M/S RANA POLYCOT LTD vs. COMMISSIONER OF INCOME TAX AAYAKAR BHAWAN CHANDIGARH

Whether Reporters of local papers may be allowed to see the judgment?

To be referred to the Reporters or not?

Whether the judgment should be reported in the Digest? Present: Mr. Ravi Shankar, Advocate for the appellant. Ms. Urvashi Dhugga, Advocate for the respondent.

We have heard learned counsel for the parties.

The primary issue that arises for consideration in the present appeal relates to allowance of depreciation under Section 32(1) of the Act @ 15% on ` 10,00,000/- paid by the assessee as fees to the Registrar of Companies for the expansion of capital base and capitalized towards plant and machinery.

It was not controverted by learned counsel for the assessee that the amount of ` 10,00,000/- paid by the assessee as fees to the Registrar of was urged that the assessee-company increased its authorized share capital for expansion of existing business and had to deposit ` 10 lacs as fees with the Registrar of Companies which was capitalized to plant and machinery during the year as the same was paid to generate funds for the expansion of the business. It was, thus, claimed that assessee was entitled to 15% depreciation on the aforesaid amount. Alternatively, it was submitted that in case the amount of fees paid to Registrar of Companies for augmenting the authorized capital was not attributable to any capital asset, then in that eventuality, the assessee was entitled to amortization of these preliminary expenses under Section 35D(2)(c)(iv) of the Act where it is to be allowed on amount equal to one fifth of such expenditure i.e. 20% for each of the successive previous year. It was claimed that an application bearing CM No.10420 CII of 2015 has been filed under Section 151, Code of Civil Procedure claiming reframed question of law in this regard. GURBAX SINGH 2015.11.17 12:34 integrity of this document High Court Chandigarh

Conversely, learned counsel for the revenue supported the order passed by the Tribunal and maintained that the assessee had been rightly disallowed depreciation of ` 1,50,000/- by the Assessing Officer and the rate of 15% on ` 10 lacs amounting to ` 1,50,000/-. The CIT(A) had rightly accepted the claim of the assessee with the following observations:- “19. After considering rival submissions, I find that the AO has wrongly disallowed the claim of the appellant. During the assessment proceedings, the AO accepted that the amount of ` 10,00,000/- pertains to the fee paid to the Registrar of companies for increase in authorized capital but denied the claim of the appellant by holding that it was not a capital expenditure.

This issue has been decided by the Hon'ble Apex Court in 2015.11.17 12:34 integrity of this document High Court Chandigarh “Business expenditure – capital or revenue expenditure – Fee paid to the Registrar of Companies for expansion of the capital base of the company was directly related to the capital expenditure incurred by the company and although incidentally that would certainly help in the business of the company and may also help in profit making, it still retains the character of a capital expenditure, since the expenditure was directly related to the expansion of the capital base of the company.”

The Apex Court by giving the above finding, concluded that “amount paid to Registrar of Companies as filing fee for enhancement of capital is capital expenditure.”

In view of the above, I find that the AO has wrongly denied the claim of depreciation of ` 1.50 lacs on fee paid to Registrar of Companies, thereby allowing the appeal on this ground.”

Examining the alternative plea of the assessee, it may be noted that in case, it is held that the fees paid to Registrar of Companies is a capital expenditure not attributable to any capital asset and the assessee is not entitled to claim any depreciation, then in that eventuality, the assessee would be entitled to claim an amount equal to one fifth i.e. 20% of such in the following terms:- “8. Coming to the second question, arguments were addressed before us by the Revenue that Sub-section (2)(c)(iv) of Section 35D is not applicable to the present case. The said clause reads as under : GURBAX SINGH 2015.11.17 12:34 integrity of this document High Court Chandigarh "35D(2)(c) where the assessee is a company, also expenditure--.... (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 ;" Rebutting the submission of the Revenue, the assessee argued that the language of Section 35D is wide enough to cover a case of payment of fee to the Registrar for raising capital of the assessee-company and the provision should be so interpreted that the same be not against the assessee, particularly when its object was to benefit him. Learned counsel contended that the settled principle is that a provision of law capable of two interpretations should be interpreted in a manner so as to give benefit to the asses see. Sub-section (2)(c)(iii) of Section 35D is as under : "35D(2)(c)... (iii) by way of fees for registering the company under the provisions of the Companies Act, 1956 (1 of 1956)." The provision contained in Sub-section (2)(c)(iii) of Section 35D was resorted to by learned counsel for the assessee in the alternative in support of his submission that the expenditure incurred by way of enhancement of capital would be covered by the same.

To us, it appears that even if the provision of Sub-section (2) (c)(iii). of Section 35D is not applicable, the language of Sub- section (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 GURBAX SINGH 2015.11.17 12:34 integrity of this document High Court Chandigarh 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 Sub-section (2)(c)(iv) of Section 35D, the expenditure incurred for obtaining registration would be liable to be deductible.

We, consequently, hold that the fee paid to the Registrar of Companies for raising authorised capital of the assessee- company was covered by Sub-section (2)(c)(iv) of Section 35D of the Income-tax Act.” Insecticides Limited's case (supra), on which revenue has placed reliance is concerned, that was a case relating to Section 35D(2)(c)(iii) of the Act which is different in its applicability from Section 35D(2)(c)(iv) of the Act. Thus, the argument of the revenue cannot be accepted.

Viewed from any angle, it is concluded that the claim of the assessee cannot be declined. Since the fees paid to Registrar of Companies for enhancing the authorized share capital for expansion of the business had been capitalized against plant and machinery, the assessee would be entitled to depreciation at the rate of 15% on ` 10,00,000/- and the benefit of Section 35D(2)(c)(iv) of the Act would not be available to the assessee. GURBAX SINGH 2015.11.17 12:34 integrity of this document High Court Chandigarh

Upshot of the above is that the substantial question of law is answered accordingly and the appeal is disposed of by holding that the assessee shall be entitled to depreciation of ` 1,50,000/- @ 15% on ` 10,00,000/- under section 32(1) of the Act on the amount capitalized towards plant and machinery by including the fees paid to Registrar of Companies by the assessee. Consequently, CM No.10420 CII of 2015 has been rendered infructuous and is disposed of as such`. (Ajay Kumar Mittal) Judge August 10, 2015 (Ramendra Jain) Judge ‘gs' GURBAX SINGH 2015.11.17 12:34 integrity of this document High Court Chandigarh