2006 (1) TMI 210 - AT - Income Tax

Claimed expenditure on the issuance of right shares - Prima Facie Adjustment - Assessment completed u/s 143(1)(a) - applicability of section 35D - difference of opinion between the Judicial Member and the Accountant Member - Third Member Order - Whether in view of the decision of the Hon ble Supreme Court in the case of Brooke Bond (India) Ltd. v. CIT 1997 (2) TMI 11 - SUPREME COURT adjustment u/s 143(1)(a) in respect of expenditure on right issue can be sustained? - HELD THAT - Judicial Member - Assessing Officer has made prima facie adjustment holding the expenditure as capital in nature as no facts were available on record as to whether the assessee required the funds to increase the capital to meet the need for working funds or not. In the totality of circumstances we have no hesitation in holding that the Assessing Officer is not correct in making the prima facie adjustment. Accordingly we set aside the orders of the lower authorities. In the result the appeal of the assessee is allowed. Accountant Member - My ld. colleague has also referred that CIT (Appeals) has given a finding that deduction u/s 35D may be allowed but no such claim was made before the Assessing Officer and in that view of the matter no fresh debate can be unnecessarily brought into picture. Therefore the question whether Assessing Officer was within his jurisdiction to make such adjustment when no claim u/s 35D was made has to be answered in favour of the Revenue because there is no debate involved after the c pronouncement of the decision of the Hon ble Supreme Court in the case of Brooke Bond (India) Ltd. Thus the assessee s appeal is dismissed. Third member - In the case of Brooke Bond (India) Ltd. case Hon ble Supreme Court has held that expenditure incurred by a company in connection with issue of shares with a view to increase its share capital is directly related to the expansion of the capital base of the company and is capital expenditure even though it may incidentally help in the business of the company and in the profit-making. It was contended before the Hon ble Supreme Court that where the enhancement was to have more working funds for the assessee to carry on its business and to earn more profit and that in such a case the expenditure that is incurred in connection with issuing of shares to increase the capital has to be treated as revenue expenditure. On this the Hon ble Supreme Court has held that the statement of case sent by the Tribunal did not record the finding to the effect that the expansion of the capital was undertaken by the assessee for the purpose of meeting the need for more working funds for the assessee to carry on its business. From this it can be concluded that if the expansion of capital is in order to meet the need for more working funds in that eventuality the expenditure could partake the nature of revenue expenditure. De hors examination in this regard it is not possible to apply the ratio. In my opinion the decision of the Apex Court in the case of Brooke Bond (India) Ltd. can be applied only after examining the object of the capital enhancement. This decision is not applicable it enhancement of capital was made for gearing up funds for working capital. The object of gearing up of the capital was not looked into. Total amount was disallowed without examining the details. Even applicability of section 35D was not considered. In my opinion this is not correct I have gone through the reasoning adduced by the ld. Judicial Member. In my opinion he took a correct view in the matter. I concur with his decision on this issue. The matter will now go back to the regular Bench for deciding the appeal in accordance with the majority. Therefore in accordance with the majority view the issue is decided in favour of the assessee and the appeal of the assessee is allowed.

Issues Involved:
1. Disallowance of rights issue expenses under prima facie adjustment in the intimation under section 143(1)(a) of the Income Tax Act.
2. Levy of additional tax under section 143(1A) of the Income Tax Act.
3. Applicability of the Supreme Court decision in the case of Brooke Bond (India) Ltd. to the facts of the appellant's case.
4. Determination of whether the rights issue expenses were for raising working capital and thus should be considered revenue expenditure.
5. Examination of the admissibility of deduction under section 35D of the Income Tax Act for rights issue expenses.

Detailed Analysis:

1. Disallowance of Rights Issue Expenses:
The assessee filed its return admitting an income of Rs. 6,23,07,990, which included a claim of Rs. 19,94,594 as an expenditure allowance under section 37 of the Income Tax Act, incurred towards rights issue during the year under consideration. The Assessing Officer processed the return under section 143(1)(a) and disallowed the claim, considering it as capital expenditure. The assessee argued that such a disallowance should not have been made under section 143(1)(a), which is meant for prima facie adjustments, as the nature of the expense was debatable and required further examination.

2. Levy of Additional Tax:
Due to the prima facie adjustment, additional tax was levied under section 143(1A). The assessee contended that the adjustment was not warranted under section 143(1)(a) and thus the levy of additional tax was also incorrect. The Commissioner (Appeals) confirmed the disallowance but directed the Assessing Officer to examine the claim under section 35D after collecting break-up details, which the assessee argued was beyond the scope of section 143(1)(a).

3. Applicability of the Supreme Court Decision in Brooke Bond (India) Ltd.:
The Commissioner (Appeals) concluded that the Supreme Court's decision in Brooke Bond (India) Ltd. applied to the assessee's case, justifying the prima facie adjustment. However, the assessee argued that the Supreme Court had not specifically addressed the issue of rights issue expenses for raising working capital, which was the case here. The Tribunal noted that the Supreme Court's decision did not cover the scenario where capital was raised for working funds, making the issue debatable and not suitable for prima facie adjustment under section 143(1)(a).

4. Rights Issue Expenses for Raising Working Capital:
The Tribunal examined whether the rights issue expenses were for raising working capital, which could classify them as revenue expenditure. The Assessing Officer had not provided an opportunity for the assessee to present this aspect, and the CIT (Appeals) had directed further examination under section 35D, which was beyond the scope of section 143(1)(a). The Tribunal found that the issue required detailed examination and could not be settled through prima facie adjustment.

5. Examination of Deduction under Section 35D:
The CIT (Appeals) directed the Assessing Officer to examine the admissibility of deduction under section 35D for rights issue expenses. The Tribunal held that such an examination was not permissible under section 143(1)(a) as it involved gathering fresh details and was a debatable issue. The Tribunal emphasized that prima facie adjustments should be limited to apparent errors and not extend to debatable issues requiring further investigation.

Separate Judgments:
The Judicial Member and the Accountant Member delivered separate judgments, resulting in a difference of opinion. The matter was referred to a Third Member, who concurred with the Judicial Member's view that the issue was debatable and not suitable for prima facie adjustment under section 143(1)(a). Consequently, the appeal of the assessee was allowed, and the disallowance of rights issue expenses and the levy of additional tax were set aside.

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