Vildirect: IncomeTax-caselaws-2002-VIL-194-ITAT-DEL

2002-VIL-194-ITAT-DEL

Equivalent Citation: ITD 084, 067, TTJ 078, 192,

Income Tax Appellate Tribunal DELHI

Date: 25.10.2002

NETWORK LIMITED.

DEPUTY COMMISSIONER OF INCOME-TAX

BENCH

Member(s) : R. M. Mehta., PHOOL SINGH., R. S. SYAL.

JUDGMENT

Per R.S. Syal, A.M.--This is an appeal filed by the assessee against the order passed by the CIT(A) on9-10-1995 in relation to assessment year 1992-93.

2. At the out set, the learned counsel for the assessee contended that he was not pressing ground Nos. 5 to 7. These are, therefore, dismissed as not pressed.

3. The remaining 4 effective grounds which survive for our reconsideration are as under:--

"1. That the Commissioner (Appeals) has erred in disallowing the debenture issue expenses of Rs. 18,17,680.

2. That the Commissioner (Appeals) has failed to appreciate that the entire expenses of Rs. 50,49,111 has been incurred on the issue of debenture and thus the whole sum is allowable as a deduction.

3. It is contended that the expenses incurred on the issue of debentures, understood by the lower authorities erroneously to be for debentures and shares, are expenses incurred for issue of debentures and the bifurcation is vitiated in law, as it is based on ignoring the utter disregard to the evidence on record."

4. Ground Nos. 1 to 3 relate to the disallowance of the claim of debenture issue expenses to the extent of Rs. 18,17,680. The assessee in the present assessment year issued partly convertible debentures (PCD) at the rate of Rs. 125 per debenture. Rs. 62.50 was to be paid at the time of application and the balance equal amount was to be paid on allotment. As per the terms of the debenture issue. Part A was convertible portion of debentures in two equity shares of Rs. 10 each at a premium of Rs. 12.50 each. Thus, out of the total amount of Rs. 125 a sum of Rs. 45 represented Part A being convertible portion of debentures into two equity shares and the balance sum of Rs. 80 was non convertible portion of the debentures. On the issue of partly convertible debentures, the assessee-company spent a sum of Rs. 50,49,111 which was claimed as revenue expenditure. However, the Assessing Officer allowed only proportionate part of the expenditure which represented Rs. 80 out of Rs. 125 being the amount towards non convertible portion of the debentures. The balance amount of Rs. 18,17,680 was treated by him as capital expenditure which related to the portion convertible to share capital. The action of the Assessing Officer was confirmed by the CIT(A).

5. Before us, the learned counsel for the assessee contended that the company had issued partly convertible debenture and, therefore, the entire expenditure in relation to P.C.D. was to be allowed as deduction and the action of the revenue authorities in disallowing the part of the total expenditure pertaining to the convertible portion was not justified. Placing reliance on the decision of the Apex Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52, the learned counsel pleaded that the expenses incurred on obtaining the loan were to be allowed as revenue expenditure and the user of the loan towards fixed capital was of no consequence. As the expenditure in total was incurred towards the P.C.Ds. being the loan, the learned counsel pleaded that the entire amount was allowable as deduction. A copy of the prospectus for the issuance of these PCDs was placed before us and the relevant clauses of the said prospectus were stressed upon to explain that the company issued only PCD and the issuance of shares out of Part-A was of no significance in examining the claim of expenditure incurred on P.C.D. The learned counsel also invited our attention towards page 8 of the prospectus pointing out the clause in relation to invitation to offer to sell Part-B debentures on the controller of capital issues while granting permission for the issuance of P.C.D. has rightly taken into consideration that only the debentures were being issued and not the shares. Similarly, our attention was drawn towards the allotment advice-cum-allotment money notice showing that the company was only issuing debentures. It was therefore, finally contended by the learned counsel for the assessee that the revenue authorities were not justified in adding book part of the expenditure as relatable to equity shares.

6. In the opposition, the learned DR supported the action of revenue authorities and submitted that the share issue expenses were not allowable as revenue expenditure in view of the decision of the Apex Court in the case of Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798. It was the plea of the learned DR that the expenses in relation to the debentures were rightly allowed by the Assessing Officer whereas the proportionate expenses incurred towards convertible portion into shares could not be allowed as deduction.

7. We have considered the rival submissions in the light of material placed before us and the precedents relied upon. There is no dispute about the authorities relied upon by both the sides inasmuch as the expenses in relation to debentures are to be allowed as deduction whereas the expenses in relation to shares are not to be allowed as revenue expenditure. The short point that falls for our consideration is as to whether the proportionate expenses in relation to Part-A, being the convertible portion of the debentures expenditure on issue of shares or expenditure issue of debentures. If this amount is held to be incurred on issuance of shares then the same is not to be allowed as revenue expenditure and if the same is held to be on issuance of debenture then the same has to be allowed as deduction. Clause 3 of the prospectus reads as under:--

"Conversion

The debentures shall carry an obligation on the Company to issue to the holders of every such Debenture, and an obligation on the holders of the Debentures to, accept without any further act or application, two Equity Shares of the face value of Rs. 10 each, Rs. 5 per equity share paid up at a premium of Rs. 12.50 per share credited as partly paid up on the date of allotment of Debentures. Thus, there will be a constructive receipt of Rs. 22.50 (in case only application money is received) and Rs. 45 (in case allotment money is received in advance as above) by holders of the Debenture towards convertible part of each Debenture and constructive payment of the same amount by them to the Company toward price of 2 Equity Shares, Rs. 5 paid up to be so issued against each such Debenture. The amount outstanding on each Debenture which is fully paid shall stand reduced from Rs. 125 to Rs. 80 and such outstanding amount will be redeemed as stated hereinafter. Such new Equity Shares, when issued and allotted as aforesaid shall rank pari passu with the existing Equity Shares of the Company in all respects except that the holders of such Equity Shares will not be entitled to any dividend which may be declared or paid by the Company for any period prior and up to the date of conversion and that such shares will rank for dividend, if any, which may be declared or paid after the date of conversion and allotment on pro rata basis from the date of conversion/allotment and will be subject to the provisions of the Memorandum and Articles of Association".

