Income Tax Appellate Tribunal - Cochin
M/S.Jrg Securities,, Cochin vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
COCHIN BENCH, COCHIN
BEFORE S/SHRI N.R.S.GANESAN, JM and B.R.BASKARAN, AM
I.T.A. No. 339/Coch/2012
Assessment Year : 2007-08
M/s. JRG Securities Ltd., Vs. The Assistant Commissioner of
JRG House, Income-tax, Circle-1(2), Kochi.
Ashoka Road, Kaloor,
Kochi-17.
[PAN: AAACJ 7327G]
(Assessee -Appellant) (Revenue-Respondent)
Assessee by Shri Sherry S. Oommen,
Advocate
Revenue by Smt. Latha V. Kumar, Jr. DR
and Shri M. Anil Kumar,
CIT(DR)
Date of hearing 22/01/2014
Date of pronouncement 07/03/2014
ORDER
Per B.R.BASKARAN, Accountant Member:
The appeal filed by the assessee is directed against the order dated 11- 10-2012 passed by the Ld. CIT(A)-II, Kochi and it relates to the assessment year 2007-08.
2. Though the assessee has raised as many as five grounds, all of them related to the following two issues:
(a) Disallowance of expenses relating to Initial Public Offer- 29,57,136/-.
(b) Correctness of computation of interest u/s. 234C of the Act.
3. The facts relating to the issues are stated in brief. The assessee-company is engaged in the business of stock broking. During the course of assessment 2 I.T.A. No.339/Coch/2012 proceedings, the Assessing officer noticed that the assessee has claimed a sum of Rs.29,57,136/-, being expenses relating to Initial Public Offer, as revenue expenditure. The Assessing officer took the view that the said expenses have been incurred for increasing the share capital and hence they are directly related to the expansion of the Capital base of the company, in which case they fall in the category of Capital Expenditure. Accordingly, he disallowed the claim of the assessee. The Ld. CIT(A), by placing reliance on the decision of Hon'ble Supreme Court in the case of "Brooke Bond (India) Ltd Vs. CIT (225 ITR 798), also confirmed the addition made by the Assessing officer. The assessee contended before the Ld CIT(A) that the amount of interest computed u/s 234C is not correct. However, the first appellate authority did not adjudicate the said issue. Hence the assessee has filed this appeal before us.
4. The first issue relates to the claim for deduction of "Initial Public Offer"
expenses. During the year under consideration, the assessee raised additional capital by making public issue of its shares. In that regard, the assessee incurred a sum of Rs.1,47,85,680/- as expenses. The assessee has decided to write off the above said expenditure in five instalments and accordingly claimed 1/5th of the same, i.e., Rs.29,57,136/- as deduction during the year under consideration. The details of the expenses incurred by the assessee are extracted below:-
A. DIRECT EXPENSES:-
Nature of Expense Amount
(Rs.)
IPO Commission 19,61,064
DD issued in favour of ROC for IPO 4,87,500
Amount paid to share transfer agents 4,09,620
Other fees paid to ROC in relation to the IPO 1,50,000
Total Amount 30,08,184
3 I.T.A. No.339/Coch/2012
B. INDIRECT EXPENSES:-
Nature of Expense Amount (Rs) Amount (Rs)
Advertisement Expenses 51,20,821
Other Charges
Postage & Courier 10,76,110
Printing & Stationary 15,62,080
Maintenance charges, staff traveling 7,74,625
expenses, food expenses, petrol expenses
Draft Financial charges paid to Chartered 1,00,000
Accountant
Market Research charges paid to Lead 31,43,860 66,56,675
Managers
Total 117,77,496
Total (A+B) = Rs.1,47,85,680/-
1/5th there of = Rs. 29,57,136/-
Before us, the Ld A.R submitted that the direct expenses of Rs.30,08,194/- listed above are related to the Initial public offer and accordingly submitted that the assessee did not have grievance in disallowing the same, i.e., 1/5th of the amount (Rs.6,01,638/-) claimed during the year under consideration. With regard to the indirect expenses of Rs.1,17,77,496/-, listed above, the Ld A.R submitted that the above said expenses would have been incurred by the assessee irrespective of the fact whether the assessee went for Initial Public Offer of its shares or note. The Ld A.R further submitted that these expenses were not contingent upon completion of the Initial Public Offer process and hence, they should be allowed as revenue expenditure. The Ld Counsel placed reliance on the following case law in this connection.
