Income Tax Appellate Tribunal - Mumbai
Income-Tax Officer vs India Photographic Co. Ltd. on 20 August, 1986
Equivalent citations: [1987]20ITD89(MUM)
ORDER
Rajendra, Accountant Member
1. The assessee-company deals in photographic films and materials. The relevant account year ended 31-10-1979.
Ground No. 1 :
2. The ITO disallowed under Section 40A(5)(a) of the Income-tax Act, 1961 ('the Act') Rs. 81,802 under Sub-clause (i) and Rs. 64,391 under Sub-clause (ii). He treated the medical expenses reimbursed by the assessee-company to its employees as part of the employees' salaries as per directions of the IAC.
3. The Commissioner (Appeals), however, observed that the ITO had treated the reimbursement of medical expenses to the employees by the assessee-company as perquisites and that the said action of the ITO was wrong because any cash payment cannot be treated as perquisite. He relied on the Tribunal Bombay's order in the case of Glaxo Laboratories (India) Ltd. v. Second ITO [1986] 18 ITD 226 (SB), [details not given in Commissioner (Appeals)'s order] for coming to the said finding. He accordingly deleted Rs. 10,806.
4. We have already noted above that the ITO has treated reimbursement of medical expenses as part of salary which was in conformity with paragraph 19 of the Tribunal Bombay, Special Bench decision in Blackie & Sons (India) Ltd. v. ITO [1983] 3 SOT 72. We accordingly vacate the Commissioner (Appeals)'s order on this point and restore that of the ITO.
Ground No. 2 :
5. The ITO had treated as perquisite club subscriptions paid by the assessee-company in respect of membership of its employees of different clubs. The Commissioner (Appeals) accepted the assessee's contention that the said subscriptions were not perquisites. He accordingly deleted Rs. 3,226. Clause (b) of Explanation 2 to Section 40A(5) defines perquisites to include, inter alia, as per Sub-clause (iv) payment by the assessee of any sum in respect of any obligation which but for such payment would have been payable by the employee. Normally, when an employee is a member of a club, it is the employee's obligation to pay the club subscription and, therefore, when the employer has paid the club subscription, the payment thus falls under the definition of 'perquisite' as per Clause (b) of Explanation 2 to Section 40A(5).
6. The learned counsel for the assessee urged before us that reference under Section 256(2) of the Act by the revenue in the case of CIT v. Citibank had been rejected by the High Court as per report in [1984] BCA Journal 798. We do not have the benefit of the complete judgment of the Bombay High Court nor of the findings of fact or law given by the Tribunal. We are, therefore, unable to draw any guidance from the aforesaid report. In view of the clear legal position discussed by us above, we hold that the payment of club subscription by the employer (assessee-company) in respect of its employees' obligations would constitute perquisite. We accordingly vacate the Commissioner (Appeals)'s order on this point and restore that of the ITO.
Ground No. 3 :
7. Penalty of Rs. 2,000 was levied by the customs authorities. We have not been furnished with any details to show for which offence the penalty was levied by the customs authorities. Neither the ITO's assessment order nor the Commissioner (Appeals)'s order gives any facts. The Commissioner (Appeals) held the penalty to be allowable on the ground that it was imposed for a technical default and under similar circumstances the Tribunal had deleted such additions in the assessment years 1973-74 and 1979-80. In the assessment year 1973-74, penalty of Rs. 2,300 was levied for importing certain goods in contravention of rules which goods were confiscated by the customs authorities and were released only on payment of the aforesaid amount. The Tribunal held that the said import was under a bona fide misunderstanding and hence the said penalty of Rs. 2,300 was allowable,
8. In the assessment year 1979-80, the Tribunal in paragraphs 12-14 did not discuss any facts [which were presumably given in the Commissioner (Appeals)'s order] and confirmed the order of the Commissioner (Appeals) following its order for the assessment year 1973-74. [The Commissioner (Appeals)'s order not made available to us].
9. The Bombay High Court in T. Khemchand Tejoomal v. CIT [1986] 27 Taxman 72 has held that penalty imposed for importing goods not conforming to specification of licence is not an allowable deduction. Following the said decision, we vacate the Commissioner (Appeals)'s order and restore that of the ITO disallowing the payment of penalty of Rs. 2,000.
