WE FIND THAT THIS MATTER HAS COME UP FOR CONSIDERA TION BEFORE THIS COURT IN PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD. V. CIT [199 7]225 ITR 792 (TAX REFERENCE NO. 1 OF 1990, DECIDED ON DECEMBER 4, 1996).IN THAT CASE, THE QUES TION UNDER CONSIDERATION WAS WHETHER AN AMOUNT OF RS. 1,50,000 PAID TO THE REGISTRAR OF COM PANIES AS FILING FEE FOR ENHANCEMENT OF CAPITAL WAS NOT REVENUE EXPENDITURE. THE COURT HAS TAKEN NO TE OF THE DECISIONS OF THE MADRAS, ANDHRA PRADESH, KARNATAKA AND KERALA HIGH COURTS TO WHICH REFERENCE HAS BEEN MADE BY DR. PAL AS WELL AS THE JUDGMENT UNDER CHALLENGE IN THIS APPEAL AND THE JUDGMENT OF THE HIGH COURTS TAKING THE SAME VIEW AS THAT TAKEN IN THE IMPUGNED JUDGMENT.TH IS COURT HAS ALSO TAKEN NOTE OF THE DECISIONS IN EMPIRE JUTE CO. LTD.'S CASE [1980] 124 ITR 1 (SC ) AS WELL AS INDIA CEMENTS LTD.'S CASE [1966] 60ITR 52 (SC). WHILE HOLDING THAT THE AMOUNT OF RS. 1,50,000 PAID TO THE REGISTRAR OF COMPANIES AS FILING FEE FOR ENHANCEMENT OF THE CAPITAL WAS NO T REVENUE EXPENDITURE, THIS COURT HAS SAID (AT PAGE 797 OF 225 ITR): WE DO NOT CONSIDER IT NECESSARY TO EXAMINE ALL THE DECISIONS IN EXTEN SO BECAUSE WE ARE OF THE OPINION THAT THE FEE PAID TO THE REGISTRAR FOR EXPA NSION OF THE CAPITAL BASE OF THE COMPANY WAS DIRECTLY RELATED TO THE CAPITAL EXPENDITURE INCURRE D BY THE COMPANY AND ALTHOUGH INCIDEN-TALLY THAT WOULD CERTAINLY HELP IN THE BUSINESS OF THE COMPANY AND MAY ALSO HELP IN PROFIT-MAKING, IT STILL RETAINS THE CHARACTER OF A CAPITAL EXPENDITURE SINC E THE EXPENDITURE WAS DIRECTLY RELATED TO THE EXPANSION OF THE BASE OF THE COMPANY. WE ARE, THERE FORE, OF THE OPINION THAT THE VIEW TAKEN BY THE DIFFERENT HIGH COURTS IN FAVOUR OF THE REVENUE IN T HIS BEHALF IS THE PREFERABLE VIEW AS COMPARED TO THE VIEW BASED ON THE DECISIONOF THE MADRAS HIGH CO URT IN KISENCHAND CHELLARAMS CASE [1981] 130 ITR385. THIS DECISION THUS COVERS THE QUESTION THAT FALLS F OR CONSIDERATION IN THIS APPEAL. DR. PAL HAS, HOWEVER, SUBMITTED THAT THIS DECISION DOES NOT COVER A CASE, LIKE THE PRESENT CASE, WHERE THE OBJECT OF ENHANCEMENT OF THE CAPITAL WAS TO HAVE MORE WORKING FUNDS FOR THE ASSESSEE TO CARRY ON ITS BUSINESS AND TO EARN MORE PROFIT AND T HAT IN SUCH A CASE THE EXPENDITURE THAT IS INCURRED IN CONNECTION WITH ISSUING OF SHARES TO IN CREASE THE CAPITAL HAS TO BE TREATED AS REVENUE EXPENDITURE. IN THIS CONNECTION, DR. PAL HAS INVITE D OUR ATTENTION TO THE SUBMISSIONS THAT WERE URGED BY LEARNED COUNSEL FOR THE ASSESSEE BEFORE TH E APPELLATE ASSISTANT COMMISSIONER AS WELL AS BEFORE THE TRIBUNAL. IT IS NO DOUBT TRUE THAT BEFOR E THE APPELLATE ASSISTANT COMMISSIONER AS WELL AS BEFORE THE TRIBUNAL IT WAS SUBMITTED ON BEHALFOF