M/s. Vijaya Bank, Bangalore V. ACIT, Bangalore

ITA 340/BANG/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5537 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 25-04-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 13-01-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G V GOPALA RAO CIT IDR
• Assessee Lawyers: SARANGAN SR
• Keywords: Capital asset; Capital expenditure
• Section: 43B; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SMT. P. MADHAVI DEVI , JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO. 340/BANG/2009 ASSESSMENT YEAR : 2004-05 M/S. VIJAYA BANK, HEAD OFFICE, CENTRAL ACCOUNTS DEPARTMENT, 41/2, M.G. ROAD, BANGALORE 560 001. : APPELLANT VS. THE ADDITIONAL COMMISSIONER OF INCOME TAX, LTU, BANGALORE. : RESPONDENT APPELLANT BY : SHRI SARANGAN, SR. COUNSEL RESPONDENT BY : SHRI G.V. GOPALA RAO, CIT-I(DR) O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER THIS APPEAL OF THE ASSESSEE, A NATIONALIZED BANK , IS DIRECTED AGAINST THE ORDER OF THE CIT (A)-LTU, BANGALORE DATED 29.1. 2009 FOR THE ASSESSMENT YEAR 2004-05. 2. THE FIRST GROUND OF APPEAL IS GENERAL IN NATURE AND REQUIRES NO ADJUDICATION. GROUNDS NOS. 2, 3 & 4 ARE REPRODUCED AS BELOW: 2. THE LEARNED CIT (A) ERRED IN CONFIRMING THE DIS ALLOWANCE OF PUBLIC ISSUE EXPENSES OF RS.11,51,58,939/-. 3. THE LD. CIT (A) ERRED IN TREATIN G RS.2,90,42,000/- AS SHARE ISSUE RELATED EXPENSES AS AGAINST EXPE NSES TOWARDS PRODUCT ITA NO. 340/BANG/09 PAGE 2 OF 9 DEVELOPMENT AND BRAND BUILDING. 4. WITHOUT PREJUDICE TO THE ABOVE, THE LD. CIT (A) ERRED IN NOT ACCEPTING THE CONTENTION OF THE AP PELLANT TO SET OFF THE EXPENDITURE INCURRED TOWARDS PUBLIC ISS UE AGAINST THE INCOME EARNED FROM SHARE APPLICATION MONEY AND TO DISALLOW ONLY THE NET EXPENSES, IF ANY. 3. THE ASSESSEE, A NATIONALIZED BANK, IN WHICH, MAJ ORITY OF THE SHARES ARE HELD BY THE CENTRAL GOVERNMENT. RETURN OF INCO ME WAS FILED ON 29.10.2004 DECLARING A TOTAL INCOME OF RS.388,06,22 ,650 INCLUDING INCOME FROM HOUSE PROPERTY AT RS.11,054. SUBSEQUENTLY, A R EVISED RETURN WAS FILED ON 28.3.2006, DECLARING THE SAME INCOME, HOWEVER, W ITH A CLAIM OF ADDITIONAL REFUND ON ACCOUNT OF TDS. IN THE ASSES SMENT ORDER U/S. 143(3) DATED 30.8.2006, THE AO, AFTER SEVERAL ADDITIONS AN D DISALLOWANCES, DETERMINED THE INCOME UNDER REGULAR PROVISIONS AT R S.510,07,34,098/- AND TAX PAYABLE AT RS.183,01,78,962/-. 