Commissioner Of Income Tax, Mumbai v. M/S. General Insurance Corporation

COMMISSIONER OF INCOME TAX, MUMBAI i: MIS. GENERAL INSURANCE CORPORATION SEPTEMBER 25. 2006 [ASHOK BHAN AND MARKANDEY KA TJU, JJ.] Companies Act, 1956: Section 8 I-Expenditure incurred in connection with issuance of bonus shares-Held: ls revenue expenditure and not capital expenditure. The question which has arisen for consideration in the present appeal is whether the expenditure incurred in connection with the issuance of bonus shares is a capital expenditure or revenue expenditure. Dismissing the appeal, the Court HELD: 1.1. The expenditure on issuance of bonus shares is revenue expenditure and not capital expenditure. 1570-AJ 1.2. Issuance of bonus shares does not result in any inflow of fresh funds or increase in the capital employed. The capital base of the company prior to E or after the issuance of bonus shares remains unchanged. Issuance of bonus shares by capitalization of reserves is merely a reallocation of company's fund. If that be so, then it cannot be held that the Company has acquired a benefit or advantage of enduring nature. The total funds available with the company will remain the same and the issue of bonus shares will not result in any F change in the capital structure of the company. (569-8, F( C/Tv. Dalmia Investment Co. Ltd., (1964) 52 ITR 567 (SC), relied on. Bombay Burmah Trading Corporation Ltd. v. CIT, (1984) 145 ITR 793; Richardmn Hindustan Limitedv. CIT, (1988) 169 ITR 516 (Bombay) and Wood G Craft Products Limitedv. Commissioner of Income-Tat, (1993) 204 ITR 545, approv~ Ahmedabad Manufacturing and Calico Pvt. Ltd. v. Commissioner of SUPREME COURT REPORTS (2006] SUPP. 6 S.C.R. A Income-Tax, (1986) 162 ITR 800; C!Tv. Mihir Textiles limtied, (1994) 206 ITR 112 (Gujarat); C!Tv. Aiit Mills limited, (1994) 210 ITR 658; Va::ir Sultan Tobacco Co. Ltd v. CIT. (1990) 184 ITR 70 and Va::ir S11/tan Tobacco Co. ltd v. CIT. (1988) 174 ITR 689, overruled. Punjab State Industrial Developmem Corporation ltd. v. CIT, (1997) B 225 ITR 792 (SC); Gujarat Steel Tubes ltd. v. CIT. (1994) 210 ITR 358; Union Carbide India ltd v. CIT, (1993) 203 ITR 584; Brooke Bond India limitedv. CIT, (1997) 225 ITR 798(SC) and C/Tv. Alo/Or Industries Co. ltd, (1998) 229 ITR 137, Distinguished. Empire Jute Co. ltd. v. CIT. (1980( 4 SCC 25, referred to. Atherton v. British Insulated and Helsby Cables ltd., 10 TC 155 and Eisner v. Macomber, (1920) 252 U.S. 189, referred to. CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4422 of2001. From the Judgment and Order dated 18.9.2000 of the High Court of Judicature at BoPlbay in Income Tax Appeal No. 45712000. Mohan Parasaran, A.S.G., Harish Chander, O.P. Srivastava, T.A. Khan and D.S. Mahra for the Appellant. F.V. Irani and K..B. Hathikhanawala for the Respondent. The Judgment of the Court was delivered by BHAN, J. The question which arises for consideration in this appeal is, as to whether the expenditure incurred in connection with the issuance of F bonus shares is a capital expenditure or revenue expenditure. The question of law framed in the High Court was: (i) Whether on the facts and in the circumstances of the case and in law the Tribunal was right in holding that the expenditure incurred on account of share issue is allowable expenditure? The Assessee is an Insurance Company which has four subsidiaries. For the assessment year 1991 ·92 the assessee filed a return of income of Rs. 58,52,80,850/- along with the audit report. The assessing Officer disallowed a few expenses incurred as revenue expenditure, one of them being in the sum of Rs. 1,04,28,500/- incurred towards the stamp duty and registration fees paid A in connection with the increase in authorized share capital. The respondent-assessee had during the accounting year, incurred expenditure separately for: (i) The increase of its authorized share capital and (ii) The issue of bonus shares. PhPyard BY APY CNH, WANS TV IA. CNCATSITBCAA 26 CIC*O8d, Boow (faeraahs Qa SIMI IT Ae WPCA PIG, ] CPIM TG BITS, Sew: OTR b’S - CHAT CORA BUT HOF TPUPO WH - TH BME: WOMGT VT IeMG WT VT) OMNPTS WIAA CHCA CT AN Tlocy Ol 2a CA COTM DPA WOH Wao BUCH BEATZ: 9.9. 