TH E ASSESSEE THAT THE INCREASE IN THE CAPITAL WAS TO MEET THE NEED FOR WORKING FUNDS FOR THE ASSESSEE-CO MPANY. BUT THE STATEMENT OF CASE SENT BY THE TRIBUNAL DOES NOT INDICATE THAT A FINDING WAS RECOR DED 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 UNDER- TAKEN BY THE ASSESSEE FOR THE PURPOSE OF MEETING TH E NEED FOR WORKING FUNDS FOR THE ASSESSEE TO CARRY ON ITS BUSINESS. IN ANY EVENT, THE ABOVE QUOT ED OBSERVATIONS OF THIS COURT IN PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPO-RATION LTD.S CASE [19 97] 225 ITR 792 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 T HE CHARACTER OF A CAPITAL EXPENDITURE SINCE THE EXPENDITURE IS DIRECTLY RELATED TO THE EXPANSION OF THE CAPITAL BASE OF THE COMPANY.IN THESE CIRCUMSTANCES, WE DO NOT FIND ANY MERIT IN THE APPE AL ANDIT IS ACCORDINGLY DISMISSED. FROM THE ABOVE,IT IS CLEAR THAT DUE TO EXPENDITURE INCURRED WITH REGARD TO ENHANCING SHARE CAPITAL HAS TO BE CONSIDERED CAPITAL EXPENDITURE EVEN IF SU CH EXPENDITURE INCIDENTALLY HELPS IN THE BUSINESS OF THE COMPANY IN THE PROFIT-MAKING. IN THE CASE OF MASCON TECHNICAL SERVICES LTD.(358IT R 545)DECIDED BY THE HONBLE MADRAS HIGH COURT THE ASSESSEE HAD CLAIMED A SUM OF RS.35,39,16 4/-AS DEDUCTION UNDER THE CAPTION SHARE ISSUE 4 ITA NO. 1613/M/2013 INVENTIA HEALTHCARE PVT. LTD EXPENSES.IT WAS ARGUED BY THE ASSESSEE THAT IT WANT ED TO AUGMENT ITS WORKING CAPITAL,BUT DUE TO CERTAIN TECHNICAL PROBLEMS IT COULD NOT BRING THE P UBLIC ISSUE.THE AO AND THE FAA HELD THAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS CAPITAL IN NATURE AND COULD NOT BE ALLOWED.BEFORE THE TRIBUNAL, THE ASSESSEE CONTENDED THAT THE EXPENDITU RE INCURRED WAS ONLY FOR THE PURPOSE OF BETTERING THE CASH AVAILABILITY AND THE WORKING CAP ITAL OF THE COMPANY AND, HENCE, THE EXPENDITURE SHOULD BE ALLOWED AS REVENUE EXPENDITURE. TRIBUNAL REJECTED THE CONTENTION HOLDING THAT CONSIDERING THE PURPOSES FOR WHICH THE COMPANY INCU RRED THE EXPENDITURE THE APPEAL FILED BY THE ASSESSEE WAS TO BE DISMISSED.THE ASSESSEE CHALLENGE D THE ORDER OF THE TRIBUNAL BEFORE THE HONBLE HIGH COURT.CONFIRMING THE ORDER OF THE TRIBUNAL THE COURT HELD AS UNDER: THE EXPENSES WERE INCURRED BY THE ASSESSEE FOR T HE PURPOSE OF WIDENING ITS CAPITAL BASE. EVEN THOUGH THE ASSESSEE STATED THAT THE EXPENDITURE WAS INCURRED SO AS TO IMPROVE THE CASH AVAILABILITY, THE FACT REMAINED THAT THE EXPENDITURE INCURRED WAS ONLY FOR THE PURPOSE OF EXPANSION OF THE CAPITAL BASE..THE ASSESSEE TOOK STEPS TO GO FOR PUB LIC ISSUE AND AFTER INCURRING THE EXPENDITURE, JUST BEFORE THE PUBLIC ISSUE, BY REASON OF THE ORDERS FR OM THE SECURITIES AND EXCHANGE BOARD OF INDIA, THE ASSESSEE COULD NOT GO IN FOR PUBLIC ISSUE. THUS , THE EFFORTS WERE ABORTED. THERE WAS NO JUSTIFIABLE GROUND TO ACCEPT THE PLEA OF THE ASSESS EE THAT ON ACCOUNT OF THE ABORTIVE EFFORTS, THE EXPENDITURE INCURRED WOULD LOSE ITS CHARACTER AS CA PITAL EXPENDITURE FOR THE PURPOSE OF ALLOWING IT AS A REVENUE EXPENDITURE. NOW WE WOULD LIKE TO REFER TO THE MATTER OF G. T. N .TEXTILES LTD.