Facts

The assessee is a public limited company and claimed  deduction  of Rs.65,47,448/- on advertisement and public issue as revenue expenditure in the return of income. The assessee also made an alternate claim in the return of  income  that if the claim cannot be considered as revenue expenditure, the same expenditure may be allowed under section 35D of the Act An Intimation under section 143(1) of the Act was issue and the Assessing Officer disallowed deduction of the said expenditure but allowed the alternate claim of the assessee. The CIT(A) deleted the adjustment made by the AO on the ground that such issue was a debatable issue and therefore, the concept of ‘prima facie adjustment’ under section 143(1)(a) of the Act cannot be invoked. The ITAT and Gujarat High Court confirmed the order of the CIT(A).

Issue

Whether the expenditure on public issue of shares can be disallowed in an Intimation under section 143(1)(a) of the Act, being a settled issue?

View

The Supreme Court in Brooke Bond India Ltd. v. CIT [1997] 225 ITR 798/91 Taxman 26 (SC) held that expenditure incurred on issue of shares is capital expenditure. Divergent views have been expressed by various High Courts on this issues. The Madras, Andhra Pradesh, Kerala and Karnataka High Courts have held that the preliminary expenses incurred on raising share capital is a revenue expenditure. The Allahabad, Himachal Pradesh, Delhi, Calcutta, Bombay, Gujarat and Rajasthan High Courts have held thatsuch expenditure is capital in nature.

Held

The Supreme Court has held that many High Courts including the jurisdictional High Court of Gujarat in Ahmedabad Mfg. & Calico (P.)  Ltd. v.  CIT [1986]  162 ITR 800 have taken the view that expenses on issue of shares is capital expenditure and therefore, not allowable as revenue expenditure. The present case

is from Gujarat and there is no debate as to the allowability of expenses incurred  on public issue of shares in the State of Gujarat. Therefore, disallowance of such expenditure can be made in an Intimation under section 143(1)(a) of the Act.  (AY. 1994-95) (CA No.2315/2007 dt. 29-3-2017)

Editorial: The issue in the present case is whether the disallowance of expenditure on public issue can be disallowed in the Intimation under section 143(1) of the Act and not with regards to allowability of expenditure on public issue. In Shasun Chemicals and Drugs Ltd v. CIT (2016) 388 ITR 1/243 Taxman 47 (SC) the Supreme Court held that expenses  relating to issue of shares to public which was allowed in earlier 2 years, cannot be disallowed in the subsequent years on the ground that thesame is capital expenditure.

“You have to do the right thing. It may not be     in your power, may not be in your time, that there’ll be any fruit. But that doesn’t mean you stop doing the right thing.”

– Mahatma Gandhi