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December 6, 2020

Expenditure incurred on public issue of shares are revenue or capital expenditure?

by CA Shivam Jaiswal in Income Tax

Expenditure incurred on public issue of shares are revenue or capital expenditure?

A company raises its funds by issuing shares. Such an issue could be a private placement or a public issue. No matter what mode is adopted, an offer document has to be issued. It could be a statement in lieu of prospectus or the prospectus itself.

The company incurs the following expenses at the time of issue of shares:

  • Preparation of project report
  • Brokerage charges
  • Professional fees to company secretaries, auditors, legal advisors and others.
  • Payments to merchant bankers – managers to the issue, underwriters, advisors to the issue, and so on.
  • Printing and distribution of prospectus, application forms, publicity material, etc,
  • Media publicity and advertisement
  • Fee paid to the Government such as Ministry of Corporate affairs, Securities and Exchange Board of India. Etc.

However, can such expenditure be allowed as a deduction under the provisions of Income Tax Law? Let us refer to the case of Dy. CIT v. Raghuvir Synthetics Ltd (2017), where the issue under consideration was whether the expenditure on public issue of shares can be disallowed in an Intimation under section 143(1)(a) of the Act or not.

Facts of the Case:

  • The assessee is a public limited company and claimed deduction of Rs.65,47,448 on advertisement and public issue as revenue expenditure in the return of income.
  • The assessee also made an alternate claim in the return of income that if the claim cannot be considered as revenue expenditure, the same expenditure may be allowed under section 35D
  • The Assessing Officer disallowed a sum of Rs. 58,92,700 out of the preliminary expenditure incurred on public issue. He, however, allowed 1/10th of the total expenses and raised demand on the balance amount.
  • The CIT(A) deleted the adjustment made by the AO on the ground that such issue was a debatable issue and therefore, the concept of ‘prima facie adjustment’ under section 143(1)(a) could not be invoked.
  • The ITAT and Gujarat High Court confirmed the order of the CIT(A).
  • Aggrieved, the Revenue appealed before the Supreme Court (SC)

Observations of the Supreme Court (SC) on the different views expressed in various courts

  • Appellant relied upon the decisions of SC in Brooke Bond India Ltd. v. Commissioner of Income Tax, and Punjab State Industrial Development Corporation Ltd., Chandigarh v. Commissioner of Income Tax, Patiala to contend that the preliminary expenses incurred for public issue or for raising additional capital was only capital expenditure and not a revenue expense.
  • Appellant held that as the law was settled by the SC, it would relate back and would be held to be operative from the very inception.
  • Divergent views were expressed by various High Courts on this issue.
  • The Madras, Andhra Pradesh, Kerala and Karnataka High Courts had held that the preliminary expenses incurred on raising share capital is a revenue expenditure.
  • The Allahabad, Himachal Pradesh, Delhi, Calcutta, Bombay, Gujarat and Rajasthan High Courts had held that such expenditure is capital in nature

Conclusion by the Supreme Court (SC)

  • SC held that even though it was a debatable issue but Gujarat High Court in the case of Ahmedabad Mfg. & Calico (P) Ltd. (supra) had taken a view that it was capital expenditure.
  • The same was subsequently followed by Alembic Glass Industries Ltd. V. CIT (supra).
  • As the registered office of the respondent assessee was in the State of Gujarat, the law laid down by the Gujarat High Court was binding.
  • Therefore, so far as the present case is concerned, it cannot be said that the issue was a debatable one.
  • Therefore, disallowance of such expenditure could be made in an Intimation under section 143(1)(a) of the Act.

In conclusion, as the present case was from Gujarat and there was no debate as to the allowability of expenses incurred on public issue of shares in the State of Gujarat, therefore, the said expenses were disallowed.

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