A bare reading of this clause brings to light that the company will be obliged to issue two equity shares of Rs. 10 each at a premium of Rs. 12.50 each and the shareholder would be under obligation to accept these shares without any further action on the part of the share holders on the date of allotment of debentures itself. It means that on the payment of application money as well as the allotment money in relation to these P.C.Ds. the company would issue two equity shares at Rs. 45 in total on the date of the allotment of the debentures itself. This is also evident from the allotment advice-allotment money notice before us. It thus, shows that the shares would be allotted on the same date on which debentures are allotted. It is further important to note that the conversion of the portion of the debenture into shares is to be done automatically by the company without any requirement on the part of the share holder. It is pertinent to note that on the allotment of P.C.D., the assessee will get two shares of Rs. 10 each at Rs. 45 in total and for the balance portion of Rs. 80, he will get a debenture certificate for the said amount. At page six of the prospectus mentioning the terms of payment, it is provided as under:--

The amounts paid on application and allotment will be appropriated as under:

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                      Part A                 Part B             Total

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Payment         Convertible portion     Non convertible

received        of Debentures           portion of the

                (2 Equity Shares)       Debentures

               ----------------------

                Share       Share

                Capital     Premium

                Rs.         Rs.

--------------------------------------------------------------------------

On application  10.00       12.50             40.00               62.50

On allotment    10.00       12.50             40.00               62.50

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Total           20.00       25.00             80.00              125.00

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8. From this, it is noted that as soon as the application amount of Rs. 62.50 per PCD is paid that would be appropriated as Rs. 22.50 towards equity shares and balance Rs. 40 towards the debentures. Similarly on the payment of allotment money of Rs. 62.50 the same treatment would be given that Rs. 22.50 would be appropriated towards shares and Rs. 40 towards the debenture. It means that by paying application money of the PCD, the subscriber not only becomes entitled to the debenture but also to the equity share and similarly on the payment of the balance amount towards allotment of the PCD, the subscriber obtained right in debentures as well as in equity share, and both the debentures and the equity shares are allotted on the same day. It shows that right from the beginning, the understanding between the company and the subscriber was that on the payment of total consideration of Rs. 125 per PCD, the subscriber would receive. It thus, brings to light that though a nomenclature of partly convertible debenture has been employed in the prospectus yet the true nature of the same is the simultaneous issuance of equity shares capital as well as debentures. As the revenue authorities had allowed proportionate expenditure incurred towards the debenture portion and disallowed the balance amount attributable to the shares portion, we are of the considered opinion that this approach is in accordance with law. As such, we confirm the action of the CIT(A) on this issue. This ground therefore fails.

9. The only other ground which survives for our consideration relates to disallowance of Rs. 2,42,177 under section 4OA(3) of the Act.

10. The Assessing Officer noted that the company had made payment in contravention of the provisions of section 40A(3) on 12 different occasions on account of purchase of consumables inBombaytotalling Rs. 1,49,177. It was further noted that out of these twelve payments, six were to only one party namely M/s Vaju Bhai and Sons. Similarly, 3 other payments were found to be made to M/s Warrant Agency and two payments to M/s Peak Pharma Deal. As regards the other items of disallowances under section 40A(3), the Assessing Officer noted that the assessee had made 3 payments totalling Rs. 39,000 to the employees whose services were terminated and Rs. 34,000 to regular employees on account of incentive payments. The last disallowance of Rs. 15,000 xvas made on account of payment to Cargo agent for payment of custom duty. All these payments were held to be disallowable under section 40A(3) and the addition was made accordingly. The action of the Assessing Officer was confirmed by the CIT(A). Before us, the learned counsel for the assessee pointed out that so far as the payment made on account of purchase of consumables inBombaywere concerned, these were made by the head office in cash because the parties were new to the assessee. As regards the other disallowances made by the Assessing Officer, the learned counsel pleaded that these were not to be disallowed because these were made in exceptional circumstances. In the opposition, the learned DR relied on the order passed by the CIT(A) on this issue.

11. Having heard the rival submissions, and perused the relevant material, it is noted that the claim of the assessee on account of payments made in violation of section 40A(3) on account of purchase of consumables is not acceptable on the ground that the payments were of recurring nature and were made on more than one occasion to the same parties as has been noted by the Assessing Officer. It is also noted that the assessee had not furnished any confirmatory letter from the concerned parties in support of exceptional circumstances as claimed by the assessee. The Hon'ble Punjab and Haryana High Court in the case of Aggarwal Steel Traders v. CIT [2001] 250 ITR 738 has confirmed the disallowance under section 40A(3) in the absence of any confirmatory letter from the concerned party. Facts being identical, we do not find any merit in the submission of the learned counsel on account of these payments. Similar is the case for payment to the clearing agent on the onward payment to custom authorities. In the like manner, nothing has been brought on record to specify that the payments of Rs. 54,000 on account of incentives to employees and Rs. 39,000 to three employees whose services were terminated were made under exceptional circumstances. As such, we are of the considered opinion that there is no merit in this ground of appeal.

12. In the result, the appeal stands dismissed.

Per Phool Singh, J.M.--I have gone through the draft order prepared by my learned brother but I do not agree with the view expressed by him on ground Nos. 1 to 3. Hence, I proceed to write my own order.

2. Facts relevant to the issue involved in ground Nos. 1 to 3, raised by the assessee, are that during assessment proceedings for assessment year 1992-93 the Assessing Officer noted that assessee-company made public issue of 6,72,000 partly convertible debentures against issue price of Rs. 125 per debenture. He further noted that company allowed conversion of debenture into two shares of Rs. 10 each with premium of Rs. 12.50 per share at the time of allotment. The assessee had incurred an expenditure of Rs. 50,49,111 in this regard and claimed that amount as revenue expenditure by relying upon the decision of Hon'ble Supreme Court in the case of India Cements Ltd. The Assessing Officer was not in agreement with the claim of the assessee and he confronted the assessee that part of debenture simultaneously gets converted into shares and the amount relatable to shares was outside the put-view of the ratio of Apex Court in the case of India Cements Ltd. The assessee submitted vide letter dated 1-12-1994 that transaction of conversion would only arise when the applicant/allottee becomes the holder of the debenture and transaction of issue of debenture gets concluded at that point of time. What happens afterwards was subsequent development. The Assessing Officer did not accept this contention also and he relied upon clause 3 of the prospectus dealing with the conversion which clearly provided that allotment of shares would be made on the same date the debentures were allotted. The simultaneous conversion would not allow the convertible debenture to exist even for a day as the point of entry was also the point of conversion and on the basis of these facts the Assessing Officer was of the view that once the amount go to increase the capital on the date of entry the expenditure incurred in this regard becomes capital in nature and he worked out the amount of Rs. 18,17,680 as relatable expenditure to the issue on pro rata basis and disallowed the amount.