4. ON AN APPEAL, THE CIT(A)-LTU, WHILE ALLOWING S OME OF THE ASSESSEES CLAIMS, CONFIRMED THE DISALLOWANCE ON AC COUNT OF EXPENDITURE INCURRED TOWARDS ISSUE OF EQUITY SHARES TO THE PUBL IC. 5. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 6. THE BRIEF FACTS ARE THAT THE ASSESSEE CLAIMED VA RIOUS EXPENDITURE AGGREGATING TO RS.11,51,58,939/- AS EXPENSES INCURR ED TOWARDS ISSUE OF EQUITY SHARES TO THE PUBLIC. THE LD. AO DISALLOWED THIS EXPENDITURE HOLDING IT TO BE IN THE CAPITAL FIELD AND HELD AS FOLLOWS: 9.1 THE ASSESSEE HAS GIVEN DETAILS OF EXPENDITURE AMOUNTING TO RS.115158938/- WHICH INCLUDES EXPENDITURE ON ACC OUNT OF OTHER ITEMS. THE EXPENDITURE INCURRED ON PUBLIC IS SUE IS CONSIDERED AS CAPITAL EXPENDITURE AND REQUIRES TO B E DISALLOWED. NUMBER OF HIGH COURTS HAVE HELD THAT EXPENDITURE IN CURRED ON ITA NO. 340/BANG/09 PAGE 3 OF 9 PUBLIC ISSUE AS CAPITAL EXPENDITURE, INCLUDING KARN ATAKA HIGH COURT IN THE CASE OF MICO (173 ITR 374). HONORABLE SUPREME COURT IN 225 ITR 98 IN THE CASE OF BROOKE BOND INDI A LTD. VS CIT HAS HELD THAT EXPENDITURE IN CONNECTION WITH IS SUE OF SHARES AS EXPENDITURE DIRECTLY RELATED TO EXPANSION OF CAPITAL BASE. HENCE THE AMOUNT OF RS.115158938/- IS TREATE D AS CAPITAL EXPENDITURE AND ADDED TO THE RETURNED INCOME. 7. BEFORE THE LD. CIT(A), IT WAS RIGOROUSLY CONTEST ED BY THE ASSESSEE THAT OUT OF THE AMOUNT OF RS.11,51,58,959/- AN AMOU NT OF RS.2,90,42,000/- WAS INCURRED EXCLUSIVELY FOR PRODUCT DEVELOPMENT AN D BRAND BUILDING INCLUDING ADVERTISEMENT RELATING TO THE BUSINESS OF THE APPELLANT AND AS SUCH, THIS AMOUNT CANNOT BE TREATED AS DISALLOWABLE CLUBBING IT WITH PUBLIC ISSUE EXPENSES. HOWEVER, THE LD. CIT(A) HELD THAT T HE SUM OF RS.2,90,42,000/- IS AN EXPENSE RELATED TO PUBLIC IS SUE SINCE NO DOCUMENTARY EVIDENCE HAS BEEN FILED BEFORE HIM. IT WAS ALSO CLAIMED BY THE APPELLANT BEFORE THE LD. CIT(A) THAT THE APPELL ANT BANK COLLECTED AN AMOUNT OF RS.4,109.65 CRORES TOWARDS THE PUBLIC ISS UE AND WAS KEPT IN THE NATIONALIZED BANK AS PER THE SEBI GUIDELINES PENDIN G ALLOTMENT FOR WHICH IT EARNED AN INCOME OF RS.9,50,51,000. SINCE THIS INC OME CANNOT BE CONSIDERED AS REVENUE INCOME OF THE APPELLANT, IT H AS TO BE REDUCED FROM THE PUBLIC ISSUE EXPENSES. ON THE TWO ISSUES WITH RESPECT TO CAPITAL EXPENDITURE AND NETTING OF INTEREST RECEIVED FROM BANK WITH PUBLIC ISSUE EXPENSES, THE LD. CIT(A) HELD AS UNDER: '8.6. THE HONBLE SUPREME COURT AND HIGH COURTS HEL D THAT EXPENDITURE INCURRED BY A COMPANY IN CONNECTION WIT H ISSUE OF SHARES WITH A VIEW TO