Ground No. 4 :
10. Rs. 8,07,624 were disallowed by the ITO as share issue expenses, after noting that the business of erstwhile (Indian) Branch of Kodak Ltd. was taken over by the assessee-company under a scheme of amalgamation approved by the Bombay High Court and the said expenditure was incurred to issue shares of the company and to bring down the non-residential holding to 40 per cent as per Reserve Bank's directive. He disallowed (as per page 4 of assessment order) the claim on the ground that it is not of current nature and is not an expenditure incurred to earn the income and, therefore, cannot be set off against (current) receipts. The Commissioner (Appeals) however, allowed the said expenses following order of the Tribunal Bombay Bench 'D' in the case of ITO v. Godfrey Philips (I) Ltd. [IT Appeal No. 1410 (Bom.) of 1981 dated 24-7-1981] for the assessment year 1976-77 (PB 8) which had followed CIT v. Kisenchand Chellaram (India) (P.) Ltd. [1981] 130 ITR 385 (Mad.).
11. The assessee-company was incorporated on 23-8-1973 for acquiring the business and undertaking in India of Kodak Ltd. which was a nonresident company. The assessee-company applied to the Bombay High Court for the takeover of the aforesaid Indian branch of Kodak under a scheme of amalgamation and by the High Court's orders dated 23-9-1977 and 11-5-1979, the business of the said Indian branch of Kodak Ltd. vested in the assessee-company with effect from 1-11-1976 and the assessee allotted 1,97,493 equity shares of Rs. 10 each to Kodak Ltd. Earlier 7 shares had been allotted to the promoters of the company. Reserve Bank of India, by letter dated 6-7-1979, granted permission to the assessee-company, which at that time was a wholly-owned subsidiary of the non-resident Kodak Ltd., to carry on business subject to reducing the non-resident interest to 40 per cent. The assessee-company thereafter made public issue of 2,32,500 equity shares of Rs. 10 each for cash at premium of Rs. 6 per share and the shares were subscribed by the public up to 26-9-1979. Thus, on the closing of the accounts on 31-10-1979 (relevant for the assessment year 1980-81), the company's share capital stood at Rs. 50 lakhs, though all the shares to the public had not yet been allotted. From the facts mentioned above, it is clear that as a result of the public issue, the assessee-company's share capital base expanded to Rs. 50 lakhs as against the original base of 7 shares of Rs. 10 each for promoters and shares of face value of Rs. 19,74,930 allotted to parent company Kodak Ltd.
12. It is on these facts that we have to examine whether share issue expenditure of Rs. 8,07,624 is allowable. We find from the details of the said expenditure that it includes (a) professional expenses for prospectus--Rs. 61,650, and (b) advertisement expenses for prospectus Rs. 86,773, charges of the Registrars to the issue--Rs. 2,33,775, printing, stationery and postage, about Rs. 3.34 lakhs.
13. From the narration of the above facts, it is clear that the aforesaid expenditure was incurred for public issue of 2,32,500 shares and the said shares were issued for expanding the capital base of the assessee-company to Rs. 50 lakhs. It is also true that by the said public issue, the non-resident shareholding of the parent company was reduced to 40 per cent.
14. The Bombay High Court in Bombay Burmah Trading Corpn. Ltd. v. CIT[ 1984] 145 ITR 793 under question No. 3 (at page 801) were dealing with allowability of expenditure on raising additional capital by the company by incurring expenditure on fees paid to Registrar of Companies. The Bombay High Court noticed that the Madras High Court in Kisenchand Chellaram (India) (P.) Ltd.'s case (supra) had taken the view that fees paid to the Registrar of Companies for enhancement of capital were spent only for the purpose of business and, therefore, there was no capital element in this expenditure. The Bombay High Court, however, observed that the said Madras High Court decision runs counter to a series of decisions of other High Courts which held to the contrary. The Bombay High Court referred to India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC) where the expenditure incurred on stamp duty, registration fees, etc., in connection with loan obtained from the Industrial Finance Corpn. was held as an admissible expenditure. The Bombay High Court noted that the Supreme Court in India Cements Ltd.'s case (supra) had highlighted the difference between obtaining of capital by issue of shares and of obtaining of loan by debentures and that the Supreme Court had referred to the Bombay High Court's earlier decision in Tata Iron & Steel Co. Ltd., In re [1921] 1 ITC 125 where underwriting commission had been paid on issue of preference shares and Macleod, CJ., had held that if cost of raising the original capital cannot be deducted from profit, it was difficult to see how the cost of raising additional capital can be treated in a different way and that expenses incurred in raising capital are of the same character whether the capital is raised on the floatation of the company or thereafter. The Bombay High Court specifically referred to the observations of the Supreme Court in India Cements Ltd.'s case (supra) at page 61 'obtaining capital by issue of shares is different from obtaining loan by debentures'.
15. We also note that the Supreme Court at page 63 had summarized the position by pointing out that the loan obtained is not an asset or advantage of an enduring nature.