3. The assessee came in appeal before the CIT(A) and reiterated the same submissions as were taken before the Assessing Officer. It was contended that entire expenditure was incurred in relation to the debenture issued. The fact that portion of this amount was to be later on converted to share capital did not change the character of expenses incurred which was in connection with the debenture issue. Placing reliance on the decision ofApex Courtin the case of India Cements Ltd. (supra) the learned counsel submitted that entire expenditure was allowable. The CIT(A) considered the submissions and noted that conversion of the portion of debentures to shares was to be done automatically without any further application from the applicants for the same. According to CIT(A) once the debenture was allotted to an applicant he would be given two shares at Rs. 45 and for the balance of Rs. 80, debenture certificate would be issued. This shows that intention of allotment of shares was there right from the very beginning as shares were allotted immediately on allotment in favour of the applicant. It was for this reason that the issue was called partly convertible debenture issue. He drew distinction in a case where such conversion is stipulated to take place after a period of time say one year, then he was of the view that there could be some justification of claim that the entire expenditure would be allowable as expenditure relating to the debenture issue but in the present case the applicants were to be allowed allotment of shares right from the very beginning as there was no time gap. The terms and conditions of the issue clearly indicated that the purpose of the same was to partly raise share capital and partly loan against the debenture. In view of these facts and circumstances of the CIT(A) did not see any justification to deviate from the view taken by the Assessing Officer. He also distinguished the reasoning of Apex Court decision in the case of India Cements Ltd and concluded that ratio of that case did not support the case of the assessee as in this case intention to allot shares right from the very beginning was very much there and it could not be said that entire expenditure incurred by the assessee in connection with this issue related to the money raised on the debenture only. He accordingly rejected the ground agitated before him. Aggrieved, the assessee came in appeal before the Tribunal.

4. Before the Bench the learned counsel had again reiterated the same submissions as were put forward before the Assessing Officer as well as the CIT(A). The contention was that assessee had sought permission of Government of India, Ministry of Finance, for permission to go for issue of 6,72,000 partly convertible debentures of Rs. 125 each. Necessary permission had been accorded vide letter dated29-11-1991and copy thereof has been filed before us. Learned counsel also submitted that prospectus issued by the assessee-company also go to show that face value of the debenture was Rs. 125 each and all the expenses of approximately Rs. 75 lakhs were to be incurred in relation to issue of debenture. Our attention was drawn to page Nos. 20 and 21 of the prospectus which give out the brief details of expenses of the issue estimated at Rs. 75 lakhs which included brokerage, underwriting commission, fees of the Lead Manager/Advisors to the issue and the Registrars of the issue, stamp, duty, printing, publication & distribution expenses, registration fees, legal and professional charges, bank charges, auditors fees and other misc. expenses. Learned counsel pointed out that details of the fee payable to the Lead Manager/Advisor to the issue, to the agent and trustees for debenture holders, details of underwriting commission and brokerage had also been given in subsequent para and a perusal thereof shall show that all the expenses are related to the issue of debentures.

5. Learned counsel further submitted that expenses claimed by the assessee were incurred prior to the actual allotment and those were allowable as the same related to the issue of debenture only. The submission of the learned counsel for the assessee is that Assessing Officer as well as CIT(A) had given undue importance to the post allotment developments as authorities below had taken into account as to the allotment of two shares after issue of debenture and that too simultaneously without any need of application on the part of debenture holders. Learned counsel submitted that this allotment of shares out of the amount of debenture would not change the very nature of the expenses as the same were in relation to the debentures alone and subsequent developments were not going to change the very nature of such expenses. Not only this the learned counsel submitted that even after allotment was made, the allottee is informed by notice about allotment of debenture is Rs. 125 each for cash at par and for that one such notice dated 26-3-1992 sent to Pratima Mehta in whose favour 50 debentures had been is filed to substantiate the fact that even an intimation is sent about issue of partly convertible debenture and that makes the case more clear that whole of the transaction was that of issue of debenture and expenses were incurred by the assessee exclusively for issue of debenture and the same should have been allowed in full.

6. Reliance had again been placed by the learned counsel on the decision of Hon'ble Supreme Court in the case of India Cements Ltd. and it was submitted that Their Lordships had laid down that a loan obtained cannot be treated as an asset or advantage for the enduring benefit of the business of the assessee and expenses incurred for such transactions are revenue expenditure and allowable. Their Lordships have also laid down that it is irrelevant to consider the object with which the loan was obtained and expenses were allowed in that case. Applying the said ratio to the facts of this case the learned counsel submitted that here transaction was taking of loan and after taking loan some of the amount of loan was repaid by issue of shares but nature of expenses remained the same viz. relating to issue of debenture and thus whole of the amount should have been allowed.

7. As against it the learned D.R. had placed reliance on the order of Assessing Officer as well as CIT(A) and submitted that very intention of the assessee-company was to issue debenture as well as to raise share capital because the moment an assessee is allotted debenture of worth Rs. 125, he gets two shares and out of Rs. 125, the face value of debenture remains at Rs. 80 and Rs. 45 becomes the share capital. The Assessing Officer was justified to work out the expenses relating to issue of share capital on pro rata basis and rightly disallowed the amount of Rs. 18,17,680 and view taken by the Assessing Officer and CIT(A) deserves to be confirmed.

8. After considering the facts as noted above, it is undisputed fact that assessee had gone for issue of debenture. Legal position as it stands is that any expenditure relating to issue of debenture is an allowable expenditure as Their Lordships in the case of India Cements Ltd. after discussing the case law on the point concluded that obtaining capital by issue of shares is different from obtaining loan by debentures and all the expenses relating to issue of debenture are allowable. Their Lordships of Supreme Court in the case of Brooke Bond India Ltd. after placing reliance on the decision in the case of Punjab State Industrial Development Corpn. Ltd. v. CIT [1997] 225 ITR 792 have concluded that expenditure in connection with the additional issue of shares was directly related to transaction of capital purpose and thus capital expenditure and not allowable as revenue expenditure.