(326 ITR 352) DECIDED BY THE HONBLE KERALA HIGH COURT.IN THAT CASE DURING THE P REVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 1993-94, THE ASSESSEE MADE A PUBLIC ISSUE OF SHARES FOR RAISING CAPITAL.THE EXPENDITURE INCURRED FOR RAISING CAPITAL WAS CLAIMED AS DEDUCTION. THE D ISALLOWANCE TOWARDS EXPENDITURE CLAIMED FOR RAISING SHARE CAPITAL WAS CONFIRMED BY THE TRIBUNAL .THE ASSESSEE PREFERRED AN APPEAL BEFORE THE HONBLE HIGH COURT.DECIDING THE MATTER AGAINST THE ASSESSEE,THE HONBLE COURT HELD AS UNDER: DISALLOWANCE ON RS.107.78LAKHS TOWARDS EXPENDITURE CLAIMED FOR RAISING SHARE CAPITAL WAS CONFIRMED BY THE TRIBUNAL FOLLOWING THE JUDGMENT OF THE SUPREME COURT IN BROOKE BOND INDIA LTD.V.CIT [1997] 225 ITR 798. IN VIEW OF THE DECISI ON OF THE SUPREME COURT,THE APPELLANTS CLAIM OF EXPENDITURE FOR RAISING SHARE CAPITAL CANNOT BE ALLOWED AS IT IS A CAPITAL EXPENDITURE.FOLLOWING THE JUDGMENT OF THE SUPREME COURT WE ANSWER THIS QU ESTION AGAINST THE ASSESSEE...IN PRINCIPLE, WE DO NOT FIND ANY DIFFERENCE BETWEEN THE SHARE CAP ITAL RAISED FOR THE CAPITAL EXPANSION OF THE COMPANY AND THE SHARE CAPITAL RAISED AND UTILISED F OR ACQUIRING SHARES OF A SUBSIDIARY COMPANY BECAUSE IN EITHER CASE EXPENDITURE IS FOR RAISING C APITAL. THEREFORE, IN OUR VIEW, THE APPELLANT IS NOT ENTITLED TO DEDUCTION FOR THE EXPENDITURE INCUR RED FOR INVESTMENT IN THE SHARES OF A SUBSIDIARY COMPANY.CONSEQUENTLY,WE UPHOLD THE ORDER OF THE TRI BUNAL AND DISMISS THE APPEAL. HONBLE CALCUTTA HIGH COURT,IN THE CASE OF HINDUSTA N GAS AND INDUSTRIES LTD.(117ITR549),HAS HELD AS UNDER: WHERE IT IS THE ASSESSEE WHO IS CLAIMING RELIEF BY WAY OF AN ALLOWABLE DEDUCTION IN RESPECT OF AN EXPENDITURE INCURRED BY HIM, IT IS STRICTLY FOR THE ASSESSEE TO ESTABLISH THAT THAT EXPENDITURE IS NOT OF THE NATURE OF A CAPITAL EXPENDITURE AND HE CANNO T CLAIM ANY BENEFIT OF AMBIGUITY OR DOUBT IN HIS FAVOUR..UNDER THE COMPANIES ACT, 1956, WHEN A COMP ANY ISSUES REDEEMABLE PREFERENCE SHARES IT DOES NOT OBTAIN A LOAN AS IT WOULD BY ISSUING DE BENTURES. THERE IS A FUNDAMENTAL DIFFERENCE BETWEEN THE CAPITAL MADE AVAILABLE TO A COMPANY BY ISSUE OF A SHARE AND MONEY OBTAINED BY A COMPANY UNDER A LOAN OR A DEBENTURE. RESPECTIVE INC IDENCES AND CONSEQUENCES OF ISSUING A SHARE AND BORROWING MONEY ON LOAN OR ON A DEBENTURE ARE D IFFERENT AND DISTINCTIVE. A DEBENTURE-HOLDER