M/s. National Textile Corporation Ltd., New Delhi V. ITO, New Delhi

ITA 2416/DEL/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6943 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 5 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 21-07-2016
• Assessment Year: 2003-2004
• Appeal Filed On: 21-04-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DEEPIKA MITTAL
• Assessee Lawyers: MANOJ ANAND
• Keywords: Capital asset; Business expenditure; Share purchase agreement; Scheme of amalgamation; Revenue expenditure; Capital expenditure
• Section: 37(1); 37; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : E NEW DELHI BEFORE SH. H.S. SIDHU , JUDICIAL M EMBER AND SH. O.P. KANT , ACCOUNTANT MEMBER ITA NO. 2416 /DEL/ 2014 ASSESSMENT YEAR: 2003 - 04 M/S. NATIONAL TEXTILE CORPORATION LTD., CORE - 4, SCOPE COMPLEX - 7, LODHI ROAD, NEW DELHI VS. ITO, WARD - 13(3), NEW DELHI PAN : AAACN2847I (APPELLANT) (RESPONDENT) APPELLANT BY SH. MANOJ ANAND, CA RESPONDENT BY MS. DEEPIKA MITTAL, CIT(DR) DATE OF HEARING 21.07.2016 DATE OF PRONOUNCEMENT 28.09.2016 ORDER PER O.P. KANT , A. M. : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST ORDER DATED 02/01/2014 OF THE LEARNED COMMISSIONER OF INCOME - TAX ( APPEALS) - XVII, LAXMI NAGAR , NEW DELHI , FOR ASSESSMENT YEAR 2003 - 04 , RAISING FOLLOWING GROUNDS: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - 19 (CIT (A) IS BAD BOTH IN THE EYE OF LAW AND ON FACTS. 2 ITA NO. 2416/DEL/2014 AY: 2003 - 04 2.1 THE LEARNED CIT (A) HAS ERRED, BOTH ON FACTS AND IN LAW BY CONFIRMING T HE ADDITIONS OF RS 1.46 CRORES BY TREATING THE BOND EXPENSES AS CAPITAL IN NATURE. 2.2 THE LEARNED CIT (A) HAS ERRED, BOTH ON FACTS AND IN LAW BY TREATING THE BOND EXPENSES AS NOT FOR CARRYING OUT ANY BUSINESS BUT FOR RESTRUCTURING, REHABILITATION & RENEWAL OF SICK UNITS AGAINST THE FACT THAT NTC S MAIN OBJECT WAS FORMED WITH THE OBJECT OF RESTRUCTURING, REHABILITATION & RENEWAL OF SICK UNITS TO SAFEGUARD THE INTEREST OF WORKERS AND ANY EXPENSES INCURRED FOR THAT SHALL BE REVENUE IN NATURE ONLY. 2.3 THE LEARNED CIT (A) HAS ERRED, BOTH ON FACTS AND IN LAW BY TREATING BOND EXPENSES AS CAPITAL IN NATURE DESPITE THE FACT THAT SHE HERSELF HAS ADJUDICATED THAT THESE ARE THE EXPENSES INCURRED FOR AUGMENTATION OF WORKING CAPITAL. IN OTHER WORDS ANY EXPENSES INCURRED FOR WORKING CAPITAL ESPECIALLY ON YEAR TO YEAR BASIS CAN NEVER BE CAPITAL EXPENSES. 3. HOWEVER WITHOUT PREJUDICE TO ABOVE, EVEN IF IT IS ACCEPTED THAT RS 1.46 CRORES EXPENSES INCURRED ARE CAPITAL IN NATURE EITHER FULLY OR PARTIALLY THAN 3.1 20 % OF CAPITAL EXPENSES AS INCLUDED IN TOTAL EXPENSES BE ALLOWED AS DEDUCTION AS PER PROVISO TO SEC 35 D (1) (II) OF THE I - TAX ACT 1961 AND 3.2 ALL REVENUE EXPENSES AS ARE INCLUDED IN TOTAL EXPENSES OF RS 1.46 CRORES SHOULD BE ALLOWED AS DEDUCTION U/S 37 (1) OF THE I - TAX ACT 1961. 4. THAT THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR ALTER ANY OF THE GROUNDS. 