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Income Tax Appellate Tribunal, Hyderabad ‘ B ‘ Bench, Hyderabad
Before: Smt. P. Madhavi Devi & Shri S.Rifaur Rahman
Per Smt. P. Madhavi Devi, J.M.
This is Revenue’s appeal for the A.Y 2011-12 against the order of the learned CIT (A)-4, Hyderabad, dated 20-03-2014. The Revenue has raised the following grounds of appeal: “1. On the facts and in the circumstances of the case, and in law, the Ld.CIT(A) erred in deleting the disallowance made u/s 14A by holding that assessee did not earn any exempt income. 2. On the facts and in the circumstances of the case, and in law, the Ld. CIT(A) erred in deleting the disallowance of preliminary expenses written off u/s 35D. 3. On the facts and in the circumstances of the case, and in law, the Ld. CIT(A) erred by not following the Supreme Court decisions in the case of Brooke Bond India Ltd Versus CIT (225 ITR 798) and Punjab State
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Industrial Development Corporation Ltd Versus CIT(220 ITR 792) 4. The appellant prays that the order of Ld. CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored”.
Brief facts of the case are that the assessee company, engaged in the business of supply and trading of construction material, construction machinery and other goods for infrastructure, real estate and power sector, filed its return of income for the A.Y 2011-12 on 01.10.2011 admitting income of Rs.55,61,743. Subsequently, the assessee filed revised return of income on 27.09.2012 admitting an income of Rs.51,45,828. During the assessment proceedings u/s 143(3) of the Act, the AO observed from the balance sheet of the company, that an amount of Rs.26,60,52,000 has been shown under the head “investments” as on 31.03.2011 and that no income has been offered in the computation of income from the said investments. He presumed that income is not offered for the reason that the same is exempt from tax. Observing that the assessee is likely to earn dividend income which is exempt from tax, he sought to make the disallowance u/s 14A of the Act. The assessee submitted that it has not earned any dividend income during the A.Y 2011-12 and hence no disallowance u/s 14A is warranted. The AO was, however, not convinced with the assessee’s contentions. The AO made a reference to the decision of the ITAT Delhi in the case of Cheminvest Ltd, reported in (2009) 121 ITD 0318, wherein it was held that even if there is no income earned by the assessee in the year under consideration, which would be exempt from tax, a
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disallowance u/s 14A to be made. Accordingly, he made the disallowance of Rs.58,44,724 under Rule 8D of the I.T. Rules.
Thereafter, he proceeded to consider the preliminary expenses of Rs.22,40,400 u/s 35D. From the P&L A/c of the assessee, the AO u/s 35D observed that during the financial year 2010-11, the assessee has incurred R.O.C fee expenditure amounting to Rs.1,11,02,000 towards increase in authorized share capital and debited the same to the P&L A/c and that the assessee added back the expenditure and claimed 1/5th of the expenditure as a deduction u/s 35D of the Act. Observing that the ROC fee expenditure incurred towards increase in authorized share capital is not allowable u/s 35D, it being capital in nature and relying upon the decision of the Hon'ble Delhi High Court in the case of Bharat Carbon & Ribbon Mfg. Co. Ltd vs. CIT reported in (1981) 127 ITR 239 (Del.) which has been approved by the Hon'ble Supreme Court in the case of Punjab State Industrial Development Corporation Ltd vs. CIT (1997) 93 Taxmann.com 5 (S.C), he disallowed a sum of Rs.22,20,400 and brought it to tax. Aggrieved, the assessee preferred an appeal before the CIT (A), who granted relief to the assessee and the Revenue is in appeal before us by raising the grounds reproduced in Para-1 above.
As far as Ground No.1 is concerned, though the learned DR supported the order of the AO, it is seen that this issue is covered in favour of the assessee by the decision of the Hon'ble Delhi High Court in the case of Cheminvest Ltd vs. CIT reported in 378 ITR 33 (Del.) wherein it has been held that if there
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is no dividend income (which is exempt from tax) earned during the relevant period, no disallowance u/s 14A can be made. Respectfully following the same, we see no reason to interfere with the order of the CIT (A) who has followed the decision of the Hon'ble Delhi High Court. Therefore, ground of appeal No.1 is rejected.
As regards Ground No.2, the learned DR relied upon the decision of the Hon'ble Supreme Court in the case of Brooke Bond India Ltd vs. CIT reported in (1997) 91 Taxman 26 (S.C) and also the decision in the case of Punjab State Industrial Development Corporation vs. CIT reported in (1997) 225 ITR 792 (S.C) in support of the disallowance made by the AO.
The learned Counsel for the assessee, on the other hand, submitted that the decisions relied upon by the learned DR are distinguishable in facts from the case of the assessee. He submitted that the Hon'ble Supreme Court in the case of Brooke Bond India Ltd (Supra) was considering the issue of allowability of expenditure incurred in connection with increase of share capital u/s 37(1) of the Act and also in the case of Punjab State Industrial Development Corporation (Supra) wherein the Hon'ble Supreme Court observed that the amount of Rs.1,50,000 paid to the Registrar of Companies, as filing fee for enhancement of capital was not revenue but was capital in nature. He placed reliance upon the decision of the Hon'ble High Court of Rajasthan in the case of CIT vs. Multi Metals Ltd reported in (1991) 188 ITR 151 (Raj.) and also the decision of the Hon'ble Punjab & Haryana
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High Court in the case of CIT vs. Nuchem Ltd reported in (2015) 59 Taxmann.com 455 (P&H) in support of allowability of assessee’s claim.
