Brief Facts of the case:
In the Assessment Year 1980-81, the assessee had issued 6,25,000 equity shares of Rs.10/- each. Accordingly, a sum of Rs.62.50 lakhs was raised by issue of shares The purpose of issue was to set up an unit for the manufacture of computer and OEM peripheral manufacturing project. For the issue of shares, the assessee had incurred expenses of Rs.14,21,276/- under different heads like financial consultancy, managerial fees, legal fees, underwriting commission, advertisement, issue house expenses, printing charges etc. Out of total expenditure of Rs.14,21,276/-, the assessee capitalized a sum of Rs.29,668/- on plant & machinery and factory equipment and Rs.9,79,438/- on the work-in-progress. The balance sum of Rs.4,12,170/- was treated as preliminary expenses and on these expenses had claimed relief under Section 35D of the Act in the following Assessment Year i.e. 1981-82. On the capitalized amount of Rs.29,668/-, the assessee claimed depreciation of Rs.4,203/- in the Assessment Year 1980-81 and on work in progress part claimed the depreciation Rs. 1,97,636 on capitalized value Rs. 9,79,438 in Assessment Year 1981-82.
The Assessing Officer disallowed the assessee’s claim for depreciation on the capitalized sum of Rs.29,668/- for an amount of Rs.4,203/-.and applying the same logic also rejected the claim of the assessee for AY 1981-82 for depreciation on the sum of Rs.9,79,438/- (capital work in progress) amounting to Rs.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 capitalized amount of Rs.4,176/- and Rs.1,97,636/- respectively.
The Assessing Officer further pointed out that the expenditure incurred was in the nature of expenses listed under Section 35D of the Act and thus were required to be treated in accordance with Section 35D of the Act and not in the manner as done by the assessee in claiming depreciation under Section 32.
The assessee approached the Commissioner of Income Tax challenging the AO’s order.
CIT (A) rejected the ground as raised in this behalf by the assessee and the confirmed the findings of AO.
The appeal of the assessee was dismissed by the tribunal on the ground that share issue expenses are squarely covered under Sec 35D ,thus, the said expenditure cannot be capitalized, thus, no question of allowing depreciation on any part.
Aggrieved by the order of tribunal, assessee reached to Hon’ble Bombay High Court to claim relief.
Contention of the Assessee:
The learned counsel for assessee justified the claim for depreciation on the ground that these amounts which were capitalized, 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 reliance was placed on the decision of the Supreme Court in the case of Chellapalli Sugars Ltd. Vs. CIT, (98 ITR 167).
Contention of the Revenue:
The Revenue contended that the expenditure of Rs.14,21,276/- was in the nature of expenses listed under Section 35D of the Act and thus were required to be treated in accordance with Section 35D of the Act. It was further argued that there is a separate section to allow deduction in relation to expenditure incurred for the issue of shares as preliminary expenses in the manner prescribed u/s 35D.Thus, the share issue expenses are governed by Sec 35D and not by Sec 32.
Decision of the Hon’ble High Court:
The Hon’ble High Court after considering the rival submissions observed that Section 32 provides for depreciation in respect of capital assets owned by the assessee and used for the purpose of business or profession. In the present case, the assessee has claimed depreciation on the capitalized expenditure on issue of shares which cannot fall within the purview of Section 32 because the legislature, specifically provide for amortization of the preliminary expenditure (under Sec 35D) which includes expenditure incurred for issuance of shares by the assessee in connection with the issue of shares.
The court further observed that the contention of the assessee as to the application of the decision of the Supreme Court in the case of Chellapalli Sugars Ltd. Vs. CIT, that the Assessing Officer, the CIT(A) and the Tribunal have correctly held that the same was not applicable in the facts of the present case. Because in that case the Supreme Court was not dealing with an issue in regard to expenditure incurred by the assessee in issuing shares and also the provisions of Section 35D of the Act was not in the then statute book.
Therefore, considering the above observations the claim of the assessee for depreciation on such expenditure being capitalized could not be allowed taking into consideration the provisions of Section 32 of the Act and taking into consideration the specific provision for amortization as provided under Section 35D.
Thus, appeal of assessee is dismissed.
Analysed by CA Saurabh Chokhra
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