2. T HE FACTS IN BRIEF OF THE CASE ARE THAT THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME FOR THE YEAR UNDER 3 ITA NO. 2416/DEL/2014 AY: 2003 - 04 CONSIDERATION ON 28/ 11/2003 DECLARING A LOSS OF RS.65,33, 24,395/ - A ND ASSESSMENT UNDER SECTION 143 (3) OF THE INCOME TAX ACT, 1961 (IN SH ORT THE ACT ) WAS COMPLETED ON 27/01/2006 AT A LOSS OF RS.43,18,74, 010/ - . THE COMMISSIONE R OF I NCOME TAX, DELHI - V, NEW DELHI CALLED FOR THE RECORD OF THE CASE AND HELD THE ASSESSMENT ORDER TO BE ERRONEOUS INSOFAR AS PREJUDICIAL TO THE INTEREST OF THE R EVENUE VIDE HIS ORDER UNDER SECTION 263 OF THE ACT DATED 12/03/2008. ACCORDING TO THE LEARNED COMMISSIONER OF INCOME - TAX, THE ASSESSEE COMPANY HAD INCURRED EXPENDITURE OF RS.1,45,51, 851/ - ON ISSUING OF BOND AND DEBITED THE SAME IN THE PROFIT AND LOSS ACCOUNT AS BOND ISSUE EXPENSES AND SAME WERE ALLOWED BY THE ASSESSING OFFICER AS REVENUE EXPENDI TURE. CERTAIN FACTS OBSERVED BY THE LEARNED COMMISSIONER OF INCOME T AX IN RESPECT OF BOND ISSUE EXPENSES ARE REPRODUCED AS UNDER: 3. BRIEF FACTS RELEVANT TO THE ISSUE AS AVAILABLE IN THE RECORD ARE AS UNDER: - I) 119 MILLS RUN BY 9 SUBSIDIARIES OF THE ASS ESSEE COMPANY WERE SICK AND NON - VIABLE. DURING THE YEAR UNDER CONSIDERATION, GOVERNMENT OF INDIA HAS SANCTIONED REHABILITATION SCHEMES FOR REVIVAL OF SOME OF THESE MILLS. II) SUBSTANTIAL RESTRUCTURING IN FORM OF CAPITAL RESTRUCTURING AS WELL AS ORGANIZATIONAL RESTRUCTURING WAS UNDERTAKEN IN VIEW TO ECONOMIZE THE ADMINISTRATIVE OVERHEADS AND TO MAKE THE MILLS VIABLE AS A BUSINESS III) VARIOUS ACTIONS WERE TAKEN BY THE ASSESSEE COMPANY IN ORDER TO REHABILITATE AND REVIVE THE MILLS WH ICH INCLUDED VOLUNTARY RETIREMENT SCHEMES FOR THE EMPLOYEES, SALE OF SURPLUS LAND AND BUILDING AND OLD PLANT MACHINERY, 4 ITA NO. 2416/DEL/2014 AY: 2003 - 04 CLOSURE OF SOME OF THE MILLS AND MODERNIZATION OF SOME OF THE MILLS. IV) AS PART OF THIS EXERCISE, ASSESSEE COMPANY HAD MOBILIZED FUNDS OF RS.248.69 CRORES BY ISSUING OF OTS BONDS AND ALSO MOBILIZED RS. 749.35 CRORES THROUGH ISSUE OF TAX SAVING BONDS IN FIVE TRANCHES. V) IN CONNECTION WITH RAISING THE FUNDS THROUGH PRIVATE PLACEMENT OF BONDS EXPENSES OF RS. 1.46 CRORES WERE INCU RRED MAINLY,.AS PAYMENT IN FORM OF ARRANGERS FEE' OF RS. 1.27 CRORES. THE EXPENDITURE WAS CLAIMED AS REVENUE EXPENDITURE'. 4. THESE FACTS ARE STATED IN THE PUBLISHED 35M ANNUAL REPORT AT PAGE 10, 11 AND PAGE 70. MOREOVER, THE PURPOSE OF ISSUING THESE BONDS IS ALSO EVIDENT FROM THE GUARANTEE LETTER ISSUED BY MINISTRY OF TEXTILE DATED 12TH FEBRUARY, 2002 WHICH READS AS UNDER: - IN PURSUANCE OF THE REQUEST OF NATIONAL TEXTILE CORPORATION LIMITED (NTC) NEW DELH I FOR RAISING RESOURCES TO START THE PROCESS OF GIVING VRS TO SURPLUS WORKERS OF NTC AS A PART OF REHABILITATION OF SICK SUBSIDIARIES OF NTC. GOVERNMENT OF INDIA HERBY PERMIT NTC TO ISSUE BONDS FOR RS. 500 CRORES (RUPEES FIVE HUNDRED CRORES ONLY) THROUGH P RIVATE PLACEMENT FOR FIVE YEARS PERIOD.' 5. THESE FACTS WERE NOT PROPERLY EXAMINED BY THE ASSESSING OFFICER AND BOND ISSUE EXPENSES WERE ALLOWED AS 'REVENUE EXPENDITURE1 WITHOUT APPLICATION OF MIND. ANY EXPENDITURE INCURRED IN CONNECTION WITH THE RESTRUCT URING OF PROFIT MAKING STRUCTURE OR ALTERING THE CHARACTER IN STRUCTURE OF BUSINESS IS CAPITAL IN NATURE. THIS HAS BEEN CLEARLY HELD BY GUJARAT HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. OFFICIAL LIQUIDATOR OF AHMEDABAD MANUFACTURING & CALICO PRINTING COMPANY LIMITED (244 ITR 156} (2000) . IN THIS CASE CERTIFICATES OF SHARES 5 ITA NO. 2416/DEL/2014 AY: 2003 - 04 AND BONDS ETC WERE ISSUED IN RESPECT OF RESTRUCTURING OF THE MILL BY WAY OF AMALGAMATION AND COURT HELD THAT ALL THE EXPENDITURE INCURRED IN CONNECTION WITH THE ISSUANCE OF SHARE CERTIFICATES AND BONDS WERE NATURE OF 'CAPITAL EXPENDITURE . 