Income Tax Appellate Tribunal - Mumbai
Ags Transact Technologies ... vs Dcit Circle 6(1)(1), Aayakar Bhavan ... on 17 February, 2025
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "A" MUMBAI
BEFORE SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER)
AND
SHRI RAHUL CHAUDHARY (JUDICIAL MEMBER)
ITA No. 4653/MUM/2024
Assessment Year: 2020-21
AGS Transact Technologies DCIT Circle 6(1)(1),
Ltd., Aayakar Bhavan,
601-602, Trade World, B Wing Vs. Mumbai-400020.
S.B. Marg, Lower Parel,
Mumbai-400013.
PAN NO. AAECA 0901 H
Appellant Respondent
Assessee by : Mr. Dalpat Shah
Revenue by : Dr. K.R. Subhash, CIT-DR
Date of He aring : 04/12/2024
Date of pronouncement : 17/02/2025
ORDER
PER OM PRAKASH KANT, AM
This appeal by the assessee is directed against order dated 01.08.2024 passed by the Ld. Commissioner of Income-tax (Appeals) - National Faceless Appeal Centre, Delhi [in short 'the Ld. CIT(A)'] for assessment year 2020-21, raising following grounds:
AGS Transact Technologies Ltd 2 ITA No. 4653/MUM/2024
1. Disallowance of Aborted IPO Expenditure of Rs.10,22,08,242/ U/sec 37.
Rs.10,22,08,242/-
1.1. On the facts and circumstances of the case and in Law, The Commissioner of Income tax (Appeals), National Faceless Appeal Centre (NFAC), erred in confirming the disallowance of IPO expenditure of Rs. Rs.10,22,08,242/ Rs.10,22,08,242/- U/sec 37 of the Income tax Act, on the ground that the same is capital in nature but ignoring the fact that the proposed IPO was aborted as the appellant could not open the same by the SEBI approved the due date of 04.10.2019 and hence the Legal and Filing Cost was allowable U/sec 37 no enduring benefit has accrued to the assessee as no new asset was acquired.
C.I.T.(Appeals) also erred in not considering the fact that 1.2. The said C.I.T.(Appeals) there was a Offer for Sale (OFS) by existing shareholders to Public and it was not an IPO during A.Y.2021-22 22 and also erred in not considering the fact that the expenditure on OFS were incurred by the th said shareholders and not by the A Appellant can ppellant and therefore that cannot be the ground to disallow aborted IPO expenditure U/sec 37 of the.
the 1.3. The said C.I.T.(Appeals) erred in following the decision of Supreme Court in the case of Brooke Bond India Ltd. 2 25 ITR 798 ignoring the 225 fact that the said expenditure was towards Legal & Professional Fees, SEBI Fees, Stock Exchange Fees and not for increase in Autho Authorized Share Capital.
2. No Interest granted U/sec 244A on Tax Refund On the facts and circumstances of the case and in Law, the said A.O. erred in not granting any interest U/sec 244A on the due income tax refund since the date of filing of income tax return.
2. Briefly stated, facts of the case are that during the year under consideration the assessee company com was engaged in the business of providing end to end cash and digital payments solutions and automation technology to its customers.. The assessee filed return of income on 29.06.2021 declaring total income at Rs.111,94,45,140/-
Rs.111,94,45,140/ .The The return of income fil filed ed by the assessee was selected for scrutiny Income assessment and statutory notices under the Income-tax Act, 1961 (in short 'the Act') were issued and complied with. In the AGS Transact Technologies Ltd 3 ITA No. 4653/MUM/2024 assessment order passed u/s 143(3) of the Act, the Assessing Officer disallowed expenses of Rs.10,22,10,000/ Rs.10,22,10,000/- incurred in relation to initial public offer (IPO) for raising equity share capital. During the assessment proceedings, the assessee contend contended that the IPO was aborted and hence no asset of enduring nature was created by way of those expenses, thus, expenses being in the nature of the revenue expenditure, expenditure same were allowable u/s 37(1) of the Act. But the Ld. Assessing Officer held that expenses incurred for raising equity share capital were in the nature of enduring benefit spread over the future for long period of time. The Assessing the assessee that IPO was aborted.
