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TMI Blog2006 (2) TMI 254X X X X Extracts X X X X X X X X Extracts X X X X ..... [1997] 225 ITR 798 delivered on 27-2-1997, the assessee is not entitled for deduction of share expenses as revenue expenditure and such expense should be treated as capital expenditure. Accordingly, the Assessing Officer issued notice for rectification under section 154 of the Act on 3-8-1998 and the order under section 154 was passed on 24-11-1998, disallowing the above expenditure, after giving opportunity of hearing to the assessee. Aggrieved, the assessee went in appeal before the CIT (Appeals), who has allowed the appeal of the Assessee holding that the issue is a debatable one and whether the said expenditure falls under the purview of section 35D or not is to be decided. The revenue being aggrieved, filed this appeal before us. 3. None appeared on behalf of the assessee despite issue of notice of hearing. However, the Official Liquidator vide his letter on record requested the Tribunal to decide the issue on merit. Accordingly, we proceed to decide the issue on merit after hearing the learned Departmental Representative. 4. The learned Departmental Representative submitted that the CIT (Appeals) ought to have appreciated the wrong mention of section would not render rect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the office of the Official Liquidator. The Official Liquidator further requested this Tribunal to dispose of the appeal on merit on the basis of the material available on record. Accordingly, we heard Mr. K. Srinivasan, the Departmental Representative (D.R.) and dispose of the appeal on merit. I.T.A. No. 865/Mds./99 (Assessment Year 1996-97) 3. The facts of the case in this appeal are as follows:- For the assessment year 1996-97, the assessee incurred an expenditure of Rs. 7,47,464 towards preliminary expenses for issue of shares. The total expenses was Rs. 47,36,953. The assessee by applying the provisions of section 35D claimed a deduction of 1/10th of the total expenditure at Rs. 4,73,695. The Assessing g Officer while processing the return under section 143(1)(a) allowed the claim of the assessee and also issued intimation under section 143(1)(a). After issue of intimation, the Assessing Officer found that the expenditure incurred for issue of shares has to be treated as capital in nature in view of the judgment of the Supreme Court in the case of Brooke Bond India Ltd. Accordingly the Assessing Officer issued notice under section 154 for making a rectification in the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses are to be treated as capital in nature since it relates to expansion of the assessee's business or setting up of a new unit. Therefore, it is obvious that the assessee has not disputed the classification of the preliminary expenditure for issue of shares as capital expenditure. In fact, the assessee admits that it has to be classified only as capital expenditure. The revenue has filed the appeal before this Tribunal on the presumption that the CIT(A) has treated the expenditure as revenue in nature. This is misunderstanding of the order of the CIT(A). The CIT(A) found that the expenditure has to be classified as capital expenditure. However, since the expenditure was claimed in respect of expansion of the business in relation to setting up of a new unit, the deduction claimed under section 35D in respect of 1/10th of the expenditure has to be allowed. Therefore, the CIT(A) held that whether such expenditure should be allowed or not in the assessment year under consideration cannot be decided suo motu by the Assessing Officer. Accordingly, he observed that the issue arises in section 154 proceeding is a debatable point, therefore, the Assessing Officer was not justified in m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed the judgment of the Supreme Court in the case of Brooke Bond India Ltd. for making the disallowance. However, he has not considered the claim of the assessee under section 35D. The first Appellate authority has simply confirmed the order of the Assessing Officer on the basis of the judgment of the Supreme Court in the case of Brooke Bond India Ltd. As elaborately discussed while considering the disallowance made under section 154 of the Income-tax Act, it is found that the judgment of the Apex Court in the case of Brooke Bond India Ltd. may not be applicable to the issue arises for consideration in this appeal. The assessee categorically makes a claim with regard to preliminary expenses under section 35D. Therefore, we have to examine whether the assessee is entitled to relief under section 35D. Since both the authorities below have not examined the applicability of provisions of section 35D with regard to claim made by the assessee, in my opinion, the matter has to be sent back to the Assessing Officer for examination with regard to applicability. 9. Accordingly, the orders of the lower authorities are set aside and the matter is remitted back to the file of the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axation Laws (Amendment) Act, 1970 with effect from 1-4-1971. The Supreme Court had no occasion to consider the expenditure in the context of section 35D. Besides under section 35D assessee treats the expenditure as capital expenditure but because of the special provision 1/10th of the total expenditure was claimed. Such claim is not denied by the Apex Court in the case of Brooke Bond India Ltd. 4. Learned Judicial Member held that the case of the assessee is beyond the ken of the decision of Brooke Bond India Ltd.'s case. Moreover, it is a debatable issue. Hon'ble Supreme Court has held that the expenditure incurred by a company in connection with issue of shares, with a view to increase its 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. It was contended before the Hon'ble Supreme Court that where the enhancement was to have more working funds for the assessee to carry on its business and to earn more profit and that in such a case the expenditure that is incurred in connection with issuing of shares to increase the capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35D in the said decision. The ld. Judicial Member restored the issue to the file of Assessing Officer to examine the same de novo in the context of the provisions of section 35D since originally assessee made the claim under section 35D only. In my opinion, the view expressed by the ld. Judicial Member is correct. I concur with the same. 8. The matter will now go back to the regular Bench for deciding the appeals in accordance with the majority. Per N.R.S. Ganesan, Judicial Member. - On a difference of opinion, the points of difference were referred to the Hon'ble Vice-President as Third Member. The Hon'ble Vice-President agreed with the view expressed by the Judicial Member. Accordingly the appeals were posted today for passing order in conformity with the majority opinion. 2. No one appeared for the assessee in spite of issue of notice. We heard the learned D.R. In conformity with the majority opinion, we hold that since the issue of deduction under section 35D is a debatable nature, it cannot be disallowed in a proceeding under section 154 of the Income-tax Act. Therefore, the order of the CIT(A) is confirmed and appeal of the revenue in I.T.A. No. 865/Mds./99 stands dism ..... X X X X Extracts X X X X X X X X Extracts X X X X
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