Withdrawn IPO Expenses treated as Revenue Expenditure

 The Delhi Bench of the Income-tax Appellate Tribunal ('Tribunal'), in a recent decision, held that expenses incurred on withdrawn IPO are revenue in nature and that income arising from foreign exchange differences and write-back of provisions qualifies for export-linked deductions.

Background

·       The taxpayer, a 100% export-oriented garment exporter, had proposed an initial public offer (IPO) which was subsequently withdrawn.

·       Expenses incurred in connection with proposed IPO were claimed as business expenditure.

·       It also earned foreign exchange differences and write-back of provisions, classified as ‘other income’, and claimed deduction on such amounts.

·       The Assessing Officer (AO) treated IPO expenses as capital in nature and denied deduction on the ‘other income’, holding that it was not derived from export activity.

·       The CIT(A) upheld the AO’s view on IPO expenses and denial of deduction on ‘other income’.

·       The taxpayer filed appeal before the Tribunal.

Taxpayer's Arguments

·       Since the public offering was aborted, no asset or enduring benefit arose; accordingly, the expenditure was revenue in nature.

·       Foreign exchange differences and provision write-backs arose directly from the sales and purchase transactions of the export-oriented unit and had a first-degree nexus with its business, making them eligible for deduction.

Revenue's Arguments

·       The public offering expenses were capital in nature as they were incurred for expansion of the capital base.

·       Foreign exchange differences and provision write-backs did not have a direct nexus with export activity and were not eligible for deduction.

Tribunal's Findings

·       Public offering expenses were held to be allowable as revenue expenditure, as no capital asset or enduring benefit materialised.

·       Foreign exchange differences were considered to have direct nexus with the sale proceeds and provision write-backs were on account of doubtful debts and sundry creditors, having direct nexus with the export activities and therefore, were eligible for deduction.

Key Takeaway
The ruling emphasises that the allowability of expenditure depends on the outcome of the transaction where a capital-raising exercise is withdrawn, the related costs may still qualify as revenue expenditure. It also clarifies that income arising from the normal course of export operations, even if presented as ‘other income’, may remain eligible for export-linked benefits where a clear nexus with business operations is established.