M/S SHRISTI HOUSING DEVELOPMENT LTD.(FORMERLY KNOWN AS SHRISTI HOUSING DEVELOPMENT PVT. LTD.) (NOW AMALGAMATED WITH SHRISTI INFRASTRUCTURE DEVELOPMENT CORPORATION LTD.),KOLKATA vs. D.C.I.T.,CIRCLE-7, KOLKATA

First grounds of appeal of assessee is against the action of the ld. CIT(A) in confirming the addition of Rs. 25,90,000/-.

Aggrieved, the assessee is before us. The main contention of the assessee is that the assessee company had issued bonus shares to the existing shareholders and for that increased the authorized share capital from Rs. (INR) 30,00,000 to Rs. (INR) 51,00,00,000. For this activity, the assessee claimed to have incurred an amount of Rs. 25,90,000/- towards ROC filing fees, which the assessee claimed as revenue expenses. However, the AO did not accept the assessee’s claim and disallowed the same. On appeal the ld. CIT(A) dismissed this ground of assessee’s appeal.

Shri S.M. Surana, Advocate, Ld. AR of the assessee drew our attention to page-10 of the P.B, wherein as per balance sheet as on 31-03-2011 in Scehdule-1, it has been mentioned in (b) 499,50,000 Equity Shares of Rs. 10/- each allotted as fully paid up Bonus Shares by capitalization of Business Development Reserve of Rs. 495,764,855/- and credit balance of Profit & Loss Account as on 31-03-2010 amounting to Rs. 37,35,145/-. Thus, according to Ld. AR as per said Schedule, share capital was increased from Rs. 30,000,000/- to Rs. 51,000,000/-. The Ld. AR submitted before us that the issue of bonus shares by capitalization of reserves is merely a reallocation of company’s funds and thereby there is no inflow of fresh funds or increase in the capital employed. According to him, it remains the same. And further according to Ld.AR, the issue of bonus shares will not result in any change in the capital structure of the company. He submitted that the issue of bonus shares does not result in the expansion of capital base of the assessee and, therefore, the increase in authorized share capital was not for any capital expansion or capital investments. Therefore, he pleaded that the said expenses incurred in connection with issue of bonus shares should be treated as Revenue expenditure.

Learned D.R’s objection is that nowhere before the AO the assessee has contended that expenditure incurred was for issuance of bonus shares. In his rejoinder, the Ld. AR

Having heard both the parties, we note that the assessee claimed to have incurred an expenditure of Rs. 25,90,000/- as filing fees of R.O.C in respect of issue of Bonus shares to its existing share-holders. According to assessee, for issuance of bonus shares to its existing shareholders there is no inflow of fresh funds or increase in the capital employed and by the issue of bonus shares does not result in the expansion of capital base of the assessee and, therefore, the increase in authorized share capital was not for any expansion of capital investments. Therefore, the assessee claimed that the expenses incurred in connection with issue of bonus shares should be treated as Revenue expenditure as held by the Hon’ble Supreme Court in the case of CIT vs. General Insurance Corporation reported in (2006) 286 ITR 232 (SC) as under: “18. Issuance of bonus shares does not result in any inflow of fresh funds or increase in the capital employed, the capital employed remains the same. Issuance of bonus shares by capitalization of reserves is merely a reallocation of company’s fund.” 19. If that be so, then it cannot be held that the Company has acquired a ben or advantage of enduring nature. The total funds available with the company will remain the same and the issue of bonus shares will not result in any change in the capital structure of the company. 20. The case Wood Craft Products Ltd. 's case (supra) of the Calcutta High Court is similar of the case to the respondent. In that case as well there was increase of authorized share capital by the issue of fresh shares and a separate issue of bonus shares. The Calcutta High Court drew a distinction between the raising of fresh capital and the issue of bonus shares and held that expenditure on the former was capital in nature as it changed the capital base. On tile other hand, in the case of bonus shares, was held to be revenue expenditure following the decision of the Supreme Court in Dalmia Investment Co. Ltd.'s case (supra) on the ground that there was no change in the capital structure at all. 21. In our considered opinion, the view taken by the Bombay and Calcutta High Courts is correct to tire effect that the expenditure on issuance of bonus shares is revenue expenditure.

In the light of the aforesaid decision of the Hon’ble Supreme Court, we are of the opinion that the expenditure incurred by the assessee if it is for issuance of bonus of shares towards filing fees in the R.O.C to the tune of Rs. 25,90,000/-, then it should be allowed as Revenue expenditure. However, the AO may verify whether the expenditure claimed by M/s. Shristi Housing Development Ltd (formerly, known as Shristi Housing Dev. P.Ltd) the assessee has been incurred for issuance of bonus share before allowing the same. If it is found that assessee has rightly claimed the expenditure as discussed, then the said expenditure may be allowed subject to verification as discussed.

Second ground of assessee’s appeal is against the action of the ld. CIT(A) in confirming the disallowance of Rs. 1,33,03,278/- u/s. 14A read with Rule 8D Income Tax Rules, 1962, (hereinafter referred to as the ‘Rules’).

The AO noted that the assessee had received dividend of Rs.1,02,89,995/-, which are exempt from tax. The assessee has not disallowed any expenses for earning dividend income. So when confronted by the AO, the assessee explained that the investments were made in the subsidiaries to acquire the investment and not to earn dividend from such investments and hence, disallowance u/s. 14A of the Act would not apply. However, the AO did not agree. According to him, the explanation of the ld.AR was carefully considered and he found no substance in it. According to AO, the earning of dividend income cannot be an automatic process but on the other hand the assessee is required to be more vigilant and there must be some expenses incurred for administrative and official expenses attributable to earning the exempt income in the nature of dividend. And therefore, the AO was of the opinion that expenditure incurred for earning the exempt income need to be determined and disallowed u/s. 14A of the Act and thereafter, the AO computed the disallowance u/s. 14A read with Rule 8D, wherein the AO had not made any addition on account of Rule 8D(2)(i) or Rule 8D(2)(ii). However, he was pleased to make addition under Rule 8D(2)(iii) i.e. average value of investment, which is calculated at Rs. 1,33,03,278/- i.e. ½ % of Rs.(2607454600 + 2713856600= Rs. 53,213,11,200/2). Aggrieved, the assessee preferred an appeal before the ld. CIT(A), who was pleased to dismiss the same by holding as under:- 4.3 Ground No. 4 of the appeal is against disallowance of Rs.1, ,33,03,270/- made by the A.O. u/s. 14A r. w. Rule-8D. During appellate proceedings, the appellant has submitted that the investments which were made in subsidiaries to acquire controlling stake and not to earn dividend income and also submitted that the Ld. A.O. did not consider only those investments from which exempt income have been earned during the year. The appellant did not give any proof with respect to the computation of 14A along with investments made with subsidiary companies. The appellant relied on various case Jaws without any documentary evidence

Before us the assessee has contended that the disallowance should be restricted to the investments made from which only the assessee had earned yield/dividend income and relied upon the decision of the Jurisdictional High Court in the case of CIT vs. REI Agro Limited ( GA 3022 of 2013 ITAT 161 of 2013) and the judgment of the Special Bench of Delhi Tribunal in the case of Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Delhi)(SB). We note that the AO has made only disallowance under Rule 8D(2)(iii). Therefore, applying the principle laid down by the Hon’ble Jurisdictional High Court in the case of REI Agro (supra), we direct the AO to compute the disallowance ( ½ %) of actual investment made in shares, which yielded dividend income. With the aforesaid direction, this ground of assessee’s appeal is allowed for statistical purpose.

In the result, the appeal of assessee is partly allowed for statistical purpose.