International Computers Indian Manufacture Ltd. vs Commissioner of Income Tax

G.S. Kulkarni, J.—By this income-tax reference under section 256(1) of the Income-tax Act, 1961 (for short "the Act"), the Income-tax Appellate Tribunal ("the 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 capitalized to plant and machinery and factory equipment Rs. 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 Rs. 1,97,636 on the cost of issue of shares capitalised to plant and machinery and factory equipment Rs. 29,668 and Rs. 9,79,438 towards capital work-in-progress?"

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 Rs. 10 each. Accordingly, a sum of Rs. 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 for the manufacture of computer and OEM peripheral manufacturing project. For the issue of shares, the assessee had incurred expenses of Rs. 14,21,276 under different heads like financial consultancy, managerial fees, legal fees, underwriting commission, advertisement, issue house expenses, printing charges, etc. Out of the total expenditure of Rs. 14,21,276, the assessee capitalised a sum of Rs. 29,668 on plant and machinery and factory equipment and Rs. 9,79,438 on the work-in-progress. The balance sum of Rs. 4,12,170 was treated as preliminary expenses and on these expenses had claimed relief under section 35D of the Act in the following assessment year, i.e., 1981-82. On the capitalised amount of Rs. 29,668, the assessee claimed depreciation of Rs. 4,203 in the said assessment year. The applicant justified the claim for depreciation on the ground that these amounts which were capitalised, represented expenditure incurred in raising finance for the acquisition of and/or for bringing into existence capital assets and thus formed part of the cost of fixed assets. In support of its claim for depreciation under section 32 of the Act, the applicant principally relied upon the decision of the Supreme Court in the case of Challapalli Sugar Ltd. Vs. The Commissioner of Income Tax, A.P., Hyderabad, AIR 1975 SC 97 : (1975) 98 ITR 167 : (1975) 3 SCC 572 : (1975) 2 SCR 538 . The Assessing Officer in the assessment order dated March 1, 1984, held that the expenditure of Rs. 14,21,276 was in the nature of expenses listed under section 35D of the Act and thus were required to be treated in accordance with section 35D of the Act and not in the manner as done by the assessee in claiming depreciation under section 32 of the Act and disallowed the assessee''s claim for depreciation on the capitalised sum of Rs. 29,668 for an amount of Rs. 4,203. Similarly, for the assessment year 1981-82 by an assessment order dated March 25, 1984, applying the same yardstick the Assessing Officer rejected the claim of the assessee for depreciation on the sum of Rs. 9,79,438, amounting to Rs. 1,97,636. Thus, for the assessment year 1980-81 and the assessment year 1981-82 the Assessing Officer disallowed the assessee''s claim for depreciation on the capitalised amount of Rs. 4,176 and Rs. 1,97,636, respectively.

The assessee approached the Commissioner of Income-tax (Appeals) (for short "the CIT(A)") against the order dated March 1, 1984, and March 25, 1984, passed by the Assessing Officer disallowing its claim for depreciation for the assessment years 1980-81 and 1981-82, respectively. The Commissioner of Income-tax (Appeals) by a common order dated January 31, 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 the judgment of the Supreme Court in the case of Challapalli Sugars Ltd. (supra) was misconceived as the said decision of the Supreme Court cannot be applied in the facts of the case.

The assessee being aggrieved by the decision of the Commissioner of Income-tax (Appeals) rejecting its claim for depreciation for both the assessment years approached the Tribunal. The Tribunal by a common order dated April 4,1991, passed on the two appeals of the assessee for the assessment year 1980-81 and the assessment year 1981-82 upheld the order passed by the Commissioner of Income-tax (Appeals). The Tribunal observed thus:

"7. The third ground of appeal is that the Commissioner of Income-tax (Appeals) erred in not allowing depreciation on the expenditure incurred on the issue of shares which was capitalised. The assessee had incurred a total expenditure of Rs. 14,21,276 on issue of shares out of which Rs. 29,668 were capitalised to plant and machinery and factory equipment, an amount of Rs. 4,12,170 related to preliminary expenses and the balance amount was for work-in-progress. The assessee claimed that this amount was incurred on raising finance by issue of shares for purchase of fixed assets and for working capital requirements. In support of the same, the assessee filed details of expenditure and a copy of the advertisement. The assessee in this connection relied upon the decision of the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT and the decision of the Madras High Court in the case of Commissioner of Income Tax Vs. Lucas-T.V.S. Limited (No. 1), (1977) 110 ITR 338 . The Commissioner of Income-tax (Appeals) hold that the decision in the case of Challapalli Sugars Ltd. (supra) must be stretched in the manner so as to claim depreciation incurred on issue share capital. The Departmental representative relied upon the orders of the Commissioner of Income-tax (Appeals).

