THE issues before the Bench are - Whether in the context of industrial undertaking, the I-T Act does not assign any specific meaning to the word ''extension''; Whether the expression ''extension'' means both horizontal as well as vertical extension; Whether the word 'being' used in Sec 35D is restrictive in nature and Whether expenditures incurred in connection with Euro issue also qualify for amortisation u/s 35D. And the verdict goes in favour of the assessee.
Facts of the case
Assessee derives income from the manufacture and sale of commercial vehicles, engines and parts thereof. In the return filed, the assessee claimed a sum of Rs.14,21,52,904/- being the Euro issue expenditure as revenue expenditure. The assessee
furnished the particulars in respect of its expenses, which amounted to a sum of Rs.14,21,52,402/-. The projected capital expenditure for five years ending 31st March 2000 was approximately to the tune of Rs.8,885 million. The issue document indicated the proposal of the company to invest approximately Rs.6,493 million for expanding this production capacity of vehicles, particularly the cargo range of vehicles, at its plants at Hosur and Bhandara. The company also planned, in due course, to replace the entire Leyland range of vehicles with the cargo range. The company was also planning to invest approximately Rs.722 million in the modernisation of its Ennore plant, in particular, the paint shop. Apart from that, a sum of Rs.1640 million was proposed to be invested in routine capital replacement, modernisation of other existing facilities and development. The assessee pointed out that the assessee also planned to go for capacity expansion of its Units at Hosur I and II. In the context of its proposal for expansion, the assessee claimed that it was entitled to claim deduction under Section 35D. The said claim was however rejected, taking the view that Section 35D deduction was available in respect of expenditure incurred in connection with the expansion for the purpose of setting up of a new industrial unit. Since the document did not reveal that there was any expansion or setting up of a new industrial unit, the assessee did not qualify for deduction under Section 35D of the Income Tax Act. Thus the claim was rejected.
The CIT(A) held that as per the agreement, with the Lead Managers, the GDRs would be subscribed by the Managers at a price of 12.79 USD (the issue price less a commission of 1.75% of the aggregate issue price of the shares - the selling commission). It was further stated in the said agreement that the company had already agreed to pay the Manager on each closing day, management commission and underwriting commission. Thus the Appellate Commissioner came to the conclusion that the Lead Manager fees was nothing but selling commission at 1.75% and underwriting commission at 1.3%. Holding that this fell for consideration under Section 35D(2)(c), the Commissioner directed the Officer to re-do the deduction in terms of the directions contained in the Commissioner's order. In other words, other than the listing fees of Rs.1,000/-, management fee of Rs.12,29,523/- and the legal fee of Rs.9,55,000/-, the other expenses qualified for deduction under Section 35D of the Income Tax Act. The CIT (Appeals) also agreed with the assessee that it was entitled to deduction on the expansion undertaken by it. Aggrieved by this, the Revenue went on appeal before the Tribunal.
On the question of the assessee's entitlement for amortisation under Section 35-D, the Tribunal held that as the expenditure was for extension of the industrial undertaking, the same qualified for deduction in terms of Section 35D. However, on the aspect of expenditure to be considered under Section 35D, the Tribunal referred to Section 35D(2) Sub Clause (iv) and pointed out that the deduction allowable under the Act must be allowed in accordance with the provisions of the Act. The word "being" used in the Section is not restrictive and hence, the deduction could be allowed. In the circumstances, by order dated 04.02.2005, the Tribunal directed the Assessing Officer to re-compute the deduction according to the provisions of the Act. Thus the assessee's appeal was partly allowed and the Revenue's appeal as regards the allowability of expenditure was also considered in terms of the decision in the assessee's appeal.
Consequent on the remand order of the Tribunal, the Assessing Officer had taken up the assessment for considering what were the expenditure that qualified for deduction under Section 35D. As against the order of the Assessing Officer dated 10.05.2005, restricting the deduction to Rs.16,60,762/- out of the total sum of Rs.14.21 crores, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who held that the entire expenditure incurred in connection with the machinery issue, as claimed by the assessee, was allowable under Section 35D(2)(c) of the Act. The Revenue filed further appeal before the Tribunal; pointing out that there were no discussions in the Assessing Officer's order as regards the treatment of a particular expenditure, the Tribunal set aside the order of the authorities below and once again remanded the matter back to the file of the Assessing Officer to pass fresh orders in terms of the directions of the Tribunal in its order dated 4.2.2005.
