- (1.) THE Court : The subject matter of challenge in this appeal is a judgement and order dated 28th January, 2005 passed by the learned Income Tax Appellate Tribunal pertaining to the assessment year 1996 -97. Briefly stated the facts and circumstances of the case are as follows. The assessee claims to have incurred an expenditure of a sum of Rs.87,20,000/ - on account of share issue expenses during the assessment year 1994 -95. The assessee claimed deduction of the aforesaid sum of Rs.87,20,000/ - at the rate of 10% under section 35D. The assessment for the aforesaid year was completed under section 143(1) and therefore, there was no scrutiny and the expenditure claimed was allowed. In the assessment year 1995 -96 an identical claim was repeated and disallowed because the assessment, this time, was under section 143(3). The matter travelled to the CIT (Appeal) who held that: - " The expenditure can be incurred in connection with issue for public subscription of shares, or debentures of the company being under writing commission, brokerage and charges for drafting, typing, printing and advertisement with prospectus. Since the expenditure are incurred for the purpose of public issue, it can be amortised U/s.35D. Appellant has claimed I/10th of such expenditure. Therefore, he is entitled to such deduction U/s.35D. The case of Brooke Bond India is not applicable to that of the appellant. A.O. is not justified in treating Rs.8.72 lacs as capital expenditure. The addition in this regard is deleted."
(2.) THE CIT (Appeal) in its aforesaid order dated 29th May, 1998, however, missed out sub -section 3 of section 35D. The department also appears to have been oblivious about the same. The assessee repeated its claim for deduction of a sum of Rs.8.72 lakhs in the assessment year 1996 -97 which the assessing officer disallowed relying on sub -section 3 of section 35D. He held that the outer limit of allowable expenditure was 2.5% of the capital employed which in this case worked out to Rs.2.51 lakhs. Therefore, deduction to that extent was allowed. The CIT (Appeal) without considering the logic advanced by the assessing officer directed that the previous order of the CIT (Appeal) should be followed. The revenue preferred an appeal which was allowed by holding, inter alia, as follows: - " We find that the assessee is entitled for deduction of share issue expenses u/s.35D at the rate of 1/10th of the expenses for 10 successive assessment years. However, the total amount of deduction allowable shall be restricted to 2.5% of the capital employed. In the present case, the A.O. has held that because of this restriction of 2.5% prescribed in the section itself, qualifying amount for deduction in the year under appeal comes to Rs.2.51 lakhs in place of Rs.8.72 lakhs claimed by the assessee in the return. Ld. A.R. of the assessee could not point out any error in the above calculation of the Ld. A.O. Hence, we set aside the order of the CIT(Appeals) and restore back the order of the A.O. and allow the grounds of appeal of the Revenue."
(3.) AGGRIEVED by the order of the learned Tribunal, the assessee has come up in appeal. The following question of law was formulated: - " Whether on a true and proper interpretation of section 35D of the Income Tax Act, 1961 the quantum of deduction admissible under the section for a period of ten successive years at the rate of 1/10th of the expenditure having been fixed and become final in the initial year, the amount of such deduction can be varied in any subsequent year? " The amount deductible under sub -section 1 of Section 35D is subject to the provisions contained in Sub -section 3 of Section 35D. The provision contained in Sub -section 3 provide an outer limit. Therefore, there can be no dispute nor has Mr. Khaitan, learned Senior Advocate disputed that deduction under Section 35D cannot be in excess of the provision contained in Sub -section 3 which is 2.5% of the total capital employed.;