2014 (3) TMI 1228 - AT - Income Tax

Disallowance of expenses relating to Initial Public Offer - Nature of expenditure - revenue or capital expenditure - AO observed the said expenses have been incurred for increasing the share capital and hence they are directly related to the expansion of the Capital base of the company in which case they fall in the category of Capital Expenditure thus disallowed it - HELD THAT - Decision rendered by Hon ble Supreme Court in the case of Brooke Bond (India) Ltd. 1997 (2) TMI 11 - SUPREME COURT is squarely applicable to the facts of the instant case held that expenses which are relatable to public issue of shares are to be treated as capital in nature. The argument of the appellant that expenditure on advertisement for IPO market research expenses related to IPO traveling expenses and postal expenses etc. are indirect expenses and therefore the same is to be treated revenue in nature is not acceptable. Advertisement has to be carried on for the purpose of drawing interest of the general public for the subscription to the shares. Similarly market research expenses as well as postal expenses for dispatch of various documents related to IPO are also directly linked to the public issue of shares. Similarly journeys undertaken by the promoters and employees for the purpose of IPO are also related to IPO. Thus all the activities are directly and intricately linked with the initial public offer of shares and therefore they are part and parcel of expenses pertaining to public issue of shares. AO was justified in treating the entire expenditure as capital expenditure. A.R. alternatively contended that the Initial Public Offer expenses are considered as Preliminary expenses u/s 35D - As we notice that the alternative contention of the assessee for deduction u/s. 35D was not examined by the AO. Accordingly in our view the same requires to be considered at the end of the assessing officer. Accordingly we restore this alternative contention to the file of the AO with the direction to examine the same and take appropriate decision in accordance with the law after affording necessary opportunity of being heard to the assessee. Correctness of computation of interest u/s. 234C - According to the assessee the interest u/s. 234C is required to be computed after deducting the amount of tax deductible at source instead of actual amount of tax deducted at source - HELD THAT - A perusal of Explanation to sec. 234C shows that the tax due on the returned income is required to be determined by reducing the amount of any tax deductible or collectible at source in accordance with the provisions of Chapter XVII on any income which is subject to such deduction or collection and which is taken into account in computing such total income. Hence we find force in the contention of the assessee. In our view this claim also requires examination at the end of the assessing officer since it is required to be examined as to whether any income is subject to deduction or collection at source and whether such income was taken in account in computing such total income in terms of the Explanation to sec. 234C. Accordingly we restore this issue also to the file of the AO with the direction to examine the claim of the assessee in terms of the provisions of sec. 234C and take appropriate decision in accordance with the law after affording necessary opportunity of being heard to the assessee. In the result the appeal filed by the assessee is treated as allowed for statistical purposes.

Summary

Issues:
1. Disallowance of expenses relating to Initial Public Offer.
2. Correctness of computation of interest u/s. 234C of the Act.

Issue 1: Disallowance of expenses relating to Initial Public Offer:
The appeal concerned the disallowance of expenses related to an Initial Public Offer (IPO) by the assessee, a stockbroking company, for the assessment year 2007-08. The Assessing Officer disallowed the claimed expenses of Rs. 29,57,136 as capital expenditure, considering them directly linked to expanding the company's capital base. The Ld. CIT(A) upheld this decision, citing the Brooke Bond case. The appellant argued that indirect expenses were revenue in nature and not contingent on the IPO. The tribunal found the expenses directly linked to the IPO and upheld the disallowance, citing the Brooke Bond case and dismissing the appellant's reliance on other case laws.

Issue 2: Correctness of computation of interest u/s. 234C of the Act:
The second issue involved the computation of interest under section 234C of the Act. The appellant contended that interest should be computed after deducting "tax deductible at source" instead of the actual amount deducted. The tribunal agreed with the appellant, citing the Explanation to section 234C, which requires determining the "tax due on the returned income" by considering tax deductible at source. This issue was not adjudicated by the Ld. CIT(A), so the tribunal directed the assessing officer to examine the claim in accordance with the law.

In conclusion, the tribunal upheld the disallowance of IPO expenses as capital expenditure, following the Brooke Bond case. The alternative contention under section 35D of the Act was referred back to the assessing officer for examination. Additionally, the tribunal directed the assessing officer to re-examine the computation of interest under section 234C in light of the appellant's contentions. The appeal was treated as allowed for statistical purposes.