INCREASING ITS SHARE CAPITAL IS DIRECTLY RELATED TO THE EXPANSION OF CAPITAL BASE OF THE COM PANY AND IS CAPITAL EXPENDITURE, EVEN THOUGH IT MAY INCIDENTALL Y HELP IN THE BUSINESS OF COMPANY AND IN THE PROFIT MAKING. FOLL OWING THE DECISIONS OF THE HONBLE APEX COURT AND THE HIGH CO URTS, IT IS ITA NO. 340/BANG/09 PAGE 4 OF 9 HELD THAT THE EXPENDITURE INCURRED FOR RS.11,51,58, 939/- IS CAPITAL EXPENDITURE. IN VIEW OF THIS FACT, THE DISA LLOWANCE MADE BY THE AO IS UPHELD. 8.7 THE APPELLANT FURTHER CLAIMED THAT INCOME EARNE D HAS TO BE SET OFF AGAINST THE EXPENDITURE INCURRED TOWARDS PUBLIC ISSUE EXPENSES AND THE NET EXPENSES, IF ANY, ARE TO BE AL LOWED AS DEDUCTION U/S. 35D. RELIANCE WAS PLACED ON THE JUD GMENT OF THE HONBLE HIGH COURT OF RAJASTHAN IN THE CASE OF CIT VS NEHA PROTEINS LTD. (2008) 171 TAXMAN 455 (RAJ.). AS DIS CUSSED HEREINABOVE, THE EXPENDITURE INCURRED IN CONNECTION WITH ISSUE OF SHARES IS CONSIDERED CAPITAL EXPENDITURE AS HELD BY THE SUPREME COURT AND SEVERAL HIGH COURTS AND THE SAME CANNOT BE ALLOWED U/S 35D OF THE I.T. ACT AND AS SUCH THE DECISION OF THE HONBLE HIGH COURT IS NOT APPLICABLE. DEDUCTIO N U/S 35 IS NOT AVAILABLE IN RESPECT OF EXPENDITURE INCURRED AF TER COMMENCEMENT OF BUSINESS IF SUCH EXPENDITURE IS INC URRED IN CONNECTION WITH EXTENSION OF (OR SETTING UP) OF A N ON-INDUSTRIAL UNDERTAKING. FOR INSTANCE, IF AN EXISTING FINANCE COMPANY RAISES CAPITAL THROUGH A PUBLIC ISSUE FOR EXPANSION OF ITS FINANCING BUSINESS, DEDUCTION U/S 35 OF THE ACT IS NOT AVAILABLE AS PER THE RATIO OF JUDGMENT IN THE CASE OF MEFCOM CAPITAL MARKETS LTD. VS CIT (2005) 145 TAXMAN 43 (DELHI)(MA G.). 8. THE LD. AR RELIED ON THE CASE LAW OF CIT V. NEHA PROTEINS LTD. REPORTED IN 171 TAXMAN 455 (RAJ) / 306 ITR 102 AND THE CBDT CIRCULAR NO.1 OF 2009 DATED 27.3.2009 REPORTED IN 310 ITR 42 (ST.) AT PAGE 55 PARA 11.1 AND PLEADED THAT IN THE EVENT THE BENCH HOLDS THAT EXPENDITURE RELATED TO PUBLIC ISSUE IS IN THE CAPITAL FIELD, THEN NETTI NG OF THE INCOME EARNED FROM BANK DEPOSIT MAY BE PERMITTED FOR AMORTIZATION OF E XPENSES U/S 35D OF THE I.T. ACT. THE LD. AR STATED THAT THOUGH THE CIRCUL AR CITED SUPRA CLEARLY STATES THAT THE APPLICABILITY OF THE AMENDED PROVIS ION IS WITH EFFECT FROM 1.4.2009, IT SHOULD BE GIVEN EFFECT RETROSPECTIVELY AS HELD IN CIT V. ALOM EXTRUSIONS LTD. (2009) 319 ITR 306 (SC) . THE LD. DR VEHEMENTLY OPPOSED THE SUBMISSION OF THE LD. AR AND PLACED RELIANCE ON THE ORDER OF THE LD. CIT (A). ITA NO. 340/BANG/09 PAGE 5 OF 9 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD AND THE CASE LAWS ON WHICH STRONG RELIANCE W AS PLACED. WITH RESPECT TO THE CLAIM OF THE ASSESSEE THAT RS.2,90,4 2,000 IS AN EXPENSE RELATED TO PRODUCT DEVELOPMENT, ADVERTISING AND BRA ND BUILDING EXPENDITURE, EVEN BEFORE US NO COGENT EVIDENCE WAS BROUGHT FORTH BY THE APPELLANT. THEREFORE ON THIS ISSUE WITH RESPECT TO GROUND NO.2 , WE CONFIRM THE ORDER OF THE LD. CIT (A) . AT THE OUTSET, WE HAVE TAKEN NOTE OF THE DECISION RENDERED BY THE HONBLE SUPREME COU RT WITH RESPECT TO THE ISSUE OF PUBLIC ISSUE IN BROOKE BOND INDIA LTD. 225 ITR 798 WHEREIN IT IS HELD THAT EXPENDITURE INCURRED BY A COMPANY IN CONNECTION WIT H ISSUE OF SHARES WITH A VIEW TO INCREASE ITS SHARE CAPITAL, I S DIRECTLY RELATED TO THE EXPANSION OF CAPITAL BASE OF THE COMPANY, AND IS CA PITAL EXPENDITURE, EVEN THOUGH IT MAY INCIDENTALLY HELP IN THE BUSINESS OF THE COMPANY AND IN THE PROFIT-MAKING. . RESPECTFULLY FOLLOWING THE DECISION OF HONB LE SUPREME COURT, WE HOLD THAT THE EXPENDITURE INCURRED TOWARD S PUBLIC ISSUE EXPENSES IS CAPITAL IN NATURE. 10. ON THE ISSUE OF NETTING OF INTEREST INCOME ARIS ING FROM BANK DEPOSITS WITH PUBLIC ISSUE EXPENSE, THE LD. AR HAD RELIED ON THE CASE OF CIT V. NEHA PROTEINS LTD. REPORTED IN 171 TAXMAN 455 (RAJ) / 306 ITR 102 , WHEREIN IT WAS HELD THAT: ON A COMBINED READING OF SECTIONS 14 AND 56, IT IS CLEAR THAT THE INCOME IN QUESTION, IN ORDER TO FALL WITHIN THE EXPRESSION INCOME FROM OTHER SOURCES, HAS TO BE INCOME BY WA Y OF INTEREST ON SECURITY. THE TERM SECURITY HAS BE EN DEFINED IN EXPLANATION 2 APPENDED TO SECTION 2(42A), WHICH DEA LS WITH SHORT-TERM CAPITAL ASSET, AND PROVIDES THAT THE E XPRESSION SECURITY SHALL HAVE THE MEANING ASSIGNED TO IT IN CLAUSE (H) OF SECTION 2 OF THE SECURITIES CONTRACTS (REGULATIONS) ACT, 1956. ITA NO. 340/BANG/09 PAGE 6 OF 9 IN VIEW OF SECTION 2(H) OF THE SECURITIES CONTRACTS (REGULATIONS) ACT, 1956 THE AMOUNT OF APPLICATION MONEY LYING IN THE SEPARATE ACCOUNT WITH THE BANK, AS PROVIDED IN SECTION 73(3) AND (3A) OF THE COMPANIES ACT, 1956 DOES NOT FALL WITHIN THE EX PRESSION SECURITIES, EVEN THOUGH THE DEFINITION IS AN INCL USIVE ONE. THAT BEING THE POSITION, THE AMOUNT OF INTEREST ACC RUED ON THE SHARE APPLICATION MONEY LYING IN DEPOSIT WITH THE B ANK UNDER THE MANDATE OF SECTION 73(3) AND (3A) CANNOT BE SAI D TO FALLING WITHIN THE DEFINITION OF INCOME FROM OTHER SOURCES AS PROVIDED