AS A CREDITOR HAS A RIGHT TO SUE THE COMPANY, WHERE AS A SHAREHOLDER HAS NO SUCH RIGHT. APART FROM THAT, THE SCHEME OF THE COMPANIES ACT AND IN PARTIC ULAR THE FORMS AND CONTENTS OF ITS BALANCE- SHEETS ARE EXTREMELY RIGID AND BY REASON OF THE SPE CIFIC COMPARTMENTS IN SUCH ACCOUNTS IT IS NOT POSSIBLE TO CONVERT AN ITEM OF CAPITAL INTO AN ITEM OF LOAN.. THEREFORE,THE EXPENDITURE INCURRED FOR PAYMENT OF LEGAL CHARGES TO SOLICITORS ON THE I SSUE OF A PROSPECTUS FOR OFFERING REDEEMABLE PREFERENCE SHARES TO THE PUBLIC AND PAYMENT OF UNDE RWRITING COMMISSION AND BROKERAGE FOR THE ISSUE OF THE SAME IS CAPITAL EXPENDITURE AND NOT RE VENUE EXPENDITURE. (EMPHASIS BY US.) 5 ITA NO. 1613/M/2013 INVENTIA HEALTHCARE PVT. LTD IN THE CASE OF UNION CARBIDE INDIA LTD.,(203ITR584) THE ISSUE OF REDUCTION OF FOREIGN HOLDING AND RELATED EXPENDITURE FOR ISSUING FRESH SHARES WAS DE LIBERATED UPON BY THE CALCUTTA HONBLE COURT,AS FOLLOW: UNDER THE FOREIGN EXCHANGE REGULATION ACT, THE ASSE SSEE WAS REQUIRED TO BRING DOWN ITS FOREIGN EQUITY CAPITAL FROM 60 PER CENT. TO 50.9 PER CENT. THE REDUCTION OF FOREIGN HOLDING COULD BE ACHIEVED BY READJUSTMENT OF THE SHARES AMONGST THE EXISTING SHAREHOLDERS NOT INVOLVING ANY FRESH ISSUE OF SHARES. THE NECESSITY OF DILUTION MIGHT HA VE BEEN A FACTOR FOR FRESH ISSUE OF SHARES BUT THE END RESULT WAS THE RESTRUCTURING OF THE CAPITAL BAS E BY WIDENING IT THROUGH SECURING TO THE ASSESSEE-COMPANY A LARGE SUBSTRATUM AS CAPITAL. THI S WAS THE CRUCIAL FACTOR. THAT APART, THE ENHANCEMENT IN THE SHARE CAPITAL COULD NOT BE SAID TO BE WHOLLY INCIDENTAL TO THE PRESERVATION OR CONTINUATION OF THE BUSINESS, BECAUSE THERE COULD B E OTHER MEANS OF REDUCING FOREIGN HOLDING IN ACCORDANCE WITH THE STATUTORY REQUIREMENT UNDER THE FOREIGN EXCHANGE REGULATION ACT. THE EXPENDITURE ON ISSUE OF FRESH SHARES WAS NOT DEDUCT IBLE AS BUSINESS EXPENDITURE. HERE,WE WOULD LIKE TO MENTION SOME IMPORTANT PRINCI PLES GOVERNING SHARE CAPITAL OF COMPANIES. ONE OF THEM STIPULATES THAT EXPENDITURE INCURRED FO R ISSUING SECURED CONVERTIBLE DEBENTURE IS ALLOWABLE EXPENDITURE,EVEN IF THE DEBENTURES WERE T O BE CONVERTED INTO SHARES LATER AND WERE TO BE PART OF CAPITAL SHARE(326 ITR 29).BUT,THE ISSUE BE FORE US IS NOT OF ISSUANCE OF DEBENTURES,BUT OF SHARE CAPITAL.AS PER THE SECOND PRINCIPLE, ANY EXPE NDITURE INCURRED BY AN ASSESSEE ON ACCOUNT OF STAMP DUTY AND REGISTRATION FEES FOR THE ISSUE OF B ONUS SHARES IS ALLOWABLE EXPENDITURE.IT IS SAID THAT BECAUSE ISSUANCE OF BONUS SHARES BY A COMPANY DOES NOT RESULT IN ANY INFLOW OF FRESH FUNDS OR INCREASE IN THE CAPITAL EMPLOYED.IN THE CASE OF BEFORE US,THE MATTER IS NOT RELATED TO BONUS SHARES.WE WOULD ALSO LIKE TO MENTION