2003 (7) TMI 53 - HC - Income Tax

Deduction under section 35D - Tribunal treating the increase in the production capacity from 6 lakhs head lamps per annum to 12 lakhs head lamps per annum as expansion and not extension as envisaged in section 250 (sic) of the Income-tax Act, 1961, and consequently holding that the assessee was not entitled to deduction under section 35D in respect of expenses as public issue Held that the expenses incurred on issue of public subscription, of shares or of debentures of the company, any payment made against commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus, which are clearly referred to in sub-clause (iv) of section 35D(2)(c), and any expenses incurred on these items, the assessee is eligible for benefit of section 35D - We clarify that the expenses will be allowed only to the extent incurred on the items referred to in sub-clause (iv) of clause (c) of sub-section (2) of section 35D

Summary

Issues:
Interpretation of "expansion" and "extension" under Income-tax Act, 1961 for deduction eligibility under section 350.

Analysis:
The case involved a dispute regarding the classification of expenses incurred by the assessee on a public issue for raising capital as revenue or capital expenditure. The Assessing Officer rejected the claim as capital expenditure, leading to an appeal before the Commissioner of Income-tax (Appeals) and subsequently before the Tribunal. The Tribunal upheld the Assessing Officer's decision, stating that the expenditure was on "expansion" and not "extension" of business, thereby denying the assessee the benefit under section 350 of the Income-tax Act.

During the proceedings, the applicant contended that the expenditure fell under sub-clause (iv) of clause (c) of sub-section (2) of section 350. The applicant argued that there was no distinction between "extension" and "expansion," citing a Bombay High Court case where "extension" was interpreted as "expansion" for allowing a similar claim under section 350. The Revenue, however, emphasized the need for a detailed breakdown of the expenditure to determine eligibility under sub-clause (iv) of section 350(2)(c).

The High Court analyzed the provisions of section 350(2)(c)(iv) and concluded that if the expenses were incurred on public subscription of shares or debentures, including underwriting commission, brokerage, and related charges specified in sub-clause (iv), the assessee was eligible for the benefit under section 350. The Court directed the Assessing Officer to obtain a breakdown of the expenditure to verify if any amount was spent on the items listed in sub-clause (iv) and instructed to allow the benefit accordingly.

Ultimately, the Court ruled in favor of the assessee, clarifying that the expenses would only be allowed to the extent incurred on the items specified in sub-clause (iv) of clause (c) of sub-section (2) of section 350. The judgment resolved the issue in question, providing guidance on the interpretation of "expansion" and "extension" for deduction eligibility under the Income-tax Act, 1961.