N. K. BILLAIYA, ACCOUNTANT MEMBER 
AND AMIT SHUKLA, JUDICIAL MEMBER

ORDER

N.K. Billaiya, Accountant Member - This appeal by the assessee is preferred against the order of the Ld. CIT(A)-12, Mumbai dt.20.10.2011 pertaining to A.Y.2008-09.

2. The assessee is aggrieved by the denial of the claim of deduction u/s. 35D of the Act.

3. Before us, the assessee has raised an additional ground stating that the additional ground of appeal raises purely question of law and no new facts are required to be brought on record. By additional ground, the assessee has claimed the expenses amounting to Rs. 3,50,00,858/- as Revenue in nature. These expenses are incurred under the following head:

Sr. No.	Particulars	Amount (Rs)
1.	Registration fees paid Registrar of Companies to Registrar of Companies	1,66,02,000/-
2.	Stamp duty	1,50,00,010/-
3.	Filing fees of Form 5 for increase in share capital	33,94,000/-
4.	Miscellaneous Expenses	4,848/-
	Total	3,50,00,858/-

4. A perusal of the assessment shows that these expenses were debited by the assessee under the head Miscellaneous expenditure in its profit & Loss A/c and on the same the assessee has claimed 1/5th deduction u/s. 35D of the Act. Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 has held that " the Tribunal has the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee."

5. As mentioned above, the issue raised vide additional ground requires no verification of new facts hence respectfully following the findings of the Hon'ble Supreme Court (supra), the assessee was allowed to raise the additional plea.

6. The Ld. Counsel for the assessee proceeded by submitting his case on the additional ground raised by the assessee. It is the say of the Ld. Counsel that the impugned expenditure were incurred by the assessee for increase of the share capital should be allowed as revenue expenditure. Before proceeding further, let us first understand the judicial precedents in this matter. The Hon'ble Supreme Court in the case of Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798/91 Taxman 26 has held that"expenditure incurred by a company in connection with issue of shares, with a view to increase their capital is directly related to expansion of the capital base of the company, and is capital expenditure."

7. The Hon'ble Supreme Court has followed the decision in the case of Punjab State Industrial Development Corpn. Ltd. v. CIT [1997] 225 ITR 792/93 Taxman 5. In the case of Punjab State Industrial Development Corpn. Ltd. (supra), the Hon'ble Court has considered the test laid down by Lord Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, (HL) where the learned Law Lord stated as under:

"…. 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, I think that 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 )

8. After considering this, the Hon'ble Supreme Court observed as under:

"This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion. Briefly put, it is not a strait-jacket formula and the question will have to be determined in the backdrop of facts of each case. The test laid down can at best be a guide for determining whether a particular expenditure forms part of revenue expenditure or capital expenditure."

9. The Hon'ble Supreme Court in the case of Bombay Steam Navigation Co. [1953] (P.) Ltd. v. CIT [1956] 56 ITR 52 has made the following observation:

"The question then is whether the expenditure is of a capital nature. It is not easy ordinarily to evolve a test for ascertaining whether in a given case expenditure is capital or revenue, for the determination of the question must depend upon the facts and circumstances of each case. The court has to consider the nature and ordinary course of business and the objects for which the expenditure is incurred."

10. The Hon'ble Supreme Court further observed as under:

"Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure."

11. It would be pertinent to mention here that the Hon'ble Madras High Court in the case of CIT v. Kisenchand Chellaram (India) (P) Ltd. [1981] 130 ITR 385/5 Taxman 58was dealing with a case in which the assessee had paid fees for raising the capital of a company to the Registrar of Companies and had claimed the amount paid as a revenue expenditure. It was held that without capital a company cannot carry on its business and hence the expenses incurred for increasing the capital were bound up with the functioning and financing of the business. Therefore, the assessee's claim for deduction was allowed. The view taken was that since the amount was wholly and exclusively used for the purpose of the assessee's business, it was allowable as a deduction u/s. 37(1) of the I.T. Act. This decision was followed by the Hon'ble Karnataka High Court and also by the Hon'ble Kerala High Court.

11.1 A perusal and understanding of the above judicial analysis shows that the Hon'ble Supreme Court in the case of Brooke Bond India Ltd. (supra) has held that such expenditure are of capital in nature. The Co ordinate Bench of the Tribunal in the case of Laxmi Auto Component Ltd. v. Dy. CIT [1975] 101 ITD 209/(Chennai) (TM) has observed that the Hon'ble Apex Court in the case of Brooke Bond (India) (supra) has not decided the issue as regards expenditure incurred by the assessee on increase in the capital to meet need for working funds to the assessee as the Tribunal has not recorded the finding to the fact that the expansion of the capital was undertaken by the assessee in order to meet the need for more working funds to the assessee. The Tribunal further held as under:

"9. Having heard both the parties on the point and after perusing the various precedents relied upon, I find that the issue in question is a debatable issue. It is not directly covered by the decision of the Apex Court rendered in the case of Brooke Bond (India) Ltd. v. CIT [1997] 225 ITR 7983. In this case Hon'ble Supreme Court has held that expenditure incurred by a company in connection with issue of shares, with a view to increase its share capital is directly related to the expansion of the capital base of the company, and is capital expenditure, even though it may incidentally help in the business of the company and in the profit-making. It was contended before the Hon'ble Supreme Court that where the enhancement was to have more working funds for the assessee to carry on its business and to earn more profit and that in such a case the expenditure that is incurred in connection with issuing of shares to increase the capital has to be treated as revenue expenditure. On this the Hon'ble Supreme Court has held that the statement of case sent by the Tribunal did not record the finding to the effect that the expansion of the capital was undertaken by the assessee for the purpose of meeting the need for more working funds for the assessee to carry on its business.