THAT PRICE PAI D FOR PURCHASE OF SHARES HELD BY THE MINORITY SHAREHOLDERS BY THE COMPANY CANNOT BE ALLOWED AS RE VENUE EXPENDITURE.THE LOGIC BEHIND THE PRINCIPLE IS THAT THE PAYMENT IS IN RELATION TO CHA NGE IN THE CAPITAL STRUCTURE OF THE COMPANY,THAT IF THE EXPENDITURE INCURRED FOR EXPANDING THE CAPITAL BASE IS A CAPITAL EXPENDITURE THEN ANY EXPENDITURE INCURRED TO REDUCE THE CAPITAL BASE CAN NOT NOT BE TERMED AS REVENUE EXPENDITURE,THAT BY REDUCING THE CAPITAL,FUNDS TO THAT EXTENT,GOES O UT OF THE COMPANY AND THEREFORE SUCH EXPENDITU -RE ON REDUCING THE CAPITAL CANNOT BE CONSIDERED AS EXPENDITURE INCURRED FOR WORKING OF THE COMPANY MORE EFFICIENTLY OR MORE PROFITABLY.IN SHOR T,WHERE THE SHARE CAPITAL OF A COMPANY IS INCREASED,THE COMPANY GETS MORE CAPITAL TO SPEND.TH EREFORE,EVERY INCREASE IN CAPITAL IS AN ADVANTAGE OF ENDURING NATURE.IN THE CASE BEFORE US, THE EXPENDITURE INCURRED WAS FOR RAISING SHARE CAPITAL WILL,SO IT HAS TO BE TREATED A CAPITAL EXPE NDITURE. COURTS ARE OF THE VIEW THAT IN ORDER TO DETERMINE T HE NATURE OF EXPENDITURE, WHETHER THE CAPITAL ARE REVENUE,WHAT IS MATERIAL IS TO CONSIDER THE NATURE OF ADVANTAGE IN COMMERCIAL SENSE.THEY HAVE HELD THAT WHERE THE ADVANTAGE WAS IN THE CAPITAL FI ELD THAT EXPENDITURE HAD TO BE DISALLOWABLE,BUT IF THE ADVANTAGE CONSISTEDS MERELY IN FACILITATING THE ASSESSEE'S TRADING OPERATION OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEE'S BUSINESS T O BE CARRIED ON MORE PROFITABLY WHILE LEAVING THE FIX CAPITAL UNTOUCHED,SUCH EXPENDITURE WAS TO B E ALLOWED AS REVENUE EXPENDITURE. IN THE CASE BEFORE US,THE ISSUE DOES NOT DEAL WITH ENHANCING WO RKING CAPITAL BUT IT IS A CASE OF SUBSTANTIAL ENHANCEMENT OF SHARE CAPITAL. IT WAS ARGUED ON BEHA LF OF THE ASSESSEE THAT THE EXPENDITURE IN QUESTION WAS INCURRED BY THE ASSESSEE FOR AVAILING PROFESSIONAL SERVICES.IT IS TRUE,BUT AVAILING PROFESSIONAL SERVICES DOES NOT MAKE AN EXPENDITURE CAPITAL OR REVENUE.THE BASIC AND DECIDING FACTOR IS THE OBJECT OR THE PURPOSE OF AVAILING PRO FESSIONAL SERVICES.THE ASSESSEE HAD NOT HIRED THE PROFESSIONALS FOR ANY FEASIBILITY REPORT FOR ONGOIN G-PROJECT,RATHER THE PAYMENT WAS MADE FOR AUGMENTING THE CAPITAL OF THE COMPANY.IN OUR OPINIO N,ANY EXPENDITURE INCURRED FOR INCREASING SHARE CAPITAL OF A CORPORATE ENTITY IS TO BE TREATE D AS CAPITAL EXPENDITURE. NOW,WE WOULD LIKE TO DISCUSS THE CASES RELIED UPON BY THE ASSESSEE.IN THE CASE OF GALAXO LABORATORIES INDIA LTD. (181 ITR 59) THE ISSUE BEFO RE THE HON'BLE COURT WAS ABOUT ALLOWABILITY OF EXPENDITURE WHERE THE ASSESSEE-COMPANY WAS DIRECTED BY THE GOVERNMENT TO BRING DOWN THE SHARE HOLDING OF FOREIGN PARENT COMPANY FOR RENEWING COLL ABORATION.THE ASSESSEE WAS