2006 (2) TMI 254 - AT - Income Tax

Summary

Issues Involved:
1. Whether the CIT (Appeals) erred in cancelling the additional tax levied by the Assessing Officer by revising the intimation under section 143(1)(a) of the Income-tax Act.
2. Whether the share issue expenses should be treated as capital expenditure or revenue expenditure.
3. Whether the claim of the assessee under section 35D can be disallowed in a proceeding under section 154 by making a rectification in the intimation issued under section 143(1)(a) when the issue is debatable in nature.
4. Whether the issue of deduction under section 35D should be remitted back to the Assessing Officer for consideration on merit.

Detailed Analysis:

1. Cancellation of Additional Tax Levied by the Assessing Officer:
The revenue contended that the CIT (Appeals) erred in cancelling the additional tax levied by the Assessing Officer by revising the intimation under section 143(1)(a). The Assessing Officer had disallowed an amount of Rs. 2,73,765 while processing the return under section 143(1)(a). This was based on the Supreme Court's judgment in Brooke Bond India Ltd. v. CIT, which held that share issue expenses should be treated as capital expenditure. The CIT (Appeals) allowed the assessee's appeal, holding that the issue was debatable and needed further examination under section 35D.

2. Treatment of Share Issue Expenses:
The primary issue was whether share issue expenses should be treated as capital or revenue expenditure. The Assessing Officer, following the Supreme Court's decision in Brooke Bond India Ltd., treated the share issue expenses as capital expenditure and disallowed the deduction. The CIT (Appeals) found that the classification of the expenditure as capital was not in dispute but held that the issue was debatable, and thus, the rectification under section 154 was not justified.

3. Debatable Nature of the Issue under Section 154:
The Tribunal had to decide whether the claim of the assessee under section 35D could be disallowed in a proceeding under section 154. The Judicial Member held that the issue was debatable and could not be rectified under section 154. The Supreme Court's decision in Brooke Bond India Ltd. did not consider section 35D, which was introduced later. Therefore, the issue of whether the expenditure could be claimed under section 35D was debatable and could not be rectified under section 154. The Third Member concurred with the Judicial Member, holding that no apparent mistake existed that could be rectified under section 154.

4. Remittance Back to the Assessing Officer:
The Tribunal also considered whether the issue of deduction under section 35D should be remitted back to the Assessing Officer for consideration on merit. The Judicial Member opined that since the lower authorities did not examine the applicability of section 35D, the matter should be remitted back to the Assessing Officer. The Third Member agreed, stating that the claim under section 35D needed to be examined de novo. Consequently, the matter was remitted back to the Assessing Officer to examine the applicability of section 35D and decide the issue afresh.

Conclusion:
In conformity with the majority opinion, the Tribunal held that the issue of deduction under section 35D was debatable and could not be disallowed in a proceeding under section 154. The appeal by the revenue was dismissed, and the matter was remitted back to the Assessing Officer to examine the claim under section 35D on merit and decide the issue afresh.