We have heard the rival submissions. There is no doubt that the Supreme Court held in the case of Challapalli Sugar Ltd. Vs. The Commissioner of Income Tax, A.P., Hyderabad, AIR 1975 SC 97 : (1975) 98 ITR 167 : (1975) 3 SCC 572 : (1975) 2 SCR 538 that the initial expenditure incurred including interest could be capitalised to the extent it was incurred prior to the commencement of the production. The Supreme Court held that since the actual cost was not defined, it should be construed in a sense which no commercial man would misunderstand and it would be necessary to ascertain the connection of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. The Commissioner of Income-tax (Appeals) had made reference to the Bombay High Court decision in the case of Commissioner of Income Tax, Bombay City-I Vs. Great Eastern Shipping Co. Ltd., (1979) 12 CTR 16 : (1979) 118 ITR 772 wherein, it has held that all expenditure incurred directly or indirectly or intimately on the capital assets acquired by the assessee may be allowed to be included in the actual cost. Similarly, in the case of Commissioner of Income Tax, Bombay City I Vs. Polychem Ltd., (1975) 98 ITR 574 , the Bombay High Court held that printing and stationery expenses had no connection with the acquisition and installation of machinery and could not be allowed. In this connection reference may also be made to the provisions of section 35D which provides for amortisation of certain preliminary expenses which includes expenditure in connection with the issue, for public subscription, of shares in debentures. Thus, there is independent provision for amortisation expenses in connection with share issue expenses. Under the circumstances, we agree with the Commissioner of Income-tax (Appeals) that the Assessing Officer was right in disallowing the depreciation on the amount capitalised. Hence, this ground of appeal is dismissed."

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.

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, the Commissioner of Income-tax (Appeals) and the Tribunal.

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 sections 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 on the capitalised expenditure on issue of shares which ex facie cannot fall within the purview of section 32. Section 35D of the Act provides for amortisation of certain preliminary expenses incurred by the assessee being an Indian company incurred after March 31, 1970, in respect of expenditure specified in sub-section (2) before the commencement of the business or after the commencement of the business, in connection with the extension of an industrial undertaking or in connection with his setting up a new industrial unit. It would be useful to extract section 35D of the Act which reads thus:

"35D. Amortisation of certain preliminary expenses.--(1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),--

(i) before the commencement of his business; or

(ii) after the commencement of his business, in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit,

the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation.

(2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely:--

(a) expenditure in connection with--

(i) preparation of feasibility report;

(ii) preparation of project report;

(iii) conducting market survey or any other survey necessary for the business of the assessee;

(iv) engineering services relating to the business of the assessee:

Provided that the work in connection with preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved in this behalf by the Board.

(b) legal charges for drafting any agreement between the assessee and any other person for 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 association 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 charges 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 Here printed in italics supplied)

A plain reading of the above provision indicates that the Legislature has thought it appropriate to give a special benefit to the assessee after March 31, 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 the commencement of business or after the commencement of business, in connection with the extension of industrial undertaking or in connection with setting up a new industrial unit. Sub-section (2) of section 35D of the Act sets out the categories of expenditures relevant for the purpose of section 35D. The relevant clause for the present reference is sub-clause (c) of sub-section (2) which concerns the expenditure by a company in connection with the issue, for public subscription, of shares or debentures, underwriting commission, brokerage and charge for drafting, typing, printing and advertisement of the prospectus. This provision, therefore, allows amortisation of the specific category of expenditures incurred by the assessee, by way of deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years as provided therein. The Legislature, therefore, having specifically provided for amortisation of the preliminary expenditure which includes expenditure incurred for issuance of shares by the assessee in connection with the issue of shares, the Assessing Officer had rejected the claim of the assessee for depreciation on the capitalised expenditure on issue of shares for the assessment years in question. It was held by the Tribunal that the claim of the assessee for depreciation on such expenditure being capitalised could not be allowed taking into consideration the provisions of section 32 of the Act and taking into consideration the specific provision for amortisation as provided by the Legislature under section 35D.

As regards the contention of the assessee as to the application of the decision of the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT (supra), the Assessing Officer, the Commissioner of Income-tax (Appeals) and the Tribunal have correctly held that the same was not applicable in the facts of the present case. In this decision the Supreme Court was not dealing with an issue in regard to expenditure incurred by the assessee in issuing shares. As also the provisions of section 35D of the Act was not on the statute book. In the case before the Supreme Court, interest was paid before the commencement of production on amounts borrowed by the assessee for acquisition and installation of plant and machinery. As the expression "actual cost" was not defined in the statute, the Supreme Court held that it should be construed in the sense the term would be understood in common commercial parlance in accordance with the normal rules of accountancy prevailing in commerce and industry. It was observed that the 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 Challapalli Sugars Ltd. (supra) to the facts of the present case. Moreover, as regards the category of expenditure capitalised by the assessee, the provisions of section 35D(2)(c)(iii) of the Act were held to be attracted. We do not find that the reasoning as adopted by the Tribunal in not applying the ratio in Challapalli Sugars Ltd.''s case, is in any manner inappropriate.