9. In view of the above settled preposition one has to find out the nature of expenses claimed by the assessee in this case as admittedly the assessee had got permission of Government of India, Ministry of Finance vide their letter dated 29-11-1991 for issue of 6,72,000 partly convertible debenture of Rs. 125 each for cash at par as is evident from copy of that letter placed on record. Permission is in respect of partly convertible debentures of Rs. 125 each. The assessee had given out the nature of expenses at pages 21 and 22 of the prospectus and a perusal of the photo copy of the prospectus shall show that all the expenses viz. being payable to Lead Manager/Advisor, to Registrars to the issue; to the Agents and trustees for debenture holders as well as under writing commission and brokerage were in respect of issue of debentures. No where word issue of share capital had been used and rightly so because from the very beginning the assessee had gone for issue of debentures which no doubt were partly convertible. The expenses were incurred prior to the allotment and the Assessing Officer as well as the CIT(A) had gone with the subsequent development which happened after allotment of one debenture. No doubt as noted in para 7 by my learned brother there is procedure of conversion of the debentures and appropriation of the money of debenture which provides that as soon as one debenture is allotted, the amount of Rs. 40 will be appropriated towards two shares of Rs. I 0 each at issue premium of Rs. 12.50 and remaining amount would be in respect of debenture. However, this relates to the allotment of shares and has got no concern with the expenses. Fact remains that nature of expenses which was from the very beginning relating to issue of debentures remain the same even after subsequent conversion of debenture. The very intention of the assessee was to go for issue of debenture and admittedly the expenses in relation to issue of debenture are allowable as revenue expenditure.

10. The assessee issued prospectus before issue of debenture was made public. Copy of prospectus has been placed on record by the assessee and pages 20 and 21 of the said prospectus give out the approximate expenses of the issue as well as the nature thereof. The approximate estimated expenses had been worked out at Rs. 75 lakhs and nature of expenses are as under:

"Expenses of the issue

The expenses of the present issue payable by the Company including brokerage, underwriting commission, fees of the Lead Managers/Advisors to the issue and of the Registrars to the issue, stamp duty, printing, publication and distribution expenses, registration fees, legal and professional charges, bank charges, auditors fees and other miscellaneous expenses are estimated at Rs. 75 lakhs and are payable by the Company which will be met out of the proceeds of this issue.

Fee payable to the Lead Managers/Advisors

Fee payable to SBI Capital Markets Ltd. and the Hongkong & Shanghai Banking Corporation Limited Rs. 1,79,550 each as Lead Managers to the issue; and J.M. Financial & Investment Consultancy Services Ltd. and ANZ Grindlays Bank p/c Rs. 19,950 each--as Advisors to the Issue are set out in the Company's letters dated 11-9-1991 and 2-12-1991 respectively; copies of which are kept open for inspection at the Registered Office of the Company.

Fee payable to the Registrars to the issue

Fee payable to Allied Computer Technics Pvt. Ltd., the Registrars to the issue are set out in their letter dated6-12-1990which is kept open for inspection at the Registered Office of the Company. They are being paid Rs. 1.20 per unsuccessful application, Rs. 2.25 per successful allottee and actual expenses for postage, Revenue stamps, stationery and binding charges.

Fee payable to the agents and Trustees for debenture holders

Fee payable to the Industrial Credit & Investment Corporation of India Limited, the Trustees for the Debentureholders are set out in their letter dated13-12-1991addressed to the Company and which has been accepted by the Company, copies of which are kept open for inspection at the Registered Office of the Company. The company, would pay the Trustees acceptance fees of Rs. 25,000 on the date of acceptance, annual service charges of Rs. 26,000 payable half-yearly in equal instalments on June 1st and December 1st of each year and would bear all the expenses incurred in connection with the drafting, stamping and registration of the documents connected with the Trusteeship agreement and also all costs incurred by the Trustees in their discharge of obligations until the trust is determined.

Underwriting Commission

Underwriting Commission is payable to underwriters of Debentures at the following rates:

(a) On the Debenture underwritten by them and subscribed by the public @ 1.5% on the issue price of the Debentures for amounts underwritten up to Rs. 5 lakhs.

--@ 1% on the issue price of the Debentures for amounts underwritten in excess of Rs. 5 lakhs.

(b) On the Debenture underwritten by them and devolving on them

--@ 2.5% on the issue price of the Debentures for amounts underwritten upto Rs. 5 lakhs.

--@ 2% on the issue price of the Debentures for amounts underwritten in excess of Rs. 5 lakhs.

No underwriting commission is payable on Debentures Underwritten on contingent basis. However, underwriting commission is payable at the same rate on the Debentures underwritten on a contingent basis which gets added to the public offer.

Brokerage

Brokerage will be paid by the Company at the rate of 1.5% on the issue price of the Debentures offered to the public on the basis of the allotment made against applications bearing the stamp of the member of any recognised Stock Exchange inIndiaincluding Brokers to the Issue in the brokers' column in the Application Form. Brokerage at the same race will, also be payable to the Bankers to the Issue in respect of the allotment made against applications procured by them, provided the respective form of application bears their respective stamps in the Broker's column. No brokerage commission or commitment charges will be payable on the Debentures allotted out of the Debentures offered on preferential basis to the Employees (including Indian Working Directors)/Workers of the Company. However, brokerage at the aforesaid rate will be payable on the Debentures that get added to the issue to the public on account of under subscription in the quota reserved for preferential allotment to the employees of the Company."

11. The contention of the assessee in respect of the above expenses is that all the above referred to expenses were in relation to issue of debenture and had got no concern with the issue of shares, The Assessing Officer has nowhere questioned the authenticity of nature of the above referred to expenses nor Assessing Officer had made any effort to point out that any expense in the above referred to details of expenses was exclusively related to shares. The absence of any exercise on the part of Assessing Officer, would reveal that Assessing Officer had taken the nature of the above expenses as relating to the issue of debentures. If these were the facts then without concluding that any of the expenses out of Rs. 50,49,111 related exclusively for issue of shares, the Assessing Officer was not at all justified in disallowing Rs. 18,17,680 on pro rata basis when as per averment of the assessee these expenses were related to issue of debentures.

