Section 37(1) of the Income Tax  provides for a general deduction for all expenditure laid out wholly and exclusively for the purpose of the business or profession. The relevant exclusions made by the section along with the Explanation 1 are the following:

(i) Expenses of capital nature,

(ii) Expenses which are personal in nature,

(iii) Expenses incurred for any purpose which is an offence by law,

(iv) Expenses incurred for any purpose which is prohibited by law,

All the threse type of payments in question squarely falls within the ambit of section 37(1) and the question of their deductibility or allowability depends on the fact whether these expenses can be regarded as expenditure laid out wholly and exclusively for the purpose of the business or profession or hit by the exclusions provided. Exclusions  (ii) above are not applicable to the question in hand. Further exclusion (iii) and (iv) are applicable only if the purpose of the expenditure is an offence or is prohibited. Further Section 40(a)(ii) specifically disallows income tax paid as a deductible expenditure. However none of the payments described above falls within the ambit of this section.

Amortization of preliminary expenditure is allowed as deduction under section 35D of the Income Tax Act. An assessee falling under any of the following categories is eligible to claim deduction under section 35  to   an Indian Company; or  a person, other than the company, resident in India. Amortization of preliminary expenditure is available towards eligible expenditure which is incurred-  either before commencement of the business; or after commencement of the business, towards an extension of the undertaking or setting up of a new unit. The extent of deduction allowable under section 35D. Provisions of section 35D(2) cover the list of eligible preliminary expenditure which is allowable as a deduction under section 35D of the Income Tax Act.  The maximum  permissible limit is 5 % of the cost of the project or 5 % of the capital employed . The total amount of deduction, as calculated above, will be available as a deduction in five equal instalments. The instalments will begin from the previous year in which business is commencement or extension of the undertaking is completed or new unit commences production/ operation. In the case of CIT Vs Ashok Leyland Ltd (2012) 349 ITR 663, the Madras High Court has defined the meaning of the phrase “being” as mentioned in section 35D (2)(c)(iv)  and held that expenditure incurred in connection with the issue of shares and debentures of the company to public subscription, which qualify for consideration under Section 35D, are underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus and nothing more. However, there may be certain expenditure which may fall under the definition of actual cost u/s 43,  but not under provision of Section 35D and vice versa. It was held in CIT Vs Polychem Ltd 98 ITR 574 that printing and stationery which has no connection with the acquisition and installation of machinery could not be allowed. In the case of CIT Vs Ennar Steel and Alloy Pvt Ltd (2003) 261 ITR 347 wherein it was held that the Board need to include items of expenditure and items which are not included cannot be claimed under the same section. In most of the cases, such expenditure incurred in connection with the issues of shares of company being underwriting commission, brokerage was not entitled to be benefit of Section 35D as that section was in applicable having regard to the increase in share capital being subsequent to the establishment of the business and the assesse had not established any new industrial unit nor had it expanded the existing industrial undertaking as mentioned in the case of Sakthi Finance Ltd Vs CIT (2002) 256 ITR 488 (Mad) by Madras High Court.

Another Question arise whether the ROC fee paid for enhancement of share capital   can be claimed as Actual Cost under section 43(1) for the purpose of   charging of depreciation. Section 43(1)  deals with actual cost and  as per section 43(1)   the actual cost means in sections 28 to 41 and in this section, unless the context otherwise requires  “actual cost” means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. Further Explanation 8. Also clarify that for the removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset. In the case of [2016] 65 taxmann.com 125 (Punjab & Haryana)[10-08-2015]-  Where amount of fees paid to Registrar of Companies for increasing authorized share capital was capitalized against plant and machinery, assessee was entitled to depreciation at rate of 15 per cent on said amount, However In the case of International Computers India Manufacture Limited Vs CIT (2015) 230 Taxman 428 the assesse who has incurred expenditure for issue of shares and had it capitalised to various heads of plant and machinery and factory equipment relying on the decision of Chellapalli Sugars Vs CIT 98 ITR 167 . Similar view was held in the cases of Autolite India Ltd Vs CIT 264 ITR 117 and CIT Vs Mahindra Ugine and Steel Co Ltd (2001) 250 ITR 84 (Bom) where the Courts have denied depreciation on such expenses which were capitalised.

