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2015 (3) TMI 502 - BOMBAY HIGH COURT

2015 (3) TMI 502 - BOMBAY HIGH COURT - [2015] 374 ITR 243 (Bom) - Depreciation on a part of issue of shares capitalised to Plant & Machinery and factory equipment denied - Held that:- As relying on Commissioner of Income Tax Vs. Mahindra Ugine and Steel Co.Ltd. [2000 (2) TMI 26 - BOMBAY High Court] the expenditure as incurred by the assessee in the present case can very well be said to fall within the provisions of Section 35D of the Act which provides for amortisation of certain preliminary exp .....

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/b. Crawford Bayley & Co. For the Respondent : Ms.Suresh Kumar,. ORDER:- (Per G.S.Kulkarni, J.) 1. By this Income Tax Reference under Section 256(1) of the Income Tax Act,1961 (for short the Act ), the Income Tax Appellate Tribunal (Tribunal) has referred the following questions of law for decision of this Court:- (I) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in not granting depreciation on a part of issue of shares capitalised to Plant & .....

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essee had issued 6,25,000 equity shares of ₹ 10/- each. Accordingly, a sum of ₹ 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 ₹ 14,21,276/- under different heads like financial consultancy, managerial fees, legal fees, .....

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#8377; 29,668/-, the assessee claimed depreciation of ₹ 4,203/- in the said Assessment Year. The applicant justified the claim for depreciation on the ground that these amounts which were capitalised, represented expenditure incurred in raising finance for the acquisition of and/or for brining into existence capital assets and thus formed part of the cost of fixed assets. In support of its claim for depreciation under Section 32 of the Act, the applicant principally relied upon the decisio .....

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on the capitalised sum of ₹ 29,668/- for an amount of ₹ 4,203/-. Similarly, for the Assessment year 1981-82 by an Assessment order dated 25 March 1984, applying the same yardstick the Assessing Officer rejected the claim of the assessee for depreciation on the sum of ₹ 9,79,438/-, amounting to ₹ 1,97,636/-. Thus for the Assessment Year 1980-81 and Assessment Year 1981-82 the Assessing Officer disallowed the Assessee's claim for depreciation on the capitalised amount .....

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reciation on the basis of judgment of the Supreme Court in the case of Chellapalli Sugars Ltd (supra) was misconceived as the said decision of the Supreme Court cannot be applied in the facts of the case. 4. The assessee being aggrieved by the decision of the CIT (A) rejecting its claim for depreciation for both the Assessment Years approached the Tribunal. The Tribunal by common order dated 4 April 1991 passed on the two appeals of the assessee for the Assessment Year 1980-81 and Assessment Yea .....

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s for work-inprogress. The assessee claimed that this amount was incurred on raising finance by issue of shares for purchase of fixed assets and for working capital requirements. In support of the same, the assessee filed details of expenditure and copy of the advertisement. The assessee in this connection relied upon the decision of the Supreme Court in the case of Challapalli Sugars Ltd. Vs. CIT and decision of Madras High Court in the case of CIT Vs. Lucas V.S.lmt. (No.1) (110 ITR 338). The C .....

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the commencement of the production. The Supreme Court held that since the actual cost was not defined, it should be construed in a sense which no commercial man would misunderstand and it would be necessary to ascertain the connection of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The CIT(A) had made reference to the Bombay High Court decision in the case of CIT Vs. Greater Eastern Shipping Co.Ltd. (118 ITR 774) wherein, it has held tha .....

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minary expenses which includes expenditure in connection with the issue, for public subscription, of shares in debentures. Thus there is independent provision for amortisation expenses in connection with share issue expenses. Under the circumstances, we agree with the CIT (A) that assessing officer was right in disallowing the depreciatic on the amount capitalised. Hence, this ground of appeal is dismissed. 5. The assessee, thereafter, approached the Tribunal for a reference to be made to this C .....

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wed by the Assessing Officer as upheld by the Tribunal. In the facts of the case the question would be required to be decided taking into consideration the provisions of Section 32 and 35D of the Act as applied by the Revenue. Section 32 provides for depreciation in respect of plant and machinery or furniture owned by the assessee and used for the purpose of business or profession. In the present case, the assessee is claiming depreciation on the capitalised expenditure on issue of shares which .....