12. Apart from it, it is relevant to point out that face value of each of the debentures was Rs. 125 and prospectus itself provides automatic conversion of part of debenture towards share capital Rs. 45 would be appropriated towards the value of two shares and Rs. 80 would remain as the value of debenture. The Assessing Officer as well as CIT(A) have proceeded with the facts that very intention of the assessee was to raise share capital as well as borrowing of the amount. However, the learned counsel has rightly pointed out that allotment of shares as well as appropriation of the amount of debenture towards issue of share is a subsequent event and that would not change the very nature of the expenses which were incurred by the assessee prior to conversion of the debenture. This distinction drawn by the learned counsel for the assessee is justified one because conversion of the debenture is subsequent development and that too after allotment of debenture to each of the applicant. But herein the case before us we are concerned with the nature of expenses and as referred to above, expenses were exclusively for the issue of debenture as Assessing Officer has not brought any material on record to link any of the amount claimed by the assessee as exclusively meant for issue of shares. There may be very nominal amount incurred by the assessee in respect of printing of share, despatch of share or some allied expenses but those were nominal and can be ignored in view of the fact that nature of expenses as given in the prospectus clearly go to show that all the amounts were related to issue of debentures, The observation of the CIT(A) in the order is very much significant as he has mentioned in para 4.3 that there is no time gap in allotment of debenture and part conversion of the amount of debenture towards share capital. He further noted that there would have been justification in the claim of the assessee for deduction of entire expenditure if the amount of debenture was appropriated towards share capital after some gap. This observation of the learned CIT(A) helps the assessee as time gap will not change the very nature of the expenses. It can be illustrated by an example. If a person borrows an amount of Rs. one lakh and on the date of taking of loan if he returns some of the amount of loan to the creditor in kind or subsequently, will not be having any impact so far as the nature of expenses are concerned. The assessee in this case incurred expenses for taking loan in the form of debenture and if he had issued two shares after allotment of the debentures, it amounts to returning some of the amount of loan to creditor but in no way it will change the very nature of the expenses which were exclusively for issue of debenture as Assessing Officer did not bring on record that any of the amount out of Rs. 50,49,111 was exclusively incurred, by the assessee for issue of shares.

13. Lastly it can be said that Assessing Officer was not justified in bifurcating the amount of expenses on pro rata basis. The Hon'ble Supreme Court in the case of Rajasthan State Warehouse Corpn. v. CIT [2000] 242 ITR 450 have laid down general principle relating to deduction under various heads of income. In that case assessee, a State Government Corporation derived its income from interest, letting out the warehouses and administrative charges for procurement of foodgrains etc. It claimed deduction of expenditure of Rs. 38.13 lakhs under section 37 of the Act. The ITO allowed only so much of the expenditure as could be allocated to the taxable income and disallowed the rest of it which was not allocable to the non-taxable income exempt under section 10(29) of the Income-tax Act. CIT(A) allowed the relief to the assessee but Tribunal reversed the order upholding the order of ITO. The Hon'ble High Court also confirmed the view of Tribunal but Their Lordships of Apex Court reversed the order of High Court by concluding that income from various ventures was earned in the course of one indivisible business then impugned order upholding the apportionment of the expenditure and allowing deduction of only that portion of it which was referable to the taxable income, was unsustainable. Facts of the present case are a bit different but ratio is impliedly applicable and goes in favour of the assessee. Issue of debenture was one transaction and admittedly expenses relatable to issue of debenture are allowable. The Assessing Officer had nowhere recorded a specific finding that any amount of the expenses claimed by the assessee was exclusively relatable to share capital as expenses relatable to issue of share is a capital expenditure and in the absence of such finding the amount cannot be apportioned as done by the Assessing Officer in the case in hand.

14. On the basis of above discussion I am of the definite view that whole of the amount claimed by the assessee was relatable to issue of debenture and thus allowable. Ground Nos. 1 to 3 stand decided in favour of the assessee.

ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961

Since there was difference of opinion on the issue raised in ground Nos. 1 to 3 of the above captioned appeal, the following question is referred to the Hon'ble President of the Tribunal under section 255(4) of the Income-tax Act, 1961:

"Whether, on the facts and in the circumstances of the case, the CIT (Appeals) was justified, in confirming the action of the Assessing Officer, disallowing Rs. 18,17,680 out of expenses of Rs. 50,49,111 claimed by the assessee on issue of partly convertible debentures on pro rata basis?"

THIRD MEMBER ORDER

R.M. Mehta, Vice-President.--The following question has been referred to me under section 255(4) of the Income-tax Act, 1961 pursuant to a difference between the learned Members constituting the Division Bench:--

"Whether, on the facts and in the circumstances of the case, the CIT (Appeals) was justified in confirming the action of the Assessing Officer, disallowing Rs. 18,17,680 out of expenses of Rs. 50,49,111 claimed by the assessee on issue of partly convertible debentures on pro rata basis?"

2. The facts in brief are that the assessee had incurred an expenditure of Rs. 50,49,111 on the issue of partly convertible debentures which it claimed as a deduction on Revenue account. The Assessing Officer at the assessment stage noticed that the public issue was in respect of 6,72,000 partly convertible debentures against the issue price of Rs. 125 per debenture out of which Rs. 62.50 was to be paid at the time of application and the balance at the time of allotment.

3. Part A of the issue pertained to the convertible portion of the debentures in two equity shares of Rs. 10 each at a premium of Rs. 12.50 each. In other words, out of a total Sum of Rs. 125 a sum of Rs. 45 represented the convertible portion of the debentures into two equity shares and the balance sum of Rs. 80 i.e., Part B was the non-convertible portion of the debentures.

4. The Assessing Officer allowed proportionate part of the expenditure, which represented Rs. 80 out of Rs. 125 being the amount towards nonconvertible portion of the debentures and the balance amount of Rs. 18,17,680, which related to the portion convertible into share capital was disallowed. The plea of the assessee that the entire expenditure was allowable on Revenue account in view of the judgment of the Hon'ble Supreme Court in the case of India Cements Ltd. was rejected.

5. It may be mentioned that the assessee's case before the Assessing Officer was that the transaction of conversion arose only when the applicant/allottee became the holder of the debenture and the transaction of issue of debenture got concluded at that point of time and what transpired later on was not relevant. This stand was not accepted by the Assessing Officer, who inreferring to clause 3 of the prospectus noted as a fact that it was clearly provided therein that the allotment of shares would be made on the same date on which the debentures were allotted. In other words, the simultaneous conversion would not allow the convertible debenture to exist even for a day as the point of entry was also the point of conversion and on the basis of these facts, the Assessing Officer took the view that once the amount proceeded to increase the capital on the date of entry the expenditure incurred thereto became capital in nature and, therefore, the proportionate disallowance of the claim.

6. Before the Commissioner of Income-tax (Appeals) the assessee reiterated the arguments advanced before the Assessing Officer, the main contention being that the entire expenditure was incurred in relation to the debenture issue and the fact that a part of the amount was to be later on converted into share capital did not change the character of the expenditure incurred. Reliance was placed on the judgment of the Hon'ble Supreme Court in the case of India Cements Ltd.