Allow ability of Additional Fee / Penalty / Late fee to ROC:-   Interest or late fee  is not paid for a purpose which is an offence or prohibited. In fact the interest and late fee  are paid for the purpose of the compliance with the Income Tax Act and/or the Companies Act. Therefore the exclusions (iii) and (iv) are also not applicable to the interest /late fee paid The Hon’ble Supreme Court in Bharat Commerce and Industries Ltd. Vs CIT (1985) has ruled that interest paid for delay in furnishing ITR and Advance Tax is not deductible as business expenditure. The Court observed that;

“it  is difficult to see how the interest so paid for not paying the requisite amount  of advance  tax  as  prescribed  can  be considered as expenditure laid  out wholly and exclusively for the purpose of  business.”

In the case of   Aruna Mills Ltd. v. CIT   [1957] 31 ITR 153, the Bombay High Court observed that it was difficult to understand how, when a business  man commits default in discharging his statutory obligation,  the consequences of that default could constitute  an expenditure  exclusively  incurred  for the purpose of his business.

Here is compilation of few cases  on ROC / MCA Fee for enhancement of Share Capital and allow ability  thereof :-

> BROOKE BOND INDIA LIMITED VERSUS COMMISSIONER OF INCOME-TAX- Aupreme Court- [1997] 225 ITR 798 (SC):-

Expenses for issue of shares – though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit-making, the expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company – Tribunal was not right in sustaining the disallowance

> PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LIMITED VERSUS COMMISSIONER OF INCOME-TAX- SUPREME COURT-[1997] 225 ITR 792 (SC)

Fee paid to the Registrar for expansion of the capital base of the company – directly related to the capital expenditure incurred by the company – Tribunal was right in law in holding that the amount of ₹ 1,50,000 paid to the Registrar of Companies, as filing fee for enhancement of capital was not revenue expenditure – Held, yes

> Groz-Beckert Saboo Ltd. v. CIT [1986] 160 ITR 743, the Punjab and Haryana High Court, agreeing with the decision of the Calcutta High Court, took the view that the fee paid under the Companies Act for increasing the share capital was an expenditure of capital nature.

> Kodak India Limited 229 ITR 445 (2002).- Expenditure incurred by a company in connection with issue of shares with a view to increase its share capital is directly related to the expansion of the capital base of the company, and is capital expenditure , even though, it may incidentally help in the business of the company and in profit making.

> Fees paid for increasing authorized capitalis a capital expenditure. Refer CIT v Tungabhadra Industries Limited 207 ITR 553 (1994), CIT v Hindustan Insecticides Limited 250 ITR 228 (2001) & PSIDC v CIT 225 ITR 792 (1997).Such expenditure also not eligible for deduction under section 35D of the act.

> Mohan Meakin Breweries Ltd. v. CIT (No. 2) [1979] 117 ITR 505, the Himachal Pradesh High Court took the same view that increase of share capital and fees paid to Registrar of Companies for increasing authorized capital will result in an advantage of enduring nature and is, therefore, capital expenditure and is not allowable as revenue expenditure

> ITAT HYDERABAD :- OCIMUM BIO SOLUTIONS INDIA LTD., HYDERABAD. VERSUS DY. COMMISSIONER OF INCOME-TAX, CIRCLE – 16 (3) , HYDERABAD- No.- ITA No. 2178/H/2018  – May 5, 2021

Addition towards ROC expenses – HELD THAT:- On perusal of the financial statements submitted by the assessee, we find that there is no doubt that the assessee has increased share capital. On perusal of the provisions of section 35D, we find substance in the written synopsis submitted by the ld. AR of the assessee relying on the judgements quoted supra that section 35D provides amortization of certain expenses, which are in the nature of capital/intangibles/preliminary expenses, which have been incurred by the assessee in the preliminary stage of the company or in the normal course of business and the assessee is entitled to amortize of expenses over a period of time as per section 35D. Therefore, the AO is directed to allow the ROC expenditure incurred towards increase of share capital as per section 35D – Decided in favour of assessee.

> M/s. Rohit Ferro Tech Limited Vs DCIT (ITAT Kolkata)- No.1052/Kol/2011 dt 10/06/2015-The present appeal filed by the assessee challenging the order passed by CIT(A) confirming the disallowance made u/s 35D in respect of expenditure incurred related to issue of shares and computation of book profit u/s 115JB.

