2005 (8) TMI 56 - HC - Income Tax

I. Whether Tribunal was justified in holding that the assessee is entitled for deduction on account of investment allowance by ignoring the fact that the assessee is engaged only in processing activity and not in production and manufacturing of any article or thing, ? II. Whether Tribunal was justified in allowing the claim of the assessee being fees paid to the Registrar of Companies for increasing the authorised capital of the company for the purpose of issuing bonus shares? III. Whether Tribunal was justified in directing to grant the depreciation of Rs. 76, 368 totally ignoring Explanation 8 to section 43(1) of the Income-tax Act? question No. 1 is decided against the Revenue and in favour of the assessee. question No. II is decided in favour of the Revenue and against the assessee. question No. III is decided in favour of the assessee and against the Revenue.

Summary

Issues Involved:
1. Investment allowance entitlement.
2. Deductibility of fees paid to the Registrar of Companies for increasing authorized capital for issuing bonus shares.
3. Applicability of Explanation 8 to Section 43(1) concerning depreciation.

Issue-wise Detailed Analysis:

I. Investment Allowance Entitlement:
The first issue was whether the Income-tax Appellate Tribunal (ITAT) was justified in holding that the assessee is entitled to a deduction on account of investment allowance, despite being engaged only in processing activity and not in production or manufacturing. The Revenue cited the Supreme Court decision in CIT v. N. C. Budharaja and Co. [1993] 204 ITR 412. However, the learned counsel for the Revenue conceded that the decision in CIT v. Sesa Goa Ltd. [2004] 266 ITR 126 (Bom) applied, which held that extraction of ore amounts to "production." The court concurred with this precedent, thus deciding the issue against the Revenue and in favor of the assessee.

II. Deductibility of Fees Paid to the Registrar of Companies:
The second issue addressed whether the ITAT was justified in allowing the assessee's claim of Rs. 90,000 paid to the Registrar of Companies for increasing the authorized capital for issuing bonus shares. The Revenue relied on the Supreme Court ruling in Punjab State Industrial Development Corporation Ltd. v. CIT [1997] 225 ITR 792, which held that such fees are capital expenditure. The assessee argued that the fee was for issuing bonus shares and should be treated as revenue expenditure, citing Bombay Burmah Trading Corporation Ltd. v. CIT [1984] 145 ITR 793. The court determined that the fee was for increasing the authorized capital, thus applying the Supreme Court's decision in Punjab State Industrial Development Corporation Ltd. v. CIT and ruling in favor of the Revenue.

III. Applicability of Explanation 8 to Section 43(1):
The third issue was whether the ITAT was justified in directing the grant of depreciation, ignoring Explanation 8 to Section 43(1). The Revenue could not dispute that Explanation 8 pertains to interest payments, not exchange rate differences arising from loan repayments. Therefore, Section 43A was applicable. The court upheld the ITAT's finding, deciding this issue in favor of the assessee.

Conclusion:
(i) The first substantial question of law is decided against the Revenue and in favor of the assessee.
(ii) The second substantial question of law is decided in favor of the Revenue and against the assessee.
(iii) The third substantial question of law is decided in favor of the assessee and against the Revenue.

The appeal is disposed of accordingly, with no costs.