2016 (10) TMI 406 - HC - Income Tax

Deduction u/s 35D(2)(c)(iv) - whether the expenditure incurred by the Appellant in connection with the issue of Right Shares to the public is not covered under Section 35D(2) (c ) (iv) ? - Held that - A reading of the provision shows that any reference in the Companies Act or in the Articles of a Company offering shares to the public shall, subject to the provisions of the Companies Act, be construed as including a reference to offering the shares to any section of the public also. In other words, insofar as the Companies Act is concerned, the section of the public holding shares in a company would be treated as public, for the purposes mentioned in Section 67. It is also clear from Section 67, that the purposes of the Section would include rights issue of shares under Section 81 of the Companies Act also. Therefore, when the scope and purport of Section 35D(2)(c)(iv) of the Income Tax Act is examined, this Court is entitled to refer to the provisions of Section 67 of the Companies Act and if so done, the inevitable conclusion is that the term for public subscription employed in Section 35D(2)(c)(iv) of the Income Tax Act would include subscription by a section of the public, i.e., the existing shareholders in a Company as well. Any interpretation to the contrary would lead to a situation where the benefit of amortization would be available to public issue of shares and the same benefit would be denied when shares are issued by Companies on rights basis. Sum and substance of the above discussions that the findings of the Assessing Officer confirmed by the First Appellate Authority and the Tribunal is unsustainable. Therefore, answering the questions of law in favour of the assessee and against the revenue

Summary

Issues:
1. Interpretation of Section 35D(2)(c)(iv) of the Income Tax Act regarding the amortization of preliminary expenses incurred for a rights issue of shares.
2. Determination of whether a rights issue of shares to existing shareholders qualifies as "public subscription" under Section 35D(2)(c)(iv) of the Income Tax Act.
3. Analysis of whether the expenses incurred in connection with a rights issue can be allowed as a deduction under Section 35D.

Issue 1: Interpretation of Section 35D(2)(c)(iv) of the Income Tax Act
The High Court analyzed the provisions of Section 35D(2)(c)(iv) of the Income Tax Act, which allows for the amortization of certain preliminary expenses incurred by an Indian company in connection with the issue of shares for public subscription. The court noted that the provision includes underwriting commission, brokerage, and charges for drafting, typing, printing, and advertisement of the prospectus as qualifying expenses for amortization.

Issue 2: Qualification of Rights Issue as "Public Subscription"
The court deliberated on whether a rights issue of shares to existing shareholders qualifies as "public subscription" under Section 35D(2)(c)(iv) of the Income Tax Act. The Assessing Officer and the First Appellate Authority had disallowed the amortization claim, stating that the shares were only offered to a section of the public, not the public at large. However, the court disagreed with this interpretation, emphasizing that the term "public" is not defined in the Income Tax Act. Referring to Section 67(1) of the Companies Act, the court concluded that the section of the public holding shares in a company should be considered as public for the purposes of the Income Tax Act.

Issue 3: Allowance of Expenses as a Deduction under Section 35D
The court examined whether the expenses incurred in connection with the rights issue could be amortized and allowed as a deduction under Section 35D. By referencing the interpretation of the term "general public utility" in a Supreme Court judgment, the court highlighted that benefiting a section of the public qualifies as serving a charitable purpose. The court found that the Assessing Officer's decision, upheld by the First Appellate Authority and the Tribunal, was unsustainable. Consequently, the court ruled in favor of the assessee, holding that the expenses could be amortized and allowed as a deduction under Section 35D.

In conclusion, the High Court's judgment favored the assessee, ruling that the preliminary expenses incurred in connection with the rights issue of shares qualified for amortization under Section 35D(2)(c)(iv) of the Income Tax Act. The court emphasized that a rights issue to existing shareholders should be considered as public subscription, and the expenses could be allowed as a deduction under the relevant provisions.