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Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI GEORGE MATHAN & SHRI INTURI RAMA RAO
आदेश / O R D E R PER INTURI RAMA RAO, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee company directed against the Order of the Commissioner of Income Tax (Appeals)-1, Chennai, dated 21.05.2018 for the AY 2015-16.
2. The appellant raised the following grounds of appeal:
The learned Commissioner of Income-tax (Appeals) erred in confirming the order of the Assessing Officer in disallowing the entire loss of Rs.73,64,380/- claimed.
The learned Commissioner of Income-tax (Appeals) should have seen that the fees paid of Rs.20,04,000/- to the Ministry of Corporate Affairs (MCA) for increase of authorized share capital is revenue expenditure as the same was incurred towards functioning and financing of business and was only to broaden the capital base necessary for viability of the business set-up and admissible under section 37 of the Act.
3. The authorities below erred in disallowing the other expenditure of Rs.53,60,380/- treating as pre-operative expenses for the reason that the appellant’s business had not yet commenced.
4. The appellant humbly submits that it being a private limited company it is deemed to have commenced its business from the date of incorporation itself. The appellant further submits that admittedly the appellant had set-up / started its business during the relevant previous year and incurring of testing charges of Rs.4,85,395/- is conclusive proof thereof.
The appellant submits that there is no necessity that the appellant should earn an income to claim an expenditure when the expenditure was incurred wholly and exclusively for the purpose of business. The authorities below ought to have appreciated the fact that the trial run of production testing tantamounts to the appellant setting up / commencing its business during the year.
6. The authorities below erred in disallowing the business premises rent of Rs.37,08,857/- paid treating as pre-operative expenses, when the appellant had started its business by taking the business premises and started the testing work also.
7. The appellant submits that the other expenditure incurred as per the Profit & Loss account of the appellant was clearly a revenue expenditure which is admissible u/s.37(1) of the Act and the authorities below erred in disallowing the same as pre-operative expenses.
8. The authorities below erred in disallowing the depreciation of Rs.63,028/- especially when the appellant had put to use its assets for the purpose of business during the year and satisfied the conditions laid down in section 32 of the Act.
The appellants therefore pray that the Hon’ble Income-tax Appellate Tribunal may be pleased-
a. To delete the disallowance of Rs.20,04,000/- being the fees paid to the Registrar of Companies for increase of authorized share capital being revenue expenditure and not capital in nature; b. To allow the rent of Rs.37,08,857/- paid as normal business expenditure as the appellant had carried on the business in the said premises; c. To allow the other expenses of Rs.15,88,495/- claimed u/s.37(1) as the appellant had already commenced its business and the same cannot be disallowed as pre-operative expenditure; d. To allow depreciation of Rs.63,028/- u/s.32 as the appellant had satisfied the conditions laid down therein and render justice.
Briefly, the facts of the case are as under:
The appellant is a company duly incorporated under the provisions of the Companies Act. The company is set up for the purpose of assembling the electronic goods. The return of income for the AY 2015-16 was filed on 30.09.2015 admitting ‘Nil’ income. Subsequently, the return of income was revised on 11.06.2016 disclosing a loss of Rs.73,64,380/-.
Against the said return of income, the assessment was completed by the Income Tax Officer, Corporate Ward-1(3), Chennai, [hereinafter called as ‘Assessing Officer’ (in short “AO”)] vide order dated 18.04.2017 passed u/s.143(3) of the Income Tax Act, 1961 at a total income of Rs.NIL.
While doing so, the AO disallowed a sum of Rs.20,04,000/- being fees paid to Registrar of Companies for increase of the authorized share capital holding it to be capital expenditure. Further, the AO also disallowed the expenses of Rs.53,60,380/- holding that the appellant neither set up the business nor commence business operations during the previous year relevant to the AY under consideration.
4. Being aggrieved by the Assessment Order, an appeal was preferred before the Ld.CIT(A) who vide impugned Order dismissed the appeal.
