COMMISSIONER OF INCOME-TAX VS M.P. AUDHYOGIK VIKAS NIGAM LTD.
1999 P T D 929
[225 I T R 782]
[Madhya Pradesh High Court (India)]
Before A. K. Mathur, C. J. and S. K. Kulshrestha, J
COMMISSIONER OF INCOME-TAX
Versus
M.P. AUDHYOGIK VIKAS NIGAM LTD.
Miscellaneous Civil Case No.70 of 1992, decided on 15/01/1996.
Income-tax---
----Capital or revenue expenditure---Company---Fees paid to Registrar of Companies for increasing authorised share capital---Capital expenditure-- Not deductible---Indian Income Tax Act, 1961, S.37---[CIT v. Kisenchand Chellaram (India) (P.) Ltd. (1981) 130 ITR 385 (Mad.); Warner Hindustan Ltd. v. CIT (1988) 171 ITR 224 (AP) and Hindustan Machine Tools Ltd. (No.3) v. CIT (1989) 175 ITR 220 (Kar.) dissented from].
Fees paid to the Registrar of Companies by a company for increasing its authorised share capital represent a capital expenditure and cannot be allowed as deduction under section 37 of the Income Tax Act, 1961.
CIT v. Aditya Mills (1990) 181 ITR 195 (Raj.); Shree Digvijay Cement Co. Ltd. v. CIT (1982) 138 ITR 45 (Guj.); Brooke Bond India Ltd. v. CIT (1983) 140 ITR 272 (Cal.); Groz-Beckert Saboo Ltd. v. CIT (1986) 160 ITR 743 (P & H); Upper Doab Sugar Mills Ltd. v. CIT (1979) 116 ITR 928 (All.) and Mohan Meakin Breweries Ltd. v. CIT (No.2) (1979) 117 ITR 505 (HP) fol.
CIT v. Kisenchand Chellaram (India) (P.) Ltd. (1981) 130 ITR 385 (Mad.); Warner Hindustan Ltd. v. CIT (1988) 171 ITR 224 (AP) and Hindustan Machine Tools Ltd. (No.3) v. CIT (1989) 175 ITR 220 (Kar.) dissented from,
Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC) ref.
Abhay Sapre for the Commissioner.
B.L. Nema for the Assessee.
JUDGMENT
A.K. MATHUR, C.J.---This is an income-tax reference under section 256(I) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), at the instance of the applicant/Revenue and the following question of law has been referred by the Tribunal to this Court for answer:
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the fee paid to the Registrar of Companies for increasing the authorised share capital is allowable as deduction under section 37 of the Income-tax Act and as revenue expenditure?"
The brief facts giving rise to this petition are thus: The assessee is a financial institution registered and incorporated under the Companies Act, 1956. A sum of Rs.75,120 was incurred as expenditure towards the payment of fee for increasing the authorised share capital of the company. This amount was paid to the Registrar of Companies. The Income-tax Officer treated the expenditure as capital in nature and thereby assessed the liability of the tax. The assessee approached the Commissioner of Income-tax (Appeals) and the Commissioner of Income-tax (Appeals) allowed the appeal of the assessee and permitted the deductions holding the said expenditure to be revenue expenditure.
Aggrieved by the order of the Commissioner of Income-tax (Appeals), the Revenue approached the Tribunal and the Tribunal after relying on the decisions of the Madras, Andhra Pradesh and Kerala High Courts, took the view that the increase in limit of the authorised share capital does not result in acquisition of any asset. Hence, it is not a capital expenditure but it is a revenue expenditure. The Revenue approached the Tribunal for making a reference before this Court. Hence, the Tribunal referred the aforesaid question of law for answer of this Court.
We have heard learned counsel for the parties and perused the records. There has been a serious conflict of views on this issue, but the consensus of opinion of the High Courts of the country is that such expenditure should be treated to be a capital expenditure and not revenue expenditure because it is in the nature of increasing the authorised share capital of the company and such expenditure is enduring in nature. A number of High Courts of the country have taken. the view that such expenditure should be treated to be a capital expenditure and not revenue expenditure. All decisions of the Madras High Court, Kerala High Court and Andhra Pradesh High Court have come up for consideration 'in various cases and after considering those cases, the consensus view of the majority of the High Courts which has emerged, is that such expenditure should be treated to be a capital expenditure. In this connection, we may first refer to the decision of the Rajasthan High Court given in CIT v., Aditya Mills (1990) 181 ITR 195. In this case, the memorandum of association of a company was amended in order to increase its capital and, additional capital was made available for carrying on the business of the company and as such the expenditure incurred for the purpose of amending the memorandum and articles of association was considered to be of capital nature and not a revenue nature.
