2020 (8) TMI 86 - AT - Income Tax

Appeal granted for deduction under section 35D for QIP expenses.

Yes Bank Ltd. Versus Deputy Commissioner of Income Tax-2 (2) (2)

The Tribunal allowed the appeal, setting aside the CIT(A)'s order and granting the appellant the deduction under section 35D for expenses incurred in ... Deduction u/s. 35D - Addition on the assumption that the shares may have been allotted only to selected Qualified Institutional Buyers ('QIBs') - disallowing deduction claimed u/s 35D in respect of expenses incurred in connection with the QIP on the alleged ground that the issue of shares to QIP does not tantamount to public subscription and such capital expenses are not eligible for deduction u/s. 35D - whether CIT(A) erred in disallowing the expenses in connection with QIP on the ground that the expense may not be allowable in view of section 40(a)(i)/(ia) ? - HELD THAT:- As can be seen from the list of QIBs to whom shares are issued, the shares are not issued to any of the aforesaid category. Thus QIBs, not being promoters, promoter group, subsidiaries and associates of the company would qualify as 'public'. As specified in clause 40A(ii) of the listing agreement, public shareholding can be increased by any of the modes specified therein to comply with Rule 19(2) and 19A of SCRR. One such note is the issue of IIP in accordance with Chapter VIIIA of the SEBI-ICDR. Chapter VIIIA has been included to provide for fresh issue of shares to comply with minimum shareholding requirement in Rule 19(2) and 19A of SCRR. Reg. 91B defines IPP as a further public offer made only to QIBs. These regulations provide that when a company has a public shareholding lower than the requirements specified, then the company may issue IPP to QIBs and raise the public shareholding to the required levels. It thus implies that QIBs form part of public. Further, even Reg. 82 which gives conditions for QIP, provides that the same must be in compliance with the requirements of public shareholding. That 'a section of public qualifies as public' has been clarified in Nitta Gelatine India Ltd. [2016 (10) TMI 406 - KERALA HIGH COURT] and Andhra Chamber of Commerce [1964 (10) TMI 19 - SUPREME COURT]. Facts being identical, we follow the order of the Tribunal in the case of Deccan Chronicle Holdings Ltd [2015 (8) TMI 914 - ITAT HYDERABAD and in view of the discussion hereinabove hold that the appellant is eligible for deduction u/s 35D - Decided in favour of assessee. Issues Involved:1. Disallowance of deduction under section 35D of the Income-tax Act, 1961, for expenses incurred in connection with Qualified Institutional Placement (QIP).2. Classification of Qualified Institutional Buyers (QIBs) as 'public' for the purpose of section 35D.3. Applicability of section 40(a)(i)/(ia) of the Income-tax Act concerning the disallowance of expenses.Issue-wise Detailed Analysis:1. Disallowance of Deduction under Section 35D:The appellant, a public limited company, raised Rs. 1033.87 crore through a QIP, incurring expenses of Rs. 14,14,01,453/- for payments to Lead Managers, Legal consultants, and Auditors. The appellant claimed 1/5th of these expenses, amounting to Rs. 2,82,80,290/-, under section 35D of the Income-tax Act for the assessment year 2010-11. The CIT(A) disallowed this deduction on the grounds that the shares were allotted to QIBs and not through public subscription, thus not qualifying for deduction under section 35D. The Tribunal referenced the ITAT Hyderabad Bench decision in DCIT v. Deccan Chronicle Holdings Ltd., which held that QIBs are considered 'public' for section 35D purposes. The Tribunal found that the appellant's expenses were eligible for deduction under section 35D, setting aside the CIT(A)'s order.2. Classification of QIBs as 'Public':The Tribunal examined whether QIBs could be regarded as 'public' for section 35D purposes. The CIT(A) had rejected this classification, citing SEBI ICDR 2009 regulations, which state that QIP issues are not public offers. However, the Tribunal noted that QIBs are a class of investors within the larger investor community, as per various laws and SEBI regulations. The Tribunal referenced the Deccan Chronicle Holdings Ltd. case, where it was held that QIBs constitute 'public' and that the subscription made by them amounts to public subscription. The Tribunal also referred to the SEBI Listing Agreement and SCRR, which classify QIBs under 'public shareholding.' Thus, the Tribunal held that QIBs qualify as 'public,' allowing the appellant's deduction claim under section 35D.3. Applicability of Section 40(a)(i)/(ia):The CIT(A) also disallowed the QIP-related expenses, suggesting they might not be allowable under section 40(a)(i)/(ia) of the Income-tax Act. However, the Tribunal did not find merit in this argument, as the primary issue was the classification of QIBs as 'public' and the eligibility of expenses under section 35D. The Tribunal focused on the broader interpretation of 'public' and the legislative intent behind section 35D, ultimately allowing the deduction.Procedural Issue:The Tribunal addressed a procedural delay in pronouncing the order due to the COVID-19 pandemic and nationwide lockdown. The Tribunal cited extensions granted by the Hon'ble Supreme Court and Bombay High Court, justifying the delay under Rule 34(5) of the Income-tax Appellate Tribunal Rules, 1963.Conclusion:The Tribunal allowed the appeal, setting aside the CIT(A)'s order and granting the appellant the deduction under section 35D for the expenses incurred in connection with the QIP. The Tribunal's decision was based on the classification of QIBs as 'public' and the eligibility of the expenses under the relevant sections of the Income-tax Act.