HINDUJA LEYLAND FINANCE LIMITED,TAMIL NADU vs. ACIT, CHENNAI

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

Order pronounced on the 14th day of October, 2022, in Chennai.

Sd/- Sd/- (वी. दुगा� राव) (जी. मंजूनाथा) (G. MANJUNATHA) (V. DURGA RAO) लेखा सद�य/ACCOUNTANT MEMBER �याियक सद�य/JUDICIAL MEMBER

चे�ई/Chennai, �दनांक/Dated: 14th 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