IN SECTION 14(F), READ WITH SECTION 56(2)( ID). IN THE INSTANT CASE, ON THE SAME ANALOGY, THE AMOUN T OF INTEREST ACCRUING ON THE SHARE APPLICATION MONEY COULD NOT B E USED BY THE ASSESSEE FOR ANY PURPOSE WHATSOEVER, OTHER THAN THOSE MENTIONED IN SECTION 73(3) AND (3A) AND, OBVIOUSLY, ON THE ALLOTMENT OF THE SHARES, THE ASSESSEE WAS ASKED TO TAKE STOCK OF THE THINGS ABOUT THE EXPENDITURE INCURRED BY IT, BE ING THE PUBLIC ISSUE EXPENSES AND THE INTEREST ACCRUED OBVIOUSLY D ID REDUCE THAT EXPENDITURE, AND IT WAS REQUIRED TO BE ADJUSTE D AGAINST THE EXPENDITURE, I.E., THE ASSESSEE WAS ENTITLED TO CLA IM AMORTIZATION OF THE PUBLIC ISSUE EXPENSES ONLY ON THE FIGURE SO REDUCED AFTER SETTING OFF OR ADJUSTING THE INTEREST ACCRUED ON TH E SHARE APPLICATION MONEY LYING WITH THE BANK, AS MANDATED BY SECTION 73 OF THE COMPANIES ACT, 1956. HENCE, THE TRIBUNAL WAS RIGHT, IN LAW, IN HOLDING T HAT INTEREST ACCRUED ON THE SHARE APPLICATION MONEY LYING WITH T HE BANK UNDER THE MANDATE OF SECTION 73 OF THE COMPANIES AC T, 1956 WAS NOT TAXABLE AS INCOME FROM OTHER SOURCES AND WAS REQUIRED TO BE SET OFF OR ADJUSTED AGAINST THE PUBL IC ISSUE EXPENSES, SO AS TO REDUCE THE AMOUNT OF PUBLIC ISSU E EXPENSES FOR THE PURPOSE OF ENABLING THE ASSESSEE TO CLAIM A MORTIZATION UNDER AND IN ACCORDANCE WITH THE PROVISIONS OF SECT ION 35D. 11. WE HAVE ALSO PERUSED THE CBDT CIRCULAR RELIED U PON BY THE LD. AR CITED SUPRA AND THE SAME IS REPRODUCED HEREINBELOW FOR READY R EFERENCE: 11.1 SECTION 35D PROVIDES FOR DEDUCTION OF CER TAIN SPECIFIED PRELIMINARY EXPENSES. AFTER THE COMMENCEMENT OF BU SINESS, THE DEDUCTION WAS BEING ALLOWED TO ONLY AN INDUSTRI AL UNDERTAKING OR UNIT. IN ORDER TO PROVIDE A LEVEL P LAYING FIELD TO THE SERVICES SECTOR, THE SECTION HAS BEEN AMENDED T O PROVIDE THE BENEFIT OF AMORTIZATION TO ALL ASSESSEES AFTER COMM ENCEMENT OF ITA NO. 340/BANG/09 PAGE 7 OF 9 HIS BUSINESS, IN CONNECTION WITH THE EXTENSION OF H IS UNDERTAKING OR IN CONNECTION WITH HIS SETTING UP A NEW UNIT. 11.2 APPLICABILITY THIS AMENDMENT HAS BEEN MADE APPLIC ABLE WITH EFFECT FROM 1 ST APRIL, 2009 AND SHALL ACCORDINGLY APPLY FOR THE ASSESSMENT YEAR 2009-10 AND SUBSEQUENT ASSESSMENT Y EARS. 12. WE HAVE ALSO PERUSED THE CASE LAW OF CIT V. ALO M EXTRUSIONS LTD. CITED BY THE LD. AR WHEREIN IT WAS HELD THAT THE OMISSION OF THE SECOND PROVISO TO SECTION 43B OF THE INCOME-TAX ACT, 1961, BY THE FINANCE ACT, 2003, OPERATED, RETROSPECTIVELY, WITH EFFECT FROM