Officer also rejected the claim of the Instead, the Assessing Officer Officer observed that assessee had successfully raised equity share capital of Rs.501.81 crores through IPO in the subsequent financial year. On further appeal, the assessee relied on the decision of Hon'ble Supreme Court in the case of CIT v. Idea Cellular Ltd. 76 taxmann.com 77 and CIT v. Nimbus Communication Ltd. (ITA No. 4244 of 2010) dated 08.12.2011 and submitted submi that when the IPO is aborted, aborted no new re is no question of assessee getting asset come into existence and there any enduring benefit and hence said expenses incurred on the Act. But the Ld. CIT(A) aborted IPO was allowable u/s 37 of the Act.
cision of the Hon'ble Supreme Court in the case referred to the decision of Brook Bond India Ltd. v. CIT reported in 225 ITR 798 (SC) and in the case of Punjab State Industrial Development Corporation Ltd. v. CIT 225 ITR 792(SC) 792 and submitted that AGS Transact Technologies Ltd 4 ITA No. 4653/MUM/2024 expenditure incurred in connection with the issuance of shares is directly related to the expansion of the capital base and, hence, the same falls under the purview of capital expenditure. The Ld. CIT(A) further referred to the decision of the Hon'ble Delhii High Court in the case of Triveni Engineering Works Ltd. v. CIT 237 ITR 639 sustained the disallowance observing as under:
"4.2.3 4.2.3 It is further notable that, as per the decision of Hon'ble High Court of Delhi in the case of Triveni Engineering Works Limited Limi (vs) CIT 237 ITR 639, wherein, it has been held that, legal and professional charges incurred in connection with the merger of the company is not deductible as revenue expenditure.
4.2.4. It has been held in the following decisions of various judicial forums that, the expenditure incurred to maintain the capital base as per the FERA requirements can be construed to be a capital expenditure due to the fact that, the end result is restructure of the capital base:
a) Eskayef Limited (vs) DCIT, 71 ITD 419 (ITAT, (ITAT, Bombay)
b) Union Carbide India Limited (vs) CIT, 203 ITR 584 (Cal.)
c) CIT (vs) Kotak India Limited 253 /TR 445 (SC) In view of the above, I am of the considered view that, the expenditure incurred by the appellant to the tune of Rs.10,22,10,000/ being Rs.10,22,10,000/- ing expenses of certification fees and other services in connection with the issuance of IPO are capital in nature and the same is not allowable as deduction u/s 37 of the Act as revenue expenditure as per the above stated decisions of the Hon'ble Supreme Court. Accordingly, the action of the Assessing Officer on this issue is sustainable and hereby upheld.
Thus, the ground of appeal filed by the appellant on this is dismissed."
3. The Ld. counsel for the assessee filed a Paper Book containing pages 1 to 181.
AGS Transact Technologies Ltd 5 ITA No. 4653/MUM/2024
4. We have heard rival submissions of the parties and perused the relevant materials on record record.. Briefly stated facts of the case are additio al share capital by way of IPO, tthe assessee that for inviting additional engaged certain legal consultants and experts. The assessee filed draft read hearing prospectus (DRHP) with S Securities ecurities and Exchange EBI) on 20.08.2018 for IPO aggregating Rs.1000 Board of India (SEBI Rs.1 crores comprising of fresh issue of Rs.400 crores and offer for sale (OFS) by promoters Rs.600 crores. The SEBI approved the said IPO vide letter dated 26.10.2018 with a time line to open the IPO within 12 months. The he assessee incurred IPO related expenditure of Rs.10,2208,242/- toward fees to merchant bankers, stock exchange and SEBI filing fees, legal and professional professional fees and advertisement fees etc. in two years having details as under:
Particulars Rupees Remarks
F.Y. 2018-19 Rs.7.38 crores Shown under other current
(A.Y. 2019-20) assets (Refer Note 16 of
Balance Sheet for FY 2018-
2018
19)
F.Y. 2019-20 Rs.2.84 crores
(A.Y. 2020-21)
Total Rs.10.22 Crores Claimed as Revenue
Expenditure (Fef. Note 33
of Bal Sheet - FY2019-20)
4.1 However, the assessee abandoned the said proposed IPO during the assessment year under consideration vide Board 16.12.2019 a copy which is available on Paper Resolution dated 16.12.2019, Book page 82. The assessee claimed that expenses incurred on the consideration were the revenue proposed IPO during the year under consideration AGS Transact Technologies Ltd 6 ITA No. 4653/MUM/2024 expenditure u/s 37 of the Act. The assessee further submitted that in subsequent year, the assessee again filed a DHRP with the SEBI on 18.08.2021 for IPO aggregating Rs.800 crores through offer for sale (OFS) by promoters which was approved by the SEBI vide letter approved dated 24.11.2021. The assessee has mentioned that banker/stock exchange and SEBI filing fees, legal fees, advertisement fees etc. was incurred and born by the selling promoter in their individual capacity and not by the assessee and the same was claimed by the assessee promoter against the sale of the shares under the OFS.