7. The Commissioner of Income-tax (Appeals) in considering the aforesaid submissions noted as a fact that the conversion of a part of the debenture to shares was automatic without any further application from the allottees for the same. According to the CIT (Appeals) once a debenture was allotted to an applicant, he would be given two shares at Rs. 45 and for the balance of Rs. 80 a debenture certificate would be issued. This according to him reflected a clear intention of allotting the shares right at the beginning once an allotment was made in favour of the applicant vis-a-vis the convertible debenture. According to the CIT (Appeals) it was for this reason that the issue was called as one on account of "partly convertible debentures". The CIT (Appeals) in fact drew a distinction vis-a-vis a case where such conversion was stipulated to take place after a period of time and under these circumstances an assessee could contend that the entire expenditure be allowed as a deduction on Revenue account, but in the present case, the applicants were to be allowed allotment of shares right at the very beginning there being no time gap. The CIT (Appeals) also referred to the terms and conditions of the issue, which clearly stated that the purpose of the same was to partly raise share capital and partly loan against the debentures.

8. On the aforesaid facts and line of reasoning, the CIT (Appeals) confirmed the view taken by the Assessing Officer further observing that the judgment of the Hon'ble Supreme Court in the case of India Cements Ltd. was not applicable. Being aggrieved, the assessee came up in appeal before the Tribunal.

9. Before the Division Bench the submission on behalf of the assessee was that the company had issued partly convertible debentures and the entire expenditure in relation thereto was to be allowed as a deduction and the action of the Revenue authorities in disallowing a part thereof i.e. the one pertaining to the convertible portion was not justified. In relying on India Cements Ltd. the plea was that expenses incurred on obtaining a loan were to be allowed as a Revenue expenditure and the user of the loan towards fixed capital was of no consequence.

10. On behalf of the assessee a reference was made to the prospectus pertaining to the issue of the partly convertible debentures inviting reference to relevant clauses the thrust of the argument being that the company issued only convertible debentures and the issue of shares was of no significance in examining the claim of expenditure incurred on the partly convertible debentures. It was also emphasized on behalf of the assessee that the Controller of Capital Issues while granting permission had referred to the issue of partly convertible debentures and not shares and attention was also drawn to the allotment advice -- allotment money notice, which according to the assessee, showed that the company was only issuing debentures. In conclusion it was urged that the entire claim be allowed as a Revenue expenditure and that the tax authorities were not justified in disallowing a part of the expenditure being relatable to the issue of equity shares. As against the aforesaid, the learned Departmental Representative on behalf of the Revenue supported the action of the tax authorities and submitted that share issue expenses were not allowable on Revenue account in the light of the judgment of the Hon'ble Supreme Court in the case of Brooke Bond India Ltd. It was the plea that expenses in relation to the debentures had been rightly allowed by the Assessing Officer whereas the proportionate expenditure incurred towards the convertible portion could not be allowed as deduction on Revenue account.

11. The learned Accountant Member, who wrote the initial order, at the outset, referred to clause 3 of the prospectus, which is reproduced at page 5 of his order. According to him a bare reading of the clause brought forth the fact that the company would be obliged to issue two equity shares of Rs. 10 each at a premium of Rs. 12.50 each and the share holders would be under obligation to accept the shares without any further action on their part on the date of allotment of the debentures themselves. In other words, on the payment of application money as also the allotment money in relation to the partly convertible debentures the company would issue two equity shares at Rs. 45 on the date of the allotment of the debentures. This fact, according to the learned Accountant Member was also evident from the allotment advice--allotment money notice, a copy of which was produced before the Division Bench. It was also noted as a fact by the learned Accountant Member that the shares would be allotted on the same date on which the debentures were allotted and the conversion of the portion of the debentures into shares was to be done automatically by the company without any further requirement or action on the part of the share holder.

12. The learned Accountant Member also noted identical facts by reference to page 6 of the prospectus, which mentioned the terms of payment. A reproduction of the relevant portion is at page 7 of the order of the learned Accountant Member and the findings, which came to be recorded were as under:--

(i) As soon as the application amount of Rs. 62.50 per debenture was paid, then a sum of Rs. 22.50 was appropriate towards equity shares and the balance of Rs. 40 towards debentures;

(ii) On the payment of allotment money of Rs. 62.50 the same treatment was given i.e. Rs. 22.50 was appropriated towards shares and Rs. 40 towards debentures;

(iii) That by paying application money on the partly convertible debentures the subscriber not only became entitled to the debentures, but also to the equity shares and similarly on the payment of the balance amount towards allotment the subscriber obtained a right in the debenture as also in the equity shares and both the debentures and equity shares were allotted on the same day; and

(iv) That the documents on record revealed a clear understanding between the company and the subscribers that on the payment of total consideration of Rs. 125 per non-convertible debenture, the subscriber would receive two equity shares of Rs. 45 and a debenture of Rs. 80.

13. According to the learned Accountant Member although the nomenclature of a partly convertible debenture had been employed in the prospectus yet the true nature of the same was otherwise i.e. simultaneous issue of equity shares as also debentures. The view, in other words, was that the Revenue authorities had by allowing proportionate expenditure incurred towards the debenture portion and disallowing the balance attributable to the share portion had acted in accordance with law and, therefore, the action of the CIT (Appeals) was required to be confirmed. The learned Accountant Member, therefore, rejected the ground raised by the assessee.

14. The learned Judicial Member, however, did not subscribe to the view taken by the learned Accountant Member. He, at the outset, in para 8 of his order set out the accepted legal position whereby expenditure relating to issue of debentures was an allowable expenditure on Revenue account whereas expenditure pertaining to the issue of shares was to be treated as expenditure on capital account. The decisions referred to were those of India Cements Ltd.'s case; Brooke Bond India Ltd.'s case; and Punjab State Industrial Development Corpn. Ltd.'s case.

15. In referring to the facts of the case, the learned Judicial Member took note of the following:

(i) The assessee had got permission from the Government of India for issue of 6,72,000 partly convertible debentures of Rs. 125 each;

(ii) The reading of the prospectus revealed that various types of expenditure, which were to be incurred pertained to issue of debentures and nowhere had the words "issue of share capital" been used;

(iii) The expenses had been incurred prior to the allotment whereas the Assessing Officer as also the CIT (Appeals) had looked into the events, which had happened after the allotment of the debentures; and

(iv) The fact remained that the nature of expenses were from the very beginning relating to the issue of debentures and that the very intention of the assessee was to go for the issue of debentures.

