In CIT v. M/s Raghuvir Synthetic Ltd, the two-judge bench of the Supreme Court categorically held that preliminary expenditure incurred on public issue is capital in nature and this, being a settled issue, a claim in respect of the same had rightly dismissed by the AO in the proceedings under section 143 (1) of the Income Tax Act.
Assessee claimed revenue expenditure on advertisement and public issue. In the return of income, they made an alternative claim that if the above cannot be deemed as revenue expenditure, that may allowed under section 35D of the Income Tax Act by way of capitalizing in the plant and machinery obtained. However, the AO disallowed the claim and send an intimation Section 143(1)(a) of the Act disallowing a sum of Rs.58,92,700/- out of the preliminary expenditure incurred on public issue.
Assessee challenged the intimation before the first appellate authority, wherein it was held that the concept of ‘prima facie adjustment’ under Section 143(1)(a) of the Income Tax 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 Income Tax Act.
Both the Appellate Tribunal and the High Court dismissed the departmental appeal by holding that a debatable issue cannot be disallowed while processing return of income under Section 143(1)(a) of the Act.
The bench noted that there was a divergence of opinion between the various High Courts on the issue.
In view of the opinion of various High Courts, it was contended that the issue cannot be said to be a debatable one.
The bench noted that the Gujarat High Court in the case of Ahmedabad Mfg. & Calico (P) Ltd. had taken a view that it is capital expenditure which was subsequently followed by Alembic Glass Industries Ltd. V. CIT 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. It was therefore, said that it cannot be said that the issue was a debatable one.
Allowing the departmental appeal, the Apex Court brushed aside all the appellate orders.
Read the full text of the Judgment below.