NOT IN NEED OF FUNDS WHAT WAS REQUIRED WAS ONLY TECHNICAL COLLABOR ATION AGREEMENT.THE OBJECT AND PURPOSE OF 6 ITA NO. 1613/M/2013 INVENTIA HEALTHCARE PVT. LTD THE SAID EXPENDITURE WAS TO OBTAIN APPROVAL OF THE GOVERNMENT. CONSIDERING THESE PECULIAR FACT OF THE CASE THE HON'BLE BOMBAY HIGH COURT HAD HELD AS UNDER: ' THE OBJECT AND PURPOSE OF SAID EXPENDITURE, SEEN FROM THE BUSINESSMAN'S POINT OF VIEW, MUST BE HELD TO BE OBTAINED THE APPROVAL OF THE GOVERNMENT, THAT BEING THE OBJECT AND PURPOSE THE EXPENDITURE MUST BE HELD TO BE REVENUE EXPENDITURE AND ALLOWABLE DEDUCTION' WE FIND THAT THE FACTS OF THE CASE UNDER CONSIDERAT ION ARE TOTALLY DIFFERENT FROM THE FACTS OF THE GALAXO LABORATORIES INDIA LTD. (SUPRA). IN THE CASE OF GLAXO THE SHARE CAPITAL WAS RAISED IN ORDER TO BRING DOWN THE EQUITY OF THE FOREIGN PATENT COMP ANY AS PER THE DIRECTION OF THE GOVERNMENT. SECONDLY ARRANGEMENTS WERE MADE BY THE ASSESSEE FOR THE RENEWAL OF FOREIGN COLLABORATION AGREEMENT. LASTLY THE ASSESSEE WAS NOT IN NEED OF A NY FRESH CAPITAL. IN THE CASE BEFORE US, THE ASSESSEE WAS IN NEED OF FRESH CAPITAL AND THERE WAS NO DIRECTION BY THE GOVERNMENT TO BRING DOWN THE EQUITY OF THE FOREIGN PARENT COMPANY. IN OUR OP INION, THE MATTER OF GALAXO LABORATORIES INDIA LTD.(SUPRA) IS OF NO HELP TO THE ASSESSEE.THE ASSES SEE HAS ALSO RELIED UPON THE CASE OF BOMBAY BURMAH TRADING CORPORATION LTD. (145 ITR 793)DELIVE RED BY THE HON'BLE BOMBAY HIGH COURT. WE FIND THAT IN THAT MATTER EXPENDITURE INCURRED FO R ISSUING BONUS SHARE WAS DEALT WITH AND IT WAS HELD THAT EXPENDITURE TOWARDS FEES PAID TO REGISTRA R OF COMPANIES RELATING TO ISSUE OF BONUS SHARES,PRINTING AND POSTAGE ETC. WAS ALLOWABLE EXPE NDITURE.IN THE CASE BEFORE US THE EXPENDITURE WAS NOT INCURRED FOR ISSUING BONUS SHARES.ASSESSEE HAD ALSO RELIED UPON THE ORDER OF WARNER HINDUSTAN LTD.(171 ITR 224) OF HON'BLE ANDHRA PRADE SH HIGH COURT. WE FIND THAT WHILE DECIDING THE CASE PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPOR ATION LTD.(SUPRA) THE HON'BLE SUPREME COURT HAD OVERRULED THE DECISION OF WARNER HINDUSTAN LTD. (SUPRA).AS FAR AS CASE OF LAKSHMI AUTO COMPONENTS LTD.(SUPRA)IS CONCERNED, WE WANT TO STAT E THAT IT DEALS WITH THE PRIMA FACIE ADJUST - MENT TO BE MADE U/S 143(1)(A) OF THE ACT AND IN OUR OPINION IT DOES NOT DEAL WITH THE ISSUE BEFORE US.IN SHORT NONE OF THE CASES RELIED UPON BY THE AS SESSEE SUPPORT THE ARGUMENTS TAKEN BY IT. CONSIDERING THE ABOVE DISCUSSION,WE ARE OF THE OPIN ION THAT THE ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL OR FACTUAL INFIRMITY.SO,CONFIRMING H IS ORDER,WE DECIDE GROUND NO.1 AGAINST THE ASSESSEE. 