2.1 I N COMPLIANCE TO THE DIRECTION OF THE COMMISSIONER OF I NCOME TAX, THE ASSESSING OFFICER COMPLETED THE ASSESSMENT ON 0 5/12/2008 UNDER SECTION 263/143 (3) OF THE ACT HOLDING THE EXPENS ES TOWARDS BOND ISSUE AS CAPITAL IN NATURE. THE RELEVANT FINDING S OF THE ASSESSING OFFICER ARE REPRODUCED AS UNDER: IN VIEW OF ABOVE, NOTICE U/S 143(2) WAS ISSUED AND DULY SERVED UPON THE ASSESS E E. SUBSEQUENTLY THE CASE WAS TRANSFERRED TO UNDERSIGNED ON 6/11/2008. AGAIN FRESH NOTICE FIXING THE CASE FOR 17/11/2008 WAS ISSUED. IN RESPONSE TO NOTICE SH. K.K. KOHLI, MANAGER ACCOUNT OF THE COMPANY ATTENDED ON 20/11/2008 AND NOT FILED ANY WRITTEN SUBMIS SION, HOWEVER, HE HAS BEEN ASKED TO EXPLAIN WHY THE BOND ISSUE EXPENSES MAY NOT BE DISALLOWED AND TREATED AS CAPITAL EXPENDITURE. SUBSEQUENTLY THE SH. MANOJ ANAND C.A. OF THE ASSESSEE COMPANY ATTENDED AND FILED THEIR SUBMISSION AS UNDER 1. THESE ARE REVEN UE EXPENSES BEING INCURRED FOR AUGMENTATION OF WORKING CAPITAL UNDER THE MINISTRY OF TEXTILE S REHABILITATION SCHEME. 2. TAX AUDITOR VIDE ITS REPORT DATED 27 TH NOV. 2003 HAS ALSO NOT TREATED THESE AS CAPITAL EXPENSES. 3. IT HAS BEEN DECIDED IN 'THE FO LLOWING JUDICIAL PRONOUNCEMENT DIAL EXPENSES OF THIS NATURE ARE NOT CAPITAL EXPENDITURE (1) PREMIER AUTOMOBILES LTD. VS. CIT BOMBAY (1971) 80TTR (2) INDIA CEMENT LTD. VS. CH (1966) 601 ITR 6 ITA NO. 2416/DEL/2014 AY: 2003 - 04 (3) HIMANCHAL PRADESH FINANCIAL CORP. LTD. VS. CPI( 1998) 232 ITR THE REPLY OF THE ASSESSEE COMPANY HAS BEEN CONSIDERED BUT THE FACTS IN THE CASE REFERRED ABOVE WERE DIFFERENT FROM THE FACTS OF THE CASE UNDER CONSIDERATION. THE EXPENDITURE INCURRED FOR RAISING OF FUNDS FOR ISSUE OF BONDS WERE RELATED TO RESTRUCTURING, REHABILITATION AND REVIVAL OF SICK UNITS AND WAS NOT INCURRED FOR CARRYING OUT OF BUSINESS. MOREOVER THE EXPENSES INCURRED FOR ISSUE OF BONDS, SHARE CERTIFICATES ARE EXPENSES DIRECTLY RELATED TO RAISING OF CAPITAL OF THE ASSESSEE COMPANY, H ENCE SAME ARE NOT REVENUE EXPENSES AS CLAIMED BY THE ASSESSEE COMPANY. 2.2 AGGRIEVED, THE ASSESSEE FILED APPEAL TO THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS), WHO UPHELD THE DISALLOWANCE OF EXPENSES. 2.3 A GGRIEVED, THE ASSESSEE IS IN APPEAL BEF ORE THE TRIBUNAL RAISING THE GROUNDS AS REPRODUCED ABOVE. 3. THE L EARNED AUTHORIZED REPRESENTATIVE OF THE ASSESSEE SUBMITTED T HAT THE ASSESSEE SPENT ONLY RS. 1.46 CRORE AGAINST TOTAL BOND S WORTH OF RS. 749.45 CRORES ISSUED, WHICH IS MERELY 0.20% OF THE BOND S ISSUE D . HE F URTHER SUBMITTED THAT BONDS WERE ISSUED FOR A C Q U I S I T I O N , REHABILITATION , RESTRUCTURING OR REVIVAL OF SICK TEXTILE UNITS/UNDERTAKINGS , WHICH WAS ONE OF T HE BUSINESS OF THE ASSESSEE AND, THEREFORE , THE CONTENTION OF THE ASSESSING OFFICER THAT BOND S WERE ISSUED FOR NON - BUSINESS PURPOSE S , IS NOT CORRECT. HE FURTHER SUBMITTED THAT THE EXPENSES UNDER REFERENCE ARE OF RECURRING NATURE AND HAVE BEEN ACCEPTED BY THE DEPARTMENT IN THE SUBSEQUENT ASSESSMENT YEARS FROM 20 04 - 05 TO 2010 - 11. HE FURTHER 7 ITA NO. 2416/DEL/2014 AY: 2003 - 04 SUBMITTED THAT LEARNED COMMISSIONER OF INCOME - TAX ( APPEALS) IN ASSESSMENT YEAR 2007 - 08 HAS FULLY ALLOWED THE BOND ISSUE EXPENSES AND NO FURTHER APPEAL HAS BEEN PREFERRED BY THE INCOME T AX DEPARTMENT AGAINST THAT ORDER. IN SUPPORT OF T HE ALTERNATIVE GROUND, THE ASSESSEE SUBMITTED THAT IF THE SAID EXPENSES ARE HELD TO BE CAPITAL IN NATURE T HAN ASSESSEE