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l to extract Section 35D of the Act which reads thus :- Amortisation of certain preliminary expenses 35D. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March,1970, any expenditure specified in sub-section (2), - (i) before the commencement of his business; or (ii) after the commencement of his business, in connection with the extension of his industrial undertaking or in connection with his setting up a n .....

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section (1) shall be the expenditure specified in any one or more of the following clauses, namely- (a) expenditure in connection with - (i) preparation of feasibility report; (ii) preparation of project report; (iii) conducting market survey or any other survey necessary for the business of the assessee; (iv) engineering services relating to the business of the assessee;\ Provided that the work in connection with preparation of the feasibility report or the project report or the conducting of m .....

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Articles of the company; (ii) on printing of the Memorandum and Articles of Association; (iii) by way of fees for registering the company under the provisions of the Companies Act,1956 (1 of 1956); (iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charge for drafting, typing, printing and advertisement of the prospectus; (d) such other items of expenditure (not being expenditure eligible for any al .....

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ncement of business, in connection with the extension of industrial undertaking or in connection with setting up a new industrial unit. Sub-section (2) of Section 35D of the Act sets out the categories of expenditures relevant for the purpose of Section 35D. The relevant clause for the present reference is sub-clause (c) of sub-section (2) which concerns the expenditure by a company in connection with the issue, for public subscription, of shares or debentures, underwriting commission, brokerage .....

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the assessee in connection with the issue of shares, the Assessing Officer had rejected the claim of the assessee for depreciation on the capitalised expenditure on issue of shares for the Assessment Years in question. It was held by the Tribunal that the claim of the assessee for depreciation on such expenditure being capitalised could not be allowed taking into consideration the provisions of Section 32 of the Act and taking into consideration the specific provision for amortisation as provide .....

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on 35D of the Act was not on the Statute book. In the case before the Supreme Court, interest was paid before the commencement of production on amounts borrowed by the assessee for acquisition and installation of plant and machinery. As the expression actual cost was not defined in the Statute, the Supreme Court held that it should be construed in the sense the term would be understood in common commercial parlance in accordance with the normal rules of accountancy prevailing in commerce and ind .....

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ult of such expenditure. In the case before the Supreme Court, the issue was payment of interest, before commencement of production, on the amount borrowed by the assessee for acquisition and installation of plant and machinery. 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 so as to apply the ratio of the decisi .....

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of the case, learned Counsel for the Revenue has drawn our attention to the decision of the Division Bench of this Court in the case of Commissioner of Income Tax Vs. Mahindra Ugine and Steel Co.Ltd., (250 ITR 84) . In this case the Division Bench was concerned about the stamp duty paid on debentures issued whether was allowable as the item of deduction under Section 35D of the Act. In deciding the issue that such expenditure fell under Section 35D(2)(c) of the Act, the Division Bench has obser .....

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or after the commencement of his business, in connection with the extension of his industrial undertaking, the assessee shall be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, the previous year in which the extension of the industrial undertaking is completed. Section 35D(2) enlists the expenditure in respect of which deduction can be claimed by the assessee .....

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tion with the issue of public subscription of the debentures of the company essentially for the expansion of the business is a very wide expression and it would certainly include the stamp duty payable by the assessee on the debenture issue. Section 35D would apply only in respect of expenditure which is otherwise not allowable under the law, for example, capital expenditure. Therefore, in this case, the judgment of the Supreme Court in the case of India Cements Ltd. v. CIT , applies in respect .....

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the case of Autolite India Ltd. Vs. Commissioner of Income Tax, (264 ITR 117) following the decision of the Division Bench of this Court in Commissioner of Income Tax Vs. Mahindra Ugine and Steel Co.Ltd. (supra), the Rajasthan High Court held that the claim of the assessee in respect of expenditure incurred on the public issue to raise capital for expansion of his business would fall under sub-clause (iv) of Section 35D(2)(c) of the Act and the assessee would be entitled for the benefit of the p .....

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ssion, learned Counsel for the applicant does not dispute that the question as framed has to be decided in favour of the revenue. Learned Counsel for the applicant relies on the decision of the Division Bench of this Court in the case Indoswe Engineers (P.) Ltd. Vs. State of Maharashtra, (101 STC 177(Bombay)) to contend that in exercising the reference jurisdiction under Section 256(1) of the Income Tax Act, this Court should not limit itself to the questions which are referred by the Tribunal o .....

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