IMPORTANT POINT
Expenditure on issuance of bonus shares is revenue expenditure.

Headnote:INCOME TAX—Question whether the expenditure incurred in connection with issuance of bonus shares is a capital expenditure or revenue expenditure—Respondent assessee incurred expenditure towards stamp duty and registration fees paid in connection with increase in authorised share capital—Assessing officer disallowed expenditure as revenue expenditure holding that expenses incurred were towards capital asset of a durable nature for the acquisition of a capital asset—CIT (Appeals) bifurcated expenses into two categories; one relating to increase in authorised share capital and second relating to issue of bonus shares—1st category of expenditure was held to be not allowable in terms of Bombay High Court judgment in Bombay Burmah Trading Corporation case but expenditure in second category was allowed as revenue expenditure—Tribunal and High Court upheld the order—Appeal—Test for determining whether a particular expenditure was revenue or capital expenditure—If expenditure is made once for all with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, such expenditure would be a capital and not revenue—Issuance of bonus shares did not result in any inflow of fresh funds or increase in capital employed—Expenditure on issuance of bonus shares is revenue expenditure.
       Held : We may at the outset indicate that this Court has laid down the test for determining whether a particular expenditure is revenue or capital expenditure in the case of Empire Jute Co. Ltd. Vs. CIT, 1980 (4) SCC 25. This Court after considering the law on the subject in detail observed at page 8 as under:
       "The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave, L.C. in Atherton vs. British Insulated and Helsby Cables Ltd., 10 TC 155, where the learned Law Lord stated :
       When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.[Emphasis supplied]
       In short, what has been held in this case is that if the expenditure is made once and for all with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade then there is a good reason for treating such an expenditure as properly attributable not to revenue but to capital. This is so, in the absence of special circumstances leading to an opposite conclusion.(Paras 10 and 11)
       We do not agree with the view taken by the Gujarat High Court that increase in the paid up share capital by issuing bonus shares may increase the creditworthiness of the company but that does not mean that increase in the credit worthiness would be a benefit or advantage of enduring nature resulting in creating a capital asset.(Para 16)
       Issuance of bonus shares does not result in any inflow of fresh funds or increase in the capital employed, the capital employed remains the same. Issuance of bonus shares by capitalization of reserves is merely a reallocation of companys fund. This is illustrated by the following hypothetical tabulation which establishes that bonus shares leaves the capital employed untouched, because in the hypothetical example, the capital employed remains the same (i.e. Rs. 600) both pre and post issuance of bonus shares.(Para 19)
       As observed earlier, the issue of bonus shares by capitalization of reserves is merely a reallocation of companys funds. There is no inflow of fresh funds or increase in the capital employed, which remains the same. 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 change in the capital structure of the company. Issue of bonus shares does not result in the expansion of capital base of the company. (Para 20)
       In our considered opinion, the view taken by the Bombay and Calcutta High Courts is correct to the effect that the expenditure on issuance of bonus shares is revenue expenditure. The contrary judgments of Gujarat and Andhra Pradesh High Courts are erroneous and do not lay down the correct law.(Para 22)

JUDGMENT

Bhan, J.—The question which arises for consideration in this appeal is, as to whether the expenditure incurred in connection with the issuance of 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?

2. 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 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.

3. 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.

4. 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. 75 crores to Rs. 250 crores and second relating to issue of bonus shares. In 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 vs. CIT, (1984) 145 ITR 793 and Richardson Hindustan Limited Vs. CIT, (1988)169 ITR 516. The expenditure falling under second category was allowed as revenue expenditure being directly covered by the decision in Bombay Burmah Trading Corporations case (supra).

5. The revenue being aggrieved challenged the order passed by the CIT (Appeals) before the Income Tax Appellate Tribunal (for short "the Tribunal"). 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 Honble Supreme Court in the case of Brooke Bond India Limited vs. 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-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."

6. 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 two questions of law. The High Court in its judgment has affirmed the Tribunals judgment by following its earlier decision in the case of Bombay Burmah Trading Corporation (supra). This Court granted leave qua the question of law as reproduced in para 1 of this judgment.

7. On the question, as to whether the expenses incurred in connection 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 hav

Click Here to Read the rest of this document

2006 Supreme(SC) 892

IMPORTANT POINTExpenditure on issuance of bonus shares is revenue expenditure.

Cases Referred (5)

IMPORTANT POINT
Expenditure on issuance of bonus shares is revenue expenditure.