2012 (10) TMI 711 - AT - Income Tax

Disallowance of expenditure u/s 35D - Whether fee paid for increase in share capital is eligible u/s 35D Held that - Following the decision in case of Punjab State Industrial Development Corporation Ltd.(1996 (12) TMI 6 - SUPREME COURT) 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. As the fee paid for increase in share capital is not fee for registration of company and hence is not amortised even u/s 35D(2)(c)(iii). - Appeal decides in favour of revenue

Summary

Issues Involved:
1. Computation of total income.
2. Disallowance under section 35D of the Income Tax Act, 1961.
3. Disallowance under section 14A of the Income Tax Act, 1961.
4. Initiation of penalty under section 271(1)(c) of the Income Tax Act, 1961.
5. Levy of interest under sections 234B and 234C of the Income Tax Act, 1961.
6. Legality and validity of the assessment order.

Detailed Analysis:

1. Computation of Total Income:
The assessee contended that the Assessing Officer (AO) erred in computing the assessment at a total income of Rs. 3,93,355/- as against a loss of Rs. 46,69,139/- returned by the appellant. However, this issue was not specifically addressed in the judgment as it was not pressed during the hearing.

2. Disallowance under Section 35D:
The primary issue was the disallowance of Rs. 49,99,000/- claimed under section 35D. The assessee incurred an expenditure of Rs. 2,49,95,000/- on increasing its authorized capital and claimed 1/5th of this amount under section 35D. The AO disallowed this claim, stating that the expenditure for increasing authorized capital is not allowable under section 35D. The CIT(A) upheld the AO's decision.

The assessee argued that section 35D allows for amortization of certain capital expenditures and cited the Rajasthan High Court's decision in Commissioner of Income-tax v. Multi Metals Ltd., which supported their claim. However, the AO and CIT(A) relied on the Supreme Court's decisions in Punjab State Industrial Development Corporation Ltd. v. Commissioner of Income-tax and Brooke Bond India Ltd. v. Commissioner of Income-tax, which held that such expenditures are capital in nature and not allowable as revenue deductions.

The Tribunal upheld the AO's decision, emphasizing that the expenditure for increasing authorized capital is not covered under section 35D(2) and cited the Delhi High Court's decision in Commissioner of Income-tax v. Hindustan Insecticides Ltd., which supported the disallowance.

3. Disallowance under Section 14A:
The assessee did not press this ground during the hearing, and it was dismissed as not pressed.

4. Initiation of Penalty under Section 271(1)(c):
The assessee challenged the initiation of penalty under section 271(1)(c). The Tribunal found this ground premature as the penalty had not yet been levied and dismissed it accordingly.

5. Levy of Interest under Sections 234B and 234C:
The assessee contested the levy of interest under sections 234B and 234C. The Tribunal held that the levy of interest under these sections is mandatory and consequential, dismissing this ground as well.

6. Legality and Validity of the Assessment Order:
The assessee argued that the assessment order was illegal, bad in law, ultra vires, and contrary to the provisions of law and facts. However, this ground was general in nature and did not require a specific finding.

Conclusion:
The Tribunal dismissed the appeal of the assessee, upholding the AO's disallowance of the claim under section 35D, and confirmed that the levy of interest under sections 234B and 234C is mandatory and consequential. The initiation of penalty under section 271(1)(c) was deemed premature. Grounds related to the computation of total income and the legality of the assessment order were not specifically addressed as they were general or not pressed.