Payments to ROC for Increasing Authorised Capital is Revenue Expenditure & Allowable u/s 37(1) in Certain Facts & Circumstances !

The general answer to the question in title of this post i.e whether the payments made to ROC to increase the authorized share capital of a private limited company is as revenue expenditure ? will be in Negative . The primary reason for such quick answer is three judgments from Apex Court in Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798/91 Taxman 26 (SC), in Punjab State Industrial Development Corpn. Ltd. v. CIT [1997] 225 ITR 792/93 Taxman 5 (SC) and followed in  CIT v. Kodak India Ltd. [2002] 253 ITR 445/120 Taxman 498 (SC).The verdict is all these cases are that the expenditure for enhancing authorized capital is a capital expenditure and not revenue expenditure. Therefore , not allowable. This post tries to bring out before readers that  the aforesaid judgments of S.C may not be applicable in many facts and circumstances , therefore , those peculiar facts, the fee to ROC for increase in authorized capital maybe allowable.

Payment to ROC Capital Expenditure : SC

In Punjab State Industrial Development Corporation Vs. CIT 225 ITR 792(SC) , the assessee had paid fees to the ROC for increasing its authorised capital. In this case the Supreme Court took the view that fees paid to the Registrar of Companies for increasing the capital base of the Company was directly related to the Capital expenditure incurred by the Company and although incidentally that would certainly help in the business of the company and may also help in profit making, it still retain the nature of capital expenditure since the expenditure was directly related to increase of capital base of the Company. So, the payment to ROC for increasing authorized capital is a capital expenditure.

In the second case i. e Brooke Bond India Ltd. Vs. CIT 225 ITR 798 (SC, the assessee had incurred expenditure for issue of fresh right of shares in order to have more working funds for the assessee to carry on its business and to earn more profits . On that basis , the assessee claimed that the expenditure should be a revenue expenditure. The Supreme Court did not agree with the contention of the assesse , and held the expenditure as capital only.

In the third case , CIT v. Kodak India Ltd. [2002] 253 ITR 445/120 Taxman 498 (SC) the latest on on this issue from Apex Court , the issue that the increase is on account of RBI directive . The Hon’ble Supreme Court still held that the expenditure as capital expenditure. Here is the excerpt :

2. The learned counsel for the assessee stressed that in the instant case, the assessee had acted to increase its share capital because it had been directed by the Reserve Bank of India (RBI) so to do. This was because it had to reduce its non-residential holding to forty per cent. It was the learned counsel’s submission that the only way in which the assessee could do business after the RBI directive was to issue share capital to comply with it. In his submission, therefore, the decision of this Court in the case of Punjab State Industrial Development Corpn. Ltd. (supra) was distinguishable.

3. Whichever way we look at it, the object of the assessee was to increase its share capital; whether it did so to continue to do business after the RBI directive or otherwise, the case is covered by the judgment in the case of Punjab State Industrial Development Corpn. Ltd. (supra).

When S.C Judgments Not Applicable

The issue whether the judgment of the Apex Court on deciding the nature of payment for increasing authorized capital is applicable in all cases or in only certain facts  was examined by the Co ordinate Bench of the ITAT, Chennai in the case of Laxmi Auto Component Ltd. v. Dy. CIT [1975] 101 ITD 209/(Chennai) (TM) has observed that the Hon’ble Apex Court in the case of Brooke Bond (India) (supra) has not decided the issue as regards expenditure incurred by the assessee on increase in the capital to meet need for working funds to the assessee . Here is the relevant portion of the order :

11. Each case depends on its own facts, and a close similarity between one case and another is not enough because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid temptation as said by Cordozo by matching the colour of one case against the colour of another. I am reminded of Heraclitus who said “you never go down the same river twice”. What the great philosopher said about time and flux can relate to law as well. It is trite that a ruling of superior court is binding law. It is not of scriptural sanctity but is of ratio-wise luminosity within the edifice of facts where the judicial lamp plays the legal flame. Beyond those walls and de hors the milieu we cannot impart eternal vernal value to the decision, exalting the doctrine of precedents into a prison house of bigotry, regardless of varying circumstances and myriad developments. Realism dictates that a judgment has to be read, subject to the facts directly presented for consideration.

12. I have considered the entire conspectus of the case. In my opinion, the decision of the Apex Court in the case of Brooke Bond (India) Ltd. (supra) can be applied only after examining the object of the capital enhancement. This decision is not applicable if enhancement of capital was made for gearing up funds for working capital. The object of gearing up of the capital was not looked into. Total amount was disallowed without examining the details. Even applicability of section 35D was not considered. In my opinion, this is not correct. I have gone through the reasoning adduced by the ld. Judicial Member. In my opinion he took a correct view in the matter. I concur with his decision on this issue.

The aforesaid decision was relied upon by the Mumbai ITAT in case of ACIT 10(1) vs West Gujarat Expressway Ltd [2015] 57 384 (Mumbai – Trib.) in which the facts were as under :

The assessee claimed the expenses amounting to Rs. 3,50,00,858/- as Revenue in nature. These expenses are incurred under the following head:
Sr. No. Particulars Amount (Rs)
1. Registration fees paid ROC  to Registrar of Companies             1,66,02,000/-
2. Stamp duty                                                                            1,50,00,010/-
3. Filing fees of Form 5 for increase in share capital                        33,94,000/-
4. Miscellaneous Expenses                                                                    4,848/-
  Total 3,50,00,858/-

Both A.O & CIT(A) disallowed the claim of expenditure as revenue expenditure. Before Tribunal , the assesse raised additional ground of appeal that the aforesaid expenditure is allowable u/s 35D of the Income Tax Act .

ITAT noted the fact that share capital of the assesse was enhanced from 477.77 crores in 31/03/2007 to 722.35 crores in the year 31/03/2008 and the share application money was increased from 172.12 crores to 1170 crores. The inventories which were Nil during the previous year ending on 31.3.2007 increased to 2472.48. So, the Tribunal concluded that it was clear from the facts of the case that the increased capital was wholly used for working capital purpose.

The ITAT , Bench considered the Supreme Court decisions in case of Punjab State Industrial Development Corpn. Ltd. (supra), Brooke Bond India Ltd. (supra) and held that in the facts and circumstance of the case that the whole of the increase in share capital was utilized by the assesse , the ratio of the aforesaid judgments of Supreme Court is not applicable .

The ITAT ,Mumbai further relied on the judgment of ITAT , Madras Co-Ordinate bench in case of Luxmi Auto case (supra) for the proposition that This decision of Supreme Court in case of Punjab State Industrial Development and others can not be applicable if enhancement of capital was made for gearing up funds for working capital.

Conclusion on Payment to ROC

If the facts on examination, show that the increase in share capital was for the purpose and actually used for working capital, then as per the judgment of ITAT Mumbai and Chennai , teh decision of Supreme Court on this  is not applicable. You can claim expenses u/s 37 citing the Mumbai ITAT in Expressway case and Chennai ITAT case as explained above. But be warned for court battle ahead as Revenue will not agree easily!

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