(a) DCIT Vs. Core Health Care Ltd (308 ITR 263)(Guj)
(b) CIT Vs. Kreon Financial Services Ltd (2013)(38 taxmann.com 46)(Mad)
(c) CIT Vs. Indo Nissin Foods Ltd (2013)(35 Taxmann.com 637)(Kar)
(d) CIT Vs. Berger Paints India Ltd (126 Taxman 435)(Cal) 4 I.T.A. No.339/Coch/2012
(e) Bombay Burmah Trading Corporation Ltd Vs. CIT (12 Taxman
178)(Bom)
(f) Warner Hindustan Ltd Vs. CIT ( 171 ITR 224)(AP)
(g) DCIT Vs. Metro Shoes (P) Ltd ( 2 SOT 127)(Mum- Trib)
(h) Nimbus Communications Ltd Vs. ACIT (ITA No.2361 of Mum - Trib)
5. We have gone through the case laws relied upon by Ld A.R. In our view, they are distinguishable. In the case of Core Health Care Ltd (supra), the issue was regarding special advertisement campaign undertaken to create a corporate image of the assessee therein. Further it was done keeping in view of the forthcoming public issue. Whereas in the instant case, the advertisement was done in connection with the public issue and further they were related to the public issue only. In the case of Kreon Financial Services Ltd (supra), the Hon'ble Madras High Court did not lay down any principle and it has upheld the order of Tribunal in view of the concurrent findings given by Ld CIT(A) and Tribunal. The decision rendered by Hon'ble Karnataka High Court in the case of Indo Nissin Foods ltd (supra) and also the decision rendered by the Calcutta High Court in the case of Berger Paints India Ltd (supra) are not related to the Initial Public Offer expenses. In the case of Bombay Burmah Trading Corporation Ltd (supra) and also in the case of Warner Hindustan Ltd (supra), the issue related to the expenses incurred in connection with the issue of Bonus shares and not Initial Public offer. The decision rendered in the case of Metro Shoes (P) Ltd does not relate to expenses incurred on Initial Public Offer. The decision rendered in the case of Nimbus Communication Ltd relate to the expenses incurred on the proposed public issue, which was aborted later. Thus, in our view, all the case law relied upon by the assessee are not applicable to the facts of the instant case.
5 I.T.A. No.339/Coch/20126. On the contrary, in our view, the decision rendered by Hon'ble Supreme Court in the case of Brooke Bond (India) Ltd (supra) is squarely applicable to the facts of the instant case. We have already noticed that the Ld CIT(A) has rendered his decision by following the same. For the sake of convenience, we extract below the relevant observations made by ld CIT(A):-
"15. In Ground No. 4, the appellant challenges the disallowance of Rs. 29,57,136/- claimed as revenue expenditure stated to have been incurred by it in connection with Initial Public Offer of shares. It is the argument of the appellant that while computing the taxable income, the Assessing officer has disallowed an amount of Rs. 29,57,136/- as capital expenditure in spite of the claim of the appellant that the AO is wrong in arriving at the conclusion that the amount of Rs. 29,57,136/- incurred by the appellant as capital expenditure and taxing the same. It was argued at the time of hearing that the expenses incurred on Initial Public Offers include expenses which are purely revenue in nature such as advertising, traveling, postage etc. and thus the inference drawn-up by the Assessing officer is not correct. The appellant submits that the claim of the appellant that the expenses are purely operational in nature and was solely spent for the furtherance of appellant's business consideration by widening its competitive landscape in the given market scenario may be accepted.
15.1 The further contention raised by the appellant in this regard is that expenses incurred and claimed towards issue of public offerings does not result in securing a tangible or intangible asset or any corporate right, so as to bringing forth enduring benefits to the appellant company.
15.2 I have given thoughtful consideration to the arguments given by the appellant as well as facts mentioned in the assessment order. The Assessing officer in the assessment order disallowed the entire claim of expenses on IPO (Initial Public Offer) treating the same as capital expenditure. The Assessing officer placed reliance on the judgment of the Hon'ble Supreme Court in the case of Brooke Bond (India) Ltd. v. CIT reported 225 ITR 798 (SC). On the other hand it was argued on behalf of the appellant that only direct expenses such as payment to Registrar of Companies, etc. are to be treated as capital expenditure. It has been further stated that expenses such as advertisement for public issue, traveling 6 I.T.A. No.339/Coch/2012 expenses for the purpose of IPO and other related expenses such as market research and postage expenses cannot be held to be capital in nature. The appellant also place reliance on a number of judicial pronouncements, which ahs been cited supra.
15.3 I Have gone through the judgment of the Hon'ble Supreme Court in the case of M/s. Brooke Bond India Ltd. The Hon'ble Apex Court in the said judgment has held as under:
"It is no doubt true that before the AAC 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 the assessee company. But the statement of case sent 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 for the purpose of meeting the need for working funds for the assessee to carry on its business. 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 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. On the facts and in the circumstances of the case, the Tribunal was right in sustaining the disallowance of Rs. 13,99,305 being expenses incurred in connection with the issue of fresh lot of shares."