4.2 Before us, the Ld. counsel for the assessee relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. Nimbus bus Communication Ltd. (supra). T d. counsel submitted The Ld. that the Assessing Officer erred in holding that the IPO expenditure capitalized ignoring the fact that same incurred till 31.03.2019 was capitalize was shown "other current assets. He further submitted that the lower authorities had ignored the fact that IPO during AY 2022-23 2022 promoter only and the whole proceedings of the was 'OFS' by the promoters OFS IPO was received by the promoter promoter and not by the assessee, hereas the lower authorities have completely ignored the said fact. whereas With reference to the decision decision of the Hon'ble Supreme Court relied upon by the Ld. CIT(A). The Ld. counsel submitted that said decisions are on expenditure incurred increase in the authorize authorized share capital and therefore are not applicable to the case of the assessee.
AGS Transact Technologies Ltd 7 ITA No. 4653/MUM/2024 4.3 is firstly, Thus issue in dispute before us is, firstly whether the expenditure incurred by the assessee for raising fresh capital of Rs.1000/- crores pertained completely to the proposed equity share capital of Rs. 400 crores for the assessee or was partly related to offer for sale by promoters of Rs.600 crores also. The assessee has claimed entire expenditure of Rs.10.22 crores pertaining to the IPO in its hand whereas the share of the expenditure related to OFS by the promoter was to be transferred/debited in the hands of the promoters which has apparently not been done for the year under consideration. Secondly, Secondly, the issue in dispute is whether the portion of the expenses related to the aborted IPO are in the nature of the revenue expenditure in the hands of the assessee. The Ld. CIT(A) has relied on the decision of the Hon'ble Supreme Court in the case of Brook Bond India Ltd. (supra) and Punjab State Industrial Development Corporation Ltd. (supra) wherein the registration fee paid for increase in share capital/ penses were held capital share issue expenses to be in nature of the capital expenditure being connected with the capital base of the assessee. The relevant finding of Hon'ble Supreme Court in the case of Brook Bond India Ltd. (supra) (supra is reproduced as under:
The question relates to the assessment year 1969-70 1969 and the relevant account year ended on June 30,1968. The assessee is a public limited company. It issued ordinary shares of Rs 10/ each at a premium with a view to 16,75,000/- of Rs 10/-
increase its share capital and, in that connection, it incurred an capital 13,99,305/- which amount was claimed by expenditure of Rs. 13,99,305/ AGS Transact Technologies Ltd 8 ITA No. 4653/MUM/2024 it as deductible expenses. The said deduction was disallowed by the Income Tax Officer on the view that the expenditure incurred by the assessee was on the capital account. The said view of the Income Tax Officer was affirmed by the Appellate Assistant Commissioner and the Tribunal. The High Court, while upholding the view of the Tribunal, has held that the expenditure and would fall under capital expendexpenditure. The High Court has placed reliance on the observations of this Court in India Cements Ltd. v. Commissioner of Income Tax, Madras,, 60 ITR 52, and it did not agree with the view taken by the Madras High h Court Commissioner of Income Tax, Tamil Ltd., 130 ITR 385.
