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2016 (10) TMI 406 - KERALA HIGH COURT

2016 (10) TMI 406 - KERALA HIGH COURT - TM - Deduction u/s 35D(2)(c)(iv) - whether the expenditure incurred by the Appellant in connection with the issue of Right Shares to the public is not covered under Section 35D(2) (c ) (iv) ? - Held that:- A reading of the provision shows that any reference in the Companies Act or in the Articles of a Company offering shares to the public shall, subject to the provisions of the Companies Act, be construed as including a reference to offering the shares to .....

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provisions of Section 67 of the Companies Act and if so done, the inevitable conclusion is that the term for “public subscription” employed in Section 35D(2)(c)(iv) of the Income Tax Act would include subscription by a section of the public, i.e., the existing shareholders in a Company as well. Any interpretation to the contrary would lead to a situation where the benefit of amortization would be available to public issue of shares and the same benefit would be denied when shares are issued by C .....

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SRI.JOSE JOSEPH, SC, FOR INCOME TAX JUDGMENT ANTONY DOMINIC, J. These appeals are filed by the assessee challenging the orders passed by the Income Tax Appellate Tribunal in I.T.A. Nos.477 of 2005 and 195 of 2007, pertaining to assessment years 1999-2000 and 2003-2004. 2. The assessee is a Public Limited Company. In terms of the provisions contained in Section 81 of the Companies Act, in July 1998, the assessee announced a rights issue of shares and accordingly shares were offered to its existin .....

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nd that in a rights issue, shares are issued only to a section of the public, the Assessing Officer disallowed the claim. This order was confirmed by the First Appellate Authority and the Tribunal. 3. It is in this background these appeals are filed and the questions of law framed for the consideration of this Court are the following: 1. Whether on the facts and in the circumstances of the case the Appellate Tribunal was right in holding that the expenditure incurred by the Appellant in connecti .....

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s justified in its conclusion that the expenditure incurred in connection with the rights issue cannot be amortized and allowed as a deduction under Section 35D? 4. We heard the learned Senior Counsel for the assessee and the learned Senior Counsel appearing for the Revenue. 5. The primary question that is to be answered in these appeals is whether the preliminary expenses incurred by the assessee in connection with the rights issue of shares qualified for the benefit of Section 35D(2) (c)(iv) o .....

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subject to the provisions of this section, 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, as the case may be, the previous year in which the extension of the undertaking is completed or the new unit commences production or operation: ............................................................................... (2) The expenditure referred to in sub-sect .....

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.................. (iii)................................................. (iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus 7. From a reading of this provision, it can be seen that where the assessee is an Indian Company, the expenditure incurred by it in connection with the issue of its shares for public subscription, being .....

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tal paid up on those shares at that date. It is also provided that after the expiry of the time specified for accepting the offer thus made by the company, if the offer is declined, the Board of Directors may dispose of the shares in such a manner as they think most beneficial to the company. 8. In compliance with Section 81 of the Companies Act, the assessee Company offered shares to its existing shareholders. Many shareholders accepted the offer and such of those shares which were declined to .....

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In such a situation and when the term is to be understood in the context of a rights issue under Section 81 of the Companies Act, to understand the scope of the term 'public' employed in Section 35D(2)(c)(iv) of the Income Tax Act it is permissible to refer to the relevant provision of the Companies Act. 10. Section 67(1) of the Companies Act, reads thus: 67. Construction of references to offering shares or debentures to the public, etc.-(1) Any reference in this Act or in the articles .....

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es Act or in the Articles of a Company offering shares to the public shall, subject to the provisions of the Companies Act, be construed as including a reference to offering the shares to any section of the public also. In other words, insofar as the Companies Act is concerned, the section of the public holding shares in a company would be treated as public, for the purposes mentioned in Section 67. It is also clear from Section 67, that the purposes of the Section would include rights issue of .....

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to the contrary would lead to a situation where the benefit of amortization would be available to public issue of shares and the same benefit would be denied when shares are issued by Companies on rights basis. 12. This conclusion that we have reached is also supported by the interpretation given to the term general public utility in the Apex Court judgment in Commissioner of Income Tax, Madras v. Andhra Chamber of Commerce, Madras (AIR 1965 SC 1281) where it has been held that the term general .....

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