2017 (4) TMI 975 - SC - Income Tax

Supreme Court Overturns Disallowance of Preliminary Expenditure

The Supreme Court allowed the appeal, setting aside the High Court's order and held that the disallowance of preliminary expenditure on the public issue ... Preliminary expenses on public issue - capital expenditure - revenue expenditure - disallowance under section 143(1)(a) of the Income Tax Act, 1961 - binding precedent of the High Court within its territorial jurisdiction - treatment of a question as debatable for the purposes of assessment under section 143(1)(a)Preliminary expenses on public issue - capital expenditure - revenue expenditure - Preliminary expenses incurred for public issue are capital expenditure and not revenue expenditure. - HELD THAT: - The Court considered the conflicting views of various High Courts and earlier authorities but noted that the Gujarat High Court had taken the view that expenses incurred in raising share capital are capital in nature. Given the respondent-assessee's registered office in Gujarat and the binding effect of the law laid down by the Gujarat High Court within its territorial jurisdiction, the question could not be treated as debatable for the purposes of the present assessment. Reliance was placed on this territorial binding precedent to hold that the expenditure in question was capital and not allowable as revenue expenditure. [Paras 8, 9, 10, 11]The expenditure on advertisement and public issue is capital expenditure and not a revenue deduction.Disallowance under section 143(1)(a) of the Income Tax Act, 1961 - treatment of a question as debatable for the purposes of assessment under section 143(1)(a) - binding precedent of the High Court within its territorial jurisdiction - It was not permissible to treat the question as debatable and therefore the Assessing Officer's disallowance under section 143(1)(a) could stand where binding High Court precedent established the point. - HELD THAT: - The Court held that where a territorial High Court has laid down a clear rule that preliminary expenses on raising share capital are capital in nature, that rule is binding and the matter cannot be treated as a debatable issue for the limited exercise under section 143(1)(a). Consequently, the orders of the Commissioner (Appeals), the Income Tax Appellate Tribunal and the Gujarat High Court, which had declined to give effect to that precedent on the ground of debatable nature of the question, were incorrect. The Court therefore set aside those orders for failing to apply the binding view of the Gujarat High Court. [Paras 11, 12]The High Court and the lower authorities were wrong to treat the issue as debatable under section 143(1)(a); their orders are set aside.Final Conclusion: The appeal is allowed; the impugned order dated 14.06.2005 of the High Court is set aside and the preliminary/public issue expenditure is held to be capital expenditure, with the consequence that the view taken by the lower authorities treating the question as debatable under section 143(1)(a) cannot be sustained. Issues:1. Disallowance of preliminary expenditure on public issue under Section 143(1)(a) of the Income Tax Act.2. Interpretation of whether preliminary expenses for public issue constitute revenue expenditure or capital expenditure.Analysis:1. The appellant, a public limited company, filed a return for the assessment year 1994-95 claiming revenue expenditure on advertisement and public issue. The Assessing Officer disallowed a portion of the expenditure and raised a demand, which was challenged before the First Appellate Authority. The Authority held that the concept of 'prima facie adjustment' under Section 143(1)(a) cannot be invoked as there could be differing opinions on the treatment of public issue expenses under Section 35D or Section 37 of the Act.2. The Revenue appealed to the Income Tax Appellate Tribunal, which upheld the Authority's decision. Subsequently, the appellant approached the High Court of Gujarat, which dismissed the appeal stating that a debatable issue cannot be disallowed under Section 143(1)(a) of the Act. The appellant then appealed to the Supreme Court.3. The appellant argued that preliminary expenses for public issue or raising capital constitute capital expenditure, citing precedents like Brooke Bond India Ltd. v. CIT and Punjab State Industrial Development Corporation Ltd. v. CIT. The Court noted conflicting opinions among High Courts on the matter, with some considering such expenses as revenue expenditure and others as capital expenditure.4. Despite the issue being debatable, the Court held that since the Gujarat High Court had ruled in previous cases that such expenses are capital expenditure, and the appellant's registered office was in Gujarat, the law laid down by the Gujarat High Court was binding. Therefore, the Court set aside the orders of the lower authorities and held that the issue was not debatable in the present case.5. Consequently, the Court allowed the appeal, setting aside the High Court's order and holding that the disallowance of the preliminary expenditure on the public issue under Section 143(1)(a) of the Income Tax Act was incorrect. The judgment clarified the treatment of such expenses as capital expenditure based on the precedents and the jurisdiction of the Gujarat High Court.