MAY BE ALLOWED 1/5 TH OF AMOUNT AS DEDUCTION UNDER SECTION 35D(II) OF THE ACT OF THE CAPITAL EXPENSES AND THE R EVENUE EXPENSES INCLUDED IN RS. 1.46 CRORE MAY BE ALLOWED AS DEDUCTION UNDER SECTION 37 (1) OF THE ACT. IN SUPPORT OF THE ALTERNATIVE CLAIM, THE AUTHORIZED REPRESENTATIVE RELIED ON THE FOLLOWING TWO DECISIONS OF THE TRIBUNAL: 1. ITA NO. 2897/DEL/2007, ORDER DATED 10 TH JUNE, 2016 IN THE CASE OF G.E. CAPITAL SERVICES INDIA VS. DEPARTMENT OF INCOME TAX 2. ITA NO. 1052/KOL/2011, ORDER DATED 10 TH JUNE, 2015 IN THE CASE OF M/S. ROHIT FERRO TECH. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 1, KOLKATA . 4. THE LEARNED COMMIS SIONER OF INCOME - TAX (DEPARTMENTAL R EPRESENTATIVE) , ON THE OTHER HAND , RELIED ON THE ORDER OF THE LOWER AUTHORITIES AND SUBMITTED THAT THE EXPENSES UNDER REFERENCE WERE MAINLY TOWARDS FEE OF ARRANGERS ETC . FOR THE BONDS HAVING MATURITY OF PERIOD OF M O R E T H A N O N E YEAR AND, THEREFORE , EXPENSES WERE NOT OF RECURRING NATURE AND HAVING ENDURING BENEFIT OR ADVANTAGES OVER A PERIOD OF MATURITY LIFE OF BONDS . SHE ALSO REFERRED TO THE PAGE 3 OF THE ASSESSEE S PAPER - BOOK , WHICH IS A COPY OF THE TAX AUDIT REPORT AND SU BMITTED THAT IN CLAUSE 8(A), THE NATURE OF BUSINESS HAS BEEN MENTIONED 8 ITA NO. 2416/DEL/2014 AY: 2003 - 04 AS MANUFACTURING OF CLOTHS & YARNS AND THUS BOND ISSUE EXPENSES WERE NOT FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. SHE , ACCORDINGLY , SUBMITTED THAT BOND ISSUE EXPENSES ARE CAPITAL IN NATURE AND NOT ALLOWABLE UNDER SECTION 37(1) OF THE ACT. IN RESPECT OF THE ALTERNATIVE GROUND, SHE SUBMITTED THAT ISSUE MAY BE RESTORED TO T HE ASSESSING OFFICER FOR EXAMINING THE ALLOWABILITY OF THE EXPENSES UNDER SECTION 35D OF THE ACT. 5. WE HAVE HEA RD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE LEARNED AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS ARGUED THAT THE ISSUE IN DISPUTE HAS BEEN ACCEPTED BY THE DEPARTMENT IN SUBSEQUENT YEARS AND THE LEARNED COMMISSIONER OF INCOME - TAX ( APP EALS) IN ASSESSMENT YEAR 2007 - 08 HAS ALREADY ALLOWED THE EXPENSES. HOWEVER , FROM THE ORDER OF LEARNED COMMISSIONER OF INCOME - TAX ( APPEALS) IN ASSESSMENT YEAR 2007 - 08, A COPY OF WHICH IS AVAILABLE ON PAGE 37 TO 39 OF THE ASSESSEE S PAPER BOOK, WE FIND THAT B EFORE THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) IN A . Y . 2007 - 08, THE ASSESSEE SUBMITTED THAT EXPENSES CLAIMED IN THE RELEVANT ASSESSMENT YEAR WERE NOT BOND ISSUE EXPENSES AND RATHER THEY WERE BOND EXPENSES WHICH WERE OF RECURRING NATURE AND INCURRE D YEAR - ON - YEAR BASIS. T HE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) HAS DISTINGUISHED THE BOND EXPENSES AND BOND ISSUE EXPENSES ON THE SUBMISSION OF THE ASSESSEE. THE LEARNED COMMISSIONER OF INCOME - TAX ( APPEALS) IN ASSESSMENT YEAR 2007 - 08 HAS HELD THE EXPENSES WERE COVERED UNDER SECTION 35D(2 )(C) (IV) OF THE ACT AND ALLOWED 1/5 TH OF THE EXPENSES ACCORDINGLY. IN VIEW OF ABOVE FACTS, WE ARE NOT 9 ITA NO. 2416/DEL/2014 AY: 2003 - 04 AGREED WITH THE CONTENTION OF THE A UTHORIZED R EPRESENTATIVE THAT BOND ISSUE EXPENSES HAVE BEEN ALLO WED BY THE LEARNED COMMISSIONER OF INCOME - TAX ( APPEALS) IN A . Y . 