Commissioner of Income Tax vs Sakthi Finance Ltd.

R. Jayasimha Babu, J.—The question referred relates to the assessment year 1985-86.

The assessee, even though it had not extended any industrial undertaking or set up any new industrial unit, and even though it had commenced its

business long prior to March 31, 1970, claimed benefit u/s 35D of the Income Tax Act, 1961, and sought to claim the expenditure it had incurred

in connection with the increase in its paid up capital from Rs. 25 lakhs to Rs. 60.70 lakhs. The aggregate expenditure in that connection was

determined by the assessee at Rs. 11,22,289. It sought to spread the same over a period of ten years and also sought to write off 1/10th of that

sum and invoked Section 35D for the relevant previous year. Such a claim was negatived by the Assessing Officer, as also by the appellate

authority but was allowed by the Tribunal.

The Tribunal has held that Section 35D in terms was not applicable. It nevertheless went on to extend the benefit u/s 35D on what it regarded as

logical extension of the principle enunciated in Section 35D. Once it was, and rightly, found that the assessee could not take shelter under any part

of Section 35D, extending the benefit under that section was a question which simply did not arise. The Tribunal had also relied upon a decision of

this court in the case of Commissioner of Income Tax Vs. Kisenchand Chellaram (India) P. Ltd., wherein it was held that the expenditure incurred

for increasing the share capital of a company was revenue expenditure. Subsequently, the Supreme Court, in the case of Brooke Bond India

Limited Vs. Commissioner of Income Tax, West Bengal-III, Calcutta, , held that such expenditure is not revenue expenditure but capital

expenditure.

The assessee here clearly was not entitled to the benefit of Section 35D as that section itself was inapplicable having regard to the increase in the

share capital being subsequent to the establishment of the business and the assessee had not established any new industrial unit nor had it expanded

the existing industrial undertaking. The question referred to us, viz.,

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the assessee is entitled to the

benefit of the provisions of Section 35D in relation to the sum of Rs. 7,30,002 ?

is answered in favour of the Revenue and against the assessee.