Being aggrieved, the appellant is in appeal before us in the present appeal. Ground Nos.1 & 9 are general in nature. Ground No.2 challenges the disallowance of the fees paid to the Registrar of Companies for increase of authorized share capital. This issue is squarely covered against the appellant by the decision of the Hon’ble Supreme Court in the case of Punjab State Industrial Development Corpn. Ltd. Vs. CIT reported in 225 ITR 792 SC [1997], relevant portion of the judgment is extracted as under:
3. The issue has been answered in favour of the assessee and against the revenue by the High Courts of Madras, Karnataka, Andhra Pradesh and Kerala in the following decisions: CIT v. Kisenchand Chellaran (India) (P.) Ltd. [1981] 130 ITR 385 /5 Taxman 58 (Mad.); Warner Hindustan Ltd. v. CIT [1988] 171 ITR 224/ 36 Taxman 106 (AP), Hindustan Machine Tools Ltd. ( No. 3) v. CIT [1989] 175 ITR 220 /[1988] 40 Taxman 43 (Kar.) and Federal Bank Ltd. v. CIT [1989] 180 ITR 241 / 45 Taxman 262 (Ker.). The High Courts of Allahabad, Himachal Pradesh, Delhi, Calcutta, Bombay, Punjab, Gujarat, Andhra Pradesh and Rajasthan have held in favour of the revenue in the following cases: CIT v. Modi Spg. & Wvg. Mills Co. Ltd. [1973] 89 ITR 304 (All.), Mohan Meakin Breweries Ltd. v. CIT (No. 2)[1979] 117 ITR 505/2 Taxman 460 (HP), Bharat Carbon & Ribbon Mfg. Co. Ltd. v. CIT [1981] 127 ITR 239 /[1980] 3 Taxman 568 (Delhi), Brooke Bond India Ltd. v. CIT [1983] 140 ITR 272/[1982] 10 Taxman 18 (Cal.), Bombay Burmah Trading Corpn. Ltd. v. CIT [1984] 145 ITR 793/[1983] 12 Taxman 178 (Bom.), Groz- Beckert Saboo Ltd. v. CIT [1986] 160 ITR 743 / 27 Taxman 138 (Punj. & Har.), Ahmedabad Mfg. & Calico ( P.) Ltd. v. CIT [1986] 162 ITR 800 / 28 Taxman 306 (Guj.), CIT v. Aditya Mills [1990] 181 ITR 195 / 50 Taxman 120 (Raj.), CIT v. Multi Metals Ltd. [1991] 188 ITR 151 (Raj.) and Vazir Sultan Tobacco Co. Ltd. v. CIT [1988] 174 ITR 689 / 41 Taxman 7 (AP). We may also state that the Calcutta High Court has affirmed this earlier view in three subsequent decisions reported in Kesoram Industries & Cotton Mills Ltd. v. CIT [1992] 196 ITR 845 (Cal.), Wood Craft Products Ltd. v. CIT [1993] 204 ITR 545 (Cal.) and CIT v. Tungabhadra Industries Ltd. [1994] 207 ITR 553 (Cal.) and so also the Gujarat High Court has affirmed its earlier view in Alembic Glass Industries Ltd. v. CIT [1993] 202 ITR 214 (Guj.).
We may also indicate that this court laid down the test for determining whether a particular expenditure is revenue or capital expenditure in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 (SC). In that decision, this court surveyed the law on the subject in considerable detail and observed as under : "The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave, L.C. in Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 TC 155, 192 (HL), where the learned Law Lord stated : '.....when an expenditure is made, not only once and for all, but with a view to bringing 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 opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital'." (p. 10) 5. This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion. Briefly put, it is not a strait-jacket formula and the question will have to be determined in the backdrop of facts of each case. The test laid down can at best be a guide for determining whether a particular expenditure forms part of revenue expenditure or capital expenditure. The Madras High Court in Kisenchand Chellaram ( India)( P.) Ltd.'s case (supra) was dealing with a case in which the assessee had paid fees for raising the capital of a company to the Registrar of Companies and had claimed the amount paid as a revenue expenditure. It was held that without capital a company cannot carry on its business and hence, the expenses incurred for increasing the capital were bound up with the functioning and financing of the business. Therefore, the assessee's claim for deduction was allowed. The view taken was that since the amount was wholly and exclusively used for the purpose of the assessee's business, it was allowable as a deduction under section 37(1) of the Act. The Karnataka High Court has followed the view taken by the Madras High Court and so also has the Kerala High Court taken the same view. After considering the test laid down by this Court in Empire Jute Co. Ltd.'s case (supra), the Kerala High Court observed in the case of Federal bank Ltd. ( supra):
"...we are of the view that the expenditure incurred for the enhancement of authorised capital is only for the purpose of bettering or improving an established business and cannot be said to be for the purpose of a new business. Viewed in a business sense, the enhancement of the authorised capital is only to broaden the capital base which will be conducive to the better conduct and efficiency and profitability of the business." (p. 246) 6. In this view the High Court held that the expenditure incurred by the assessee was an item of revenue expenditure. This line of reasoning has not found favour with the other High Courts which have taken a contrary view. The Calcutta High Court in Brooke Bond India Ltd.'s case (supra) held that where the object of incurring an expenditure is to affect the capital structure as a result of which certain incidental advantage flows, the expenditure will be of capital nature. It is not the acquisition of a right of a permanent character alone, the creation of which is a condition for the carrying on of the business, that could be rightly treated as an expenditure on the capital account. Capital expenditure can be incurred after a company is floated or it started business, if it resulted in bringing about capital advantage. The Andhra Pradesh High Court had in Warner