Bombay High Court
Hindustan Lever Ltd vs The C.I.T.B.C.Iii on 8 September, 2016
Bench: M.S. Sanklecha
itr-185-1999
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX REFERENCE NO. 185 OF 1999
Hindustan Lever Ltd. ]
Hindustan Lever House, ]
165/66, Backbay Reclamation, ]
Bombay - 400 020 ] .. Applicant.
V/s.
The Commissioner of Income Tax ]
Bombay City-II, Bombay ] .. Respondent.
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.
CORAM: M.S.SANKLECHA, &
S.C.GUPTE, JJ.
RESERVED ON : 2nd SEPTEMBER, 2016.
PRONOUNCED ON : 8 th SEPTEMBER, 2016.
JUDGMENT (Per M. S. Sanklecha, J.):-
1 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:-
(A) Whether on the facts and circumstances of the case and in
law, the Tribunal was right in holding that the expenditure
incurred by the assessee company in connection with the issue of
share capital with a 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 ?
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(b) Whether on the facts and circumstances of the case and in
law, the Tribunal was right in holding that 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?
2 The Assessment Year relates to A. Y. 1978-79.
3 Briefly, the facts leading to this Reference are as under:-
(a) The Applicant-Company 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
Applicant-Company diluting foreign equity share holding in it.
The condition in the industrial licence reads as under:-
"The company should issue fresh shares to the Indian
public to the exclusion of the foreign share-holders, to the
extent of which will, after the proposed issue of bonus
shares in the proportion of one new share to every six
shares reduce the shareholding of the non-resident
shareholders from the present figure of 85% at the most
to 70% during the course of implementation of this
project only which is for the manufacture of STPP by
31.3.1977. This condition will not operate as a precedent
for any other future projects of the company."
Consequent to the above, the Applicant issued shares to the Indian
Public. Thus, reducing the percentage of foreign share holding in it.
(b) Applicant-Company had for the purpose of issuing shares to Indian
Public incurred an expenditure of Rs.33.74 lakhs. In the assessment
proceedings, the Applicant claimed that the expenses of Rs.33.74
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lakhs on account of issue of additional shares to the Indian public
were in the revenue field and sought deduction of the same while
computing its income chargeable to tax. However, the Assessing
Officer by an order dated 27th February, 1981 did not accept the
Applicant's contention, holding that any expenditure for issue of
additional share capital, would be in the capital field and thus
not allowable for deduction as a revenue expenditure.
(c) Being aggrieved, the Applicant filed an appeal to the Commissioner
of Income Tax (Appeals) [CIT(A)]. Before the CIT(A), the Applicant
urged that the entire expenses of Rs.33.74 lakhs should be allowed
as it is an expense incurred with the object of carrying on its
business to increase its profitability, in view of conditional licence
granted to it. Alternatively, it was submitted that in any event, a
sum of Rs.4.88 lakhs being the interest earned on the amounts
received on issue of shares and deposited in the bank, subject to the
allotment of shares, should be excluded while computing the total
income. The CIT(A) by his order dated 20 th April, 1983, allowed
the Appeal of the Applicant by inter alia holding that the issue of
shares for diluting the foreign share holding was issued as per the
Government of India's directions and failure to do so would have
resulted in stopping its expansion / diversification programme
affecting its business. Thus, the expenses incurred on issue of shares
to Indian public have to be allowed as a deduction while computing
the total income. In the above view, the alternative submission
urged for excluding the interest earned on the amounts received on
allotment of shares, was not considered.
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(d) Being aggrieved, the Revenue carried the issue in appeal to the
Tribunal. The Applicant-Assessee filed its cross-objection before the
Tribunal on the issue of interest earned on the share application
money till allotment of shares not to be included in computing its
income. The Tribunal by an order dated 30 th March, 1999
allowed the Revenue's Appeal by holding that raising additional
capital, being in the capital field, cannot be allowed as a
revenue expenditure. It placed reliance upon the decision of the
Kerala High Court in Commissioner of Income Tax v/s. Common
Wealth Trust Ltd. 167 ITR 365 wherein it is held that expenditure
capital in nature
incurred for changing the capital structure of the company was
and not revenue. So far as the alternative
contention raised by the Applicant in its cross-objection is
concerned, the Tribunal held that the interest earned on share
application money, has to be taxed as income from other
sources. Accordingly, the cross-objection filed by the Applicant-
Assessee, was rejected.