In Shree Digvijay Cement Co. Ltd. v. CIT (1982) 138 ITR 45, the Gujarat High Court has taken a similar view. In this case, their Lordships took the view that the expenditure on issue of new shares of the company would amount to a capital expenditure. In this connection, it was observed (headnote):
"Shares issued by a company constitute its capital. These shares are an integral part of the permanent structure of the company and are not in any way connected with its working capital. Therefore, the expenditure incurred by a company in raising new shares is expenditure of a capital nature and is not deductible."
In Brooke Bond India Ltd. v. CIT (1983) 140 ITR 272, the Calcutta High Court, Sabyasachi Mukharji, J. (as he then was), took the view 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. Their Lordships considered the decision of the Supreme Court given in Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1, and it was distinguished. Their Lordships also considered the case of the Madras High Court and distinguished it. Therefore, it was held that by acquiring capital, he is increasing his earning of his income or earning of the profit. That is the physical test. It is the resultant advantage obtained by incurring the expenditure alongwith the purpose and object of incurring the expenditure that should be the guide to determine the question, whether an expenditure is capital or revenue and in the present case, it was held that such expenditure is of capital nature.
In Groz-Beckert Saboo Ltd. v. CIT (1986) 160 ITR 743, the Punjab and Haryana High Court, agreeing with the decision of the Calcutta High Court, took the view that the fee paid under the Companies Act for increasing the share capital was an expenditure of capital nature.
In Upper Doab Sugar Mills Ltd. v. CIT (1979) 116 ITR 928, the Allahabad High Court also took the same view that equity shares constitute the capital of the company and they are an integral part of the permanent structure of the company, and are not in any manner connected with the working capital of the company which is utilised to carry on the day-to-day operations of the business. Therefore, the expenses incurred in connection with the issue of additional equity shares is not revenue expenditure and is not deductible. Similarly, in Mohan Meakin Breweries Ltd. v. CIT (No.2) (1979) 117 ITR 505, the Himachal Pradesh High Court took the same view that increase of share capital and fees paid to Registrar of Companies for increasing authorised capital will result in an advantage of enduring nature and is, therefore, capital expenditure and is not allowable as revenue expenditure. Therefore, the majority of the High Courts have taken the view that whenever there is an increase of the capital by increasing of the shares and it adds advantage to the capital asset of the company then such expenditure shall be treated to be capital expenditure and not revenue expenditure and not allowable under section 37 of the Act.
In CIT v. Kisenchand Chellaram (India) (P.) Ltd. (1981) 130 ITR 385, the Madras High Court took the view that the assessee paid fees for raising the capital of the company to the Registrar of Companies and claimed the amount paid as a revenue expenditure which was negatived by the income-tax Officer, but it was allowed by the Appellate Assistant Commissioner and the same was upheld by the Tribunal. On a reference, the Court 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. Accordingly, the assessee's claim for deduction was allowable. With great respect, we do not share the view expressed by the Madras High Court for the reasons that the increase of the capital is for the larger benefit of the company and it is with a view to increase its capital hoarding. Therefore, such expenditure in our opinion cannot be treated to be an expenditure of revenue nature.
In Warner Hindustan Ltd. v. CIT (1988) 171 ITR 224 (AP), their Lordships dissenting from the view expressed by the Bombay High Court, the Himachal Pradesh High Court and the Delhi High Court, agreed with the view of the Madras High Court and made a reference to the decision of the Supreme Court given in Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1. Their Lordships agreed that it is true that the increase in the authorised share capital is obtained from raising the share capital of the company but that is a subsequent step. That may be so, but as a matter of fact, that is for the purpose of acquiring more capital for enduring benefit. As a matter of fact, the stage of acquiring more capital for the ultimate purpose of increasing its volume of the capital for future benefit comes under the nature of enduring benefit. Therefore, such income should be treated to be capital expenditure, and with great respect, we do not agree with the view taken by the Andhra Pradesh High Court. Similarly, in Hindustan Machine Tools Ltd. (No.3) v. CIT (1989) 175 ITR 220 (Kar), a sum of Rs.75,600 incurred by way of filing fee paid to the Registrar of Companies in respect of enhancement of the authorised share capital of the company was held deductible as revenue expenditure. Their Lordships have relied on the decision of the Madras High Court and the earlier decision of the Karnataka High Court. With great respect, for the reasons mentioned in the earlier cases, we do not agree with this view. Therefore, in view of the consensus opinion of a larger number of High Courts as against the three High Courts, i.e., the Madras High Court, Andhra Pradesh High Court and Karnataka High Court, we prefer to accept the reasoning given by the High Courts of Calcutta, Gujarat, Rajasthan, Punjab and Haryana, Himachal Pradesh and Allahabad and answer the aforesaid question in favour of the Revenue and against the assessee.
C.M.A./1768/FC Order accordingly.