2007 - 08 AND THUS WE HOLD THAT THE LAW OF CONSISTENCY IS NOT APPLICABLE OVER THE FACTS OF THE ASSESSEE. FURTHER, WE FIND THAT FACT OF EXPENSES BEING PRIMARILY RELATE D TO ARRANGER FEE ETC. FOR I SSUE OF BOND IS NOT DISPUTED BETWEEN PARTIES. FURTHER, THE OBJECT OR THE PURPOSE FOR WHICH THE BONDS WERE ISSUED OR FUND HAS BEEN UTILIZED IS ALSO NOT IN DISPUTE BETWEEN THE PARTIES. THE ONLY DISPUTE IS WHETHER THE OBJECT OF ACQUISITION, REHABILITATION, RE STRUCTURING OR REVIVAL OF OLD/SICK UNITS WAS A BUSINESS ACTIVITY OF THE ASSESSEE OR NOT. 6. WE HAVE PERUSED PAGE NO. 3 OF THE PAPER BOOK OF THE ASSESSEE, WHICH IS A COPY OF THE TAX AUDIT REPORT IN FORM NO. 3CD. IT MANIFESTS FROM CLAUSE 8(A) OF THE SAID REP ORT THAT THE BUSINESS ACTIVITY OF THE ASSESSEE MENTIONED IS M ANUFACTURING OF CLOTHS & YARNS AND IT IS NOWHERE MENTIONED THAT THE ACQUISITION, REHABILITATION, RESTRUCTURING & REVIVAL OF SICK UNIT WAS A BUSINESS OF THE ASSESSEE. THE LEARNED AUTHORIZED REPR ESENTATIVE HAS ALSO NOT SUBMITTED ANY EVIDENCE IN SUPPORT OF HIS CONTENTION THAT ACQUISITION, REHABILITATION, RESTRUCTURING & REVIVAL WAS BUSINESS OF THE ASSESSEE. FURTHER , WE FIND THAT BEFORE THE LOWER AUTHORITIES, THE ASSESSEE HAS RELIED ON THE DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF PREMIER A UTOMOBILES LTD . VS. COMMISSIONER OF INCOME T AX REPORTED IN 80 ITR 4 15 AND DECISION OF THE HON BLE APEX COURT IN THE CASE OF INDIA C EMENTS LTD . VS. COMMISSIONER OF INCOME 10 ITA NO. 2416/DEL/2014 AY: 2003 - 04 TAX REPORTED IN 60 ITR 52. BOTH THESE DECISIONS ARE WITH REFERENCE TO THE INCOME T AX ACT, 1922. IN BOTH THE DECISION THE EXPENDITURE IN THE NATURE OF STAMP DUTY, RE GISTRATION FEE, LAWYERS FEE ETC. INCURRED IN RESPECT OF ISSUE OF DEBENTURES BY A COMPANY TO SECURE A LOAN HAS B EEN HELD TO BE NOT IN THE NATURE OF CAPITAL EXPENDITURE AND THE CRITERIA S FOR ARRIVING THE CONCLUSION A R E THAT THE LOAN OBTAINED WERE FOR BUSINESS PURPOSE AND FOR ADVANTAGE OF AN ENDURING NATURE. BUT IN THE CASE OF THE ASSESSEE, THE EXPENSES ARE FOUND TO BE O F ENDURING NATURE AS INCURRED ONCE F O R A P E R I O D OVER THE MATURITY PERIOD OF BONDS AND ALSO NOT FOUND TOWARDS DAY - TO - DAY REQUIREMENT OF BUSINESS AND THUS THE CASES CITED SUPPORTS THE VIEW POINT OF THE REVENUE. FURTHER, T HE HON BLE GUJARAT HIGH COURT IN THE CASE OF COMMISSIONE R OF INCOME T AX VS. OFFICIAL L IQUIDATOR OF THE AHMEDABAD M ANUFACTURING AND CALICO PRINTING COMPANY L IMITED , (2000) 244 ITR 156 HELD THE AMALGAMATION EXPENSES AS CAPITAL IN NATURE WITH THE FOLLOWING OBSERVATIONS: 5. SEC. 37 OF THE ACT HAS TWIN REQUIREMENTS BEFORE THE SAME CAN BE ALLOWABLE AS DEDUCTION IN COMPUTATION OF THE TAXABLE INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION . FIRSTLY THAT THE EXPENSES MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. IN THE SECOND, IT SHOULD NOT BE IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE. THAT THE EXPENDITURE MAY HAVE BEEN WHOLLY LAID OUT OR EXPENDED FOR THE PURPOSE OF BUSINESS YET IT WOULD 11 ITA NO. 2416/DEL/2014 AY: 2003 - 04 NOT QUALIFY FOR DEDUCTION UNDER S. 37 OF THE ACT IF THE SAME IS OF CAPITAL NATURE. THEREFORE, THE DISALLOWANCE OF THE ABOVE - MENTIONED EXPENSES IN THE CASE OF THE COMPANY HAS BEEN MADE IS CORRECT. WHETHER AN EXPENDITURE IS REVENUE OR CAPITAL IS A VEXED QUESTION. ONE TEST WHICH IS OFTEN QUOTED AND FOLLOWED IN THE WORDS OF VISCOUNT CAVE L.C. ATHERTON VS. BRITISH INSULTATED & HELSBY CABLES LTD. (1926) 10 TAX CASES 155 THAT AN EXPENDITURE IS MADE NOT ONLY ONCE AND FOR ALL BUT WITH A VIEW TO BRING ING INTO EXISTENCE AN ASSET OR AN ADVANTAGE FOR THE