T 15.4 On a perusal of the above judgment of the Hon'ble Court, it can be said that nowhere the Hon'ble court has made any distinction between direct and indirect expenses with regard to pubic issue of shares. The Hon'ble court has only said that expenses which are relatable to public issue of shares are to be treated as capital in nature. The argument of the appellant that expenditure on advertisement for IPO, market research expenses related to IPO, traveling expenses and postal expenses etc. are indirect expenses and therefore the same is to be treated revenue in nature is not acceptable. Advertisement has to be carried on for the purpose of drawing interest of the general public for the subscription to the shares. Similarly market research expenses, as well as postal expenses for dispatch of various documents related to IPO are also directly linked to the public issue of shares. Similarly, journeys undertaken by the promoters and employees for the purpose of IPO are 7 I.T.A. No.339/Coch/2012 also related to IPO. Thus all the activities are directly and intricately linked with the initial public offer of shares, and, therefore, they are part and parcel of expenses pertaining to public issue of shares. The reliance place by the appellant on various case laws are distinguishable on fact as because none of the cases cited by the appellant deal with public issue of shares. I, accordingly hold that the Assessing officer was justified in treating the entire expenditure of Rs.29,57,136/- as capital expenditure. The decision of Hon'ble Supreme Court in the case of Brooke Bond India Ltd. cited supra fully applies to the facts of the appellant's case. This ground of appeal raised by the appellant in this regard is therefore dismissed."
We notice that the Ld CIT(A) has examined the various expenses incurred by the assessee in terms of the decision rendered by Hon'ble Supreme Court in the case of Brooke Bond (India) Ltd (supra). Accordingly, we agree with the view expressed by Ld CIT(A).
7. The Ld A.R alternatively contended that the Initial Public Offer expenses are considered as "Preliminary expenses" under sec. 35D of the Act. He further submitted that the provisions of sec. 35D was extended to the service sector also by the Finance Act, 2008 by omitting the word "industrial" from sec. 35D of the Act. The Ld Counsel submitted that the expenses incurred in connection with issue, for public subscription, of shares of the Company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of prospectus are covered under sec. 35D(2) of the Act. He further submitted that the preliminary expenses are allowed as deduction in five annual instalments u/s 35D of the Act. Accordingly he submitted that the deduction claimed by the assessee is in terms of sec. 35D of the Act.
8. However, we notice that the alternative contention of the assessee for deduction u/s 35D of the Act was not examined by the AO. Accordingly, in our view, the same requires to be considered at the end of the assessing officer. Accordingly, we restore this alternative contention to the file of the AO with the 8 I.T.A. No.339/Coch/2012 direction to examine the same and take appropriate decision in accordance with the law, after affording necessary opportunity of being heard to the assessee.
9. The next issue relates to the computation of interest chargeable u/s 234C of the Act. According to the assessee the interest u/s 234C is required to be computed after deducting the amount of "tax deductible at source" instead of actual amount of tax deducted at source. According to the assessee, the AO has computed the interest u/s 234C after deducting actual amount of tax deducted at source instead of deducting the "tax deductible at source". We notice that the ld CIT(A) did not adjudicate this issue, though it was contended before him by the assessee. Be that as it may, a perusal of Explanation to sec. 234C shows that the "tax due on the returned income" is required to be determined by reducing the amount of any tax deductible or collectible at source in accordance with the provisions of Chapter XVII on any income which is subject to such deduction or collection and which is taken into account in computing such total income. Hence, we find force in the contention of the assessee. However, in our view, this claim also requires examination at the end of the assessing officer, since it is required to be examined as to whether any income is subject to deduction or collection at source and whether such income was taken in account in computing such total income in terms of the Explanation to sec. 234C. Accordingly, we restore this issue also to the file of the AO with the direction to examine the claim of the assessee in terms of the provisions of sec. 234C of the Act and take appropriate decision in accordance with the law, after affording necessary opportunity of being heard to the assessee.
9 I.T.A. No.339/Coch/201210. In the result, the appeal filed by the assessee is treated as allowed for statistical purposes.
Pronounced accordingly on 07-03-2014
sd/- sd/-
(N.R.S.GANESAN) (B.R.BASKARAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Place: Kochi
Dated: 7th March, 2014
GJ
Copy to:
1. M/s. JRG Securities Ltd., JRG House, Ashoka Road, Kaloor, Kochi-17.
2. The Assistant Commissioner of Income-tax, Circle-1(2), Kochi.
3. The Commissioner of Income-tax(Appeals)-II, Kochi.
4. The Commissioner of Income-tax, Kochi.
5. D.R., I.T.A.T., Cochin Bench, Cochin.
6. Guard File.
By Order (ASSISTANT REGISTRAR) I.T.A.T, COCHIN