INCOME TAX APPELLATE TRIBUNAL - CHENNAI

I.T.A. No. 342/Mds/2013 (assessment year 2009-10)

Dr. O. K. Narayanan And Shri Vikas Awasthy,JJ.

Shri R. Vijayaraghavan, Advocate For the Appellant :
Shri T. N. Betgeri, JCIT For the Respondent :

ORDER

The order of the Bench was delivered by

Vikas Awasthy, Judicial Member:-The appeal has been filed by the assessee impugning the order of the Commissioner of Income Tax(Appeals)-I, Coimbatore dated 04-12-2012 relevant to the Assessment Year (AY) 2009-10.

2. The assessee is a public limited company carrying on the business of manufacturing and sale of Windmills. The assessee filed its return of income for the AY. 2009-10 on 25-09-2009 declaring its total income as Rs. 24,67,613/- under normal provisions and book profit of Rs. 1,45,64,342/- u/s. 115JB. The case of the assessee was selected for scrutiny and notice u/s. 143(2) of the Income Tax Act, 1961 (herein after referred to as 'the Act') was issued to the assessee on 30-08-2010. The Assessing Officer vide assessment order dated 08-12-2011, made additions/dis- allowances inter-alia towards preliminary and pre-operative expenses written off u/s. 35D incurred on account of expansion of business activities. The Assessing Officer also restricted the dis- allowance u/s. 80IB.
Aggrieved against the assessment order, the assessee preferred an appeal before the CIT(Appeals). The CIT(Appeals) vide impugned order dated 04-12-2012, partly allowed the appeal of the assessee. The CIT(Appeals) while deciding the appeal rejected the submissions of the assessee with regard to dis- allowances made by the Assessing Officer u/s. 35D and restricting the claim of the assessee u/s. 80IB.

Aggrieved by the order the CIT(Appeals), the assessee has come in second appeal before the Tribunal.

3. During the relevant AY, the assessee had issued equity shares to the tune of Rs. 61,95,99,594/- by private placements for expansion of project. For arranging the private placement of equity shares, the assessee had paid commissions to the tune of Rs. 6,10,00,000/- and Rs. 1,20,000/- towards legal and consultancy charges. The assessee had claimed the aforesaid expenditure as miscellaneous expenditure in the Balance Sheet and had written off 1/5th i.e., 1,22,00,000/- as preliminary and pre-operative expenses in the Profit and Loss Account. The Assessing Officer observed that though increase in capital results in expansion of capital base of the company and would help in expansion for its business activities, however, the expenses incurred in that connection are capital in nature as the expenditure is directly related to the expansion of the capital base of the company. The Assessing Officer held that the expenditure is neither preliminary expenditure as envisaged in section 35D nor revenue expenditure allowable u/s.37 of the Act. The Assessing Officer added back the preliminary and pre-operative expenses written off and the legal and consultancy fee in the total income returned by the assessee.

On appeal, the CIT(Appeals) held that the expenditure incurred is for arranging the funds required for working capital. Therefore, preliminary and pre-operative expenses claimed by the assessee cannot be allowed without starting any new unit or extending the existing unit.

4. Shri R. Vijayaraghavan, Advocate, appearing on behalf of the assessee submitted that the commission and legal fees has been paid to raise the funds by private placement of equity shares for the purpose of extension/expansion of the undertaking. The ld. Counsel for the assessee placed on record a note giving details of expenditure incurred for extension/expansion of the project which are as under:

5. Project Advances Rs. 15.52 Crores The ld. Counsel further submitted that business activities of the assessee-company have increased in subsequent years as is evident from the details of sale turnover and number of Windmills:

The ld. Counsel for the assessee contended that since the expenditure on account of private placement of shares has been incurred for the expansion of existing undertaking the commission/brokerage paid for the placement of shares is allowable under the provisions of section 35D of the Act. In order to support his contentions, the ld. Counsel relied on the judgments of the Hon'ble Madras High Court in the case of EID Parry (India) Ltd., Vs. DCIT reported as 209 Taxman 214 and CIT Vs. Ashok Leyland Ltd reported as 349 ITR 663 (Mad).

5. On the other hand, Shri T.N. Betgeri, appearing on behalf of the Revenue strongly supported the order of the authorities below and prayed for dismissal of the appeal of the assessee. The ld. DR submitted that the details of the alleged expansion were not made available before the CIT(Appeals) or the Assessing Officer.

6. We have heard the submissions made by the representatives of both the sides. We have also perused the orders of the authorities below as well as the judgments relied on by the ld. Counsel for the assessee. The provisions of section 35D provides for amortization of certain preliminary expenses which are incurred before commencement of the business or incurred after the commencement of business in connection with the extension of undertaking or in connection with setting up of new unit. The ld. Counsel for the assessee has given the details of the expenditure incurred after raising of the funds through private placement of equity shares. The Counsel has also given the details of the increase in business activities of the assessee-company in the subsequent years to show that there has been increase in business of Windmills and consequent increase in higher sales turnover.

We are of the considered opinion that with the increase in capital base after issue of additional equity shares by private placement, the assessee-company intends to expand its existing project. This view is strengthened by the fact that the assessee has invested substantial amount in purchase of Machineries etc., Further, with the increase in number of Windmills, the sales turnover of the assessee has increased almost three fold from Financial Year 2008-09 to Financial Year 2010-11. Therefore, the expenditure incurred towards raising of additional equity shares by private placement can be attributed to extension of undertaking and is thus eligible for amortization under the provisions of section 35D. The Hon'ble Madras High Court in the case of EID Parry (India) Ltd., Vs. DCIT (supra) has held that where expenditure has been incurred in connection with issue of shares which are directly relatable to expansion to capital base of the company for raising of new projects, it would be allowable u/s. 35D. Similar view has been taken by the Hon'ble Madras High Court in the case of CIT Vs. Ashok Leyland Ltd (supra).

7. In view of our above findings, this ground of appeal of the assessee is allowed. The assessee is entitled to amortization of preliminary and pre-operative expenses as well as consultancy and legal charges incurred towards private placement of shares.

8. As regards the second issue in appeal relating to restriction of dis-allowance u/s.80IB is concerned, the ld. Counsel contended that the Assessing Officer has made certain additions in income returned by the assessee, therefore, the total income eligible for deduction u/s.80IB shall vary. The ld. Counsel further submitted that the assessee is maintaining separate books in respect of manufacturing activity eligible for deduction u/s.80IB according to which the profit eligible for deduction is Rs. 1,68,70,746/- and the amount of deduction on same would be Rs. 50,61,142/-.

We find that the assessee had claimed deduction of Rs. 10,78,976/- u/s.80IB, the same was allowed by the Assessing Officer. The assessee for the first time raised the issue of additional/higher deduction amounting to Rs. 50,61,142/- u/s.80IB before the CIT(Appeals). This claim was never made before Assessing Officer. We do not find any force in the submission of the ld. Counsel for allowing higher deduction u/s.80IB. This ground of appeal of the assessee is dismissed.

9. In the result, the appeal of the assessee is partly allowed in the aforesaid terms.

The order pronounced in the open court on 21st October, 2013 at Chennai.