ENDURING BENEFIT OF A TRADE. I THINK THAT THERE IS VERY GOOD REASON IN THE ABSENCE OF SPECIAL CIRCUMSTANCES LEADING TO AN APPROPRIATE CONCLUSION FOR TREATING SUCH AN EXPENDITURE AS PROPERLY ATTRIBUTABLE N OT TO REVENUE BUT TO CAPITAL . LAWRENCE, J. LAID A TEST IN SOUTHERN VS. BORAX CONSOLIDATED (1942) 10 ITR (SUPP) 1 (KB) THAT WHERE A SUM OF MONEY IS LAID OUT FOR THE ACQUISITION OR THE IMPROVEMENT OF A FIXED CAPITAL ASSET IT IS ATTRIBUTABLE TO CAPITAL BUT TH AT IF NO ALTERATION IS MADE IN THE FIXED CAPITAL ASSET BY THE PAYMENT, THEN IT IS PROPERLY ATTRIBUTABLE TO REVENUE, BEING IN SUBSTANCE A MATTER OF MAINTENANCE, THE MAINTENANCE OF THE CAPITAL STRUCTURE OR THE CAPITAL ASSETS OF THE TAXPAYER. LORD BOWEN IN CITY OF LONDON CONTRACT CORPORATION VS. STYLES (1887) 2 TAX CASES 239 HAS OBSERVED 'YOU DO NOT 12 ITA NO. 2416/DEL/2014 AY: 2003 - 04 USE IT FOR THE PURPOSE OF YOUR CONCERN, WHICH MEANS, FOR THE PURPOSE OF CARRYING ON YOUR CONCERN, BUT YOU USE IT TO ACQUIRE THE CONCERN. IN ASSAM B ENGAL CEMENT CO. LTD. VS. CIT (1955) 27 ITR 34 (SC) : TC 16R.841 SUPREME COURT SAID: 'IN CASES WHERE THE EXPENDITURE IS MADE FOR THE CAPITAL OUTLAY OR FOR EXPANSION OF A BUSINESS OR SUBSTANTIAL REPLACEMENT OF THE EQUIPMENT THERE IS NO DOUBT THAT IT IS CAPI TAL EXPENDITURE'. 6. IN THE CONTEXT DISTINCTION BETWEEN CAPITAL AND REVENUE EXPENDITURE CAN BROADLY BE STATED THUS EXPENDITURE ON ESTABLISHING, REPLACING, OR ENLARGING THE PROFIT - YIELDING SUBJECT OR INCOME - EARNING APPARATUS IS ORDINARILY OF CAPITAL NATURE. ON THE OTHER HAND EXPENSES INCURRED IN THE PROCESS OF OPERATING SUCH PROFITS - YIELDING SUBJECT OR INCOME - EARNING APPARATUS IN THE FORM OF EARNING OF PROFITS IT IS OF REVENUE NATURE. AMALGAMATION OF COMPANIES RESULTS IN SUBSTANCE ACQUISITION OF TRANSFEROR C OMPANY BY THE TRANSFEREE COMPANY RESULTING IN ALTERATION OF ITS CAPITAL STRUCTURE AS WELL AS FRAMEWORK OF BUSINESS THAT IS TO SAY AMALGAMATION IS A EVENT WHICH CONCERNS THE CORPUS AND IN CARRYING ON OF BUSINESS. THOUGH IT IS DECISION FOR BETTER AND PROFITA BLE RUNNING OF THE BUSINESS. 13 ITA NO. 2416/DEL/2014 AY: 2003 - 04 7. IN 19 TAX CASES LORD MC MILLAN HAS OPINED ON CONSTRUCTION OF CONTRACTS IN QUESTION, THAT THERE WAS AN AGREEMENT WHICH CALLS FOR CONSIDERATION WHEREIN THE CONTRACTORS WERE NOT DISMISSED OF THEIR CONTRACTS OR FAILED TO CONDUCT OF THEIR BUSINESS BUT THEY MERELY AMALGAMATED THE COMPANY TO SHARE THE PROFITS AND EARNING AS BETWEEN THE CONTRACTING PARTIES. VIEWED FROM THE AFORESAID PROPOSITION ONE CANNOT FAIL TO PERCEIVE THAT THE SCHEME OF AMALGAMATION IS A TRANSACTION WHICH AFFECTS THE BASIC FRAMEWORK OF PROFIT - MAKING APPARATUS OF THE COMPANY AND IS NOT AN EXPENDITURE FOR OPERATING THAT APPARATUS. SUCH EXPENSES THEREFORE, ARE NOT EXPENSES FOR CARRYING ON THE BUSINESS OF THE ASSESSEE BUT ARE FOR THE PURPOSE OF ACQUIRING OR BRINGING C HANGE OF PERMANENT CHARACTER IN THE STRUCTURE OF BUSINESS AND ARE OF CAPITAL NATURE. THE FACT THAT EXPENSES ARE TO BE INCURRED ACTUALLY AFTER THE SCHEME HAS BEEN PUT IN OPERATION ON EXECUTION OF THE AMALGAMATION SCHEME, WOULD NOT ALTER THE CHARACTER OF EXP ENSES WHICH PROPERLY CALLED WERE INCURRED IN RELATION TO AMALGAMATION. THE ISSUANCE OF NEW SHARE CERTIFICATE OR BONDS TO THE MEMBERS OF THE TRANSFEROR COMPANY ARE NECESSARY PART OF THE AMALGAMATION OF THE COMPANIES, AND WHETHER SUCH EXPENSES IN CONNECTION THEREWITH ARE INCURRED