2017 (4) TMI 975 - SC - Income Tax

Prim-facie adjustment u/s 143(1) intimation - Expenditure on advertisement and public issue - whether public issue expenses were covered by Section 35D or Section 37? - High Court dismissed the appeal on the ground that a debatable issue cannot be disallowed while processing return of income under Section 143(1)(a) of the Act - Held that - Even though it is a debatable issue but as Gujarat High Court in the case of Ahmedabad Mfg. & Calico (P) Ltd. (1986 (2) TMI 25 - GUJARAT High Court) had taken a view that it is capital expenditure which was subsequently followed by Alembic Glass Industries Ltd. V. CIT (1992 (9) TMI 49 - GUJARAT High Court) and the registered office of the respondent assessee being in the State of Gujarat, the law laid down by the Gujarat High Court was binding. In view of all the submissions, in our considered view the order passed by the CIT (Appeals), the Income Tax Appellate Tribunal and also the order of the Gujarat High Court impugned herein cannot sustain and are set aside as they have wrongly held that the issue was debatable and could not be considered in the proceedings under section 143 (1) of the Act. With the aforesaid observations, the Appeal succeeds and the same is allowed.

Summary

Issues:
1. Disallowance of preliminary expenditure on public issue under Section 143(1)(a) of the Income Tax Act.
2. Interpretation of whether preliminary expenses for public issue constitute revenue expenditure or capital expenditure.

Analysis:
1. The appellant, a public limited company, filed a return for the assessment year 1994-95 claiming revenue expenditure on advertisement and public issue. The Assessing Officer disallowed a portion of the expenditure and raised a demand, which was challenged before the First Appellate Authority. The Authority held that the concept of 'prima facie adjustment' under Section 143(1)(a) cannot be invoked as there could be differing opinions on the treatment of public issue expenses under Section 35D or Section 37 of the Act.

2. The Revenue appealed to the Income Tax Appellate Tribunal, which upheld the Authority's decision. Subsequently, the appellant approached the High Court of Gujarat, which dismissed the appeal stating that a debatable issue cannot be disallowed under Section 143(1)(a) of the Act. The appellant then appealed to the Supreme Court.

3. The appellant argued that preliminary expenses for public issue or raising capital constitute capital expenditure, citing precedents like Brooke Bond India Ltd. v. CIT and Punjab State Industrial Development Corporation Ltd. v. CIT. The Court noted conflicting opinions among High Courts on the matter, with some considering such expenses as revenue expenditure and others as capital expenditure.

4. Despite the issue being debatable, the Court held that since the Gujarat High Court had ruled in previous cases that such expenses are capital expenditure, and the appellant's registered office was in Gujarat, the law laid down by the Gujarat High Court was binding. Therefore, the Court set aside the orders of the lower authorities and held that the issue was not debatable in the present case.

5. Consequently, the Court allowed the appeal, setting aside the High Court's order and holding that the disallowance of the preliminary expenditure on the public issue under Section 143(1)(a) of the Income Tax Act was incorrect. The judgment clarified the treatment of such expenses as capital expenditure based on the precedents and the jurisdiction of the Gujarat High Court.