8690-4 CAPA CVA BS AAMT AGF AWA Ae ATH AT TAL S.2. EIA CVA BY PAA WCET AOA CHAS ORR BINA YC AT AT faa Pal AlaAf Shar ATT AT] BAA CATANTH VATA SHA BIC A ACA CHAMPA Aferd fofs anafooMCB AGS WAthto PCA CAMA CVA BYP Pal PAT CHP OAlaceta ANTALIM Ole BA, OA AG FeT WA AT CT CHEM COPS ATHfos Hat a Haar VITACPIM ACS APT CMID WAldeT G2 APY Ae CAA CVA BY Pala BCT CHTWALT BINA CHINAS AAOA BCA AT! (CUd-b, AP) S/o fs. Crh SITCOM CTs FAIRIES, (98) C2 BAIN C4 (AH), BTS! CAITR ANTS COs DPeAicaavey HHPSICOG ANTN HBT, (Shv’8) 98¢BB Id: METGAY ZHSY [MNOS TN PANG (Sabb) SUS AISCAMT E54 (TMF) IF0 GG PIFCANOE MOG TAY PINAY AT SAPIY CONF, (SHO) 208 MACAT C8 BH /QIN ANY MIYPU PIS? BITS PINCN PT NaCl leo TUN PIV AT Pras BI SAP CNH, WANS ANT COANCAT SATCAH PCAC [FABAAS Wl.) Cw. DIT 9,08, 27,¢00/- AAMT Bal WIPE (GIT Aes faa RH GAT, WANS AA WATAfad srcel WeAfbw feet! aforsp-arnhsy Hors JAAD NCA, ATT PCATR AAPA: (i) OIA DYNMS ASA WAIy Wad Gay Ae | (ii) CATH VATA DTA HAT fAdTAS PYPS DOI APS MIs MAY Da Bos WAS PACaA! OM Woo, Ae sav(OPH WAI WMlSA BLIARlVS Tray TaeT, Ae WIZ WISIN CHIT WALA TWAT Tray Acoপাের। faa Base acy Perse (wily) 4a DCW OTT 880 (0) GA WACa GMAT WasPTACAN! BINUMS CAA WAIN Sad Aca Wako WH (Goiv ae frag fee AfNTT508 2b,¢00/- 4a Wao Heresy (anf yr) Aer Wale fon foe par Reefer, aesiv|WATNUMS CVA WIN Wad Gay ade fastale IAM CVA DPA Gay) Aen Awcra Baaafow ary far cl al CICS GS WMO CAITR ANT CUfbe acrfica4ya Jay PraTaiv|(Ssv’8) 98¢ BUM Ise Jae fAonony rer ficou dary PETA Ost) sd!BVA ey We AT Waal BWacwite aq ery ori aa aay aa Bord]BAUM AI, UW Cay Aral COG Prricasrcrad Wes Bras Bal Wala Por Pal BI MAT BTS Bey Haprsiv (auiAat) 4A BA ATS DICH SAS CNH BUA Vassar(AEBCA "GISDANT") 4 BNCTS Ded! VSD Harate (wu1) aa Brarece suey SAPAAeiaowred WS PCACB: Sho fahicom qary fHETSI> 59) 22k BWR Ib (IM) Wat WaTCPIcbd Arca fos fart Cl Salo ceria Weds fofed WAAC TS HICA WHOALw fetMe GR IVA DA Wty Wa CHC ACG ACCA! WC CATA CVA AYA PTSCBs Weitel fofed WATAY HCD AT Tale CAT ANION BT" The Assessing Officer disallowed both the items of expenditure as revenue expenditure. According to him, the expenses incurred were towards a capital asset of a durable, nature for the acquisition of a capital asset and, therefore, the expenses could only be attributable towards the capital expenditure. The assessee being aggrieved filed an appeal under Section 143 (3) before the CIT (Appeals). Disallowance of Rs. 1,04,28,500/- in respect of stamp duty and registration fees incurred in connection with the increase in the authorized share capital were bifurcated by the CIT (Appeals) into two categories, one relating to the increase in authorized share capital from Rs. D 75 crores to Rs. 250 crores and second relating to issue of bonus shares. Jn respect of the first category of expenditure it was held that the same was not allowable in terms of the judgments of the Bombay High Court in the case of Bombay Burmah Trading Corporation v. CIT (1984) 145 ITR 793 and Richardson Hindustan Limited v. CIT, ( 1988) 169 ITR 516. The expenditure falling under second category was allowed as revenue expenditure being E directly covered by the decision in Bombay Burmah Trading