International Computers Indian Manufacture vs. CIT (Bombay High Court)

The assessee issued 6,25,000 equity shares of Rs.10/- each. 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 total expenditure of Rs.14,21,276/-, the assessee capitalised a sum of Rs.29,668/- on plant & 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. 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 brining 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 relied upon the decision of the Supreme Court in the case of Chellapalli Sugars Ltd. vs. CIT 98 ITR 167. The AO, CIT(A) and Tribunal rejectd the claim. On appeal by the assessee to the High Court HELD dismissing the reference:

A plain reading of section 35D indicates that the Legislature has thought it appropriate to give a special benefit to the assessee in respect of expenditure specified in sub-section (2) incurred before 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. This provision 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 said expenditure on issue of shares is not eligible for depreciation. The decision of the Supreme Court in “Chellapalli Sugars Ltd. vs. CIT is not applicable in the facts of the present case because the Supreme Court was not dealing with an issue in regard to expenditure incurred by the Assessee in issuing shares and also provisions of Section 35D of the Act was not on the Statute book. 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. 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.