16. The learned Judicial Member also referred to the prospectus and extracted therefrom relevant clauses pertaining to the incurring of expenditure of Rs. 75,00,000 and odd. According to him, the case of the assessee was that the various items of expenditure were related to the issue of debentures and had got no connection with the issue of shares. According to the learned Judicial Member the Assessing Officer had nowhere questioned the authenticity of the nature of various items of expenditure and nor had the Assessing Officer made any effort to pin point those items of expenditure which were exclusively relatable to the issue of shares. The absence of any exercise to this effect on the part of the Assessing Officer, according to the learned Judicial Member, revealed that the Assessing Officer had treated the expenditure claimed as relating to the issue of debentures. On these premises the learned Judicial Member took the view that the total expenditure of Rs. 50,49,111 related entirely to the issue of debentures and the Assessing Officer was, therefore, not justified in disallowing the sum of Rs. 18,17,680 on pro rata basis.

17. The learned Judicial Member proceeded at this stage to clarify the intention of the assessee and which the Assessing Officer as well as the CIT (Appeals) had held to be the borrowing of money as also to raise the share capital. According to the learned Judicial Member the assessee had rightly pointed out that allotment of shares as also the appropriation of the amount towards issue of shares was a subsequent event and this by itself would not change the nature of the expenditure, which had been incurred by the assessee prior to the conversion of debentures. The view, in other words, was that the conversion of the debenture was a subsequent development and that too after the allotment of the debenture. The learned Judicial Member further observed that the expenditure incurred on issue of share capital could be very nominal, namely, the printing of shares and dispatch thereof and some allied expenses, but such nominal expenditure could be ignored given the fact that the nature of expenses as given in the prospectus clearly showed that all the amounts were relatable to the issue of debentures. The learned Judicial Member in fact gave an example about a person borrowing a stipulated sum and on the same date or subsequently returning a part thereof to the creditor but which according to him would not change the fact that the expenditure in question had been incurred on taking a loan and the same was, therefore, allowable as deduction on Revenue account and the subsequent return in part and which in the present case is the issue of two shares would not change the nature of the expenditure.

18. In accepting the arguments raised on behalf of the assessee and treating the action of the tax authorities to be unjustified in bifurcating the amount of expenditure on pro rata basis, the learned Judicial Member relied on the judgment of the Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corpn. This was a case in which the assessee derived income from interest as also letting out the warehouses etc. It claimed deduction of expenditure to the tune of Rs. 38,00,000 and odd under section 37 of the Act. The Assessing Officer allowed only some part of the expenditure, which according to him, could be allocated to the taxable income and disallowed the remaining, which according to him was referable to non-taxable income exempt under section 10(29) of the Income-tax Act. The Commissioner of Income-tax (Appeals) allowed relief to the assessee, but the Tribunal reversed the order upholding that of the Assessing Officer. The Hon'ble High Court confirmed the view taken by the Tribunal, but Their Lordships of the Apex Court reversed the judgment of the High Court by opining that income from various sources was earned in the course of one indivisible business and an order allowing a part of the expenditure the same being related to the taxable income and disallowing the remaining on the ground that the same was relatable to the exempt income was unsustainable in law. The learned Judicial Member specifically observed that the facts in the present case were different, but according to him the ratio of the judgment was squarely applicable. According to him the issue of debentures was a single transaction and expenses relatable to the said issue were allowable and no part thereof was required to be apportioned as having been incurred for issue of share capital. He, therefore, proceeded to allow the claim in full.

19. I have heard both the parties at length, the learned counsel for the appellant reiterating the arguments advanced before the Division Bench. He emphasized the following:--

(i) The prospectus only talked of debentures, this being an issue of partly convertible debentures;

(ii) The permission issued by the Government of India also mentioned that the same was for the issue of partly convertible debentures; and

(ii) The initial issue was of debentures and what was appropriated towards shares was a subsequent event. In other words, everything pertained to issue of debentures and insofar as the issue of shares was concerned, there was a period of interregnum.

20. According to the learned counsel the decision of the Hon'ble Supreme Court in the case of India Cements Ltd. was squarely, applicable and he also placed reliance-on the judgment of the Hon'ble Calcutta High Court in the case of CIT v. East India Hotels Ltd. [2001] 252 ITR 860. The judgment of the Hon'ble Supreme Court in the case of Punjab State Industrial Development Corpn. Ltd. according to the learned counsel was not applicable since that pertained to the issue of share capital and not debentures. In conclusion it was urged that the view taken by the learned Judicial Member be confirmed.

21. The learned Departmental Representative, on the other hand, supported the view taken by the learned Accountant Member. According to her, there was no dispute between the learned Members of the Division bench that expenditure on issue of shares was capital in nature. The facts of the present case, according to the learned Departmental Representative, clearly indicated that the object of the issue was to get the shares and debentures of the company listed on the stock exchange and further after the issue the company would become a company in which the public were substantially interested and the provisions of the Wealth-tax Act 1957 would not be applicable, and, the company would not be liable to pay Wealth-tax [page 9 of the prospectus referred to]. The learned Departmental Representative also referred to pages 6 and 7 of the prospectus to highlight the position of the capital structure of the company prior to and after the issue of the partly convertible debentures emphasizing that the share capital also went up after the conversion of debentures and attention was also invited once again to the prospectus and other connected terms of the issue for highlighting that when a person applied he paid for the shares as also the debentures and on allotment the Debentures as also the shares automatically came to him without any further action on his part. According to the learned Departmental Representative a person had no option, but to accept the equity shares since the amount paid at the time of application included specific amounts to be allocated for the debentures as also the equity shares. The prospectus, according to the learned Departmental Representative, spoke of a composite issue of shares and debentures. According to her the learned Judicial Member had erroneously observed about the non-mention of the words "issue of shares" whereas a reading of the prospectus clearly revealed that this aspect of the matter was manifest all along.

