Income Tax Appellate Tribunal - AhmedabadPalco Metals Limited,, Ahmedabad vs Assessee on 19 August, 2016IN THE INCOME TAX APPELLATE TRIBUNAL
                    AHMEDABAD "C" BENCH

          Before: Shri S. S. Godara, Judicial Member
          and Shri Amarjit Singh, Accountant Member

                     ITA No. 2488/Ahd/2013
                    Assessment Year 2009-10


     Palco Metals Ltd,                   The ACIT,
     Opp Khanwadi, Ramol                 Circle-5,
     Road,                          Vs   Ahmedabad
     Ahmedabad-382449                    (Respondent)
     PAN-AAACP9154D
     (Appellant)


       Revenue by:          Shri Prasoon Kabra, Sr. D.R.
       Assessee by:         Shri Tushar Hemani, A.R.


       Date of hearing                   : 04-08-2016
       Date of pronouncement             : 19-08-2016



                            आदेश /ORDER

PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-This assessee's appeal for A.Y. 2009-10, arises from order of
the CIT(A)-XI, Ahmedabad dated 12-08-2013 in appeal no. CIT(A)-
XI/217/Addl. CIT.R-5/11-12, in proceedings undersection 143(3)of
the Income Tax Act, 1961; in short "the Act".I.T.A No. 2488/Ahd/2013      A.Y. 2009-10                      Page No       2
Palco Metals Ltd. vs. ACIT2.      The assessee has filed the appeal raising following substantive
grounds:-1. The Ld. CIT(A) XI has erred in law and on facts in confirming the
        addition of Rs 1,04,000 made by the Ld. Assessing Officer while
        making the assessmentu/s 143(3), in respect of the deduction of
        l/5th of the expenditure incurred for increase in Authorised Capital of
        the Company. The appellant prays that the order being bad in law
        and on facts may kindly be quashed and the addition may kindly be
        deleted.2. The Ld. CIT(A) XI has further erred on facts in confirming the
        addition of Rs 3,26,457 made by the Ld. Assessing Officer while
        making the assessmentu/s 143(3), being disallowanceu/s 14-Arwr
        8-D. The appellant prays that the order being bad on facts may
        kindly be quashed and the addition may kindly be deleted."Ground No. 13.      The fact of the case is that the Assessing Officer on perusal of
the P &L A/c of the Company, noticed that the assessee has debited
a sum of Rs. 1,04,000/- as preliminary expenses written off.               On
query, the assessee submitted before the Assessing Officer that
preliminary expenses incurred in the year 2005-06 is in the nature of
increase in the capital of the company hence qualify to be amortized
as stipulated insection 35Dof Income-Tax Act, 1961. The assessee
also stated that the details of the additions to fixed assets made by
the company during that year is a part of extension of the industrial
undertaking.       He further stated tha bank loan was taken and also
increased the authorized capital for further issuance of shares. He
explained that the assessee- company was therefore required to
incur expenses in the nature of fees and stamp duty payable as per
 I.T.A No. 2488/Ahd/2013      A.Y. 2009-10                    Page No        3
Palco Metals Ltd. vs. ACIT


the provisions of theCompanies Act1956, to increase the authorized
capital. The expenses so incurred are not revenue expenses as they
likely to give benefit of enduring nature,so it treated the same as
deferred revenue expenses. Accordingly, it has been claiming 1/5 of
the total expenditure incurred then every year, for five years.The
Assessing Officer stated that the jurisdictional High Court decision in
M/s Vareli Textiles Ltd 284 ITR 238(Guj), which has followed the
decision of Supreme Court reported in 225 ITR 798 (SC) inBrooke
Bond India Vs CIThas held that expenses for increase in authorized
share capital are capital expenses which cannot be allowed as
deduction as revenue expenses.              He further stated that as persection 35D(2), the nature of expenses eligible for deductionu/s 35Dhave been specified which do not include expenses for increase in
authorized share capital. Accordingly, a sum of Rs. 1,04,000/-claimed as Revenue Expenditure is disallowed and added to the
income of the assessee. Against the order of Assessing Officer, the
assessee has filed appeal before the Ld. Commissioner of Income
Tax(A). The Commissioner of Income Tax(A) held as under:-"2.1 I have carefully considered the facts of the case. Hon'ble
      Supreme Court in the case of Brook Bond India Ltd. 225 ITR 798
      has held that the fees paid to registrar for increase In authorised
      share capital is a capital expenditure. On going through the
      provisions ofsec. 35D, I find that the fees for registering the
      company has been covered insection 35D(2)(c)(iii). The provision
      only allow the fees which is paid for registering the company under
      the provisions ofCompanies Act, 1956. The payment made to
      registrar for increase in authorised share capital is not covered in the
      above clause or in any other clause ofsec.35D.2.2 In the case ofCIT vs Hindustan Insecticides Ltd.250 ITR 338
      (Del) it is held that "a reading of Sch.X of the Companies Act would
 I.T.A No. 2488/Ahd/2013      A.Y. 2009-10                    Page No        4
Palco Metals Ltd. vs. ACIT


      go to show that items 1 and 2 deal with registration of a company
      depending on the nominal share capita!, in respect of a company
      having a share capital. Item 3, on the other hand, deals with fees
      payable for filing a notice for increase in the nominal share capital of
      the company. The first two items and the third item operate in
      conceptually and contextually different fields. This is also clear from
      a reading of item 4 which provides that for registration of any existing
      commpany, except such companies as are by theCompanies Actexempted from payment of fees in respect of registration underCompanies Act, the same fee as is charged for registering a new
      company is payable. Sec. 35D (2}(c)(iii) deals with expenditure
      incurred by way of fees for registration of a company under the Act.As the analysis of the position above would go to show, fees paid
      under item 3 of Sch. X cannot be stated to be fees paid for
      registering a company. That being the position s. 35D(2)(c)(iii) has
      no application to the facts of the case."Similar view has been taken in the case of Shakti Finance Ltd.
             250 JTR 488 Madras.2.3 From the above discussion what emerges is the fact that the
      fees paid to registrar for increase in the authorised share capital is a
      capital expenditure and is therefore not allowed under the general
      provisions ofsec. 37of the I.T. Act. The same is not allowed under
      the specific provisions ofsec.35Dof the I.T. Act also. Accordingly,
      the disallowance made by the A.O. of Rs. 1 ,04,000/- u/s. 35D of the
      I.T. Act is held to be correct. This ground of appeal is dismissed."4.    The ld. counsel contended that the expenses claimed be
allowed as persection 35D(ii)indicating that the language of that
section is so wide in nature that it would mean to include even the
above expenses.         On the other hand, the Ld. Departmental
Representative relied on the order of Ld. Commissioner of Income
Tax(A).   We have carefully considered the contention of both the
sides and gone through the materials available on record.                The
assessee has debited an amount of Rs. 104,000/- as preliminary
 I.T.A No. 2488/Ahd/2013      A.Y. 2009-10               Page No       5
Palco Metals Ltd. vs. ACIT


expenses on account of expenditure incurred in the case of fees and
stamp duty payable to increase the authorized capitalu/s. 35Dof the
I.T. Act We find that according to provisions ofsection 35D(ii)of the
Act    the kinds of expenses claimed by the assessee are not
specifically covered in thesection 35D(ii). Hon'ble supreme court in
the case of Brook Bond India Ltd. 225 ITR 798 has held that the fees
paid to registrar for increase in authorized share capital is a capital
expenditure.InCommissioner of Income Tax vs. Hindustan
Insecticides Ltd(2001) 250 ITR 338 (Del) held that the fee paid to
Registrar of Companies for increasing the authorized capital is a
capital expenditure. It is not possible to get such deduction undersection 35Dunless it is coupled with the extension of an industrial
undertaking or in connection with setting up of a new industrial
undertaking.The Hon'ble apex court in the case ofPunjab State
Industrial Development Corp Ltd. vs. Commissioner of Income Tax(1997) 225 ITR        792/93 also held that fee paid to Registrar of
Companies for expansion of capital base of the company is capital
expenditure.The co-ordinate bench of this tribunal in the case ofGujarat Power Corporation Ltd. vs. ACIT(2013) 33 taxmann.com 318
Ahmedabad Tribunal has disallowed the claim of assesseeu/s. 35Das the asssessee was not fulfilling the conditions laid down under
sub-section (1) and (2) ofsection 35D.We find that this disallowance
was confirmed by the Ld. Commissioner of Income Tax(A) by giving a
specific finding that the assessee is not fulfilling the conditions
imposed under sub-sections (1) and (2) ofsection 35D, we, therefore,
 I.T.A No. 2488/Ahd/2013      A.Y. 2009-10               Page No       6
Palco Metals Ltd. vs. ACIT


uphold the order of the Ld. Commissioner of Income Tax(A) and
dismissed the appeal of the assessee on this ground.Ground No. 25.     Fact of the case is that the Assessing Officer on perusal of the
balance sheet noticed that the assessee has shown investment of
Rs. 80,12,500/- both at the beginning of the year and at the end of
the year, the dividend income from which are exempt from tax. In the
computation of income, the assessee has not disallowed any amount
towards disallowanceu/s 14A.         On being queried as to why the
provisions ofSection 14Ar.w. Rule 8D be not applied to the facts of
the present case, the assessee contended that since the company
has not received any income exempt from tax, the provisions ofsec.
14Aare not applicable. The assessee further submitted that
provisions of 14A r.ws. 8D are applicable only when the assessee
has any income which is exempt from tax. The Assessing Officer
stated that the contention of the assessee is not correct. He pointed
out that the assessee has not stated anything in its reply as to
whether any expenditure has been incurred by it in relation to the
exempt income (whether earned or not).         The Assessing Officer
further stated that it is to be noted thatsection 14Adisallows
expenditure "in relation to income which does not form part of total
income" and in order to disallow the expenditure actual income need
not be earned. He relied on the judgment in the case of Cheminvest
Ltd. vs. ITO (ITAT, Delhi (SB)) in ITA No. 87/Del/2008.            The
 I.T.A No. 2488/Ahd/2013      A.Y. 2009-10                   Page No       7
Palco Metals Ltd. vs. ACIT


Assessing Officer pointed out that the assessee has not been able to
show that no interest expenses incurred           in relation to exempt
income. The Assessing Officer held that the provisions ofsec. 14Ais
applicable in the case of the assessee and worked out disallowanceu/s. 14Aof the Act to the amount of Rs. 326457/-.
The assessee filed appeal before the ld. Commissioner of Income
Tax(A) against the order of the Assessing Officer. The Commissioner
of Income Tax(A) held as under:-"3.2 I have carefully considered the rival contentions. As far as the
      claim of the appellant that no exempt income has been earned
      during the year is concerned the same is not accepted since the act
      provides that the investments made by the appellant should be
      capable of producing or generating exempt income. This issue is
      amply covered by the decision of Hon'ble Delhi Special Bench in the
      case of Ken Investment Ltd 121 ITD 318 (2009) (S.B). With regard to
      the claim that the investments made by the appellant were in the
      nature of trade investment made with an objective of furthering the
      business interest of the company, this aspect has been considered
      by various judicial authorities. In the case of Maxopp Investments
      Ltd. [203 taxman 185 (Del)] the Hon'ble Special Bench has held thatsec.14Adisallowance is applicable to the interest paid on
      borrowings used for business related investments. Even though
      earning of dividend income is only incidental. Reliance is also placed
      on the decision of Hon'ble Kerala High Court in the case of Smt.
      Leena Ramchandran reported in 339 ITR 296 and decision of
      Hon'ble Cochin Bench of ITAT in the case of State Bank of
      Travencore reported in 124 ITD 332.Appellant's case is clearly a case of mixed fund as highlighted by the
      A.O. being used for the purpose of earning taxable as well as
      exempt income. Appellant has not been able to show before the
      A.O. that no interest expenses have been incurred by it in relation to
      the assets capable of generating exempt income. In view of the
      above facts and decisions the disallowance made by the A.O. of
      Rs.3,26,457/- is hereby confirmed and this grounds of appeal is
      dismissed."I.T.A No. 2488/Ahd/2013      A.Y. 2009-10               Page No      8
Palco Metals Ltd. vs. ACIT6.     The ld. counsel contended that the assessee company has not
earned any income exempt from income tax, hence the proceedings
ofsection 14Aare not applicable to the case of the assessee. The ld.
counsel further stated it is also evident from the profit and loss
account and return of income that assesse-company has not earned
any exempt income. He also relied on the decision of co-ordinate
bench of this tribunal.      On the other hand, the ld. departmental
representative relied on the order of the lower authorities.   We have
considered the submission of both the parties and perused the
material on record. The provisions ofsection 14-Aare being re-
produced as under:"(1) For the purpose of computing the total income under this
      chapter no deduction shall be allowed in respect of the
      expenditure incurred       by the assessee in relation to income
      which does not form part of the total income under this Act.(2) The assessing officer shall determine the amount of
      expenditure incurred in relation to such income which does not
      form part of the total income under this Act in accordance and
      with such method as may be prescribed if the assessing officer
      having regard to the accounts of the assessee is not satisfied
      with the correctness of the claim of the assessee in respect of
      such expenditure in relation to income which does not form part
      of the total income under this Act."I.T.A No. 2488/Ahd/2013      A.Y. 2009-10               Page No       9
Palco Metals Ltd. vs. ACIT


From the plain reading of the provisions ofsection 14-Ait clearly
emerges that:-1. The assessee must have earned an exempt income2.   The assessee must have incurred an expenditure in relation to
that income3.   The assessing officer shall work out the expenditure incurred to
earn such income.In the case of the company it is evident from the Profit & loss account
and return of income filed by the company that it did not earn any
income exempt from income tax, hence the provisions ofsection 14-Aitself are not applicable to the case7.    We find that the assessee submitted before the lower
authorities that it has not earned any exempt income during the year.
The Assessing Officer has also not provided any detail of exempt
income earned by the asssessse during F.Y. 2008-09.           The Ld.
Commissioner of Income Tax(A) held that the appellant has not been
able to show before the Assessing Officer that no interest expenses
have been incurred by it in relation to the assets capable of
generating exempt income. The ld. counsel relied on the decision of
the co-ordinate bench of ITAT Ahmedabd ITA No. 1032/Ahd/2011 in
the case of Shr Nandlal J. Agarwal vs. DCIT, Circle-1 Ahmedabad
where it was held that the disallowance undersection 14Acannot be
made when no income is claimed to be exempt in that particular year
 I.T.A No. 2488/Ahd/2013      A.Y. 2009-10                  Page No    10
Palco Metals Ltd. vs. ACIT


after relying on the decision of Hon'ble jurisdictional high court in the
case ofCommissioner of Income Tax vs. Corrtech Energy (P) Ltd.(272 ITR 262).         In view of the above mentioned facts and
circumstances and after considering the legal findings, we allow the
appeal of the assessee on this ground as lower authority has not
pointed out generation of any exempt income during the particular
year.8.      In the result, appeal of the assessee is partly allowed.Order pronounced in the open court on 19-08-2016


         Sd/-                                    Sd/-(S.S. GODARA)                        (AMARJIT SINGH)
JUDICIAL MEMBER                      ACCOUNTANT MEMBER
Ahmedabad : Dated 19/08/2016
ak
आदेश क त ल प अ े षत / Copy of Order Forwarded to:-
1. Assessee
2. Revenue
3. Concerned CIT
4. CIT (A)
5. DR, ITAT, Ahmedabad
6. Guard file.
                                              By order/आदेश से,

                                                       उप/सहायक पंजीकार
                                                आयकर अपील य अ धकरण,
                                                               अहमदाबाद