1985 (5) TMI 81 - AT - Income Tax

Preliminary Expenses Excluded from Capital Employed for Tax Relief

The Tribunal held that preliminary expenses, considered fictitious assets, cannot be included in the computation of capital employed for section 80J ... Capital Employed, Computation Of Capital, Industrial Undertaking, Preliminary Expenses, Profits And Gains Issues:1. Whether preliminary expenses shown on the assets side of the balance sheet should be considered in working out the capital employed for the purpose of relief under section 80J of the Income-tax Act, 1961.2. Whether the corresponding liability for incurring preliminary expenses should be considered as a liability and deducted from the aggregate value of assets.Analysis:1. The appeal was filed by the assessee-company against the order of the Commissioner (Appeals) Bombay regarding the treatment of preliminary expenses of Rs. 4,95,435 in the assessment year 1979-80 for the purpose of relief under section 80J of the Income-tax Act, 1961. The assessee argued that the preliminary expenses were for a public issue of share capital and should be considered as an asset for computing capital employed. The departmental representative contended that preliminary expenses were fictitious assets with no value and could not be considered as part of capital employed. The Tribunal examined relevant rules and provisions, including rule 19A of the Income-tax Rules, and concluded that preliminary expenses did not qualify as assets under the specified classifications and, therefore, should not be included in the computation of capital employed. The Tribunal also rejected the argument that the corresponding liability for these expenses should not be considered as a liability in the computation.2. The Tribunal referred to the principles of accountancy and legal provisions to determine the treatment of preliminary expenses and corresponding liabilities in the balance sheet. It highlighted that preliminary expenses are considered fictitious assets with no value and should be written off. Section 35D of the Income-tax Act allows expenses related to public share subscriptions to be deducted from business income over ten years, indicating that such expenses do not constitute capital assets. The Tribunal further analyzed rule 19A and section 80J(1A) to establish that borrowed moneys and debts owed by the assessee should be deducted from the aggregate value of assets, emphasizing that preliminary expenses do not fall under any category that allows their inclusion in the computation of capital employed. The Tribunal upheld the retrospective amendment of section 80J and ruled that the preliminary expenses were rightly excluded from the capital employed calculation for section 80J relief. The Tribunal dismissed the appeal filed by the assessee-company, affirming that the preliminary expenses should not be considered in determining capital employed for section 80J relief and that the corresponding liabilities should be deducted from the asset value.Overall, the Tribunal's decision clarified that preliminary expenses, being fictitious assets, cannot be treated as part of capital employed for section 80J relief and that the corresponding liabilities should be considered as deductions in the computation.