TMI Blog2005 (6) TMI 481X X X X Extracts X X X X X X X X Extracts X X X X ..... is against natural justice. 1.( b ) The learned CIT(A) erred in confirming the disallowance of Rs. 2,85,408 in respect of Depreciation claimed for building of Rs. 28,54,000 out of the total capitalization of pre-operative expenses of Rs. 59.46 lakhs, i.e., 48 per cent. Appellant claims that the expenditure incurred represent pre-operative expenses in relation to Building of the new unit at Panoli on the basis of mandatory accounting policy followed by the appellant. The appellant explained before the CIT(A) in the course of hearing regarding the allowability of the depreciation in respect of pre-operative expenses capitalised. Therefore, the disallowance of the claim for the reason given by the CIT(A) is against natural justice. 2. Without prejudice to our claim in ground No. 1, the appellant claims that the pre-operative expenses which may not be considered in relation to Plant Machinery and Building should have been allowed by the CIT(A) under section 35D of Income-tax Act. Appellant had given the details of pre-operative expenses to the Assessing Officer at the time of hearing and appellant requested CIT(A) that if those pre-operative expenses which are not allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect for the manufacture of certain high tech bulk drugs at the Chemical Zone of GIDC at Panoli, District Bharuch. For this purpose, the assessee floated a public issue of equity shares aggregating to Rs. 3.35 crores in March, 1994. It was stated in the Prospectus issued for the purpose that the proceeds of the said issue would be utilized towards the objects of the issue. The objects of the issue, as stated in the Prospectus, were as under : "( i )To meet the cost of expansion- cum -diversification project ( ii )To meet the cost of project for manufacture of New Bulk Drugs at various units ( iii )To meet the cost of expansion programmes for the existing products ( iv )To upgrade and modernize the existing R D and OCD facilities ( v )To meet the cost of normal on going capital expenditure ( vi )To augment the Company s Working Capital Requirements arising out of increased business ( vii )To defray the cost of issue expenses ." [Emphasis supplied] 4. Cost of the project and the means of finance were also spelt out in the prospectus. Total cost of the project was spelt out at Rs. 672 crores out of which Rs. 3.35 crores were proposed to be met out of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer himself has allowed the depreciation in subsequent years and hence there was no basis to sustain the disallowance of depreciation this year. As regards his alternative plea, he submitted that the Departmental authorities ought to have considered the claim of the assessee for amortisation of the impugned expenditure for allowance under section 35D on merits instead of rejecting the same on the ground that the assessee had not claimed it earlier. 9. In reply the Ld. DR supported the orders of the departmental authorities. 10. We have considered the rival submissions. There is no doubt that the impugned expenses were incurred for raising the share capital. One of the objects for raising the share capital was also to defray the cost of issue expenses. Besides, the objects of the present issue as stated at page 14 of the prospectus were not only to meet the cost of expansion- cum -diversification project but also to meet the cost of normal ongoing capital expenditure, working capital requirements, up-gradation and modernization of the existing R D and OCD facilities as also to meet the cost of project for manufacture of new drugs at various units. Another importan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in our view has been correctly denied depreciation on the impugned expenses. 12. Reliance placed by the assessee on the decision in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC) does not also assist the assessee. In the said case, the Hon ble Supreme Court has held that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in a working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. As evident on bare perusal of the said decision that it is the expenditure on borrowed capital which can be capitalized for the purpose of depreciation. The case before us is not of the expenditure on borrowed capital but of the expenditure incurred on raising the equity capital, i.e., the own capital of the assessee-company. The distinction between owned capital and borrowed capital is too well known to warrant any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s relevant to assessment year 1995-96 and hence the claim under section 35D should have been made in that year. The assessee has not done so but has not tried to capitalize the expenses by adding them to the block of assets of the Panoli Plant which commenced production during this assessment year. The appellant s representative has not pressed any evidence on record to show that any of this expenditure was related to the assets. Hence, the question of adding it to the block of the assets does not arise. I therefore, uphold the action of the Assessing Officer in disallowing depreciation on these expenses and also not entertaining claim under section 35D in the second year after issue of shares. The addition made on this point is confirmed." 17. The Ld. CIT(A) has not examined the claim of the assessee with reference to the provisions of section 35D. It is, therefore, considered appropriate to set aside the order of Ld. CIT(A) and restore the matter to his file for a fresh decision in accordance to law and more particularly the provisions of section 35D. Alternative ground taken by the assessee stands allowed for statistical purposes. 18. As regards third issue relating to s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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