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TMI Blog2021 (10) TMI 163X X X X Extracts X X X X X X X X Extracts X X X X ..... acquisition for the shares and therefore the interest paid on such acquisition of shares is a capital expenditure and that the learned AO has misappreciated the facts." 3. Facts in brief are that assessee is an investment company. It has filed its return of income on 22.9.2015 declaring total income of Rs. 3,33,740/-. The return was processed under section 143(1) of the Act, and thereafter the same was taken up for scrutiny assessment under section 143(3) for limited purpose by issuance of notice under section 143(2) of the Act on 19.9.2016, which was served upon the assessee. During the course of assessment proceedings, it was observed by the AO that the assessee has claimed deduction of Rs. 26,42,282/- under section 35D of the Income Tax Act, 1961 being 1/5th of amortization of preliminary expenses. By show cause notice, the ld.AO sought details of claim of preliminary expenses which had been amortized during the year under consideration and as to why deduction of Rs. 26,42,285 incurred towards increase of authorized capital should not be disallowed, as the same was capital in nature. The assessee filed a detailed reply dated 15.12.2017, in which it has given a detailed breakup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorized capital after the incorporation of the company. It was submitted that business of the company has commenced from the date of passing of the resolution dated 17.12.2013 i.e. within 20 days from the date of incorporation on 28.11.2013 to invest in the shares to the tune of Rs. 305 cores. The company was incorporated on 28.11.2013 for the purpose of investment in Core Investment Company, and this object was achieved by investing as CIC in Sterling Addlife India P.Ltd. Therefore, even the subsequent increase in the authorized share capital was the part of initial registering activity and therefore the preliminary expenses such as stamp duty and form filing fees with ROC are eligible for deduction under section 35D of the Act. He submitted that as per the provisions of section 35D the expenses for registering the company does not mean that the expenses incurred at the time of incorporation, but also the expenditure incurred for registering the company for compliance of other formalities for the purpose of commencement of business. In the instant case, the assessee has commenced the business for the first time by investing Rs. 305 cores in shares of Sterling Addlife India Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld.DR supported the orders of the Revenue authorities. 5. We have gone through the record and material available on record. We also gone through order of the Tribunal in the assessee's own case in ITA No.2053/Ahd/2017 order dated 1.6.2020. We find that the issue whether claim in respect of deduction under section 35D of the Act incurred towards increase of authorized share capital is allowable or not, has been agitated before the Tribunal by the assessee in preceding assessment year i.e. 2014-15. The Tribunal vide order dated (supra) allowed claim of the assessee. The ground raised by the assessee in that appeal exactly the same as that of the year under consideration. Therefore, in order to decide the issue on hand, we reproduce the ground raised in that and finding of the Tribunal on the issue as under: Ground No.2 "2. The learned CIT(A) has erred in holding that Section 35D is not applicable on the facts of the case and thereby as erred in disallowing the amortization of 1/5th preliminary expenses under Section 35D by placing reliance on certain decisions in as much as the assessee is eligible to claim deduction under Section 35D as per the ratio laid down in the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved 94 in this behalf by the Board; (b) legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee; (c) where the assessee is a company, also expenditure- (i) by way of legal charges for drafting the Memorandum and Articles of Association 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) 94a ; (iv) in connection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquired the shares as capital assets and not as business assets, and therefore, the same was not covered under section 36(1)(iii) but under section 48 and therefore, cost of acquisition included the interest paid on borrowing used for the purpose of acquisition of capital assets. Assessee accordingly capitalized the interest on borrowing utilized for the purpose of investment in shares, and disallowed such interest in the computation of income. After going through the submissions of the assessee, the ld.AO has taken a different view in the matter. The ld.AO observed that inclusion of interest expenditure incurred in post acquisition in the cost of acquisition of shares would give rise to analogous situation, whereby there would be artificial increase of cost of acquisition of the investments, and would result in incorrect and invalid indexation at the sale of capital assets, and the correct treatment would be capitalize the interest cost and other related finance only upto the date of acquisition of investments in the value of the investment. In the instant case, since the financial cost was incurred post-acquisition, the same should be accounted year to year basis as revenue exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ." Findings of the Tribunal: 10. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, the assessee in the present case is an Investment Company and it can earn two types of income out of such investment i.e. on transfer of such investments which is chargeable to tax under the head capital gain and the dividend income under the head income from other sources but the same has been exempted under section 10(34) of the Act. It is a fact on record that interest cost has been incurred by the assessee on the money borrowed which was utilised for the purpose of the investments. The AO in his order held that the impugned interest expenses can be allowed as revenue in nature whereas the learned CIT (A) reversed the finding of the AO by holding that such expenditure cannot be treated as revenue in nature. The relevant finding of the learned CIT (A) reads as under: "It is observed that as per provisions of section 36(1)(iii) of the Act, interest payable in respect of capital borrowed for the purpose of business is allowable expenditure but in present case, as appellant has not acquired shares for the purpose of its business, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would partake character of cost of share and, therefore, the same was rightly capitalized along with the cost of acquisition of shares." The principles laid down by the Hon'ble Madras High Court in the case cited above are directly applicable to the present facts of the case. Therefore, we are of the view that the impugned interest expenses needs to be capitalized. Before parting, it is also pertinent to note that the authorities below and the assessee has referred to many cases which are recorded in the respective orders but we do not find any reason to deal with all of them individually for the sake of brevity and convenience but suffice to hold that the principles laid down in the case of Trishul Investment Limited (supra) are directly applicable in the present facts of the case. Hence the ground of appeal of the assessee is allowed." 11. The facts and circumstances as mentioned in the above order remain the same in the present year as well, therefore following the decision of the Tribunal, we allow claim of the assessee for capitalization of interest expenditure on the money borrowed from the bank for investment in post-acquisition of shares. 12. In the result, appeal of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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