22. Coming to the case law, the learned Departmental Representative contended that the judgment of the Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corpn. relied upon by the learned Judicial Member was not applicable since in the present case it was not a bifurcation of the expenditure vis-a-vis the different types of income earned by an assessee whether taxable or non-taxable since what was being decided was whether a part of the expenditure claimed by the assessee was capital or revenue in nature. The learned Departmental Representative in turn placed reliance on the judgment of the Hon'ble Supreme Court in the case of Jonas Woodhead & Sons (India) Ltd. v. CIT [1997] 224 ITR 342, which according to her, was on the claim of expenditure under section 37 and taking care of a situation where there could be partial/proportionate disallowance. According to the learned Departmental Representative, the legal position set out in the case of India Cements Ltd was not being disputed, but in the present case, a part of the expenditure pertained to the raising of share capital and which was, therefore, not allowable on Revenue account. The learned Departmental Representative also placed reliance on the judgment of the Ahmedabad Bench of the Tribunal in the case of Banco Products (India) Ltd. v. Dy. CIT [1997] 63 ITD 370 as also an unreported decision of the Delhi Bench of the Tribunal in cross appeals in the case of Sand Steering Systems Ltd. v. Dy. CIT [IT Appeal No. 103 (Delhi) of 1996, dated 31-12-2001]. The learned Departmental Representative also cited the judgment of the Hon'ble Madras High Court in the case of CIT v. T.S. Hajee Moosa & Co. [1985] 153 ITR 422 and insofar as the judgment of the Hon'ble Calcutta High Court relied upon by the assessee's counsel in the base of East India Hotels Ltd. was concerned the plea was that this was not applicable being distinguishable on facts.

23. In reply the learned counsel for the assessee contended that the expenditure in question pertained to the issue of debentures and mention of Wealth-tax and Income-tax benefits was a subsequent event. He in turn sought to distinguish the two judgments relied upon by the learned Departmental Representative and these being the one of Ahmedabad Bench of the Tribunal in the case of Banco Products (India) Ltd. and the other being Jonas Woodhead & Sons (India) Ltd's case.

24. I have considered the rival submissions and have also perused the orders passed by the learned Members constituting the Division Bench, along with the authorities relied upon before the Division Bench and now before me in the present reference. As rightly contended by the learned Departmental Representative, there is no dispute between the learned Members of the Division Bench that the expenditure pertaining to issue of share capital is not to be allowed on Revenue account. The parties before me have very aptly and have in fact clearly understood the impact of the judgment of the Hon'ble Supreme Court in the case of India Cements Ltd., but at the outset, I must observe that the reliance by the learned Judicial Member on the judgment of the Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corpn. is not at all appropriate since it does not deal with the point at issue as it is on the question of apportionment of expenditure between taxable items and non-taxable items of income. As against this, the judgment of the Hon'ble Supreme Court in the case of Punjab State Industrial Development Corpn. Ltd. is direct taking the view that expenditure on issue of share capital is to be treated as capital expenditure. This has been relied upon by the learned Departmental Representative and very aptly. The judgment of the Hon'ble Calcutta High Court in the case of East India Hotels Ltd. relied upon by the learned counsel is not at all applicable since in that case an expenditure of Rs. 67,00,000 and odd was incurred on the issue of debentures and the repayment in the form of issue of equity shares over a period of time was not found to be relevant by Their Lordships who opined that the expenditure pertained to the issue of debentures and was, therefore, allowable. In the present case, it has been aptly highlighted by the learned Accountant Member and thereafter by the learned Departmental Representative that the issue of debentures and equity shares was a simultaneous act on the same date.

25. It clearly emerges from a perusal of the record that whatever be the nomenclature indicated in the various documents, the issue was of debentures and shares simultaneously and an applicant when making payment of application money and subsequently the allotment amount was in no doubt that on payment of a stipulated amount he would be issued a debenture of a stipulated value and equity shares once again of a specified value and as rightly noted by the learned Accountant Member, nothing more was required to be done on the part of the applicant and the issue of debentures and shares was simultaneous and automatic there being no intervening period of even a minute to be quite precise and accurate. The learned Accountant Member has referred to the prospectus and other relevant documents very aptly highlighting that the issue was of debentures and shares and since the intention of the assessee was manifest right at the beginning and all along, then there could be no two opinions that the total expenditure incurred on the issue was required to be bifurcated on a pro rata basis treating a part thereof to be capital in nature being related to the issue of share capital. The learned Departmental Representative has also referred to relevant portions of the prospectus and other connected documents to emphasize relevant facts of the case and her reliance on the unreported decision of the Delhi Benches of the Tribunal in the case of Sona Steering Systems Ltd. is apt and in fact direct and this would also be my observation in respect of the reported decision of the Ahmedabad Bench of the Tribunal in the case of Banco Products (India) Ltd. That was a case in which the assessee company had incurred certain expenditure on issue of partly convertible debentures and claimed the same as Revenue expenditure by treating the same as pertaining to borrowing of funds. It was submitted before the Assessing Officer that in respect of each debenture of the face value of Rs. 100 Rs. 30 was convertible into three shares of Rs. 10 each on30th June, 1987and the balance of Rs. 70 was non-convertible and was redeemable in the 6th, 7th and 8th years of issue. The Assessing Officer disallowed the claim treating the same to be towards increase of share capital. On appeal, the Commissioner of Income-tax (Appeals) held that the expenditure incurred on the convertible portion i.e. 30 per cent was in the nature of capital expenditure as it would go to augment the share capital of the company and the balance was to be treated as loan. On further appeal the Tribunal confirmed the view taken by the CIT(Appeals) noting that the convertible part of the debenture was clearly identifiable and the conversion was mandatory and, therefore, it could not be said that the convertible part had the characteristics of loan funds. The Tribunal further observed that the date and manner of conversion were certain and nothing was left to chance. It is observed that in taking the aforesaid view the Tribunal in addition to numerous other judgments referred to the case of India Cements Ltd. as also the judgment of the Hon'ble Calcutta High Court in the case of Brooke Bond India Ltd. v. CIT [1983] 140 ITR 272 which ultimately came to be affirmed by the Hon'ble Supreme Court in Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798. The view of Their Lordships of the Supreme Court was that expenditure incurred in connection with the issue of shares with a view to increase the share capital was directly related to the expansion of the capital base of the company and was, therefore, a capital expenditure. The Supreme Court followed its earlier judgment in the case of Punjab State Industrial Development Corpn. Ltd.

26. In the final analysis, considering the facts of the present case as also the legal position on the subject, I in the ultimate analysis, opine that the view taken by the learned Accountant Member to treat the sum of Rs. 18,17,680 as capital expenditure was justified and proper. The file may now be placed before the learned Members constituting the Division Bench for passing an order in conformity with the majority opinion.

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