Tribunal Orders Reassessment on Interest Set-off; Allows Amortization & Design Expenses; Capital Computation Adjusted.

The Tribunal upheld the disallowance of expenditure on increased authorized share capital, referencing SC judgments. It set aside the CIT(A) decision on interest set-off, directing reassessment. Amortization of public issue expenses was directed to be fully considered under s. 35D. The Tribunal accepted the inclusion of debenture application money for capital computation. Sales promotion expenses were to be spread over five years. Drawings and design expenses were allowed as revenue expenditure, with adjustments to prevent double deduction. Both appeals were allowed for statistical purposes, with directions for reassessment and consideration of relevant legal precedents.

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Issues Involved:
1. Disallowance of expenditure on increase in authorized share capital.
2. Set off of interest received from deposits against public issue expenses or interest paid on bridge loan.
3. Amortization of public issue expenditure u/s 35D.
4. Disallowance of penal interest on sales-tax.
5. Claim of preliminary expenses u/s 35D.
6. Allowance of sales promotion expenses.
7. Treatment of drawings and design expenses as revenue expenditure u/s 37 or u/s 35AB.

Summary:

1. Disallowance of Expenditure on Increase in Authorized Share Capital:
The assessee's appeal regarding the disallowance of Rs. 1,35,000 incurred for increasing authorized share capital was rejected. The issue was covered against the assessee by the Supreme Court judgments in *Punjab State Industrial Development Corpn. Ltd. vs. CIT* and *Brooke Bond India Ltd. vs. CIT*.

2. Set Off of Interest Received from Deposits:
The assessee contended that interest of Rs. 5,24,596 received from deposits should be set off against public issue expenses or interest paid on bridge loan. The CIT(A) rejected this, citing lack of nexus between the activities. The Tribunal set aside the orders of the CIT(A) and AO, directing the AO to reassess the issue considering relevant judgments and providing reasonable opportunity to the assessee.

3. Amortization of Public Issue Expenditure u/s 35D:
The assessee claimed amortization of public issue expenses totaling Rs. 40,75,476.83, but the AO allowed only Rs. 28,43,507. The CIT(A) granted relief for Rs. 3,00,000 incurred for postage but confirmed the disallowance of Rs. 9,31,969. The Tribunal directed the AO to consider the entire amount for amortization u/s 35D, following the judgment in *CIT vs. Shree Synthetics Ltd.*

4. Disallowance of Penal Interest on Sales-Tax:
The ground regarding disallowance of penal interest on sales-tax amounting to Rs. 2,75,610 was not pressed by the assessee and was thus rejected.

5. Claim of Preliminary Expenses u/s 35D:
The CIT(A) confirmed the AO's action of excluding debenture application money from the computation of capital employed for determining the ceiling/deduction u/s 35D. The Tribunal, however, accepted the assessee's contention that debenture application money should be included for computing total capital employed.

6. Allowance of Sales Promotion Expenses:
The CIT(A) held that sales promotion expenses of Rs. 34,82,241, though of revenue nature, should be spread over five years as per the assessee's accounting practice. The Tribunal upheld this decision, referencing the Supreme Court judgment in *Madras Industrial Investment Corpn. Ltd. vs. CIT*.

7. Treatment of Drawings and Design Expenses:
The AO treated drawings and design expenses of Rs. 65,44,703 as capital expenditure, allowing only 1/6th u/s 35AB. The CIT(A) confirmed this but directed the AO to allow 1/6th of the total expenditure. The Tribunal, however, allowed the entire amount as revenue expenditure for the year under consideration, provided the AO withdraws the 1/6th deduction allowed in subsequent years to prevent double deduction.

Conclusion:
Both appeals were treated as allowed for statistical purposes, with directions for reassessment and consideration of relevant judgments and provisions of law.

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