The Pune Bench of Income Tax Appellate Tribunal (ITAT) has held that expenses incurred on an abandoned Initial Public Offering (IPO) are revenue in nature and directed the deletion of the disallowance made under Section 37(1) of the Income Tax Act, 1961.
Indus Biotech Limited, (assessee) engaged in the manufacturing of botanical drugs and other health-related products, filed its return of income declaring a total income of Rs. 27,61,96,070 under normal provisions.
During the processing of the return under Section 143(1), the Centralized Processing Centre (CPC) made certain adjustments, including a disallowance of Rs. 1,17,25,562 incurred on IPO-related expenses, treating them as capital in nature.
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Aggrieved by the order of the CPC, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee contended that these expenses were incurred for an IPO that was abandoned and therefore, the expenditure should be treated as revenue in nature.
However, the [CIT(A)] upheld the CPC’s action, citing that the tax auditor had classified the expenditure as capital in nature in Form 3CD. The CIT(A) held that a mismatch in reporting between Form 3CD and the ITR justified the CPC’s adjustment under Section 143(1)(a)(iv).
Aggrieved by the order, the assessee further appealed before ITAT. The assessee’s counsel relied on the Bombay High Court in Nimbus Communication Ltd., which had held that expenses incurred on an aborted IPO do not result in an enduring benefit and, hence, should be classified as revenue expenditure.
On the other hand, the counsel for the revenue supported the findings of the CIT(A).
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The two-member bench comprising Vice President Shri R.K. Panda and Judicial Member Ms. Astha Chandra, examined the assessee’s contentions and the legal precedents. The tribunal observed that the judicial precedents clearly supported the claim of the assessee.
The tribunal observed the decision of the Bombay High Court on the Nimbus Communication Ltd. had held that expenses incurred on an aborted IPO do not result in an enduring benefit.
The tribunal observed that The CPC’s reliance on the auditor’s classification in Form 3CD was misplaced, as judicial precedents clearly supported the assessee’s claim.
Therefore, the tribunal directed the Assessing Officer to delete the disallowance of Rs. 1,17,25,562 under Section 37(1). The appeal of the assessee was partly allowed for statistical purposes.
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