PRIOR TO THE DATE WITH EFFECT FROM WHICH THE AMALGAMATION IS EFFECTIVE OR HAS IN FACT BEEN 14 ITA NO. 2416/DEL/2014 AY: 2003 - 04 INCURRED THEREAFTER FOR ANY REASONS WOULD NOT ALTER THE CHARACTER OF EXPENDITURE FROM CAPITAL TO REVENUE. IN THIS CONNECTION WE MAY REFER TO THE DECISION IN THE CASE OF RAZA BULAND SUGAR CO. LTD. VS. CIT (1979) 8 CTR (ALL) 181 : (1980) 122 ITR 817 (ALL) : TC 16R.1054. THE QUESTION RELATED TO ALLOWING OF THE ASSESSEE - COMPANY FOR DEDUCTION OF THE AMOUNT PAID TO THE LAWYER IN CONNECT ION WITH THE AMALGAMATION WHICH WAS CLAIMED AS ITS BUSINESS EXPENSES . THE ASSESSEE - COMPANY WAS FORMED BY THE AMALGAMATION OF TWO COMPANIES NAMELY, THE RAZA SUGAR COMPANY AND THE BULAND SUGAR COMPANY. IT WAS HELD THAT THE LEGAL EXPENSES OF RS. 11,069 WERE I NCURRED BEFORE THE ASSESSEE - COMPANY CAME INTO BEING. THEY WERE INTEGRALLY CONNECTED WITH THE CREATION OF THE ASSESSEE - COMPANY AND WERE CLEARLY CAPITAL IN NATURE. YET IN ANOTHER CASE IN RELATION TO THE AMALGAMATION OF THE SAME COMPANY ALLAHABAD HIGH COURT I N THE CASE OF RAZA BULAND SUGAR CO. LTD. VS. CIT (1980) 123 ITR 24 (ALL) : TC 16R.1105 TOOK THE VIEW THAT THE EXPENSES INCURRED IN CONNECTION WITH THE AMALGAMATION HAD BEEN INCURRED PRIOR TO ITS FORMATION AND WERE INTEGRALLY CONNECTED WITH THE CREATION OF THE ASSESSEE - COMPANY. THE EXPENSES WERE OF CAPITAL NATURE AND NOT ALLOWABLE, BUT RELATED TO AMALGAMATION EXPENSES GENERALLY. THE FACT THAT THE COURT HAS OBSERVED THAT EXPENSES WERE PRIOR TO ITS FORMATION WAS ONLY A STATEMENT OF FACT. BUT THE 15 ITA NO. 2416/DEL/2014 AY: 2003 - 04 DECISION IS NO T FOUNDED ON THE BASIS WHETHER EXPENSES WERE INCURRED PRIOR TO OR AFTER AMALGAMATION BECAME EFFECTIVE. IT WOULD NOT MAKE ANY DIFFERENCE FOR THE PRESENT PURPOSE INASMUCH AS THE SUBSTANCE OF THE ISSUE IS WHETHER THE EXPENSES ARE IN FACT PART OF THE AMALGAMAT ION PROCESS. THE EXPENSES NECESSARY FOR BRINGING INTO EXISTENCE AMALGAMATION BEING ONE RELATING TO THE STRUCTURE OF BUSINESS ARE CAPITAL IN NATURE. THE FACT THAT THE LIABILITY HAS BEEN DISCHARGED ACTUALLY AFTER AMALGAMATION WOULD NOT MAKE ANY DIFFERENCE. 8 . THIS COURT IN AN UNREPORTED DECISION IN NEW COMMERCIAL CO. LTD. VS. ADDL. CIT (IT REF. NO. 40 OF 1972) HAS CONSIDERED THE QUESTION WHETHER A SUM OF RS. 10,000 PAID BY THE ASSESSEE - COMPANY TO THE CHARTERED ACCOUNTANT IN RELATION TO THE SCHEME OF AMALGAMAT ION WHICH WAS ULTIMATELY APPROVED BY THIS COURT WAS AN ADMISSIBLE EXPENSES UNDER S. 37 OF THE IT ACT OR NOT. THE COURT TOOK NOTICE OF THE FACT THAT THE MAIN OBJECT OF THIS ARRANGEMENT IS TO EFFECT INTERNAL ECONOMIES WITH A VIEW TO BRING DOWN THE COST OF PR ODUCTION AND TO UTILISE THE CAPITAL EQUIPMENTS TO THE MAXIMUM ADVANTAGE OF BOTH THE UNITS SO AS TO OBTAIN THE OPTIMUM PRODUCTION AND TO STOP COMPETITION BETWEEN THE TWO UNITS. THE COURT HELD THAT OBVIOUSLY, THE SERVICES OF THE CHARTERED ACCOUNTANTS WERE UT ILISED IN ORDER TO GET THE ADVICE REGARDING THIS SCHEME OF AMALGAMATION BY WHICH CERTAIN PERMANENT BENEFITS OF 16 ITA NO. 2416/DEL/2014 AY: 2003 - 04 ENDURING NATURE WERE OBTAINED BY THE COMPANY. THE COMPANY S VERY STRUCTURE WAS CHANGED AND THE COMPANY BY ENTERING INTO THIS SCHEME OF AMALGAMATI ON GOT MORE SHAREHOLDERS BY THE ISSUE OF SHARES AS EXPLAINED IN THE SCHEME OF AMALGAMATION WHICH FORMS PART OF THE AMALGAMATION. ISSUE OF SHARE CERTIFICATE AND BONDS BY THE TRANSFEREE OR NEW COMPANY