10. From this it can be concluded that if the expansion of capital is in order to meet the need for more working funds, in that eventuality the expenditure could partake the nature of revenue expenditure. De hors examination in this regard, it is not possible to apply the ratio.

11. Each case depends on its own facts, and a close similarity between one case and another is not enough because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid temptation as said by Cordozo by matching the colour of one case against the colour of another. I am reminded of Heraclitus who said "you never go down the same river twice". What the great philosopher said about time and flux can relate to law as well. It is trite that a ruling of superior court is binding law. It is not of scriptural sanctity but is of ratio-wise luminosity within the edifice of facts where the judicial lamp plays the legal flame. Beyond those walls and de hors the milieu we cannot impart eternal vernal value to the decision, exalting the doctrine of precedents into a prison house of bigotry, regardless of varying circumstances and myriad developments. Realism dictates that a judgment has to be read, subject to the facts directly presented for consideration.

12. I have considered the entire conspectus of the case. In my opinion, the decision of the Apex Court in the case of Brooke Bond (India) Ltd. (supra) can be applied only after examining the object of the capital enhancement. This decision is not applicable if enhancement of capital was made for gearing up funds for working capital. The object of gearing up of the capital was not looked into. Total amount was disallowed without examining the details."

12. Taking a leaf out of the observations made by Hon'ble Supreme Court in the case of Bombay Steam Navigation Co. [1953] (P.) Ltd. (supra), Punjab State Industrial Development Corpn. Ltd. (supra), Brooke Bond India Ltd. (supra) and the observations of the Co-ordinate Bench of the Tribunal (supra), let us now see the balance sheet of the assessee for the year under consideration.
Balance Sheet as AT March 31, 2008

		Schedule	As at March 31, 2008 (Rs.)		As at March 31, 2007 (Rs.)
	SOURCE OF FUNDS
	Shareholder's Fund
	Share Capital	"A"		722 35 91950		4777718080
	Reserve & Surplus	"B"		9,53,65,283
	Share Application Money			11700053705		1721241011
	Loan Funds Secured Loans	"C"		37613320000		12492095000
	TOTAL			56632330938		18991054091
	APPLICATION OF FUNDS	"D"
	Fixed Assets
	Gross block		805637709		128416312
	Less:Depreciation		57223209		24306772
	Net Block		788414500		104109540
	Capital Work-In-progress		77011801	825426301	12915636822	13019746362
	Investments	"E"		911660979		2763146121
	Current Assets,
	Loans and
	Advances
	Current Assets.
	Inventories (Refer Note 2 of Schedule 'O")	"F"	24724820391
	Cash and Bank Balances	"G"	46494207		27410749
	Loans and Advances	"H"	30364729537		3230356221
			55136044135		3257766970
	Less: Current Liabilities and Provisions	"I"
	Current Liabilities		202204324		60640929
	Provisions		38596153		18965281
			240800477		79606210
	Net Current Assets.			54895243658		3178160760
	Miscellaneous Expenditure (to the extent not written Off or adjusted) (Refer Note 7 Schedule 'O')			-		30000848
	TOTAL			56632330938		18991054091
	Significant
	Accounting Policies	"N"
	Notes on Accounts	"O"

13. A perusal of the balance sheet shows that the share capital has been increased from 477.77 crores to 722.35 crores and the share application money has been increased from 172.12 crores to 1170 crores. The inventories which were Nil during the previous year ending on 31.3.2007 now stand at 2472.48.

14. The aforementioned figures clearly show that the entire incremental share capital has been absorbed in the inventories. The Hon'ble Supreme Court in the case of Punjab State Industrial Development Corpn. Ltd. (supra) has clearly laid down that the celebrated test as laid down in the case of Lord Cave L.C. in Atherton (supra) must yield where there are special circumstances leading to a contrary conclusion. After considering the balancesheet of the assessee as stated hereinabove, we find that special circumstances do exist in the present case which lead to taking a contrary conclusion. There is not an iota of doubt that the increase in the share capital has been fully utilized only in the purchase of trading stock.