Hindustan Ltd.'s case (supra), following the decision of the Madras High Court in Kisenchand Chellaram ( India)( P.) Ltd.'s case (supra) , held that the expenditure incurred was connected with the functioning and financing of the assessee's business and, hence, the fees paid could not be treated as on capital account. However, this line of reasoning was departed from in the subsequent decision in Vazir Sultan Tobacco Co. Ltd.'s case (supra) , wherein it was observed that where the object of incurring an expenditure is to affect a capital structure as a result of which certain incidental advantage flows, the expenditure will be of capital nature. In other words, it followed the decision of the Calcutta High Court referred to earlier. It distinguished the earlier decision in Warner Hindustan Ltd.'s case (supra)holding that it was unable to appreciate the reasoning of the Madras High Court which held it to be a revenue expenditure. It, therefore, refused to extend the ratio of the decision in the earlier case of Warner Hindustan Ltd. ( supra)to expenses incurred directly for the purpose. The Gujarat High Court in Ahmedabad Mfg. & Calico ( P.) Ltd.'s case (supra) held that the expenditure incurred being for an enduring benefit in the commercial sense could fall in the capital field. It was held that the shares issued by the company constituted its capital and being an integral part of the permanent structure of the company fell within the realm of capital expenditure. This view was reiterated in the subsequent case of Alembic Glass Industries Ltd. ( supra). The Bombay High Court in Bombay Burmah Trading Corpn. Ltd..'s case (supra) , while dealing with the question whether the fees paid to the Registrar of companies for enhancement of capital could be described as revenue expenditure or capital expenditure, differed with a view taken by the Madras High Court and held that it runs counter to the decision of this Court in India Cements Ltd. v. CIT [1966] 60 ITR 52 and Tata Iron & Steel Co. Ltd., In re [1921] 1 ITC 125 (Bom.), wherein it was expressly pointed out that the expenditure incurred for the issue of preference shares could not be said to be solely incurred for the purposes of the company's business. Briefly put, it was held that it was an expenditure incurred directly for the purposes of expansion of the capital asset and was, therefore, of capital nature.
We do not consider it necessary to examine all the decisions in extenso because we are of the opinion that the fee paid to the Registrar for expansion of the capital base of the company was directly related to the capital expenditure incurred by the company and although incidentally 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 since the expenditure was directly related to the expansion of the capital base of the company. We are, therefore, of the opinion that the view taken by the different High Courts in favour of the revenue in this behalf is the preferable view as compared to the view based on the decision of the Madras High Court in Kisenchand Chellaram (India) (P.) Ltd.'s case (supra) . We, therefore, answer the question raised for our determination in the affirmative, i.e., in favour of the revenue and against the assessee.
The tax reference will stand answered accordingly with no order as to costs.
In the light of the above decision of the Hon’ble Supreme Court, we hold that fees paid to Registrar of Companies for increasing authorized share capital is capital in nature. Accordingly, we confirm the action of the lower authorities in holding the same as capital in nature.
5. Ground Nos.3-8 are challenges the action of the AO in disallowing the loss of Rs.53,60,380/- on the ground that the business have not been set up. The findings of the Ld.CIT(A) are as under:
8. The appellant’s contentions are considered. Reference to the Balance Sheet of the Company for the year ended 31.03.2016 shows that the appellant’s business has commenced from July, 2015. The balance sheet for the relevant assessment year does not contain any information regarding the date of setting up of the business or the commencement of the business. The appellant has further placed on record the tax invoice dated 14th August, 2015 for clearance of goods from its factory. However, this evidence also establishes the fact that the business commenced in the subsequent year i.e August, 2015. However, no evidence was placed on record to show that the business of manufacturing and assembling of electronic goods was fully set up by 31.03.2015. Rather, the appellant has placed on record evidence of payment made to Joint Director, Industrial Health and Safety, a sum of Rs.60,000/- on 12.05.2015 which falls in the next financial year. No other evidence is available to show that the business was set up by 31.03.2015. Though the appellant has submitted a legal argument that the expenditure should be allowed from the date of setting up of business, the appellant has not specified the date when the setting up was completed or any evidence in support of the same. In view of appellant’s failure to establish the date of setting up of business, this ground of appeal is dismissed.
No evidence was filed before us controverting the above findings of the Ld.CIT(A). Further, it is not the case of the appellant that the business is set up and ready to commence the operations. In the absence of commencement of business, no expenditure can be allowed as deduction. Hence, we do not find any reason to interfere in the order of the Ld.CIT(A) and accordingly, Ground Nos.3-8 raised by the appellant are dismissed.
In the result, the appeal filed by the appellant is dismissed.
Order pronounced in the Open Court on the 17th day of December, 2018 in Chennai.