COMING INTO EXISTENCE AS A RESULT OF THE SCHEME OF AMALGA MATION IS IN ESSENCE A PART AND PARCEL OF EXECUTION OF AMALGAMATION SCHEME AND CANNOT BE DIVORCED FROM IT. IN VIEW OF THE AFORESAID DECISIONS, WE COME TO THE CONCLUSION THAT THE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT THE ASSESSEE WAS NOT ENTITLED TO DEDUCT ION OF RS. 53,423 SPENT IN CONNECTION WITH THE ISSUANCE OF SHARE CERTIFICATES AND BONDS AS A PART OF AMALGAMATION SCHEME AND ANSWER THE QUESTION NO. 3 IN THE AFFIRMATIVE THAT IS TO SAY IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE . 7. IN THE LIGHT O F THE ABOVE DECISION OF THE HON BLE GUJARAT HIGH COURT, WHEN WE ADVERT TO THE FACTS OF THE INSTANT CASE , WE FIND THAT THE BONDS HAVE BEEN RAISED FOR RESTRUCTURING OR REHABILITATION OF THE SICK MILLS THROUGH VOLUNTARILY RET IREMENT SCHEME OF EMPLOYEES ETC. , THE ADVANTAGE IS DEFINITELY OF ENDURING NATURE TO THE ASSESSEE. THE EXPENDITURE IN THE NA TURE OF INTEREST ON THE BOND IS PAYABLE EVERY YEAR , WHICH IS AN EXPENSE OF RECURRING NATURE WHEREAS THE ARRANGER FEE PAID BY THE ASSESSEE IS ONE - TIME FEE IN CONNECTION WITH RAISING OF BONDS 17 ITA NO. 2416/DEL/2014 AY: 2003 - 04 AND THUS THE EXPENDITURE IS COVERED OVER THE MATURITY LIFE OF THE BOND. THE EXPENDITURES ON BOND ISSUE EXPENSES HAS BEEN INCURRED IN CONNECTION WITH THE RESTRUCTURING OF THE VARIOUS UNITS OF THE COMPANY, WHICH ARE PROFIT - MAKING CENTE RS . THE EXPENSES ARE HAVING DEFINITE ROLE IN REORGANIZING THE COMPANY AND THUS PLAYED A ROLE IN ENH ANCING THE VALUE OF THE COMPANY . IN VIEW OF THE DISCUSSION , WE HOLD THAT THE BOND ISSUE EXPENSES IN THE CASE OF THE ASSESSEE ARE NOT ALLOWABLE U/S 37(1) OF THE ACT AS REVENUE EXPENDITURE . THUS , THE GROUND NO. 2 OF THE APPEAL IS DISMISSED. 8. IN GROUND NO. 3 , THE ASSESSEE HAS RAISED A N ALTERNATIVE PLEA OF ALLOWING THE BOND ISSUE EXPENSES UNDER SECTION 35D(1)(II) OF THE ACT. WE FIND THAT UNDER SECTION 3 5D(1)(I I) OF THE ACT EXPENDITURE INCURRED BY THE ASSESSEE AFTER COMMENCEMENT OF BUSINESS IN CONNECTION WITH EXPANSION OF HIS UNDERTAKING OR IN CONNECTION WITH SETTING UP OF A NEW UNIT ARE ALLOWED SUBJECT TO THE FULFILLMENT OF THE CONDITIONS LAID DOWN IN THE SAID SECTION. THE EXPENDITURE SPECIFIED UNDER THE SECTION INCLUDE LEGAL CHARGES FOR DRAFTING OF AGREEMENT, EXPENSES INCURRED BY COMPANY IN CONNECTION WITH ISSUE FOR PUBLIC SUBSCRIPTION, OR SHARES OR DEBENTURES OF THE COMPANY ETC. AS THIS ISSUE HAS NOT BEEN EXAM INED BY THE LOWER AUTHORITIES, WE FEEL IT APPROPRIATE TO RESTORE THE ISSUE TO THE ASSESSING OFFICER FOR EXAMINING THE ALLOW ABILITY OF THE BOND ISSUE EXPENSES UNDER SECTION 35D OF THE ACT AND DECIDE THE ISSUE IN ACCORDANCE TO THE LAW. THE ASSESSEE IS DIRECT ED TO PRODUCE ALL THE DETAIL S OF 18 ITA NO. 2416/DEL/2014 AY: 2003 - 04 THE EXPENSES ALONGWITH OTHER EVIDENCES. ACCORDINGLY , THE GROUND NO. 3 OF THE APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 9. THE GROUNDS NO. 1 AND 4 OF THE APPEAL ARE GENERAL IN NATURE AND , THEREFORE , NOT REQUIRED TO BE AD JUDICATED UPON BY US. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED PARTLY FOR STATISTICAL PURPOSE. THE DECISION IS PRONOUN CED IN THE OPEN COURT ON 2 8 T H SEPT., 2016 . S D / - S D / - ( H.S. SIDHU ) ( O.P. KANT ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 2 8 T H SEPTEMBER , 2016 . LAPTOP / - COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI