Case: Deputy Commissioner of Income Tax Vs. Raghuvir Synthetics Ltd

R.K. Agrawal, J.1. The present appeal arises out of the judgment and order dated June 14, 2005 passed by the High Court of Gujarat at Ahmedabad, in Tax Appeal No. 333 of 2004. The Respondent-Assessee is a public limited company and for the assessment year 1994-95, it had filed its return wherein it had claimed revenue expenditure of Rs. 65,47,448 on advertisement and public issue. However, in the return of income, the company made a claim that if the aforesaid claim cannot be considered as a revenue expenditure then alternatively the said expenditure may be allowed Under Section 35D of the Income-tax Act, 1961 (hereinafter referred to as "the Act") by way of capitalising in the plant and machinery obtained.2. The Assessing Officer issued an intimation Under Section 143(1)(a) of the Act on February 23, 1995 disallowing a sum of Rs. 58,92,700 out of the preliminary expenditure incurred on public issue. He, however, allowed one-tenth of the total expenses and raised demand on the balance amount.3. The intimation was challenged before the first appellate authority which vide order dated October 1, 1996, allowed the appeal by holding that the concept of "prima facie adjustment" Under Section 143(1)(a) of the Act cannot be invoked as there could be more than one opinion on whether public issue expenses were covered by Section 35D or Section 37 of the Act.4. Feeling aggrieved by the order passed by the first appellate authority, the Revenue preferred an appeal before the Income-tax Appellate Tribunal. The Tribunal vide order dated September 4, 2003 upheld the order of the Commissioner of Income-tax (Appeals) and dismissed the appeal filed by the Revenue.5. The Appellant preferred an appeal Under Section 260A of the Act before the High Court of Gujarat at Ahmedabad. The Division Bench of the High Court by the impugned order dismissed the appeal on the ground that a debatable issue cannot be disallowed while processing return of income Under Section 143(1)(a) of the Act.6. We have heard Mr. K. Radhakrishnan, learned Senior Counsel appearing for the Appellant. Nobody has put in appearance on behalf of the Respondent.7. Mr. K. Radhakrishnan, learned Senior Counsel relied upon the decisions of this court in Brooke Bond India Ltd. v. CIT [1997] 10 SCC 362 : [1997] 225 ITR 789 (SC) and Punjab State Industrial Development Corporation Ltd. v. CIT [1997] 10 SCC 184 : [1997] 225 ITR 792 (SC) to contend that the preliminary expenses incurred for public issue or for raising additional capital is only capital expenditure and not a revenue expense and, therefore, the law being settled by this court, it would relate back and would be held to be operative from the very inception.8. We find that there was a divergence of opinion between the various High Courts; one view being taken by the Madras High Court in CIT v. Kisenchand Chellaram (India) P. Ltd. [1981] 130 ITR 385 (Mad) , the Andhra Pradesh High Court in Warner Hindustan Ltd. v. CIT [1988] 171 ITR 224 (AP), the Kerala High Court in Federal Bank Ltd. v. CIT [1989] 180 ITR 241 (Ker) and the Karnataka High Court in Hindustan Machine Tools Ltd. (No. 3) v. CIT [1989] 175 ITR 220 (Karn) that the preliminary expenses incurred on raising a share capital is a revenue expenditure.9. On the other hand, a contrary view was expressed by the Allahabad High Court in CIT v. Modi Spinning and Weaving Mills Co. Ltd. [1973] 89 ITR 304 (All) , the Himachal Pradesh High Court in Mohan Meakin Breweries Ltd. v. CIT (No. 2) [1979] 117 ITR 505 (HP), the Delhi High Court in Bharat Carbon and Ribbon Mfg. Co. Ltd. v. CIT [1981] 127 ITR 239 (Delhi), the Calcutta High Court in Brooke Bond India Ltd. v. CIT [1983] 140 ITR 272 (Cal) and Kesoram Industries and Cotton Mills Ltd. v. CIT [1992] 196 ITR 845 (Cal), the Bombay High Court in Bombay Burmah Trading Corporation Ltd. v. CIT [1984] 145 ITR 793 (Bom) , the Punjab and Haryana High Court in Groz-Beckert Saboo Ltd. v. CIT [1986] 160 ITR 743 (P & H), the Gujarat High Court in Ahmedabad Manufacturing and Calico (P.) Ltd. v. CIT [1986] 162 ITR 800 (Guj) and Alembic Glass Industries Ltd. v. CIT [1993] 202 ITR 214 (Guj), the Andhra Pradesh High Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1988] 174 ITR 689 (AP) and the Rajasthan High Court in CIT v. Aditya Mills [1990] 181 ITR 195 (Raj) and CIT v. Midti Metals Ltd. [1991] 188 ITR 151 (Raj), that the said expenses are capital expenditure and cannot be allowed as revenue expenditure.10. Even though it is a debatable issue but as the Gujarat High Court in the case of Ahmedabad Mfg. and Calico (P.) Ltd. (supra) had taken a view that it is capital expenditure which was subsequently followed by Alembic Glass Industries Ltd. v. CIT (supra) and the registered office of the Respondent-Assessee being in the State of Gujarat, the law laid down by the Gujarat High Court was binding. (See Taylor Instrument Co. (India) Ltd. v. CIT [1998] 232 ITR 771 (Delhi) , CGT v. J.K. Jain [1998] 230 ITR 839 (P & H), CIT v. Sunil Kumar [1995] 212 ITR 238 (Raj), CIT v. Thana Electricity Supply Ltd. [1994] 206 ITR 727 (Bom) , Indian Tube Co. Ltd. v. CIT [1993] 203 ITR 54 (Cal), CIT v. P.C. Joshi and B.C. Joshi [1993] 202 ITR 1017 (Bom) and CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 (SC) . Therefore, so far as the present case is concerned, it cannot be said that the issue was a debatable one.