To bolster the submission that the Revenue had appropriately applied section 35D(2)(c)(iii) of the Act in the facts of the case, learned counsel for the Revenue has drawn our attention to the decision of the Division Bench of this court in the case of Commissioner of Income Tax Vs. Mahindra Ugine and Steel Co. Ltd., (2001) 250 ITR 84 : (2002) 120 TAXMAN 250 In this case the Division Bench was concerned about the stamp duty paid on debentures issued whether was allowable as the item of deduction under section 35D of the Act. In deciding the issue that such expenditure fell under section 35D(2)(c) of the Act the Division Bench has observed thus (page 85):

"Two points arise for consideration in this appeal. Firstly, whether the Tribunal was right in holding that the stamp duty paid on debenture issue was an allowable item of deduction under section 35D of the Income-tax Act, 1961. Section 35D deals with amortisation of certain preliminary expenses. Under section 35D(1) where an assessee, being an Indian company, incurs, after March 31, 1970, expenditure specified in sub-section (2) of section 35D before the commencement of his business, or after the commencement of his business, in connection with the extension of his industrial undertaking, the assessee shall be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, the previous year in which the extension of the industrial undertaking is completed. Section 35D(2) enlists the expenditure in respect of which deduction can be claimed by the assessee. Section 35D(2)(c) stipulates that where the assessee is a company and it incurs expenditure in connection with the issue, for public subscription of debentures of the company, such expenditure shall be an item of deduction contemplated by section 35D(1). It is contended on behalf of the Department that payment of stamp duty on the debenture issue is not an item of allowable deduction. The Tribunal has rejected the contention. We agree with the decision 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. Vs. Commissioner of Income Tax, Madras, AIR 1966 SC 1053 : (1966) 60 ITR 52 : (1966) 2 SCR 944 , 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.

In the decision of the Rajasthan High Court in the case of Autolite India Ltd. Vs. Commissioner of Income Tax, (2004) 186 CTR 548 : (2003) 264 ITR 117 following the decision of the Division Bench of this court in CIT v. Mahindra Ugine and Steel Co. Ltd. (supra), the Rajasthan High Court held that the claim of the assessee in respect of expenditure incurred on the public issue to raise capital for expansion of his business would fall under sub-clause (iv) of section 35D(2)(c) of the Act and the assessee would be entitled for the benefit of the provisions of section 35D of the Act.

A similar view was taken by the Madras High Court in the case Commissioner of Income Tax Vs. Ashok Leyland Ltd., (2012) 349 ITR 663 and by the Madhya Pradesh High Court in the case Shree Synthetics Ltd. Vs. Commissioner of Income Tax and Another, (2008) 303 ITR 451 .

We now deal with the last limb of the applicant''s submissions, namely, that in deciding this reference we may decide broader issues than those referred to us by the Tribunal. While making this submission, learned counsel for the applicant does not dispute that the question as framed has to be decided in favour of the Revenue. Learned counsel for the applicant relies on the decision of the Division Bench of this court in the case Indoswe Engineers (P.) Ltd. Vs. State of Maharastra, (1996) 2 MhLj 701 : (1996) 101 STC 177 to contend that in exercising the reference jurisdiction under section 256(1) of the Income-tax Act, this court should not limit itself to the questions which are referred by the Tribunal or the aspect which came to be decided by the Tribunal but may consider diverse aspects which would otherwise fall under the provision in question. In dealing with this proposition, a Division Bench of this court held that the legal position in this regard was no more res integra inasmuch as once a broad question has been referred, the High Court is not required to limit itself only to a particular aspect on which decision was rendered by the Tribunal. It was held that there is no limitation that reference should be limited to those aspects of questions which were argued before the Tribunal or decided by the Tribunal and that all aspects may be argued and considered where the question involves more than one aspect. A reference was made by the Division Bench to the decision of the Supreme Court in the case of Commissioner of Income Tax, Bombay Vs. Scindia Steam Navigation Co. Ltd., AIR 1961 SC 1633 : (1961) 42 ITR 589 : (1962) 1 SCR 788 and another decision of the Supreme Court in the case of Salem Co-operative Central Bank Limited Vs. Commissioner of Income Tax, AIR 1993 SC 1517 : (1993) 111 CTR 394 : (1993) 201 ITR 697 : (1993) 3 JT 181 : (1993) 2 SCALE 460 : (1993) 4 SCC 200 Supp : (1993) 2 SCR 997 : (1993) 68 TAXMAN 33 in which the Supreme Court held that it cannot be said that the 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. In the light of our above discussion, we answer questions Nos. 1 and 2 in the affirmative and in favour of the Revenue and against the assessee. The reference stands disposed of accordingly.