3. NEXT GROUND OF APPEAL IS ABOUT DISALLOWANCE OF RS.1 2 LAKHS.DURING THE ASSESSMENT PROCEEDINGS AO FOUND THAT THE ASSESSEE HAD WRITTEN OFF A SUM OF RS.12 LACS APPEARING IN THE P& L A/C.HE DIRECTED THE ASSESSEE AS TO WHY THE ADVANCE WRITTEN OFF SHOULD NOT BE DISALLOWED. IT WAS SUBMITTED BEFORE HIM THAT ASSESSEE HAS ADVANCED THE SUM TO A PHARMACEUTICAL COMPANY, THAT THE BALANCE WAS PENDING MORE THAN THREE YEARS,THAT SAME WAS CONSIDE RED NOT TO BE RECOVERABLE AFTER THREE YEARS. THE AO DISALLOWED THAT CLAIM MADE BY THE ASSESSEE. 3.1. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FAA.DURING THE APPELLATE PROCEEDINGS IT WAS SUBMITTED BEFORE HIM T HAT ASSESSEE HAD IN THE YEARS 2005-06 GIVEN BUSINESS ADVANCE OF RS.12 LACS TO ONE OF THE SUPPLI ERS,THAT FOLLOW UP WITH THE PARTY REVEALED THAT RECOVERY WAS NOT POSSIBLE,THAT THE ASSESSEES WROTE OFF THE AMOUNT IN QUESTION AFTER THREE YEARS, THAT THE LOAN WAS DIRECTLY CONNECTED WITH THE ASSES SEES BUSINESS AND THEREFORE SAME HAD TO BE ALLOWED AS BUSINESS LOSS. AFTER CONSIDERING THE SUB MISSIONS OF THE ASSESSEE AND THE ASSESSMENT ORDER, FAA HELD THAT LOSS WAS NOT ALLOWABLE U/S.28 OF THE ACT, BECAUSE SAME WAS CAPITAL LOSS. 3.2. BEFORE US,THE AR STATED THAT ADVANCE WAS GIVEN TO O NE OF THE SUPPLIERS,THAT IT WAS A PHARMACY -EUTICAL COMPANY,THAT THE AMOUNT IN QUESTION WAS RE LATED TO THE BUSINESS OF THE ASSESSEE AND HENCE ALLOWABLE AS BUSINESS LOSS.THE DR SUPPORTED THE ORD ER OF THE FAA. 3.3. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED MATERIA L BEFORE US.THERE IS NO DOUBT THAT THE ASSESSEE HAD ADVANCED A SUM OF RS.12 LACS TO ONE OF THE SUPPLIERS,THAT THE TRANSACTIONS WAS ROUTED THROUGH P&L ACCOUNT,THAT IT HAD DIRECT NEXUS WITH T HE BUSINESS CARRIED OUT BY ASSESSEE,THAT THE ASSESSEE WROTE IT OFF ONCE IT REALISED THAT RECOVER Y WAS NOT POSSIBLE.CONSIDERING THE ABOVE FACTS,WE ARE OF THE OPINION THAT THE AMOUNT HAS TO BE ALLOWABLE AS BUSINESS LOSS AS PER THE 7 ITA NO. 1613/M/2013 INVENTIA HEALTHCARE PVT. LTD PROVISIONS OF SECTION 28 OF THE ACT. SO REVERSING O RDER OF THE FAA. WE DECIDE GROUND NO.2 IN FAVOUR OF THE ASSESSEE. AS A RESULT,THE APPEA L FILED BY THE ASSESSEE STANDS PARTLY ALLOWED. 1*2 !)* 3 4 /*2 5 ' * 67 . ORDER PRONOUNCED IN THE OPEN COURT ON 26TH,DECEMBER 2014 . / ' ,-' 8 9! 26.12. 201 4 - ' . : SD/- SD/- ( / VIVEK VARMA) ( / RAJENDRA) / JUDICIAL MEMBER /ACCOUNTANT MEMBER / MUMBAI, 9! /DATE: 26.12 . 2014. / / / / ' '' ' %* %* %* %* ; '* ; '* ; '* ; '* / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / #$ 2. RESPONDENT / %&#$ 3. THE CONCERNED CIT(A)/ < = , 4. THE CONCERNED CIT / < = 5. DR I BENCH, ITAT, MUMBAI / >. %*! , . . . 6. GUARD FILE/ . 1 & * & * & * & * %* %*%* %* //TRUE COPY// /! / BY ORDER, ? / 6 DY./ASST. REGISTRAR , /ITAT, MUMBAI