I spent money issuing fresh shares to raise my capital, and I used the money as working funds. Can I write that expenditure off as revenue?
No. The Supreme Court held that expenditure incurred in issuing shares to increase capital is capital expenditure, because it is directly related to the expansion of the capital base of the company. That the expansion incidentally helps the business and may help in making profits does not change its character. The Court applied its own decision in Punjab State Industrial Development Corporation, on the filing fee paid to the Registrar of Companies for enhancement of capital, and preferred the view of the High Courts that had gone in favour of the Revenue over the Madras decision in Kisenchand Chellaram.
Decided by the Supreme Court (Supreme Court of India - S.C. Agrawal and G.B. Pattanaik JJ) on 1997-02-27, reported as AIR 1997 SC 1336; 1997 (10) SCC 362; 1997 AIR SCW 1438; 1997 Tax LR 378; (1997) 91 Taxman 26; (1997) 2 SCALE 448; (1997) 225 ITR 798. It bears on section 37(1) of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the case that ends the argument that share issue costs are revenue because the money raised is put to trading use. The distinction it draws is between what the expenditure is directed at and what the money is later used for, and it holds the first to be decisive. It is also a lesson in how such appeals are lost on the record: the assessee had argued at every stage that the capital was raised to meet a need for working funds, but the statement of case carried no finding to that effect, so the Supreme Court would not proceed on that basis, and in any event held that it would have made no difference. Read with India Cements, which allows the cost of raising a loan as revenue, it fixes the line between borrowing and raising share capital.
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The assessee was a public limited company. In the accounting year ended 30 June 1968, relevant to assessment year 1969-70, it issued ordinary shares of the face value of Rs 16,75,000 in denominations of Rs 10 each at a premium, with a view to increasing its share capital, and incurred Rs 13,99,305 of expenditure in connection with the issue, which it claimed as deductible. The Income Tax Officer disallowed the claim as being on capital account. The Appellate Assistant Commissioner and the Tribunal affirmed. On a reference the Calcutta High Court upheld the Tribunal, relying on observations of the Supreme Court in India Cements Ltd v CIT (60 ITR 52), and declined to follow the Madras High Court in CIT v Kisenchand Chellaram (India) P Ltd (130 ITR 385). The assessee appealed on a certificate granted by the High Court under section 261. Before the Supreme Court it relied on Empire Jute Company Ltd v CIT (124 ITR 1), CIT v Associated Cement Co Ltd (172 ITR 257) and Alembic Chemical Works Co Ltd v CIT (177 ITR 377), and on the decisions of the Andhra Pradesh, Karnataka and Kerala High Courts in Warner Hindustan Ltd (171 ITR 224), Hindustan Machine Tools Ltd (No 3) (175 ITR 220) and Federal Bank Ltd (180 ITR 241), as well as on Kisenchand Chellaram. It also argued that its case was different because the object of the enhancement was to have more working funds to carry on business and earn more profit.
The appeal was dismissed, with no order as to costs, the referred question having been rightly answered in favour of the Revenue. Expenditure of Rs 13,99,305 on the issue of fresh shares to increase capital was capital expenditure. The Court held the question covered by its earlier decision in Punjab State Industrial Development Corporation Ltd, Chandigarh v CIT, Patiala, decided on 4 December 1996, where a fee paid to the Registrar of Companies for enhancement of capital was held not to be revenue expenditure. On the working funds argument, the Court held that although the assessee had made that submission before the Appellate Assistant Commissioner and the Tribunal, the statement of case sent by the Tribunal recorded no finding that the expansion of capital was undertaken to meet a need for more working funds, so the Court could not proceed on that basis; and in any event the reasoning of the earlier decision showed that such an expenditure retains its capital character.