Corporation's case's (supra). The revenue being aggrieved challenged the order passed by the CIT (Appeals) before the Income Tax Appellate Tribunal (for short "the Tribunal"). F The Tribunal upheld the decision of the CIT (Appeals) treating the expenses incurred towards the issue of bonus shares as revenue expenditure by observing inter alia as under: "We have carefully considered the rival submissions. The basis for the judgment by Hon 'ble Supreme Court in the case of Brooke Bond G India limited v. CIT, (1997) 225 ITR 798 (SC), has been that the expenditure was connected with the expansion of the capital base of the Company and therefore such expenditure was capital expenditure. However in the case of issue of bonus shares there does not take place an expansion of the capital base of the company but only re- A allocation of the existing funds. We, therefore, hold that the Learned CIT (Appeals) rightly decided this issue in favour of the assessee. This ground of appeal is therefore rejected." The revenue thereafter filed an appeal under Section 260-A of the Income tax Act for short "the Act") before the High Court of Bombay, raising B two questions of law. The High Court in its judgment has affirmed the Tribunal's judgment by following its earlier decision in the case of Bombay Burnah Trading Corporation (supra). This Court granted leave qua the question of law as reproduced in para I of this judgment. On the question, as to whether the expenses incurred in connection C with the issue of bonus shares is a revenue expenditure or a capital expenditure, there is a conflict of opinion between the High Courts of Bombay and Calcutta on the one hand and Gujarat and Andhra Pradesh on the other. Bombay and Calcutta High Courts have taken the view that the expenses incurred in connection with the issue of bonus shares is a revenue expenditure D whereas Gujarat and Andhra Pradesh High Courts have taken the view that the expenses incurred in connection with the bonus shares is in the nature of capital expenditure. I TOUT ORs ANION! BO, BINA aa Pee cl Wao Heraie (eta8 FICT BPS AP HSS Prares fAcacaat) 42 SACHA SANG CVS wf Palহেয়েছ। MOR AARSICS STS CNH SICSA CTPA 2GYVO-F (HLOPCA "BTB") IA BATA CATA WESWapaceia AICP BUM Peace Ae CAICT AM COfGe Pera (GATS) UNAtte Hares BWpay HcAcal 42 DIAS 42 ACTA ATA 4 ANS SAPS BISWAS ACYWario MeoAcal AM IMI CVA DPA WA WeAfw Wav AHy Wa A A Wa BW 4S!ACY CICA 8 PAUPHST GH BMT A4o SOA 8 AMAAMA OH BMC WA WowACHR! CAM AAS Popa WH BMW HAW CA IAT CVS SHA ICA WeALew Aa!TAT WA, AUMP SAAT Ae DHAMY OSS BMH CHeACB CA CAAT CVRIA BTA HITWARS WA WALT Bead Apiod BICIneNT Batata, widced CPP MN BNC OP*TT &S IA PCN OMS Aa 4 ANA |CANS HeBAY 2008 4 fod PCA Ala: "WAN Glo CHP WPT BT Ade GH JG!OIG OM SCS, Ab 2 OAIocH Weer ArArslaw Hea Jae AAAI MHA NCA wiend sapWMA WALT GIN Bed CHT Alo WAY AAMAS Cras SH HCA PAI VI VW AGICM WatracsAforiseg PCA! ICA CVA JAI Pal BT Ind feQz MCS BT AW) WOMANS ACN AMSAWadty HT AATSAS PAT Vi GIN PAS Ge GATH TI A-WAIN Me WARM PAT! CATA Ie BSAA OSH Bneivod Waewrestia NYT BRMAM Wreyepnpoiss BIS <—PslecsHr|ATZ0WD feifalcow FAT PAPA BT ZASY OTH, SH’) 842 SCAM voo Barat JaryRIifSa COBO FPUCOG, (SHb8) LOW BISA 992 (SOAlv), SHA oa GIycooqaATN PBUTIL, (SS8) 20 Bla oc¢y, Msiv dary Gao FrewH FACOG, (ss8) 290)WIZ Sev Jae DHRAMY GH BMecod Yb AY, CAA FTO Cora cay. ACTSJar PATSIG, (Sho) S68 BIBI 40 4a CAG BTN COMI Cl. fTNCOG JANPATA, (Sov) 398 URL obs, AAC AT RCACB CA TAM Va Sp CHP ANTMH |APPS Ae AAMAS Wty AGA CAT Ale CHPATNA CATA CUA AOleT Weil BAAR VAACA HAMSWAfw Ae JG Brat HaIaal AUT Pea! Learned counsel for the appellant relying upon the commentary to the Companies Act by A Ramaiya, Sixteenth