Only fees paid to Registrar is capital expenditure, other expense incurred in relation to issue covered u/s 35D

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 1/5^th 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 1/5^th of the such expenditure.

In respect of other ground, the A.O. while determining book profit u/s 115JB added Rs.15,00,095/- in respect of FD Interest and Rs.7,10,093/- in respect of provisions for gratuity. Held that the explanation 1 defines that “book profit” means the profit as shown in the profit & loss account for the relevant previous year prepared under sub-section (2) and as increased by the amount of income-tax as are enumerated under clauses (a) to (g) and has to be reduced by the item as given under clauses (i) to 7(i). The disallowance made in respect of provision for gratuity does not fall under clauses (a) to (j), even the interest on FD, which has been added, also does not fall in any of the clauses as given under clauses (a) to (j) to Explanation 1. In view of this fact, addition made by the A.O. was deleted. As a result the appeal filed by the assessee stands partly allowed for statistical purposes.