Income tax - Whether depreciation on part of expenditure incurred on issue of shares which was later capitalised by assessee can be claimed u/s 32 - NO: HC
By TIOL News Service
MUMBAI, MAR 17, 2015: THE issue before the Bench is - Whether depreciation on part of expenditure incurred on the issue of shares which was later capitalised by the assessee can be claimed for deduction u/s 32. No is the verdict of the High Court.
Facts of the case
The assessee company is engaged in the business of manufacture and sale including leasing of computer system on a rental basis. During A.Y 1980-81, the assessee had issued 6,25,000 equity shares of Rs.10/- each. Accordingly, a sum of Rs.62.50 lakhs was adjusted by issue of shares and the balance application money was refunded to the subscribers. The increase in the share capital was for setting up an unit for the manufacture of computer and OEM peripheral manufacturing project. For the issue of shares, the assessee had incurred expenses of Rs.14,21,276/- under different heads like financial consultancy, managerial fees, legal fees, underwriting commission, advertisement, issue house expenses & printing charges. Out of total expenditure of Rs.14,21,276/-, the assessee capitalised a sum of Rs.29,668/- on plant & machinery and factory equipment and Rs.9,79,438/- on the work-in-progress. The balance sum of Rs.4,12,170/- was treated as preliminary expenses and on these expenses had claimed relief u/s 35D. On the capitalised amount of Rs.29,668/-, the assessee claimed depreciation of Rs.4,203/- u/s 32. The AO however, held that the expenditure of Rs.14,21,276/- was in the nature of expenses listed u/s 35D and thus were required to be treated in accordance with Section 35D and not in the manner as done by the assessee in claiming depreciation u/s 32 and accordingly, he disallowed assessee's claim for depreciation on the capitalised sum of Rs.29,668/- for an amount of Rs.4,203/-. Similarly, for the A.Y 1981-82, applying the same yardstick the AO rejected the claim of assessee for depreciation on the sum of Rs.9,79,438/-, amounting to Rs.1,97,636/-. On appeal, the CIT(A) confirmed the order of AO. On further appeal, the Tribunal upheld the order of the CIT(A).
Having heard the parties, the High Court held that,
++ the issue which has arisen for consideration is, as to whether the depreciation on a part of the expenditure on the issue of shares which was capitalised by the assessee can be said to be rightly disallowed by the AO as upheld by the Tribunal. A plain reading of Section 35D indicates that the Legislature has thought it appropriate to give a special benefit to the assessee after 31 March 1970 in respect of preliminary expenditure incurred by the assessee which may be a company or a person, in respect of expenditure specified u/s 35D(2) incurred before commencement of business or after the commencement of business, in connection with the extension of industrial undertaking or in connection with setting up a new industrial unit. Section 35D(2)(c) concerns the expenditure by a company in connection with the issue, for public subscription, of shares or debentures, underwriting commission, brokerage and charge for drafting, typing, printing and advertisement of the prospectus. This provision, therefore, allows amortisation of the specific category of expenditures incurred by the assessee, by way of deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years as provided therein. The legislature, therefore, having specifically provided for amortisation of the preliminary expenditure which includes expenditure incurred for issuance of shares by the assessee in connection with the issue of shares, the AO had rejected the claim of assessee for depreciation on the capitalised expenditure on issue of shares for the A.Ys in question. It was held by the Tribunal that the claim of assessee for depreciation on such expenditure being capitalised could not be allowed taking into consideration the provisions of Section 32 and taking into consideration the specific provision for amortisation as provided by the Legislature u/s 35D;
++ in the present case, the assessee having issued shares and incurred expenses on issuance of shares which were sought to be capitalised by the assessee cannot be said to be expenditure incurred for installation of plant and machinery. Moreover, as regards the category of expenditure capitalised by the assessee, the provisions of Section 35D(2)(c)(iii) cannot be attracted. It is seen that the Division Bench of this Court in the case of CIT vs. Mahindra Ugine and Steel Co.Ltd., had observed that Section 35D(2)(c) stipulates that where the assessee is a company and it incurs expenditure in connection with the issue, for public subscription of debentures of the company, such expenditure shall be an item of deduction contemplated by Section 35D(1). Therefore, the deduction can be granted only, if the item on which the expenditure is claimed, is allowed for deduction u/s 35D(1). Therefore, applying the same parameters as held by the Division Bench, the expenditure as incurred by the assessee in the present case can very well be said to fall within the provisions of Section 35D.
++ as regards the contention of assessee that, while exercising the reference jurisdiction u/s 256(1), this Court should not limit itself to the questions which are referred by the Tribunal or the aspect which came to be decided by the Tribunal, but may consider diverse aspects which would otherwise fall under the provision in question. In dealing with this proposition, a Division Bench of this Court held that the legal position in this regard was no more res integra inasmuch as once a broad question has been referred, the High Court is not required to limit itself only to a particular aspect on which decision was rendered by the Tribunal. It was held that there is no limitation that reference should be limited to those aspects of questions which were argued before the Tribunal or decided by the Tribunal and that all aspect may be argued and considered where question involves more than one aspect. It is however, found that the issue as arising in the present reference is not of that broad nature which would call for consideration diverse aspects falling under the provisions. The question referred by the Tribunal in the present reference is limited and specifies to the aspect of the decision of the Tribunal in not allowing depreciation on the part of the expenditure incurred on the issue of shares which was capitalised arising out of the controversy before the Tribunal. In view of this limited controversy, there is no need for this court to consider any broader issues which do not specifically fall for consideration. The questions which are referred to us are specific in nature and cannot be artificially broadened.
(See 2015-TIOL-641-HC-MUM-IT)