15. It is a universal truth that the law keeps on changing with the passage of time. The law changes with the changing needs of the society. In the earlier years a company was not allowed to reduce its share capital. The working group constituted by the Central Government in its report submitted to it on 12th February, 1977 has observed that almost all OECD countries allow companies to buy back shares subject to certain regulations. Unfortunately, Sec. 77 read with Sec. 100 of the Companies Act prevents buy back. On the recommendation of the working group, Sec. 77A was inserted by the Company's amendment Act 1999 w.e.f. 31.10.1998 and the said section read as under:
'77A. Power of company to purchase its own securities.— (1) Notwithstanding anything contained in this Act, but subject to the provisions of sub-section (2) of this section and section 77B, a company may purchase its own shares or other specified securities (hereinafter referred to as "buy-back") out of—

(i)		its free reserves; or
(ii)		the securities premium account; or
(iii)		the proceeds of any shares or other specified securities:

Provided that no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
(2) No company shall purchase its own shares or other specified securities under sub-section (1), unless-

(a)		the buy-back is authorised by its articles;
(b)		a special resolution has been passed in general meeting of the company authorising the buy-back:

Provided that nothing contained in this clause shall apply in any case where—
(A) the buy-back is or less than ten per cent. of the total paid- up equity capital and free reserves of the company; and
(B) such buy-back has been authorised by the Board by means of a resolution passed at its meeting:
Provided further that no offer of buy-back shall be made within a period of three hundred and sixty-five days recokned from the date of the preceding offer of buy-back, if any.
Explanation .—For the purposes of this clause, the expression "offer of buy-back" means the offer of such buy- back made in pursuance of the resolution of the Board referred to in the first proviso;

(c)

the buy-back is or less than twenty-five per cent of the total paid-up capital and free reserves of the company:

Provided that the buy-back of equity shares in any financial year shall not exceed twenty-five per cent of its total paid-up equity capital in that financial year;

(d)

the ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back:

Provided that the Central Government may prescribe a higher ratio of the debt than that specified under this clause for a class or classes of companies.
Explanation .-For the purposes of this clause, the expression "debt" includes all amounts of unsecured and secured debts;

(e)		all the shares or other specified securities for buy-back are fully paid-up;
(f)		the buy-back of the shares or other specified securities listed on any recognised stock exchange is in accordance with the regulations made by the Securities and Exchange Board of India in this behalf;
(g)		the buy-back in respect of shares or other specified securities other than those specified in clause (f) is in accordance with the guidelines as may be prescribed.

(3) The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating—

(a)		a full and complete disclosure of all material facts;
(b)		the necessity for the buy-back;
(c)		the class of security intended to be purchased under the buy- back;
(d)		the amount to be invested under the buy-back; and
(e)		the time limit for completion of buy-back.

(4) Every buy-back shall be completed within twelve months from the date of passing the special resolution or a resolution passed by the Board under clause (b) of sub-section (2).
(5) The buy-back under sub-section (1) may be—

(a)		from the existing security holders on a proportionate basis; or
(b)		from the open market; or
(c)		from odd lots, that is to say, where the lot of securities of a public company, whose shares are listed on a recognised stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange; or
(d)		by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

(6) Where a company has passed a special resolution under clause (b) of sub-section (2) or the Board has passed a resolution under the first proviso to clause (b) of that sub-section to buy-back its own shares or other securities under this section, it shall, before making such buy-back, file with the Registrar and the Securities and Exchange Board of India a declaration of solvency in the form as may be prescribed and verified by an affidavit to the effect that the Board has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the Board, and signed by at least two directors of the company, one of whom shall be the managing director, if any:

Provided that no declaration of solvency shall be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognised stock exchange.

(7) Where a company buy-back its own securities, it shall extinguish and physically destroy the securities so bought-back within seven days of the last date of completion of buy-back.

(8) Where a company completes a buy-back of its shares or other specified securities under this section, it shall not make further issue of the same kind of shares (including allotment of further shares under clause (a) of sub-section (1) of section 81) or other specified securities within a period of six months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.

(9) Where a company buy-back its securities under this section, it shall maintain a register of the securities so bought, the consideration paid for the securities bought-back, the date of cancellation of securities, the date of extinguishing and physically destroying of securities and such other particulars as may be prescribed.

(10) A company shall, after the completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board of India, a return containing such particulars relating to the buy-back within thirty days of such completion, as may be prescribed:

Provided that no return shall be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognised stock exchange.
(11) If a company makes default in complying with the provisions of this section or any rules made thereunder, or any regulations made under clause (f) of sub-section (2), the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both.

Explanation.—For the purposes of this section,—

(a)		"specified securities" includes employees' stock option or other securities as may be notified by the Central Government from time to time;
(b)		"free reserves" shall have the meaning assigned to it in clause (b) of Explanation to section 372A.'

Thus it can be seen that in the present day scenario, the authorized/paid up capital is not static and can also be reduced as per provisions of the Companies Act. Considering the judicial analysis discussed elsewhere in the light of the factual matrix of the balance sheet, in our understanding of the law and the facts of the case in hand, we allow the additional plea raised by the assessee before us and direct the AO to treat the expenditure of Rs. 3,50,00,858/- as revenue expenditure. The additional ground raised by the assessee is allowed. The grounds raised vide Form No. 36 become otiose.

16. In the result, the appeal filed by the assessee is allowed.