A PRIL 1, 1988 AND NOT PROSPECTIVELY FROM APRIL 1, 2004. EARLIER UNDER T HE SECOND PROVISO TO SECTION 43B AS AMENDED BY THE FINANCE ACT, 1989, AS SESSEES WERE ENTITLED TO DEDUCTION ONLY IF THE CONTRIBUTION STOOD CREDITED O N OR BEFORE THE DUE DATE GIVEN IN THE PROVIDENT FUNDS ACT. THIS CREATED FUR THER DIFFICULTIES AND ON A REPRESENTATION MADE TO THE FINANCE MINISTRY ONE MOR E AMENDMENT WAS MADE APPLICABLE WITH EFFECT FROM APRIL 1, 2004, THE AMENDMENT WAS CURATIVE IN NATURE AND APPLIED RETROSPECTIVELY WITH EFFECT F ROM APRIL 1, 1988. WHEN A PROVISO IN A SECTION IS INSERTED TO REMEDY UNINTE NDED CONSEQUENCES AND TO MAKE THE SECTION WORKABLE, THE PROVISO WHICH SUPPLI ES AN OBVIOUS OMISSION THEREIN IS REQUIRED TO BE READ RETROSPECTIVELY IN O PERATION, PARTICULARLY TO GIVE EFFECT TO THE SECTION AS A WHOLE. 12.1. HOWEVER, WE ARE OF THE CONSIDERE D VIEW THAT THE ABOVE CASE REFERRED BY THE LD. AR IS NOT APPLICABLE TO THE FAC TS AND CIRCUMSTANCES OF THE CASE. IN THE CASE BEFORE US THE MATTER RELATE S TO APPLICABILITY OF SECTION 35D OF THE ACT FOR THE A.Y. 2004-05. FINANCE ACT, 2008 OMITTED THE WORD ITA NO. 340/BANG/09 PAGE 8 OF 9 INDUSTRIAL W.E.F. 1.4.2009 IN SECTION 35D(1)(II) OF THE ACT, THUS EXPLICITLY MAKING IT CLEAR THAT THE SAID AMENDMENT WILL BE APP LICABLE FROM 01/04/2009. CONSIDERING THE DECISION OF THE HONBLE RAJASTHAN H IGH COURT, WE HAVE NO HESITATION IN HOLDING THAT THE INTEREST INCOME ARI SING FROM THE BANK DEPOSITS MADE FROM THE AMOUNT COLLECTED TOWARDS SHARE APPLIC ATION MONEY FROM PUBLIC U/S. 73 OF THE COMPANIES ACT, 1956 IS NOT TA XABLE AS INCOME FROM OTHER SOURCES AND IS REQUIRED TO BE REDUCED FROM TH E PUBLIC ISSUE EXPENSES FOR THE PURPOSE OF ENABLING THE ASSESSEE TO CLAIM A MORTIZATION U/S. 35D OF THE I.T. ACT, 1961. HOWEVER, WE MAKE IT CLEAR THA T FROM THE FACTS AND CIRCUMSTANCES OF THE CASE BEFORE US, THE AMENDMENT OF S. 35D BY WAY OF DELETION OF THE WORD INDUSTRIAL IN THE FINANCE A CT, 2008 W.E.F. 1.4.2009, THE ASSESSEE IS NOT ENTITLED TO CLAIM DEDUCTION U/S. 35D OF THE ACT. THUS GROUND NOS.2 & 3 ARE ALLOWED IN FAVOUR OF THE REVENUE AND GROUND NO.4 IS ALLOWED IN FAVOUR OF THE ASSESSEE. IT IS OR DERED ACCORDINGLY. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS DAY, THE 17 TH OF JUNE, 2011. SD/- SD/- ( SMT. P. MADHAVI DEVI ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 17 TH JUNE, 2011. DS/- ITA NO. 340/BANG/09 PAGE 9 OF 9 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.