Nadu-II v. Kisenchand Chellaram (India) P. Ltd., Dr. Debi Pal, the learned senior counsel appearing for the assessee, has submitted that the High Court was in appellant-assessee, error in holding that the expenses incurred by the assessee In issuing the shares with a view to increase its capital did not constitute revenue expenditure. According to the learned counsel, the said view of the High Court is not in consonance cons with the law laid by the this Court in Empire Jute Company Ltd. v. Commissioner of Income TaxTax,, 124 ITR 1; Commissioner Bombay v.. Associated Cements Co. Ltd., of Income Tax. Bombay-II Ltd. 172 ITR 257 and Alembic Chemical works Co. Ltd. v. Commissioner of Income Tax Tax.. Gujarat, 177 ITR 377. The learned counsel has also invited our attention to the decisions of thee High Courts of Andhra Pradesh, Kerala and Madras High Court in Kisenchand Chellaram (India) P. Ltd. (supra). [See: Warner Hindustan Ltd. v. Commissioner of ), 171 ITR 224; Hindustan Machine Tools Ltd. Income Tax (A.P.), (No. 3) v. Commissioner of Income Tax, Karnataka Karnataka-II, 175 ITR 220 and Federal Bank Ltd. v. Commissioner of Income Tax, Kerala. 180 80 ITR 241].
We find that this matter has come up for consideration before this Court in m/s Punjab State Industrial Development Corporation Ltd., Chandigarh v. Commissioner of Income Tax.
Tax ference No. 1 of 1990 decided on December 4, Patiala. (Tax Reference AGS Transact Technologies Ltd 9 ITA No. 4653/MUM/2024 1996). In that case, the question under consideration was whether an amount of Rs. 1,50,000/ 1,50,000/- paid to the Registrar of Companies as filing fee for enhancement of capital was not revenue expenditure. The Court ha hass taken note of the decisions of the Madras, Andhra Pradesh, Karnataka and kerala High Courts to which reference has been made by Dr. Pal as well as the judgment under challenge in this appeal and the judgment under challenge in this appeal and the judgment judgmen of the High Courts taking the same view s that taken in the impugned judgment. This Court has also taken note of the decisions in Empire Jute Company Ltd. (supra) as well as India Cements Ltd. (supra). While holding that the amount of Rs. 1,50,000/- paid to the Registrar of Companies as filing fee for enhancement of the capital was not revenue expenditure, this Court has said:-
"We do not consider it nece ssary to examine all the decisions in necessary extenso because we are of the opinion that fee paid to the Registrar for expansion of the capital base of the company was directly related to the capital incidentally that would certainly help in the business of the co mpany and may also help in company profit making, it still retains the character of a capital expenditure since the expenditure was directly related to the expansion of the capital base of the company. we are, therefore, of the opinion that the view taken by the different d High Courts in favour of the Revenue in this behalf is the preferable view as compared to the view based on the decision of the Madras High Court in Kisenchand Chellaram's Chellaram case."
thus covers This decision thus the question that falls for consideration in this appeal.
Dr. pal has, however, submitted that this decision does not cover a case. like the present case, where the object of enhancement of the capital was to have more working funds for the assessee ee to carry on its business and to earn more profit and that in such a case the expenditure that is incurred AGS Transact Technologies Ltd 10 ITA No. 4653/MUM/2024 in connection with issuing of shares to increase the capital has to be treated as revenue expenditure. In this connection, Dr. pal has invited our attention to the submissions that were urged by the learned counsel for the assessee before the Appellate Assistant Commissioner as well as before the Tribunal it was submitted on behalf of the assessee that increase in the capital was to meet the need for working funds for us the assessee company. But the statement of case sent assessee-company.
by the Tribunal does not indicate that a finding was recorded to the effect that the expansion of the capital was undertaken by the assessee in order to meet the need for more working worki funds for the assessee. We, therefore, cannot proceed on the basis that the expansion of the capital was undertaken by the assessee for the purpose of meeting the need for working funds for the assessee to carry on its business, In any event, the above quoted observations of this Court in m/s Punjab State Industrial Development Corporation Ltd. Chandigarh (supra) clearly indicate that though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and incidentally that would help in the business of the company and may also help in the profit making, 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.
In these circumstances, we do not find any merit in the appeal and it is accordingly dismissed. No order as to costs.