In respect of first ground, the assessee has incurred Rs.1,98,36,310/- in relation to raising of capital by public issue for setting up of new unit at Jajpur, Orrisa and claimed 1/5th of said expenditure of Rs.39,67,262/- during the year. The A.O. taking the view expressed by Hon’ble Supreme Court in case of Punjab State Industrial Corporation Ltd. –vs- CIT 225 ITR 792 (SC), disallowed the expenditure considering it as capital expenditure since the expenditure was directly related to the expansion of the capital base of the company. The CIT(A) confirmed the order of the AO merely observing that the assessee failed to distinguish the case relied upon by the AO in the assessment order. On an appeal, it was held by the Tribunal that the decision of the Hon’ble Supreme Court in the case of Punjab State Industrial Corporation Ltd. –vs- CIT relates to the payment of fees to the Registrar of Companies for the issue of the share capital. The decision in the case of Punjab State Industrial Corporation Ltd. –vs- CIT does not relate to the other expenses related to the issue of share capital. As per the provision of section 35D(2)(c)(iv), expenditure incurred 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” are specifically eligible and allowable u/s 35D except the fees paid to the Registrar of Companies as that has not been specifically included under section 35D(2)(c)(iv). Provisions of section 35D are applicable only to those expenditure, which cannot be regarded to be the revenue expenditure but since the fees paid to the Registrar of Companies has not been included under section 35D(2)(c)(iv), therefore, the assessee cannot get deduction for the same. From the details filed by the assessee, it was not clear how much amount has been paid by the assessee by way of fees to the Registrar of Companies. Therefore, in the interest of justice and fair play to both the parties, A.O. was directed to verify, after giving the opportunity to the assessee whether the expenditure incurred by the assessee and claimed as amortization under section 35D comply with the condition and to the extent this expenditure does not include the fees paid to the Registrar of Companies, the A.O. was directed to allow 1/5th of the such expenditure.

> COMMISSIONER OF INCOME TAX, FARIDABAD VERSUS M/S NUCHEM LIMITED- PUNJAB & HARYANA HIGH COURT-[2015] 371 ITR 164 (P&H)

Share capital expenses – AO made disallowance of expenses claimed u/s 35D in respect of capital raising expenses being one-tenth on the ground that these were not covered under the said provision – ITAT confirming order of CIT(A) in deleted addition – Held that:- In Multi Metals Ltd. [1990 (10) TMI 55 – RAJASTHAN High Court] and Goa Carbon Ltd.’s cases (1993 (9) TMI 344 – BOMBAY HIGH COURT), it has been held by the Rajasthan and the Bombay High Courts, respectively, that any expenditure incurred by way of fees paid to the Registrar of Companies for enhancement of the authorised capital is deductible over a period of ten years under section 35D(2)(c)(iv) of the Act. We are in agreement with the aforesaid view and do not find any infirmity in the order of the Commissioner of Income-tax (Appeals) or the Tribunal in this behalf. – Decided in favour of assessee.

> GOA CARBON LTD. VERSUS COMMISSIONER OF INCOME-TAX- BOMBAY HIGH COURT-No.- IT REFERENCE NO. 139 OF 982-

we have no hesitation in accepting the submissions made by the learned counsel for the assessee that in the circumstances the assessee is entitled to avail of section 35D and the expenditure incurred by the assessee on ‘share issue’ be allowed to be deducted in the manner contemplated under section 35D as it stood at the material time. The Tribunal is directed to modify its order by deciding deduction of above- referred expenditure in terms of section 35D while giving effect to this order.

> COMMISSIONER OF INCOME-TAX VERSUS MULTI METALS LIMITED-RAJASTHAN HIGH COURT-: [1991] 188 ITR 151:-

To us, it appears that even if the provision of sub-section (2)(c)(iii) of section 35D is not applicable, the language of subsection (2)(c)(iv) of section 35D is wide in nature and would include the deductibility of fee paid by the assessee to the Registrar, for enhancement of capital. Therefore, the said provision was rightly applied to the present case by the Income-tax Appellate Tribunal.

Under these provisions, deduction of expenditure incurred for registration is to be spread over a period of ten years and is not allowable in the year in which the expenses are incurred. To uphold the submission of the Revenue that expenditure incurred for obtaining registration would not be allowable either under sub-section (2)(c)(iii) or sub-section (2)(c)(iv) of section 35D would defeat the obvious intention of the Legislature and would produce a wholly unreasonable result. To achieve the obvious intention and produce a reasonable result, we have to hold that under subsection (2)(c)(iv) of section 35D, the expenditure incurred for obtaining registration would be liable to be deductible. AP

We, consequently, hold that the fee paid to the Registrar of Companies for raising authorised capital of the assessee-company was covered by subsection (2)(c)(iv) of section 35D of the Income-tax Act.

