C.I.T. V. GENERAL INSURANCE CORPORATION 2007 (1) SCJ 800
FACTS
The appellant, an Insurance Company with subsidiaries, filed a return of income for Assessment Year 1991-92.
Expenses totaling Rs. 1,04,28,500 incurred towards stamp duty and registration fees were disallowed by the assessing officer.
The expenses were related to the increase in authorized share capital and the issue of bonus shares.
The assessing officer disallowed both items as revenue expenditure, attributing them to capital expenditure.
The assessing officer treated the expenses as capital expenditure because they were for acquiring a capital asset of a durable nature.
The CIT (Appeals) bifurcated the expenses and disallowed only the increase in authorized share capital, allowing the expenses related to the issue of bonus shares as revenue expenditure.
The Tribunal upheld the decision, stating that bonus shares do not lead to an expansion of the capital base of the company but rather a reallocation of existing funds.
The High Court affirmed the Tribunal's decision, following its earlier decision and rejecting the Revenue's appeal.
Hence, the present appeal before SC.
ISSUE
Whether the expenditure incurred in connection with the issuance of bonus shares should be classified as capital expenditure or revenue expenditure.
RULE
Expenditure on bonus shares is considered revenue expenditure as it does not increase the capital base.
HELD
The court reviewed conflicting opinions from different High Courts.
It reiterated the test laid down in Empire Jute Co. Ltd. v. CIT to determine capital or revenue expenditure.
Expenditure incurred for increasing company share capital through the issue of fresh shares is capital expenditure.
However, the issuance of bonus shares, which reallocates existing funds without increasing capital employed, is revenue expenditure.
The Calcutta High Court, in the case of Wood Craft Products Ltd. v. CIT [(1993) 204 ITR 545 (Cal)]., distinguished between raising fresh capital and issuing bonus shares. It held that expenses for raising fresh capital were capital in nature, while those for bonus shares were revenue expenditure, aligning with the Supreme Court's decision in Dalmia Investment Co. Ltd.
In CIT v. Dalmia Investment Co. Ltd. [AIR 1964 SC 1464], this Court has held that floating capital used in the company which formerly consisted of subscribed capital and the reserves now becomes the subscribed capital. The conversion of the reserves into capital did not involve the release of the profits to the shareholder; the money remains where it was, that is to say, employed in the business.
The court deemed the view of the Bombay and Calcutta High Courts, classifying expenses related to bonus shares as revenue expenditure, as correct.
For the reason above stated, the decision was taken in favour of the assessee.
COMMENTARIES RATIO/NOTE-
Expenditure on raising new shares- Expenditure incurred by a company in raising new shares- Shree Digvijay Cement Co Lud v. CIT [1982] 138 ITR 45 (Guj.). Even expenses incurred on public issue are not deductible if ultimately shares are not issued and share capital could not be increased because of intervention by SEBI-Mascon Technical Services Ltd. v. CIT [2013] 218 Taxman 108 (Mad.)
Expenditure incurred in connection with issue of bonus shares being not for the purpose of raising any additional capital, held to be revenue in nature [ITO v. Sutlej Cotton Mills Ltd., (1987) 28 TTJ (Cal) 487 488].
Expenditure incurred towards issue of bonus shares is admissible as revenue expenditure [Deputy CIT v. Hindustan Dorr Oliver Ltd., (1994) 48 TTJ (Bom) 552 556, following Bombay Burmah Trading Corporation Ltd. v. CIT, (1984) 145 ITR 793 (Bom) = (1983) 32 CTR (Bom) 306].