4 On the aforesaid facts, the Tribunal has posed the two
aforesaid questions for our opinion / consideration:-
5 Regarding Question (A):-
(i) Mr. Pardiwalla, learned Senior Counsel appearing for the Applicant
urges that the entire expenditure of Rs.33.74 lakhs has to be
allowed as revenue expenditure under Section 37 of the Act to
compute its income. In support, he submits that the test to
determine whether expenses incurred on issue of shares is
capital or revenue in nature, would be to ascertain the purpose /
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object for issue of shares. If the purpose and object for issuing
shares, was to enable the Applicant-Assessee to carry on its
business by increasing its profitability then it would be revenue in
nature. In the present facts, the licence to enhance/ diversify its
manufacturing activity, was issued on the condition of diluting
the foreign share capital. This could only be achieved by
issuing shares to Indian public. Thus, the expenses incurred for
the issue of shares to Indian public is to be allowed as revenue
expenditure. It is further submitted that although, apparently,
the issue seems to be covered against the Applicant-Assessee by the
decision of the Apex Court in Commissioner of Income Tax
v/s Kodak India Ltd., 253 ITR 445, yet, on its closer scrutiny and
when read along with the other decisions, it will support the
Applicant's submission, viz: where the main object is to improve
the profitability of the business and increase in capital is
incidental, as in this case, the expenditure incurred is to be
allowed as revenue expenditure.
(ii) We have considered the submissions made on behalf of the
Applicant-Assessee. We find that the Apex Court in Kodak India
Ltd. (supra), has held that expenses incurred in connection with
issue of public shares to Indian public even when the issue of shares
was done to comply with the directions of the Reserve Bank of
India (RBI), would be an expenditure incurred in the capital field.
The facts before the Apex Court in Kodak India Ltd., (supra) were
that Kodak had to increase its share capital amongst the Indian
public as it had been directed by RBI to reduce the foreign
shareholding, if it wanted to continue to do business in India. On
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the aforesaid facts, the Court held that the object of the Assessee
therein was to increase share capital and at whose instance, it was
done, was not material. In the present facts also, the issue of fresh
shares, was to comply with the condition imposed by
Government of India for obtaining a manufacturing licence. This
licence would enable it to carry on business, and yet it would be
in the capital field just as in the case of Kodak (I) Ltd. (supra).
Thus, this issue is no longer res-integra before us and stands
concluded against the Applicant-Assessee.
(iiii) However, the Applicant-Assessee urges that the decision of the Apex
Court in Kodak India Ltd., (supra) would not apply to the present
facts as it relied upon its earlier decision in Punjab State
Development Corporation (supra). It is urged by the Applicant-
Assessee that if the principle laid down in Punjab State
Development Corporation (supra), is applied to the present facts,
then the expenditure incurred on account of issue of shares
would be a revenue expenditure. The Apex Court in Punjab State
Development Corporation (supra) was concerned with the issue
whether the filing fees paid to the Registrar of Company for
enhancement of capital by issue of shares is to be considered as a
capital or revenue expenditure. The Court held that any
expenditure directly related to expansion of the capital base of
the company would be a capital expenditure although incidental
benefit may be for running of its business and making of profit.
Thus, in the aforesaid facts, the filing fee was held to be on
capital account. Taking a cue from the words 'directly related' and
'incidental benefit' as used by the Apex Court, Mr. Pardiwalla, urges
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that in this case, the issue of share capital was primarily for doing
business and increasing its profits. The change in capital
structure was incidental.
(iv) Thus, the Apex Court in Kodak India Ltd., (supra) on an identical
fact situation applied the ratio of the Punjab State Development
Corporation (supra) to conclude that it would apply to cover
expenditure incurred for issue shares even if done to comply with
the RBI directions for the purpose of carrying on business. Thus,
the decision of the Apex Court in Kodak India Ltd. (supra)
would apply to the facts of thepresent case and no fault can be
found in view of the Tribunal.
(v) Mr. Pardiwalla, thereafter, relied upon certain observations of the
Apex Court in Brookebond (India) Ltd. v/s. CIT 225 ITR 798.
Before adverting to the observations relied upon by the
Applicant, we must note that the issue before the Apex Court
was whether expenditure in connection with issue of shares
related to expanding its capital base, should be considered to be
revenue or capital in nature. The Court held that expenditure
incurred for change in capital base, is capital in nature. It held that
the issue is covered by its decision in Punjab State Development
Corporation (supra). However, thereafter in response to submissions
of Counsel that increase in capital base by issue of additional
shares was done only in order to meet the working fund
requirements, it observed that the statement of case does not
so indicate. Mr. Pardiwalla, suggested that this implies that it
would be another matter if the statement of case had indicated so.