The Court rested on the passage it quoted from Punjab State Industrial Development Corporation. There it had declined to examine all the competing decisions in detail, holding that a fee paid to the Registrar for expansion of the capital base of a company is directly related to the capital, and that although the expansion would incidentally help the business of the company and might help in profit making, the expenditure still retains the character of capital expenditure because it is directly related to the expansion of the capital base. On that footing the Court had said the view taken in favour of the Revenue by the various High Courts was preferable to the view resting on the Madras High Court's decision in Kisenchand Chellaram. Applying that reasoning here, the Court held that the character of the expenditure is fixed by what it is directed at, the enlargement of the company's capital structure, and is not altered by incidental benefits to the trade or by the use to which the money raised is afterwards put. The working funds contention failed first on the record, there being no finding of fact to support it, and second on the reasoning, since the same analysis would apply.
the expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that expenditure incurred in issuing shares to increase capital is capital expenditure, because it is directly related to the expansion of the capital base of the company. That the expansion incidentally helps the business and may help in making profits does not change its character. The Court applied its own decision in Punjab State Industrial Development Corporation, on the filing fee paid to the Registrar of Companies for enhancement of capital, and preferred the view of the High Courts that had gone in favour of the Revenue over the Madras decision in Kisenchand Chellaram. This was decided by the Supreme Court (Supreme Court of India - S.C. Agrawal and G.B. Pattanaik JJ) and bears on section 37(1) of the Income Tax Act 1961. It is reported as AIR 1997 SC 1336; 1997 (10) SCC 362; 1997 AIR SCW 1438; 1997 Tax LR 378; (1997) 91 Taxman 26; (1997) 2 SCALE 448; (1997) 225 ITR 798. This is the case that ends the argument that share issue costs are revenue because the money raised is put to trading use. The distinction it draws is between what the expenditure is directed at and what the money is later used for, and it holds the first to be decisive. It is also a lesson in how such appeals are lost on the record: the assessee had argued at every stage that the capital was raised to meet a need for working funds, but the statement of case carried no finding to that effect, so the Supreme Court would not proceed on that basis, and in any event held that it would have made no difference. Read with India Cements, which allows the cost of raising a loan as revenue, it fixes the line between borrowing and raising share capital. If it applies to you, the first step is this: Treat share issue expenditure as capital in the computation and do not claim it under section 37(1); an unsustainable claim here is easy for the officer to spot and disallow.
The assessee was a public limited company. In the accounting year ended 30 June 1968, relevant to assessment year 1969-70, it issued ordinary shares of the face value of Rs 16,75,000 in denominations of Rs 10 each at a premium, with a view to increasing its share capital, and incurred Rs 13,99,305 of expenditure in connection with the issue, which it claimed as deductible. The Income Tax Officer disallowed the claim as being on capital account. The Appellate Assistant Commissioner and the Tribunal affirmed. On a reference the Calcutta High Court upheld the Tribunal, relying on observations of the Supreme Court in India Cements Ltd v CIT (60 ITR 52), and declined to follow the Madras High Court in CIT v Kisenchand Chellaram (India) P Ltd (130 ITR 385). The assessee appealed on a certificate granted by the High Court under section 261. Before the Supreme Court it relied on Empire Jute Company Ltd v CIT (124 ITR 1), CIT v Associated Cement Co Ltd (172 ITR 257) and Alembic Chemical Works Co Ltd v CIT (177 ITR 377), and on the decisions of the Andhra Pradesh, Karnataka and Kerala High Courts in Warner Hindustan Ltd (171 ITR 224), Hindustan Machine Tools Ltd (No 3) (175 ITR 220) and Federal Bank Ltd (180 ITR 241), as well as on Kisenchand Chellaram. It also argued that its case was different because the object of the enhancement was to have more working funds to carry on business and earn more profit. The matter was decided on 1997-02-27 by the Supreme Court (Supreme Court of India - S.C. Agrawal and G.B. Pattanaik JJ). On those facts the Supreme Court held as follows. The appeal was dismissed, with no order as to costs, the referred question having been rightly answered in favour of the Revenue. Expenditure of Rs 13,99,305 on the issue of fresh shares to increase capital was capital expenditure. The Court held the question covered by its earlier decision in Punjab State Industrial Development Corporation Ltd, Chandigarh v CIT, Patiala, decided on 4 December 1996, where a fee paid to the Registrar of Companies for enhancement of capital was held not to be revenue expenditure. On the working funds argument, the Court held that although the assessee had made that submission before the Appellate Assistant Commissioner and the Tribunal, the statement of case sent by the Tribunal recorded no finding that the expansion of capital was undertaken to meet a need for more working funds, so the Court could not proceed on that basis; and in any event the reasoning of the earlier decision showed that such an expenditure retains its capital character.
