Case Note & Summary
The case involves an Income Tax Reference under Section 256(1) of the Income Tax Act, 1961, by the Income Tax Appellate Tribunal for the assessment years 1980-81 and 1981-82. The assessee, M/s. International Computers Indian Manufacture Limited, had issued 6,25,000 equity shares of Rs.10 each, raising Rs.62.50 lakhs for setting up a computer manufacturing unit. The assessee incurred total expenditure of Rs.14,21,276/- on share issue, including financial consultancy, legal fees, underwriting commission, advertisement, and printing charges. Out of this, the assessee capitalised Rs.29,668/- to plant and machinery and factory equipment, and Rs.9,79,438/- to capital work-in-progress, treating these as part of the cost of fixed assets. The balance of Rs.4,12,170/- was claimed as preliminary expenses under Section 35D. The assessee claimed depreciation under Section 32 on the capitalised amounts, relying on the Supreme Court decision in Chellapalli Sugars Ltd. v. CIT (98 ITR 167). The Assessing Officer disallowed the depreciation, holding that the expenditure was in the nature of expenses listed under Section 35D. The Commissioner of Income Tax (Appeals) upheld the disallowance, and the Tribunal confirmed. The High Court framed two questions: (I) whether depreciation was allowable on Rs.29,668/- capitalised to plant and machinery, and (II) whether depreciation was allowable on Rs.1,97,636/- (being depreciation on Rs.29,668/- and Rs.9,79,438/-). The court analysed that for depreciation under Section 32, the asset must be owned by the assessee and used for business, and the allowance is on the 'actual cost' of the asset. The court distinguished Chellapalli Sugars Ltd., noting that in that case, the expenditure was directly related to the acquisition of the asset, whereas here the expenditure was for raising share capital, not for acquiring the plant and machinery. The court held that share issue expenses are not part of the cost of the asset but are preliminary expenses specifically covered under Section 35D. Therefore, the capitalised amounts cannot be included in the actual cost for depreciation. The court answered both questions in the affirmative, i.e., against the assessee and in favour of the Revenue, and dismissed the reference.
Headnote
A) Income Tax - Depreciation - Actual Cost - Section 32, Income Tax Act, 1961 - Share issue expenses capitalised to plant and machinery do not form part of 'actual cost' for depreciation - The assessee capitalised Rs.29,668/- on plant and machinery and Rs.9,79,438/- on capital work-in-progress from total share issue expenses of Rs.14,21,276/- - The court held that such expenses are not incurred for bringing into existence the capital asset but for raising share capital, and thus cannot be included in actual cost for depreciation under Section 32 (Paras 1-10). B) Income Tax - Preliminary Expenses - Section 35D, Income Tax Act, 1961 - Share issue expenses are specifically covered under Section 35D as preliminary expenses - The balance amount of Rs.4,12,170/- was treated as preliminary expenses and claimed under Section 35D - The court noted that the legislature intended such expenses to be amortised under Section 35D, not capitalised for depreciation (Paras 2-8).
Issue of Consideration
Whether expenditure incurred on issue of shares, when capitalised to plant and machinery and capital work-in-progress, qualifies as part of 'actual cost' for claiming depreciation under Section 32 of the Income Tax Act, 1961
Final Decision
The High Court answered both questions in the affirmative, i.e., against the assessee and in favour of the Revenue, holding that the Tribunal was justified in not granting depreciation on the capitalised share issue expenses. The reference was dismissed.
Law Points
- Depreciation under Section 32 of Income Tax Act
- 1961 is allowable only on actual cost of asset
- share issue expenses capitalised to plant and machinery do not form part of actual cost
- Section 35D provides specific treatment for preliminary expenses