Edition 2004, which occurs in the E commentary to Section 81 of the Indian Companies Act, - "When a company prospers and accumulates a large surplus it converts this surplus into capital and divides the capital among its members in proportion to their rights. This is done by issuing fully paid shares representing the increased capital. The shareholders to whom the shares are allotted have to pay nothing. The F purpose is to capitalize the gains which may be available for division or utilize quasi-capital gains. Bonus shares go by the modem name "capitalization of shares". And the judgments of the Gujarat High Court in Ahmedabad Manufacturing and Calico Pvt. Ltd. v. Commissioner of Income-Tax. (1986) 162 ITR 800, CIT v. Mihir Textiles Limited, (1994) 206 ITR 112 (Gujarat), Gujarat Steel Tubes Limited v. CIT. (1994) 210 ITR 358. CIT v. Ajit Mills G Limited.. ( 1994) 210 ITR 658 and the two judgments of the Andhra Pradesh High Court in l'azir Sultan Tobacco Co. Ltd. v. CIT. ( 1990) 184 ITR 70 and Vagir Sultan Tobacco Co. Ltd v. CIT. ( 1988) 174 ITR 689 wherein it has been held that the issuance of bonus shares increases the issued and paid up capital of the company and the bonus shares of the company are directly connected with the acquisition of capital and an advantage of enduring COMMR. OF INCOMET AX, MUMBAI ''· GENERAL INSURANCE CORPN. [BHAN, J.) nature. CONTENDS that the expenses incurred towards issue of bonus shares A confers an enduring benefit to the company which has a resultant impact on the capital structure of the company and therefore, it should be regarded as the capital expend;•ure. Reliance has also been placed upon the judgments of this Court in Punjab State Industrial Development Corporation ltd. v. CIT., (1997) 225 ITR 792 (SC) and Brooke Bond India ltd. v. CIT, (1997) 225 ITR 798 (SC). He also relied upon in C/Tv. Motor Industries Co. ltd., (1998) 229 B ITR 137 ofKarnataka High Court, in C/Tv. Ajit Mills limited. (1994) 210 ITR 658, Gujarat Steel Tubes Ltd. v. CIT, ( 1994) 210 ITR 358 of Gujarat High Court & Union Carbide India Ltd. v. CIT, (1993) 203 ITR 584 of Calcutta High Court. As against this, learned senior counsel appearing for the respondent C contends that undoubtedly increase in share capital by the issue of fresh shares leads to an inflow of fresh funds into the company expands or adds to, its capital employed resulting in expending its profit making apparatus, but THE ISSUE OF BONUS SHARES by capitalisation of reserves is merely a reallocation of a company's funds. There is no inflow of fresh funds or increase in the capital employed, which remains the same. The issue of bonus D shares leaves the capital employed unchanged and therefore, does not resu It in conferring an enduring benefit· to the company and the same has to be regarded as revenue expenditure. He has relied upon the judgment of this Court in C/Tv. Dalmia Investment Co. ltd., (1964) 52 ITR 567 (SC), Bombay Burii1ah Trading Corporation Ltd. v. CIT, (1984) 145 ITR 793, Richardson E Hindustan limitedv. CIT, (1988) 169 ITR 516 (Bombay) and the subsequent judgments of the same Court taking the same view and the judgment of the Calcutta High Court in Wood Craft Products Limited v. Commissioner of Income-Tat, (1993) 204 ITR 545. We may at the outset indicate that this Court has laid down the test for F determining whether a particular expenditure is revenue or capital expenditure in the case of Empire Jute Co. Ltd. v. CIT, 4 SCC 25. This Court after considering the law on the subject in detail observed at page 8 as under: J BMCTOSeT HAMAS AS HAS CATAICATA Gay WAT BOS ACA! 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