To extend the submission of a Counsel which the Court did not deal
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with to a status of a ratio of a decision is not permissible. These
observations of a Court being relied upon by Mr. Pardiwalla, will
not even qualify as obiter dicta. In fact, if anything, the ratio of
the Apex Court in Brookebond India (supra) that any expenditure
incurred for issue of additional issue of shares which relates to
expansion of capital base would be on capital account, would cover
the question raised herein in favour of the Respondent- Revenue.
(vi) The Applicant-Assesses then placed reliance upon the decision of
this Court in Commissioner of Income Tax Vs. Chemosyn Ltd.
371 ITR 427 (wherein one of us, M.S. Sanklecha, J. was a
member) to contend that this Court has allowed amounts paid for
reduction of capital base of the company as revenue
expenditure. Therefore, it is submitted that in this case also, the
expenditure incurred on issue of shares be allowed. The order in
Chemosyn Ltd. (supra) was passed at the admission stage when
this Court refused to entertain the Revenue's Appeal from the order
of the Tribunal on the ground that no substantial question of law
arises. The decision was rendered on the following facts :-
(a) There was a dispute between brothers, who together owned
the Assessee-Company. As a consequence of the differences
between the two groups, the dispute reached to the Company
Law Board. The two warring groups of shareholders arrived
at a settlement and as per the direction of the Company Law
Board, the Assessee-Company was directed to buy 34% of
shareholding of one of the warring group and cancel the
same. The Respondent-Assessee had claimed before the
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Assessing Officer, the amount of Rs.6.81 Crores (being
difference between the consideration paid and the face value
of the shares acquired for cancellation) as revenue
expenditure. This was on the basis that the dispute between
the shareholders had adversely affected the business of the
company and the payment was made for the purposes of the
effective carrying on the business of the company.
(b) On aforesaid facts, the Tribunal upheld the contention of the
Assessee-Company by placing reliance upon its own decision
in the case of H.J. Industries Ltd. Vs. Dy. Commissioner of
Income Tax, 88 TTJ 1089, wherein on identical fact
situation, the expenditure incurred by the Assessee to
purchase its own shares from one of the warring groups of
shareholders consequent to a direction of the Company Law
Board was allowed as a revenue expenditure. An appeal from
the order of the Tribunal was also dismissed by this Court.
(c) Further, the Tribunal recorded a finding of fact that the
dispute between the brothers had affected the business of the
company and its sales had come down from Rs.25 Crores per
annum in the pre-dispute period to about Rs.9 to 14 Crores
during the litigation period. Again, post settlement, the sales
had increased to nearly Rs.18 Crores per annum. On the
aforesaid facts, the Tribunal held that the amount paid in
excess of the face value of shares was an expenditure
incurred only for the smooth running of the business and
thus allowable as a revenue expenditure.
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(d) It was not disputed by the Revenue that the facts and
circumstances in the case of H.J. Industries Ltd. (supra) were
identical to the case under consideration and the appeal filed
by the Revenue in H.J. Industries Ltd. (supra)was dismissed
by this Court. In the above facts, the change / reduction in
the capital base by purchase of shares at its face value was
never claimed as revenue expenses. What was claimed as
revenue expense was the amount paid by the Assessee to a
warring shareholder, to let it carry on its business. The
warring shareholder, on facts was found to be an impediment
in the Assessee doing business and therefore, expenditure
incurred to get rid of the obstacle was allowable as revenue
expenditure. Thus, the above decision was not concerned
with expenditure incurred on reduction of capital of the
Assessee therein. It allowed deduction on account of
payment made to a person/ shareholder who was an obstacle
/ impediment in the doing of the business. Thus, the above
decision is rendered on completely different facts and will
not apply to the present facts. Moreover, the decision of the
Apex Court in Kodak India Ltd. (supra) was not noticed
by the Court. Therefore, in our view, reliance upon
Chemosyn Ltd. (supra) is inappropriate.
(vii) A direct decision of the Apex Court in Kodak India Ltd. (supra)
which was rendered on identical fact situation as arising in this
case, would cover the controversy herein.
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(viii) In the above view, question (A) is answered in the affirmative i.e. in
favour of the Revenue and against the Applicant-Assessee.
6. Regarding Question (B) :-
(i) Mr. Pardiwalla, learned Senior Counsel appearing in support of the
appeal, stated that the interest was earned on receipt of share
application money deposited in a specified account as required
under Section 73(3) of the Companies Act, 1956 till such time as
the allotment of shares is made. Therefore, this earning of interest
is a part of an integrated transaction, namely, issue and
allotment of shares. Thus, it is submitted that any income earned
on the amount of share application money has to necessarily be
adjusted against the share issue expenses and not separately
taxed. It is submitted that the Tribunal did not consider the
statutory obligation of the Assessee to keep the share application
amounts received from the prospective shareholders till its
allotment in a separate account under Section 73(3) Companies
Act, 1953. It was not a case of earning of interest on call deposits
with the bank made out of the share application money.