The Court rested on the passage it quoted from Punjab State Industrial Development Corporation. There it had declined to examine all the competing decisions in detail, holding that a fee paid to the Registrar for expansion of the capital base of a company is directly related to the capital, and that although the expansion would incidentally help the business of the company and might help in profit making, the expenditure still retains the character of capital expenditure because it is directly related to the expansion of the capital base. On that footing the Court had said the view taken in favour of the Revenue by the various High Courts was preferable to the view resting on the Madras High Court's decision in Kisenchand Chellaram. Applying that reasoning here, the Court held that the character of the expenditure is fixed by what it is directed at, the enlargement of the company's capital structure, and is not altered by incidental benefits to the trade or by the use to which the money raised is afterwards put. The working funds contention failed first on the record, there being no finding of fact to support it, and second on the reasoning, since the same analysis would apply. In the words reproduced by the source cited on this page: "the expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company."
It was decided by the Supreme Court on 1997-02-27 and is reported as AIR 1997 SC 1336; 1997 (10) SCC 362; 1997 AIR SCW 1438; 1997 Tax LR 378; (1997) 91 Taxman 26; (1997) 2 SCALE 448; (1997) 225 ITR 798. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 37(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed, with no order as to costs, the referred question having been rightly answered in favour of the Revenue. Expenditure of Rs 13,99,305 on the issue of fresh shares to increase capital was capital expenditure. The Court held the question covered by its earlier decision in Punjab State Industrial Development Corporation Ltd, Chandigarh v CIT, Patiala, decided on 4 December 1996, where a fee paid to the Registrar of Companies for enhancement of capital was held not to be revenue expenditure. On the working funds argument, the Court held that although the assessee had made that submission before the Appellate Assistant Commissioner and the Tribunal, the statement of case sent by the Tribunal recorded no finding that the expansion of capital was undertaken to meet a need for more working funds, so the Court could not proceed on that basis; and in any event the reasoning of the earlier decision showed that such an expenditure retains its capital character. It arises in Deductions & Disallowances matters, on section 37(1) of the Income Tax Act 1961, and was decided by Supreme Court of India - S.C. Agrawal and G.B. Pattanaik JJ. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Consider instead whether the expenditure qualifies for amortisation under section 35D, reading that section's conditions and limits for yourself, since this judgment does not deal with it. Keep the distinction between raising loan capital and raising share capital clear, as the treatment differs and India Cements does not carry across. Where a finding of fact matters to your case, make sure it appears in the Tribunal's order and in the statement of case, because an argument recorded only as a submission will not be treated as a finding on appeal.
Still good law. The proposition is short, settled and constantly applied, and the judgment records the Supreme Court preferring the pro-Revenue line of High Court decisions over the contrary Madras view; nothing in it suggests doubt. I checked no later authority. The judgment says nothing about statutory amortisation of such costs. I state from my own knowledge, unverified here, that section 35D allows specified preliminary and capital issue expenses to be written off over a period in defined circumstances, and a reader should read that section rather than assume the whole expenditure is simply lost. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The batch line lists section 35D, but the judgment neither mentions nor decides anything under it, so the sections field records only section 37(1); the section 35D point in the validity field is from my own knowledge and was not checked here. The Court did not decide what the position would be if there were a recorded finding that the capital was raised specifically for working funds, since it disposed of that both on the absence of a finding and on the reasoning of the earlier case. It also does not distinguish between the different components of issue expenditure. I have not read the Calcutta High Court judgment or the Punjab State Industrial Development Corporation decision beyond the passage quoted. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed, with no order as to costs, the referred question having been rightly answered in favour of the Revenue. Expenditure of Rs 13,99,305 on the issue of fresh shares to increase capital was capital expenditure. The Court held the question covered by its earlier decision in Punjab State Industrial Development Corporation Ltd, Chandigarh v CIT, Patiala, decided on 4 December 1996, where a fee paid to the Registrar of Companies for enhancement of capital was held not to be revenue expenditure. On the working funds argument, the Court held that although the assessee had made that submission before the Appellate Assistant Commissioner and the Tribunal, the statement of case sent by the Tribunal recorded no finding that the expansion of capital was undertaken to meet a need for more working funds, so the Court could not proceed on that basis; and in any event the reasoning of the earlier decision showed that such an expenditure retains its capital character.
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