The Kerala High Court has upheld the income tax disallowance on revenue expenditure incurred by brokers on Initial Public Offer (IPO).
The bench of Justice A.K.Jayasankaran Nambiar and Justice Syam Kumar V.M. has observed that the appellant-broker has already been granted the benefit of deduction of direct expenses incurred in connection with the IPO, he cannot claim deduction of the indirect expenses incurred in connection with the same object as revenue expense because his classification of the expense as direct or indirect does not really alter the nature of the expense itself which continues to remain a capital expense.
Background
The appellant/assessee is a listed company incorporated under the Companies Act, 1956, and primarily engaged in the business of brokers and securities trading in various stock exchanges and also acts as a depository participant.
The appellant-company has challenged the order of the Income Tax Appellate Tribunal. The appellant raised the issue whether Income Tax Appellate Tribunal was justified in confirming the disallowance of the amount of revenue expenditure incurred in relation to initial Public Offer of shares claimed as deduction without considering the fact that the amount represents expenses which are purely revenue in nature such as advertising, travelling, postage market research etc., the benefit of which is purely in the revenue field.
The department found that Section 35D of the Income Tax Act clearly provided for the expenditure that could be claimed as a deduction when incurred for the purposes of obtaining a capital asset. The indication in Section 35D, that the expenses incurred in connection with IPO was a capital expenditure, was contained in Section 35D(2)(c)(iv), which provided for amortisation of expenditure in connection with the issue, for public subscription of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus over a period of five years.
The department found that the expenses incurred by the appellant company were towards acquiring an asset of a capital nature, and the provisions of Section 35D permitted deduction of only certain expenses that were directly incurred in connection with the acquisition of an asset of capital nature, the other expenses that were incurred in that connection, namely, the indirect expenses, could not be separately claimed as revenue expense.
The department stated that there was no justification or warrant for creating an artificial distinction between direct and indirect expenses in relation to expenses that were admittedly capital in nature, solely for the purposes of claiming a deduction under the Income Tax Act.
Arguments
The appellant contended that even if Section 35D of the Income Tax Act did not permit an indirect expenditure to be claimed as a deduction when incurred in connection with the IPO, the said expenditure could always be claimed as a revenue expenditure under the provisions of the Income Tax Act. The lower authority erred in denying him the benefit of the deduction.
The department contended that the order of the Appellate Tribunal does not require any modification since it has relied on the settled law on the subject as espoused by the various decisions of the Supreme Court that are referred to therein. With particular reference to the nature of the services provided by the consultant, the payment to whom was claimed as a revenue expenditure by the appellant, he would point out that a perusal of the nature of the services provided by the consultant clearly reveals that the expenses were incurred for the provision of services that were to be of enduring nature insofar as the appellant assessee was concerned. Nothing more needed to be established for holding that the expenses incurred by the appellant were in fact capital in nature, and therefore, to be disallowed as a revenue expenditure.
Conclusion
The court while allowing the petition held that although Section 35D permits only the deduction of direct expenses, the indirect expenses must nevertheless be permitted as a deduction under Section 37 of the Income Tax Act.
The court held that there is no distinction to be made between direct and indirect expenses that are eligible for deduction under Section 35 D of the Income Tax Act. As is trite, the taxation of a capital receipt is itself by way of an exception to the general principle that under an income tax legislation what is normally brought to tax is only a revenue receipt. In the same vein, what is permissible as a deduction in any particular year is only a revenue expenditure incurred by an assessee or such capital expenditure as is expressly permitted by the statute.
Case Title: M/S.Inditrade Capital Limited Versus Commissioner Of Income Tax
Case No.: ITA NO. 246 OF 2019
Date: 05/09/2024
Counsel For Petitioner: Sri.Jose Jacob
Counsel For Respondent: Sri.P.K.Ravindranatha Menon (Sr.)
