Case Note & Summary
The case involves an Income Tax Reference under Section 256(1) of the Income Tax Act, 1961, by the Income Tax Appellate Tribunal (Tribunal) at the instance of Hindustan Lever Ltd. (the assessee). The assessee had obtained an industrial licence for manufacturing Sodium Tri Poly Phosphate (STPP), which was conditional upon diluting its foreign shareholding from 85% to 70% by issuing fresh shares to the Indian public. To comply, the assessee issued shares and incurred expenditure of Rs.33.74 lakhs. In the assessment for A.Y. 1978-79, the assessee claimed this expenditure as revenue expenditure, but the Assessing Officer disallowed it as capital expenditure. The Tribunal upheld the disallowance. Additionally, the assessee had received interest of Rs.1.20 lakhs on share application money deposited in a bank, which it sought to adjust against the share issue expenditure; the Tribunal held that the interest could not be adjusted. The High Court considered two questions: (1) whether the expenditure was capital in nature, and (2) whether the interest could be adjusted. The Court held that the expenditure was capital because it was incurred to raise capital for expansion and to comply with a condition precedent for obtaining the industrial licence, which was a capital asset. The interest income was held to be income from other sources and could not be set off against capital expenditure. The Court answered both questions in the affirmative, i.e., in favor of the Revenue and against the assessee.
Headnote
A) Income Tax - Capital Expenditure - Share Issue Expenses - Expenditure incurred by a company for issuing shares to dilute foreign shareholding under a government directive to obtain an industrial licence is capital expenditure, as it is incurred to create a new source of capital and is not for carrying on existing business (Paras 1-10).
B) Income Tax - Interest Income - Adjustment Against Expenditure - Interest received on deposit of share application money cannot be adjusted against expenditure incurred in connection with the issue of shares, as the interest is income from other sources and the expenditure is capital in nature (Paras 11-14).
Issue of Consideration
Whether expenditure incurred by assessee company in connection with issue of share capital with dominant objective to dilute its foreign shareholding under Government directive to enable it to carry on business in India was in the nature of capital expenditure; and whether interest received on deposit of share application money can be adjusted against such expenditure
Final Decision
Both questions answered in the affirmative, i.e., in favor of the Revenue and against the assessee. The expenditure is capital expenditure, and interest on share application money cannot be adjusted against it.
Law Points
- Expenditure incurred for issue of share capital with dominant objective to dilute foreign shareholding under government directive is capital expenditure
- Interest received on share application money cannot be adjusted against expenditure incurred in connection with issue of shares
Case Details
2016 LawText (BOM) (09) 86
Income Tax Reference No. 185 of 1999
M.S. Sanklecha, S.C. Gupte
Mr. Percy Pardiwalla, Senior Counsel a/w Mr. Nishant Thakkar and Mr. Rajesh Poojary i/b Mulla & Mulla & C.B.&L. for the Applicant. None for the Respondent.
The Commissioner of Income Tax, Bombay City-II, Bombay
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Nature of Litigation
Income Tax Reference under Section 256(1) of the Income Tax Act, 1961
Remedy Sought
Opinion of the High Court on two questions of law referred by the Income Tax Appellate Tribunal
Filing Reason
Dispute regarding whether expenditure incurred on issue of shares to dilute foreign shareholding is capital or revenue expenditure, and whether interest on share application money can be adjusted against such expenditure
Previous Decisions
The Income Tax Appellate Tribunal held that the expenditure was capital in nature and that interest on share application money could not be adjusted against it.
Issues
Whether expenditure incurred by assessee company in connection with issue of share capital with dominant objective to dilute its foreign shareholding under Government directive to enable it to carry on business in India was in the nature of capital expenditure?
Whether interest received by the assessee company on deposit of share application money cannot be adjusted against the expenditure incurred in connection with the issue of such shares?
Submissions/Arguments
The assessee argued that the expenditure was incurred to comply with a government directive to enable it to carry on business, and thus was revenue in nature.
The Revenue argued that the expenditure was capital in nature as it was incurred to raise capital and obtain an industrial licence.
Ratio Decidendi
Expenditure incurred for issuing shares to dilute foreign shareholding under a government directive to obtain an industrial licence is capital expenditure because it is incurred to create a new source of capital and is not for carrying on existing business. Interest received on share application money is income from other sources and cannot be set off against capital expenditure.
Judgment Excerpts
This Reference under Section 256(1) of the Income Tax Act, 1961 (the Act) by the Income Tax Appellate Tribunal (the Tribunal), seeks our opinion on the following two substantial questions of law...
The ApplicantCompany had embarked on major expansion/diversification programme for which it had obtained necessary industrial licence for manufacture of Sodium Tri Poly Phosphate (STPP). However, the industrial licence was conditional upon the ApplicantCompany diluting foreign equity share holding in it.
Procedural History
The assessee filed its return for A.Y. 1978-79. The Assessing Officer disallowed the claim for revenue expenditure and held it as capital expenditure. The assessee appealed to the Commissioner of Income Tax (Appeals) who allowed the appeal. The Revenue appealed to the Income Tax Appellate Tribunal, which restored the Assessing Officer's order. The assessee then sought a reference to the High Court under Section 256(1) of the Act, which was made by the Tribunal.
Acts & Sections
- Income Tax Act, 1961: 256(1)
