2015 (12) TMI 1127 - HC - Income Tax

Disallowance of depreciation at the rate of 15% on fee paid to Registrar of Companies for expansion of capital base - Held that - Viewed from any angle, it is concluded that the claim of the assessee cannot be declined. Since the fees paid to Registrar of Companies for enhancing the authorized share capital for expansion of the business had been capitalized against plant and machinery, the assessee would be entitled to depreciation at the rate of 15% on ₹ 10,00,000/- and the benefit of Section 35D(2)(c)(iv) of the Act would not be available to the assessee. - Decided in favour of assessee

Summary

Issues:
Allowance of depreciation on fee paid to Registrar of Companies for expansion of capital base.

Analysis:
1. The primary issue in this appeal pertains to the allowance of depreciation under Section 32(1) of the Income Tax Act on the fee paid by the assessee to the Registrar of Companies for the expansion of the capital base, which was capitalized towards plant and machinery.

2. The appellant, engaged in the business of manufacturing cotton yarn, dyed yarn, and knitted garments, filed an appeal against the order of the Assessing Officer disallowing depreciation on the fee paid to the Registrar of Companies. The Commissioner of Income Tax (Appeals) confirmed the disallowance but allowed depreciation on a portion of the fee. The Tribunal reversed the CIT(A)'s decision, leading to the current appeal.

3. The appellant argued that the fee paid to the Registrar of Companies for increasing the authorized share capital was a capital expenditure, as per the Supreme Court judgments in Punjab State Industrial Development Corporation Limited vs. CIT and Brooke Bond India Limited vs. CIT. The appellant claimed entitlement to 15% depreciation on the fee paid, which was capitalized to generate funds for business expansion.

4. The revenue contended that the disallowance of depreciation was justified, citing the Delhi High Court judgment in CIT vs. Hindustan Insecticides Limited and disputing the applicability of Section 35D(2)(c)(iv) of the Act to the case.

5. The High Court held that the fee paid to the Registrar of Companies for augmenting the share capital was capitalized against plant and machinery, justifying the claim for depreciation. The court emphasized that neither the Assessing Officer nor the Tribunal provided convincing reasons to deny the claim. The court referred to the CIT(A)'s acceptance of the claim based on the Supreme Court's decision on similar matters.

6. Additionally, the court examined the alternative argument regarding the applicability of Section 35D(2)(c)(iv) of the Act for amortization of preliminary expenses. Relying on precedents from Rajasthan High Court and other High Courts, the court concluded that the fee paid for raising authorized capital was covered under this provision, rejecting the revenue's argument.

7. The court held that the appellant was entitled to depreciation at the rate of 15% on the fee paid to the Registrar of Companies, amounting to Rs. 1,50,000, under Section 32(1) of the Act. The court dismissed the revenue's contentions and disposed of the appeal in favor of the assessee.