Let the papers of this case be returned to the Income-tax Appellate Tribunal with the answers mentioned above. Since we have answered one question in favour of the Revenue and the other against it, we do not consider it to be in the interest of justice to award any costs

> CIT v. Kisenchand Chellaram (India) P. Ltd. [1981] 130 ITR 385,

the Madras High Court took the view that the assessee paid fees for raising the capital of the company to the Registrar of Companies and claimed the amount paid as a revenue expenditure which was negatived by the Income-tax Officer, but it was allowed by the Appellate Assistant Commissioner and the same was upheld by the Tribunal. On a reference, the court held that without capital a company cannot carry on its business and hence the expenses incurred for increasing the capital were bound up with the functioning and financing of the business.

> Hindustan Machine Tools Ltd. (No. 3) v. CIT [1989] 175 ITR 220 (Kar),

a sum of Rs. 75,600 incurred by way of filing fee paid to the Registrar of Companies in respect of enhancement of the authorized share capital of the company was held deductible as revenue expenditure.

> Warner Hindustan Ltd. v. CIT [1988] 171 ITR 224 (AP),

their Lordships dissenting from the view expressed by the Bombay High Court, the Himachal Pradesh High Court and the Delhi High Court, agreed with the view of the Madras High Court and made a, reference to the decision of the Supreme Court given in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1. It was held that amount was spent by the assessee by way of fees to the Register of Companies for increasing its authorised capital. The increase in the authorised capital does not by itself result in expending the capital base or the fixed capital company. This expenditure is more in the nature of expenditure laid out for facilitating the assessee’s operations and to enable it to carry on its business more efficiently and profitably. This was done with a view to facilitate a better conduct of the assessee’s business. We may again point out that by merely obtaining an authorization for increasing the authorised capital, the fixed capital of the company was not enhanced or enlarged. In this connection, we may refer to the annual report of the assessee for the year 1972, which shows that while the authorised capital rose from Rs. 1.5 crores in the previous year to Rs. 3 crores in this year, the issued and subscribed capital remained the same at Rs. 30 lakhs (5% non-cumulative redeemable preference shares of Rs. 10 each) and Rs. 98 lakhs (enquiry shares of Rs. 10 each fully paid-up). This aspect shows that on account of the increase in the authorised capital, the fixed capital or share capital of the company remained unaltered.

> The Mumbai Income Tax Appellate Tribunal in M/s Empower India Ltd.1 vide order dated 23 October 2019,

held that expenses for increase in authorised share capital attributable to issue of bonus shares is revenue expenditure as there is no expansion of capital base nor any benefit of enduring nature on account of such bonus issue

> In case of CIT Vs Motor Industries Ltd (1998) 229 ITR 137(Kar) it was held that expenses incurred in relation to rights issue were of capital in nature and answered in favour of the Revenue disallowing such expenses.

> Hyderabad bench of the Income Tax Appellate Tribunal (ITAT) in DCIT v. M/s. Mercury Projects held that the amount paid to ROC for the enhancement of authorized share capital is not deductible from the total income under the provisions of the Income Tax Act,1961.

> CIT v. M/s Bayer Vapi Private Limited [2019] 106 taxmann.com 395 (Gujarat)- Legal fees incurred on buyback of shares allowable as revenue expenditure

> Stamp Duty expenses in connection with issue for Public Subscription of Shares or Debentures of Company is allowable Expenditure: Karnataka HC

> Fee paid for issue of Debentures :-  Karnataka High Court decided that expenditure incurred on issue of convertible debentures is to be allowed as revenue expenditure.   Refer CIT v ITC Hotels Limited 190 Taxman 430 (2010). Further, expenses incurred on issue of right shares were held as capital expenditure.  Refer CIT v CWS (India) Ltd. 242 ITR 429 (2000). Similarly, Expenditure incurred on issue of debentures, whether convertible or non convertible is allowable as revenue expenditure. Refer, Secure Meters Ltd. 221 CTR 405. Assessee is entitled to the proportionate deduction, of premium on redemption of non-convertible debenture. Refer, CIT vs. Indian Rayon & Industries Ltd. 38 DTR 313

> Rajasthan High Court that fees paid to the registrar of Companies for bringing about change in the memorandum and Articles should not be allowed.  Refer CIT v Aditya Mills 181 ITR 195 (1990).

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Ajay Kumar Agrawal FCA, a science graduate and fellow chartered accountant in practice for over 26 years. Ajay has been in continuous practice mainly in corporate consultancy, litigation in the field of Direct and Indirect laws, Regulatory Law, and commercial law beside the Auditing of corporate and View Full Profile

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