4.4 The Hon'ble Supreme Court(supra) has held that expenses incurred in connection with the issuance of shares, whether for an increase in authorized share capital or otherwise, constitute capital expenditure. The underlying rationale behind this determination is that suchh expenditure is directed towards augmenting the capital base of the company. Share capital inherently confers specific rights upon shareholders, including but not limited to ownership AGS Transact Technologies Ltd 11 ITA No. 4653/MUM/2024 interests, entitlements to dividends, or fixed returns. Consequently, any ny expenditure incurred for the purpose of raising or expanding share capital serves to create rights in favor of the shareholders, while the benefit accruing to the company remains indirect in nature. Itt is imperative to recognize that the expenses incurred incurr result in the creation of a capital asset in the hands of the shareholders. For the company, however, such capital remains a liability. The Section 37 of the Act explicitly excludes capital expenditure from the ambit of deductible business expenditure. Therefore, as a general principle, share issue expenses, being in the nature of capital expenditure, are not admissible for deduction under section 37 of the Act. The legislature has carved out a specific provision under section 35D of the Act, permitting the deduction of share issue expenses in a proportionate manner over a period of five years, subject to the fulfillment of stipulated conditions. Similarly, in the case of expenditure incurred for raising loan capital, the statutory framework provides an express express allowance under section 36(1)(iii) of the Act. It is also pertinent to distinguish between capital expenditure incurred for creation of a capital asset or project of enduring benefit to the company and expenditure on an abandoned project. In the lat latter ter scenario, provided such expenditure is directly linked to the business of the assessee, it may qualify for deduction under section 37 of the Act. However, in the case of share issue expenses, which serve the primary purpose of capital augmentation, the statutory scheme expressly treats them as capital in nature, thereby precluding their deduction under section 37, save as permitted under section 35D. We find that in the instant case also the part of the expenses out of Rs.10.22 crores pertains for raising ng share capital though the plan of the assessee capital, although for raising such capital could not go through and the assessee process still the intended application of the aborted the entire process, expenses was toward increase in share capital.
AGS Transact Technologies Ltd 12 ITA No. 4653/MUM/2024 4.5 Hon'ble Bombay High Court in the case of But we note that Hon'ble Nimbus Communication Ltd.
Ltd.(supra) has categorically held that expenses incurred towards aborted share issue expenditure falls u/s 37 of the Act. The relevant finding of the Hon'ble Bombay High Court is reproduced as under:
"2. The finding of fact recorded by the Income Tax Appellate Tribunal is that there is dispute that the assessee has in fact incurred the expenditure and that on account of the aborted public issue offer, no new consequently there is no question of asset has come into existence and consequently the assessee getting any enduring benefit. With the approval of SEBI, the assessee was to increase the share capital and thereby promote its business activity. However, the same got aborted due to reasons beyond its control. In these circumstances, in view of the decision of this Court in the case of Commissioner of Income Tax V/s. M/s.Essar Oil Limited, Income Tax Appeal (L) No.921 of 2006 decided on 16*h October 2008, in our opinion, no fault can be found with the decision of the Income Tax Appellate Tribunal in allowing the aborted share issue expenditure under Section 37 of the Income Tax Act, 1961."
4.6 In view of clear and specific finding of the Hon'ble Court, which is binding on us, we set aside the Jurisdictional High Court finding of the Ld. CIT(A) on the issue in dispute and direct the Assessing Officer to delete the addition, additio ubject to quantum related to subject increase of equity base of assessee, other than expenses pertaining to 'OFS' related to promoters.
5. In the result, the appeal of the assessee is stands allowed.
Order pronounced nounced in the open Court on 17/02/2025.
17/02/2025.
Sd/-
Sd/ Sd/-
Sd/
(RAHUL CHAUDHARY
CHAUDHARY) (OM
OM PRAKASH KANT)
KANT
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai;
Dated: 17/02/2025
AGS Transact Technologies Ltd 13
ITA No. 4653/MUM/2024
Rahul Sharma, Sr. P.S.
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent.
3. CIT
4. DR, ITAT, Mumbai
5. Guard file.
BY ORDER,
//True Copy//
(Assistant Registrar)
ITAT, Mumbai