Having heard the parties, the Bench held that,
++ as far as the eligibility of the assessee for claiming deduction under Section 35D of the Income Tax Act is concerned, the Tribunal held that the expenditure were incurred for expansion of the industrial undertaking and hence, the same qualified for deduction. As far as the qualifying amount to be considered under Section 35D(2) is concerned, the Tribunal referred to the decision of this Court reported in [2003] 261 ITR 347 (CIT Vs. Ennar Steel and Alloy (P) Ltd.) (MAD), which also held that the word "being", as is used in the said Section, is not illustrative, that only those expenses which are specified in the statute could be allowed and nothing further. In this context, the assessee's appeal was rejected and the Revenue's appeal as to the allowability of expenditure under Section 35D of the Income Tax Act was also considered in favour of the assessee's company. Aggrieved by the order, the present appeals are filed;
++ after the remand order, on appeal filed once again, we find that the Tribunal had once again set aside the orders of the authorities below and remanded the matter back to the Assessing Officer to re-compute the deduction in accordance with the provisions of the Act, in its order dated 4.2.2005;
++ as far as the assessee's case is concerned, the claim is for deduction of the entire amount under Section 35D, whereas the Department's claim is that the assessee is not entitled to deduction of the entire expenditure under Section 35D, since the assessee did not qualify itself to be considered as an eligible undertaking under Section 35D of the Income Tax Act;
++ as far as the question raised by the Revenue as to the eligibility of the assessee company is concerned, there is no denial of the fact that the object of issuing shares was for raising the assessee's expansion activities, particularly in the field of capacity expansion. The company had also proposed to invest for expansion of its plants at Hosur, Bhandara and Ennore, for materials and modernisation of the existing facilities and developments. Thus all the Units of the assessee were to go for expansion programme as well as for modernisation programme, which was in the form of capital expansion;
++ a perusal of Section 35D of the Income Tax Act shows that the amortisation relief is granted in respect of certain preliminary expenses incurred by an assessee company, being an Indian company or a person other than a company resident in India, after 31st March 1970 as specified in sub section (2). The expenditure thus incurred are (i) either 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 of a new industrial unit;
++ there is no denial of the fact that the expenditure incurred was not in connection with the setting up of a new industrial plant. On the other hand, as already seen from the purpose of the issue that it related to the extension of the industrial undertaking, there is no definition of the word "extension" under the Act. A reference to P.Ramanatha Aiyar's Law Lexicon Second Edition shows that although the word "expansion" was considered as related to different fields, yet, the one in relation to industrial activity gives the meaning as "extension". Thus going by the meaning assigned to the word "extension", quite apart from the horizontal expansion in the industrial undertaking, vertical expansion also stands included within the meaning of the term "extension" of the industrial undertaking;
++ we have no hesitation in accepting the order of the Tribunal as to the eligibility of the assessee to amortise certain preliminary expenses. In the circumstances, we answer the first question raised by the Revenue in favour of the assessee, thereby confirm the order of the Tribunal and reject the Revenue's case;
++ in the light of the law thus declared as the meaning of the phrase "being", we have no hesitation in holding that the expenditure that qualified for consideration under Section 35D is restricted by reason of use of the phrase "being". Thus expenditure incurred in connection with the issue of shares and debentures of the company to public subscription, which qualify for consideration under Section 35D, are underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus and nothing more. There is a residual clause to sub clause D, which shows such other items of expenditure not being expenditure eligible for any allowance or deduction under any other provisions of the Act as may be prescribed. Thus, other than what is contemplated under Sub Clause D, if there are still other expenditure in connection with the commencement of business or in connection with the expansion of the industrial undertaking after the commencement of the business or in connection with the set up of a new industrial unit, the same would also qualify for amortisation under Section 35D;
++ in the light of the above discussion, we hold that the rates of expenditure which would go for amortisation under Section 35D, particularly with reference to sub clause (c)(iv) of sub section (2) of Section 35D, would be only those expenditure which are specifically mentioned therein and nothing beyond. In the light of the decision of this Court, we reject the reliance placed on the decision of the Madhya Pradesh High Court by the assessee. The T.C.(A) No.1256 of 2005 filed by the assessee is dismissed and the Assessing Officer is directed to consider the claim of the assessee in terms of the decision as stated above.
++ in the result, T.C.(A) Nos.1253 and 1254 of 2005, filed by the Revenue and T.C.(A) No.1256 of 2005, filed by the assessee, stand dismissed. No costs.
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