Decision:
1[ds]8. We find that there was a divergence of opinion between the various High Courts; one view being taken by the Madras High Court in CIT v. Kisenchand Chellaram (India) P. Ltd. [1981] 130 ITR 385 (Mad)  , the Andhra Pradesh High Court in Warner Hindustan Ltd. v. CIT [1988] 171 ITR 224 (AP), the Kerala High Court in Federal Bank Ltd. v. CIT [1989] 180 ITR 241 (Ker) and the Karnataka High Court in Hindustan Machine Tools Ltd. (No. 3) v. CIT [1989] 175 ITR 220 (Karn) that the preliminary expenses incurred on raising a share capital is a revenue expenditure9. On the other hand, a contrary view was expressed by the Allahabad High Court in CIT v. Modi Spinning and Weaving Mills Co. Ltd. [1973] 89 ITR 304 (All)  , the Himachal Pradesh High Court in Mohan Meakin Breweries Ltd. v. CIT (No. 2)[1979] 117 ITR 505 (HP), the Delhi High Court in Bharat Carbon and Ribbon Mfg. Co. Ltd. v. CIT [1981] 127 ITR 239 (Delhi), the Calcutta High Court in Brooke Bond India Ltd. v. CIT [1983] 140 ITR 272 (Cal) and Kesoram Industries and Cotton Mills Ltd. v. CIT [1992] 196 ITR 845 (Cal), the Bombay High Court in Bombay Burmah Trading Corporation Ltd. v. CIT [1984] 145 ITR 793 (Bom)  , the Punjab and Haryana High Court in Groz-Beckert Saboo Ltd. v. CIT [1986] 160 ITR 743 (P   & H), the Gujarat High Court in Ahmedabad Manufacturing and Calico (P.) Ltd. v. CIT [1986] 162 ITR 800 (Guj) and Alembic Glass Industries Ltd. v. CIT [1993] 202 ITR 214 (Guj), the Andhra Pradesh High Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1988] 174 ITR 689 (AP) and the Rajasthan High Court in CIT v. Aditya Mills [1990] 181 ITR 195 (Raj) and CIT v. Midti Metals Ltd. [1991] 188 ITR 151 (Raj), that the said expenses are capital expenditure and cannot be allowed as revenue expenditure10. Even though it is a debatable issue but as the Gujarat High Court in the case of Ahmedabad Mfg. and Calico (P.) Ltd. (supra) had taken a view that it is capital expenditure which was subsequently followed by Alembic Glass Industries Ltd. v. CIT (supra) and the registered office of the Respondent-Assessee being in the State of Gujarat, the law laid down by the Gujarat High Court was binding. (See Taylor Instrument Co. (India) Ltd. v. CIT [1998] 232 ITR 771 (Delhi)  , CGT v. J.K. Jain [1998] 230 ITR 839 (P   & H), CIT v. Sunil Kumar [1995] 212 ITR 238 (Raj), CIT v. Thana Electricity Supply Ltd. [1994] 206 ITR 727 (Bom)  , Indian Tube Co. Ltd. v. CIT[1993] 203 ITR 54 (Cal), CIT v. P.C. Joshi and B.C. Joshi [1993] 202 ITR 1017 (Bom) and CIT v. Raja Benoy Kumar Sahas Roy [1957] 32 ITR 466 (SC)  . Therefore, so far as the present case is concerned, it cannot be said that the issue was a debatable one.