(ii) We find that this issue has been held in favour of the Applicant-
Assessee by the decision of Gujarat High Court in Commissioner of
Income Tax v/s. Shree Rama Multi Tech Ltd. 214 Taxman 650,
wherein an identical issue as arising herein was raised in the
following manner :-
"Whether the Tribunal erred in setting aside the issue set
off of interest income from share application money against
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public issue expenses ?"
(a) The Gujarat High Court held that the Assessee was statutorily
required to keep the share application money in a separate account,
till the allotment of shares is completed. Therefore, interest earned
on such separately kept amount was adjustable towards the
expenditure incurred for raising share capital. This is so as the
earning of interest was inextricably linked with the requirement to
raise share capital. In support, reliance was placed upon the
decisions of the Apex Court in Commissioner of Income Tax v/s.
Bokaro Steel Ltd. 236 ITR 315 and Commissioner of Income Tax
v/s. Karnal Co-operative Sugar Mills Ltd. 243 ITR 2. We are in
respectful agreement with this decision of the Gujarat High Court.
(b) The reliance placed by Gujarat High Court on Bokaro Steel Ltd.
(supra) and Karnal Co-operative Sugar Mills Ltd. (supra) was
apposite. In Bokaro Steel Ltd. (supra), the Apex Court held that
during the construction of the steel plant, M/s. Bokaro had charged
rent, hire charges and interest on advances from its contractors. The
Revenue sought to tax the above as revenue receipts. The Apex
Court held the above income went to reduce the cost of
construction and were capital receipts. In Karnal Co-operative
Sugar Mills Ltd. (supra) the amount had been deposited in a bank
to open a letter of credit for purchase of a machinery required for
setting up a plant. The deposit so made to open the letter of credit
earned interest. This interest is inextricably linked with the
purchase of the machinery and such interest income has
necessarily to be taken into account to reduce the cost of
acquisition of asset, being income incidental to the purchase of
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the asset. In this case also, the share application money has been
kept in the separate account as statutorily required till
allotment of shares and any interest earned on the deposit of share
application money is directly linked with the issue and
allotment of fresh shares. Consequently, it cannot be brought
to tax as income but has to be taken into account to reduce the
expenditure incurred on issue of shares.
(iii) Mr. Pardiwalla, learned Senior Counsel for the Applicant
Assessee, very fairly brought to our notice a decision of a single
Judge of the Karnataka High Court in Southern Herbals Ltd. v/s.
Settlement Commission and Anr. 261 ITR 681. In the above case,
the Court, while dismissing a petition under Article 226 of the
Constitution of India, upheld the order of the Settlement
Commission that interest earned by an assessee on investment of
share investor's money is to be classified under 'income from other
sources' and not as 'business income'. It applied the principle laid
down in the decision of the Apex Court in Tuticorin Alkali
Chemicals and Fertilizers Ltd. v/s. Commissioner of Income
Tax, 227 ITR 172, where interest was earned on loans taken
before the commencement of business and such interest was held
to be chargeable to tax. However, the Apex Court in Karnal Co-
operative Sugar Mills Ltd. (supra) on identical facts, as arising
herein, had occasion to consider both the decisions of the Apex
Court in Bokaro Steel Ltd., (supra) and Tuticorin (supra). On
consideration on the fact situation, it held that the ratio of the
Apex Court in Tuticorin (supra) would not apply to the
present facts but the Apex Court decision in Bokaro Steel Ltd.
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(supra) would apply. In any case, the Karnataka High Court's
decision was rendered in the context of Article 226 of the
Constitution of India and completely different considerations apply
in writ petitions as opposed to Appeals/References.
(iv) In the above view, question (B) as raised for our opinion is
answered in the negative, i.e. in favour of the Applicant-Assessee
and against the Respondent-Revenue.
8 The two substantial questions of law as referred to us by the
Tribunal, are answered as under:-ig
(i) Question (A) in the affirmative i.e. in favour of the Revenue and
against the Applicant-Assessee; and
(ii) Question(B) in the negative i.e. in favour of the Applicant-Assessee
and against the Revenue.
9 Income Tax Reference disposed of in the above terms. No
order as to costs.
(S.C.GUPTE,J.) (M.S.SANKLECHA,J.)
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