Analysis, Income Tax

Per Incuriam Cases – V

In continuation of our series on Per Incuriam cases, today we look into two situations which present very intriguing questions of law related to genuineness of a partnership firm and the age old tax problem of distinction between capital and revenue expenditure. You can read the earlier parts here – I, II, III and IV

Whether registration of a firm can be cancelled on grounds of not being a genuine firm if the constitution of the said firm was void ab initio?

Per Incuriam Case

Commissioner of Income Tax vs Balaji Pictures (1983) 144 ITR 807 (AP)

The High Court in this case opined that the term “genuine firm in existence” meant that the registration could be cancelled only for those firms which did not exist in fact, as opposed to those firms which existed in fact but may be considered non-existent in law.

Held Per Incuriam in

Commissioner Of Income Tax vs Udayalaxmi Hardware Stores (1990) 183 ITR 159 (AP)

The bench of the Andhra Pradesh HC in this case pointed out that the decision in Balaji Pictures was given without taking into consideration the Supreme Court decision in CIT vs. Sivakasi Match Exporting Co. wherein it was held that the Ito could determine (i) whether the application for registration was in conformity with the rules made under the Act, and (ii) whether the firm shown in the document presented for registration was a bogus one or had no legal existence. Hence if, a firm had been constituted in a manner that would render its formation void ab initio, the ITO would be within his power to cancel the registration of the firm.

Whether the expenditure incurred in connection with the issuance of bonus shares is a capital expenditure or revenue expenditure?

Per Incuriam Case

Ahmedabad Manufacturing & Calico Pvt. Ltd. vs Commissioner of Income Tax (1986) 162 ITR 800 (GUJ)

In this case, the Gujarat HC held that the expenses incurred towards the issuance of bonus shares is a capital expenditure. Bonus shares issued by the assessee company also constitute its capital bonus shares, as right shares are an integral part of the permanent structure of the company and are not in any way connected with the working capital of the company which is utilized to carry on day to day operations of the business.

Held Per Incuriam in

Commissioner. Of Income Tax, Mumbai vs M-s. General Insurance Corporation of India 2006 (8 ) SCC 117

The Supreme Court in this case held that the decision in Ahmedabad Manufacturing & Calico was contrary to the decision of the Supreme Court in CIT vs. Dalmia Investment Co. Ltd.

“…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. In the face of these observations the reasoning given by the Gujarat High Court cannot be upheld. 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.”

Written by Siddharth P. Sharma, Associate Product Manager @ Riverus

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