Having regard to the rival contentions and the material on record, we find that a sum of Rs.1,11,02,000 was paid by the assessee to the Registrar of Companies towards increase in authorized capital and has debited the same to the P&L A/c. The assessee has amortized the said expenditure and has claimed 1/5th of the same as deduction u/s 35D of the Act. It is also therefore, to be seen whether the sum is allowable u/s 35D of the Act. The Hon'ble Supreme Court in the cases cited by the learned DR has held that the expenditure incurred for increase in the authorized share capital, is capital in nature.
From the facts of the case before us, we find that undisputedly, the amount paid by the assessee to ROC for enhancement of the authorized share capital is capital in nature. The Hon'ble Supreme Court was considering the nature of such expenditure in the cases of Brooke Bond India Ltd as well as Punjab State Industrial Development Corporation (Supra) and their allowability u/s 37(1) of the Act. The question before us is the amortization of such expenditure and allowability of 1/5th thereof during the relevant A.Y u/s 35D of the Act.
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The heading of section 35D refers to amortization of certain preliminary expenses. For the sake of clarity and ready reference, the relevant provisions are reproduced hereunder: “ Section 35D(1) of the I.T. Act:
(1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970 , any expenditure specified in sub- section (2),- (i) before the commencement of his business, or (ii) after the commencement of his business, in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one- tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation.
We find that similar issue had arisen before the Hon'ble Supreme Court in the case of M/s. Shasun Chemicals & Drugs Ltd vs. CIT, reported in 225 ITR 798 (S.C) and the Hon'ble Supreme Court held as under:
“12. Question No. 1: Whether expenditure incurred on issue of shares is eligible to be amortized under Section 35D of the Act?
As already noted above, the Assessing Officer had allowed the claim of the assessee in this behalf for the Assessment Years 1994-95 and 1996 - 97. Such expenses which are incurred and amortization whereof is sought under Section 35D of the Act, it is allowed for a period of 10 years @ 1/10th each. This is so provided by Section 35D of the Act as it is clear from the reading of the said Section which is reproduced hereunder:
"35D. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),-
(i) before the commencement of his business, or
(ii) after the commencement of his business, in connection with the extension of his undertaking or in connection with his setting up a new
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industrial unit, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation:"
In the Income Tax Return which was filed for the Assessment Year 1995-96 the assessee had claimed that it had incurred a sum of Rs.45,51,890/- towards the share issue expenses and had claimed 1/10th of the aforesaid share issue expenses under Section 35D of the Act from the Assessment Years 1995-96 to 2004-05.
This claim of the assessee was found to be justified and allowable under the aforesaid provisions and on that basis 1/10th share issue expenses was allowed under Section 35D of the Act. When it was again claimed for the Assessment Year 1996-97, though it was disallowed and on directions of the Appellate Authority, the Assessing Officer made physical verification of the factory premises.
He was satisfied that there was expansion of the facilities to the industrial undertaking of the assesseee. It is on this satisfaction that for the Assessment Year 1996-97 also the expenses were allowed. Once, this position is accepted and the clock had started running in favour of the assessee, it had to complete the entire period of 10 years and benefit granted in first two years could not have been denied in the subsequent years as the block period was 10 years starting from the Assessment Year 1995-96 to Assessment Year 2004-05.
The High Court, however, disallowed the same following the judgment of this Court in the case of Brook Bond India Ltd (supra). In the said case it was held that the expenditure incurred on public issue for the purpose of expansion of the company is a capital expenditure. However, in spite of the argument raised to the effect that the aforesaid judgment was rendered when Section 35D was not on the statute book and this provision had altered the legal position, the High Court still chose to follow the said judgment.
It is here where the High Court went wrong as the instant case is to be decided keeping in view the provisions of Section 35D of the Act. In any case, it warrants repetition that in the instant case under the very same provisions benefit is allowed for the first two Assessment Years and, therefore, it could not have been denied in the subsequent block period. We, thus, answer question No. 1 in favour of the assessee holding that the assessee was entitled to the benefit of Section 35D for the Assessments Years in question”.
Respectfully following the decision of the Hon'ble Supreme Court in the case of M/s. Shasun Chemicals & Drugs Ltd (cited supra), we uphold the findings of the CIT (A). Therefore, the Revenue’s appeal is dismissed.
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In the result, Revenue’s appeal is dismissed.
Order pronounced in the Open Court on 18th July, 2018.
Sd/- Sd/- (S.Rifaur Rahman) (P. Madhavi Devi) Accountant Member Judicial Member
Hyderabad, dated 18th July, 2018. Vinodan/sps
Copy to:
1 DCIT, Circle 16(2) 2nd Floor, B Block, IT Towers, AC Guards, Masab Tank, Hyderabad 2 M/s. Mercury Projects P Ltd, Plot No.4, Software Units Layout, Hitech City, Madhapur, Hyderabad 3 CIT (A)-4 Hyderabad 4 Pr. CIT – 4 Hyderabad 5 The DR, ITAT Hyderabad 6 Guard File
By Order
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