2015 (3) TMI 502 - HC - Income Tax

Depreciation on a part of issue of shares capitalised to Plant & Machinery and factory equipment denied - Held that - As relying on Commissioner of Income Tax Vs. Mahindra Ugine and Steel Co.Ltd. 2000 (2) TMI 26 - BOMBAY High Court the expenditure as incurred by the assessee in the present case can very well be said to fall within the provisions of Section 35D of the Act which provides for amortisation of certain preliminary expenses which includes expenditure in connection with the issue, for public subscription, of shares in debentures. Thus there is independent provision for amortisation expenses in connection with share issue expenses. Under the circumstances, we agree in disallowing the depreciation on the amount capitalized. - Decided in favour of revenue.

Summary

Issues Involved:
1. Depreciation on capitalized expenditure from the issue of shares.
2. Applicability of Section 32 and Section 35D of the Income Tax Act, 1961.
3. Relevance of the Supreme Court decision in "Chellapalli Sugars Ltd. Vs. CIT".

Issue-wise Detailed Analysis:

1. Depreciation on Capitalized Expenditure from the Issue of Shares:
The primary issue was whether the Tribunal was justified in not granting depreciation on the part of the expenditure on the issue of shares capitalized to plant & machinery and factory equipment, and capital work-in-progress. The assessee capitalized expenses incurred on issuing shares, claiming depreciation under Section 32 of the Income Tax Act. The Assessing Officer disallowed this claim, treating the expenses as preliminary under Section 35D, which provides for amortization over ten years. The CIT(A) and Tribunal upheld this disallowance, stating that the expenses did not qualify for depreciation under Section 32.

2. Applicability of Section 32 and Section 35D of the Income Tax Act, 1961:
Section 32 allows depreciation on plant and machinery or furniture used for business purposes. The court found that capitalized expenditure on share issuance does not fall within this section's purview. Section 35D, however, specifically provides for amortization of preliminary expenses, including those related to the issue of shares. The court emphasized that the legislature intended for such expenses to be amortized under Section 35D, not depreciated under Section 32.

3. Relevance of the Supreme Court Decision in "Chellapalli Sugars Ltd. Vs. CIT":
The assessee relied on the Supreme Court's decision in "Chellapalli Sugars Ltd. Vs. CIT," which allowed capitalization of interest on borrowed funds used for acquiring and installing plant and machinery before production commenced. However, the court noted that this case did not involve expenses related to share issuance and predated Section 35D. The court agreed with the lower authorities that the "Chellapalli Sugars" decision was not applicable to the present case, as it dealt with different types of expenditures and contexts.

Conclusion:
The High Court affirmed the Tribunal's decision, holding that the assessee's claim for depreciation on capitalized share issuance expenses was rightly disallowed. The court concluded that such expenses should be amortized under Section 35D, not depreciated under Section 32. The court answered the referred questions in favor of the Revenue and against the assessee, thereby disposing of the reference.