16. The Bombay High Court thus dissented from the Madras High Court's decision in Kisenchand Chellaram India (P.) Ltd.'s case (supra) and preferred to fall in line with Upper Doab Sugar Mills Ltd. v. CIT [1979] 116 ITR 928 (All.), Mohan Meakin Breweries Ltd. v. CIT [1979] 117 ITR 505 (HP) and Hindustan Gas & Industries Ltd. v. CIT [1979] 117 ITR 549 (Cal.).
17. However, dealing with expenditure on printing and stationery and postage and telegrams, the High Court observed that the said expenses were incurred consequent upon the issue of bonus shares and they were not expenses which could be said to be incurred for the purpose of raising any additional capital and, therefore, these expenses were incurred in the normal course of the assessee-company's business. The Bombay High Court accordingly held that the said expenditure was not capital expenditure. We may, however, distinguish our case from the aforesaid case of Bombay Burmah Trading Corpn. Ltd. (supra) where a running company had issued bonus shares and the expenditure on printing and stationery, etc., was incurred in the normal course of business and not for the purpose of raising any additional capital (page 804) ; while, in our case, the company is going through stages of standing on its feet as an independent entity and not as a subsidiary of a foreign company and the expenses are being incurred on raising its original capital (see page 7 of prospectus). Therefore, the expenditure even on printing and stationery and postage and telegrams does form an integral part of the expenditure incurred on raising the initial capital of the assessee-company.
18. The learned counsel for the assessee relied on the aforesaid decision in Kisenchand Chellaram (India) (P.) Ltd.'s case (supra) and urged that the aforesaid expenditure of Rs. 8,07,624 was incurred for continuing the assessee's business and to comply with the Reserve Bank's directions for diluting the foreign equity to 40 per cent. As we pointed out to the assessee's counsel, this could be done by offering 60 per cent of the holding of the foreign shareholders to the public as was done by many FERA companies. The fact remains that the assessee-company was raising its initial share capital from the public and the said expenditure was incurred for raising the said share capital.
19. In Upper Doab Sugar Mills Ltd.'s case (supra), additional equity shares were issued and the Allahabad High Court held that equity shares constitute the capital of the company and they are an integral part of 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 day-to-day operations of the business and, therefore, the expenses incurred in connection with the issue of additional equity shares was capital expenditure.
20. In Mohan Meakin Breweries Ltd.'s case (supra), the Himachal Pradesh High Court held that obtaining capital by issue of shares is different from obtaining loan by debentures. Expenditure incurred by a company for raising a loan is a liability and it is required to be repaid, while when the share capital of a company is increased, company gets more capital and thus gets an advantage of an enduring nature and, therefore, expenditure incurred to raise the share capital is capital expenditure.
21. In Hindustan Gas & Industries Ltd.'s case (supra), the Calcutta High Court held that expenditure incurred for payment of legal charges to soli-citers on issue of prospectus for offering preference shares and payment of under-writing commission and brokerage is capital expenditure.
22. In Bharat Carbon & Ribbon Mfg. Co. Ltd. v. CIT [1981] 127 ITR 239 (Delhi), it was held that registration fees paid for increasing the authorised capital was capital expenditure.
23. In Shree Digvijay Cement Co. Ltd. v. CIT [1982] 138 ITR 45 (Guj.), it was similarly held that expenditure on issue of new shares was capital expenditure because the shares issued by the company constituted its capital and they were an integral part of the permanent structure of the company and were not in any way connected with the working capital.
24. In Brooke Bond India Ltd. v. CIT [1983] 140 ITR 272 (Cal), it was similarly held that issue of fresh lot of shares by the company reinforced the capital base of the company on a permanent basis and though alteration in the capital structure by raising the share capital would make more funds available but that by itself was not decisive of the matter and the object and purpose of the expenditure was to strengthen the capital structure of the company and as an incidental result, more funds flowed to the assessee-company making more working funds available to the assessee but that did not change the essential object and purpose of incurring the expenditure because of making fundamental change in the income earning machinery and structure. The Allahabad High Court held that amalgamation expenses of the two companies were capital expenditure--Raza Buland Sugar Co. Ltd. v. CIT [1980] 122 ITR 817 and Raza Buland Sugar Co. Ltd. v. CIT [1980] 123 ITR 24. It was held that the expenses incurred in connection with the amalgamation had been incurred prior to the company's formation and were integrally connected with the creation of the said company.
25. In view of the aforesaid decisions, we hold that the expenditure of Rs. 8,07,624 was a capital expenditure as it related to the capital structure or framework of the assessee-company. We accordingly vacate the Commissioner (Appeals)'s order on this point and restore that of the ITO disallowing the said expenditure.
26. In the result, the revenue's appeal is allowed.