2013 (7) TMI 166 - AT - Income Tax

Expenses for issue of shares to Qualified Institutional Buyers - Disallowance u/s 35D - Held that - Assessee has not complied with any one of the conditions laid down under section 35D. No merit in the contention of the assessee that fee paid is the nature of brokerage or other issue expenses, as fee, brokerage and other expenses are distinct in nature. Hence, the fee payment made by the assessee company in connection with the issue of shares is not eligible for deduction under section 35D. Also of the view that the alternative contention of the assessee for allowing the entire expenses as of revenue nature, is devoid of merit, since the expenses, which are incurred in connection with the issue of shares to increase the capital base of the company, are obviously of capital nature. Remit the entire issue back to the file of the CIT(A) for reconsideration.

Summary

Issues Involved:
1. Confirmation of addition of expenses for issue of shares to Qualified Institutional Buyers claimed under section 35D of the Income-tax Act.
2. Classification and treatment of deferred revenue expenditure.

Issue-wise Detailed Analysis:

1. Confirmation of Addition of Expenses for Issue of Shares to Qualified Institutional Buyers Claimed Under Section 35D:

The assessee contested the CIT(A)'s decision to confirm the addition made by the Assessing Officer amounting to Rs. 2,07,00,112, which was claimed as expenses for issuing shares to Qualified Institutional Buyers under section 35D of the Income-tax Act. The assessee argued that these expenses were eligible for deduction under section 35D.

The Tribunal reviewed the case in light of a similar issue previously adjudicated in the assessee's own case for the assessment year (A.Y.) 2006-07. In that instance, the CIT(A) allowed the claim, noting that the expenditure was correctly classified as deferred revenue expenditure and was not a capital expenditure. The CIT(A) emphasized that the benefits of the expenditure were expected to accrue over several years, justifying its treatment as deferred revenue expenditure.

The Tribunal also considered the decision in the case of Hbl Nife Power Systems vs. DCIT, where it was held that for expenses to be amortized under section 35D, they must be related to the issue of shares for public subscription and for the expansion of the undertaking. The Tribunal noted that the issue of shares in the present case was not for public subscription but was on a preferential basis to a few shareholders, and the assessee did not demonstrate that the share issue was for business expansion.

2. Classification and Treatment of Deferred Revenue Expenditure:

The CIT(A) had previously allowed the assessee's claim by recognizing the expenditure as deferred revenue expenditure. The CIT(A) explained that deferred revenue expenditure represents costs that are revenue in nature but are spread out over several accounting periods due to the expected future benefits. The CIT(A) cited various judicial precedents, including the Supreme Court's judgment in Alembic Chemical Works Co. Ltd. vs. CIT, which emphasized the need for flexibility in distinguishing between capital and revenue expenditures based on economic realities.

The CIT(A) concluded that the expenditure in question was for business purposes and should be allowed as deferred revenue expenditure, given that its benefits would accrue over multiple financial years. This treatment aligns with the matching principle in accounting, which aims to match expenses with the revenues they help generate.

However, the Tribunal noted that for the A.Y. 2008-09, the Department could not contest the same issue if it was accepted in the earlier A.Y. 2006-07. Consequently, the Tribunal remitted the issue back to the CIT(A) for fresh consideration, taking into account the decision for A.Y. 2006-07.

In conclusion, the Tribunal remitted the matter back to the CIT(A) for reconsideration, emphasizing the need to align the treatment of the expenses with the principles established in prior judgments and the specific provisions of section 35D.

Final Judgment:

The appeal of the assessee was allowed for statistical purposes, with the issue remitted back to the CIT(A) for fresh consideration in light of the decisions and principles discussed. The order was pronounced in the open court on 30th April, 2013.