ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - 4(1)(1), BANGALORE vs. M/S. KARNATAKA STATE FINANCIAL CORPORATION LTD.,, BANGALORE

Ground no2 & 3 deal with disallowance u/s.14A of the Act. In this regard the AO observed in para 3 that the assessee company made investment in equity shares and worked out the disallowance at Rs.82,58,623/-. It was mentioned by the AO that the disallowance was made only in respect of Rule 8D(2)(iii). However, no disallowance was made under Rule 8D(2)(i). Therefore it was observed by the AO that the investment of Rs.1,43,83,46,000/- was made from borrowed funds and invoked the provisions of Rule 8D by calculating the total disallowance at Rs.15,87,76,338/- as mentioned in para 3.8, as under :

The CIT (A) relying upon the earlier order of the Bangalore Bench of the Tribunal in dt.28.06.2017, has allowed the ground raised by the assessee.

Before us the Ld. AR has submitted that the issue is covered in favour of the assessee by the order of the Tribunal in which the author of this order is also the author there, and therefore the issue should be decided in favour of the assessee.

On the other hand the Ld. DR relies upon the order passed by the AO.

We have heard the rival contentions and perused the material on record. The Tribunal vide its order dt.28.06.2017 (supra), in para 6 had held as under :

6. We have heard the rival contentions and perused the material on record. It is the case of the AO that the assessee has invested in equity shares and therefore the AO has worked out the disallowance u/s.14A. During the course of argument, we enquired whether the shares were allotted and if allotted, any dividend income was accrued to the assessee or not. In response to that, it was submitted by both the parties that neither the shares were allotted during the year under consideration, nor any dividend income had accrued to the assessee against proposed allotment. In our view, there is a finding by the Kolkata Tribunal to the effect that the share application money invested by the assessee was merely in the nature of offer to buy the shares by the assessee and it cannot be aid be concluded contract entered by the assessee and the company. In our view the coordinate bench has taken the correct view in the decision of LGW Ltd (supra) and the case of the assessee is covered by the said judgment. Therefore we find no merit in the appeal of the Revenue.

The next ground raised by the Revenue is with respect to the expenditure on issuance of bonds for Rs.25,00,000/-. The assessee claimed stamp duty expenses amounting to Rs.2500000/- under the head contingencies. It was clarified to the AO that these are one-time statutory expenses payable at fixed percentage of the value of the bond issued to the public. The expenditure was meagre compared to ITA .888 & 889/Bang/2017 Page - 5 the capital raised by the bank and the expenditure was debited to the P & L account. It was also mentioned that the expenditure was not capital in nature and is therefore required to be allowed as revenue. For this purpose reliance was placed on the judgment of the Hon’ble Supreme Court in the matter of India Cements v. CIT [60 ITR 52] and the decision of the Hon’ble jurisdictional High Court in CIT v. ITC Hotels 334ITR 109.

The Ld. DR relies upon the judgment of the Hon’ble Supreme Court in Brooke Bond India Ltd v. CIT [(1997) 225 ITR 798].

We have heard the rival contentions and perused the material on record. In our view, the issue is squarely covered in favour of the assessee by the Hon’ble Supreme Court in the matter of India Cements (supra) had held that the debenture when issued is a loan and therefore the expenditure incurred for issuance of debenture would be admissible as revenue expenditure. Similarly in the present case, the bonds issued by the assessee were in the nature of a debt instrument and the stamp duty paid to Government of Karnataka by the assessee would be eligible as revenue expenditure as it will not enhance the capital base of the assessee. There is a distinction between the expenditure incurred for raising the loan and the instrument which had an effect of increasing the share capital. In the matter of Brooke Bond India Ltd (supra), the case before the Hon’ble SC was of increasing the share capital, but whereas in India Cements (supra), CIT v. Instrumentation Ltd [(2013) 37 taxmann.com 271], as well as in ITA .888 & 889/Bang/2017 Page - 6 Secured Meters ltd 321 ITR611 the case was of allowing the expenditure for obtaining the loan. In view of the above, we do not find any merit in the appeal of the Revenue and therefore the same is dismissed.

The facts and circumstances as existing in ITA.888/Bang/2017 for AY 2012-13, are similar to the facts of the present case. Therefore following the reasoning given therein, we dismiss the appeal of the Revenue in ITA.889/Bang/2017.

In the result, appeals filed by the Revenue are dismissed.