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TMI Blog2015 (3) TMI 502X X X X Extracts X X X X X X X X Extracts X X X X ..... (Per G.S.Kulkarni, J.) 1. By this Income Tax Reference under Section 256(1) of the Income Tax Act,1961 (for short the Act ), the Income Tax Appellate Tribunal (Tribunal) has referred the following questions of law for decision of this Court:- (I) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in not granting depreciation on a part of issue of shares capitalised to Plant Machinery and factory equipment ₹ 29,668/- ? (II) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in not granting depreciation of ₹ 1,97,636/- on the cost of issue of shares capitalised to plant and machinery and factory equipment ₹ 29,668/- and ₹ 9,79,438/- towards capital work-in-progress ? 2. Facts in brief are :- The Assessment Years in question are 1980-81 and 1981-82 respectively. In the Assessment Year 1980-81, the assessee had issued 6,25,000 equity shares of ₹ 10/- each. Accordingly, a sum of ₹ 62.50 lakhs was adjusted by issue of shares and the balance application money was refunded to the subscribers. The increase in the share capital was for setting up an unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order dated 1 March 1984 and 25 March 1984 passed by the Assessing Officer disallowing its claim for depreciation for Assessment Years 1980-81 and 1981-82 respectively. CIT(A) by a common order dated 31 January 1985 rejected the ground as raised in this behalf by the assessee while holding that this claim of the assessee seeking depreciation on the basis of judgment of the Supreme Court in the case of Chellapalli Sugars Ltd (supra) was misconceived as the said decision of the Supreme Court cannot be applied in the facts of the case. 4. The assessee being aggrieved by the decision of the CIT (A) rejecting its claim for depreciation for both the Assessment Years approached the Tribunal. The Tribunal by common order dated 4 April 1991 passed on the two appeals of the assessee for the Assessment Year 1980-81 and Assessment Year 1981-82 upheld the order passed by CIT(A). The Tribunal observed thus:- 7. The third ground of appeal is that the CIT(A) erred in not allowing depreciation on the expenditure incurred on the issue of shares which was capitalised. The assessee had incurred total expenditure of ₹ 14,21,276/- on issue of shares out of which ₹ 29,668/- were cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agree with the CIT (A) that assessing officer was right in disallowing the depreciatic on the amount capitalised. Hence, this ground of appeal is dismissed. 5. The assessee, thereafter, approached the Tribunal for a reference to be made to this Court under Section 256(1) of the Act which the Tribunal has referred the above questions for our decision. 6. We have heard the learned Counsel for the assessee and the learned Counsel for the Revenue. We have perused the orders passed by the Assessing Officer, CIT (A) and the Tribunal. 7. The short issue which arises for our consideration is, as to whether the depreciation on a part of the expenditure on the issue of shares which was capitalised by the assessee can be said to be rightly disallowed by the Assessing Officer as upheld by the Tribunal. In the facts of the case the question would be required to be decided taking into consideration the provisions of Section 32 and 35D of the Act as applied by the Revenue. Section 32 provides for depreciation in respect of plant and machinery or furniture owned by the assessee and used for the purpose of business or profession. In the present case, the assessee is claiming depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any purpose relating to the setting up or conduct of the business of the assessee; (c) where the assessee is a company, also expenditure- (i) by way of legal charges for drafting the Memorandum and Articles of the company; (ii) on printing of the Memorandum and Articles of Association; (iii) by way of fees for registering the company under the provisions of the Companies Act,1956 (1 of 1956); (iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charge for drafting, typing, printing and advertisement of the prospectus; (d) such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed. (emphasis supplied) 9. A plain reading of the above provision indicates that the Legislature has thought it appropriate to give a special benefit to the assessee after 31 March 1970 in respect of preliminary expenditure incurred by the assessee which may be a company or a person (other than a company), in respect of expenditure specified in sub-section (2) incurred before commencement of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be understood in common commercial parlance in accordance with the normal rules of accountancy prevailing in commerce and industry. It was observed that accepted rule of accountancy for determining cost on fixed assets was to include all expenditure necessary to bring such assets into existence and put them in working condition. It was held that in case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. In the case before the Supreme Court, the issue was payment of interest, before commencement of production, on the amount borrowed by the assessee for acquisition and installation of plant and machinery. In the present case, the assessee having issued shares and incurred expenses on issuance of shares which were sought to be capitalised by the assessee cannot be said to be expenditure incurred for installation of plant and machinery so as to apply the ratio of the decision in Chellapalli Sugars Ltd. (supra) to the facts of the present case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Tribunal. The expression in connection with the issue of public subscription of the debentures of the company essentially for the expansion of the business is a very wide expression and it would certainly include the stamp duty payable by the assessee on the debenture issue. Section 35D would apply only in respect of expenditure which is otherwise not allowable under the law, for example, capital expenditure. Therefore, in this case, the judgment of the Supreme Court in the case of India Cements Ltd. v. CIT , applies in respect of expenditure on account of stamp duty even after introduction of Section 35D. Under the circumstances, the Tribunal was right in allowing the said deduction. We are in complete agreement with the view taken by the Division Bench in the above case. Applying the same parameters as held by the Division Bench, 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. 12. In the decision of Rajasthan High Court in the case of Autolite India Ltd. Vs. Commissioner of Income Tax, (264 ITR 117) following the decision of the Division Bench of this Court in Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) in which the Supreme Court held that it cannot be said that High Court is bound by the terms of the question referred and cannot correct the erroneous assumption of law underlying the question. In this case it is not contended that there is an error of law in framing the question. We, however, find that the issue as arising in the present reference is not of that broad nature which would call for consideration diverse aspects falling under the provisions. The question referred by the Tribunal in the present reference is limited and specifies to the aspect of the decision of the Tribunal in not allowing depreciation on the part of the expenditure incurred on the issue of shares which was capitalised arising out of the controversy before the Tribunal. In view of this limited controversy, we do not feel that there is any need for us to consider any broader issues which do not specifically fall for our consideration. The questions which are referred to us are specific in nature and cannot be artificially broadened so as to apply the case law relied upon by the applicant. We, therefore, reject this submission as made on behalf of the applicant. 15. In the light of our above discus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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