ITAT allows deduction of Rs. 1,47,60,204 as revenue expenditure under Section 37

The Income Tax Appellate Tribunal (ITAT) partly allowed the assessee's appeal by permitting the deduction of Rs. 1,47,60,204/- as revenue expenditure under Section 37 of the Income-tax Act. The ITAT disallowed Rs. 8.35 lakhs incurred for increasing the authorized share capital. The second issue regarding the disallowance of 1/5th of the expenditure was dismissed as infructuous in light of the decision on the first issue.

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Issues Involved:
1. Allowability of expenditure incurred in connection with a public issue under Section 37(1) or Section 28 of the Income-tax Act.
2. Confirmation of disallowance of 1/5th of the expenditure incurred for the public issue.

Issue-wise Detailed Analysis:

1. Allowability of Expenditure Incurred in Connection with a Public Issue:
The primary issue concerns whether the entire expenditure of Rs. 1,55,95,204/- incurred by the assessee for a public issue, which was later aborted, is allowable as revenue expenditure under Section 37(1) or Section 28 of the Income-tax Act.

The assessee argued that the expenditure should be allowed as revenue expenditure since it was incurred for the improvement of existing business operations and did not result in any increase in the capital base. The assessee further contended that since the public issue was aborted, the expenditure should be considered a business loss under Section 28.

The Assessing Officer (A.O.) disallowed the expenditure, stating that the object of the expenditure was to increase the capital base, and even though the public issue did not materialize, the expenditure remains capital in nature. This view was supported by the decision of the Hon'ble Apex Court in Brooke Bond India Ltd., which held that even abortive capital expenditure must be disallowed as capital expenditure.

The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the A.O.'s decision, emphasizing that the expenditure was incurred for raising capital through a public issue, which is considered a capital activity with enduring benefits. The CIT(A) cited several Supreme Court cases, including Brooke Bond India Ltd., Punjab State Industrial Corporation Ltd. v. CIT, and CIT vs. Kodak India Ltd., to support this view.

However, the Income Tax Appellate Tribunal (ITAT) found that Rs. 8.35 lakhs of the total expenditure was incurred for increasing the authorized share capital, which provided an enduring benefit to the assessee and should be disallowed. For the remaining Rs. 1,47,60,204/-, the ITAT referred to the jurisdictional High Court's decision in M/s Nimbus Communications Ltd., which held that aborted share issue expenditure should be allowed as revenue expenditure under Section 37 since no new asset came into existence and no enduring benefit was received by the assessee.

Consequently, the ITAT partly allowed the assessee's appeal, permitting the deduction of Rs. 1,47,60,204/- as revenue expenditure under Section 37.

2. Confirmation of Disallowance of 1/5th of the Expenditure:
The second issue was whether the CIT(A) erred in confirming the disallowance of Rs. 31,19,041/-, being 1/5th of the total expenditure of Rs. 1,55,95,204/-.

The CIT(A) noted that the assessee initially claimed 1/5th of the expenditure as preliminary expenses under Section 35D, which was not supported by the tax auditor. The CIT(A) rejected the assessee's revised claim to allow the entire expenditure under Section 37(1) or Section 28, citing the Supreme Court's decision in Goetz India Ltd., which held that new claims cannot be entertained during assessment or appellate proceedings unless made through a revised return.

The ITAT, in light of its decision on the first issue, found that the disallowance of Rs. 31,19,041/- was no longer relevant. Since the ITAT allowed the deduction of Rs. 1,47,60,204/- under Section 37, the second ground became infructuous and was dismissed.

Conclusion:
The appeal of the assessee was partly allowed. The ITAT permitted the deduction of Rs. 1,47,60,204/- as revenue expenditure under Section 37, while disallowing Rs. 8.35 lakhs incurred for increasing the authorized share capital. The second ground of appeal was dismissed as infructuous following the decision on the first issue.

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